FSM QUESTIONS

1. What do you mean by Financial System ?

Financial system is one system which supplies the necessary financial inputs for the
production of goods and services which in turn promote the wellbeing and standard
of living of the people of a country.

2. Write the characteristics of Financial Services.

Financial Services are characterized by the following :

1. Intangibility - The basic characteristics of financial services are tangible in nature

.for financial services to be successfully created and marketed the institutions
providing them must gain good and confidence of its clients. Quality and
innovativeness of services are the focal points for building credibility and gaining
the trusts of the clients.

2.Customer Orientation - The institutions proving the financial services study the
needs of the customers in detail based on the results of the study they come out with
innovative financial strategies that give due regard to costs, liquidity and maturity
considerations for various financial products this way financial services are customer
orientated.

3. Inseparability - The functions of producing and supplying financial services have

to be carried out simultaneously their calls for a perfect understanding between the
financial services firms and their clients.

4. Perishability - Financial services have to be created and delivered to target clients

they cannot be stored. They have to be supplied according to the requirements of
customers. Hence it is imperative that the providers of financial services ensure a
match between demand and supply.

5.Dynamism - The financial services must be dynamic they have to be constantly

redefined and refined on the basis of socio-economic changes occurring in the
economic such as disposable income, standard of living, level of education

3. Explain in detail the classification of Financial Markets in India.

1. Unorganized Markets

In these unorganized markets there are a number of money lenders, indigenous

bankers, traders (who lend and collect deposits from the public) private finance
companies (Indigenous bankers are private firms or individuals who operate as
banks and receive deposits and give loans), Chit funds etc whose activities are not
controlled by the RBI.

The RBI has already taken some steps to bring private finance companies and chit
funds under its strict control by issuing Non banking financial companies Reserve
Bank Direction 1998.

2. Organised Markets

In the organized markets there are standardized rules and regulations governing their
financial dealings. There is also a high degree of institutionalization and
Instrumentalisation. These markets are subject to strict supervision and control by
the RBI or other regulatory bodies.

These organized markets can be further classified into two

1.Capital Market –The capital market is a market for financial assets which have a
long maturity generally it deals with long term securities which have a maturity
period of above one year.

Capital Market may be further divided into three namely

I . Industrial Securities Market

It is market for industrial securities namely (i) Equity shares or ordinary shares (ii)
Preference shares (iii) Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments .It can be further divided into two they are

1. Primary Market : Primary market is a market for new issues or new financial
claims. Hence it is called new issue market. The primary market deals with those
securities which are to the public for the first time. There are three way by which a
company may raise capital in a primary market

(i) PublicIssue-Themostcommonmethodofraisingcapitalbynew companies is trough

sale of securities to the public it is called public issue.

(ii) Rights Issue - When an existing company wants to raise additional capital,
securities are first offered to the existing of share holders on a pre-emptive basis
[Relating to the purchase of goods or shares by one person or party before the
opportunity is offered to others].It is called rights issue.

(iii) Private Placement - Private placement is a way of selling securities privately

to a small groups of investors.

2.Secondary Market - Secondary market is a market for secondary sale of

securities. Securities which have already passed through the new issue market are
traded in this market. Generally such securities are quoted in the stock exchange and
it provides a continuous and regular market for buying and selling of securities. This
market consists of all stock exchange recognized by the government of India.

II) Government Securities Market:

It is otherwise called Gilt- Edged Securities[High grade bonds issued by

Government for firm]. It is a market where Government securities are traded. In
India there are many kinds of GovernmentSecurities – short term and long
term.Long term securities are traded in this market while short term securities are
traded in the money market.
Securities issued by the central Government, State Government., Semi- Government
authorities like City Corporations, Port trusts etc. State

Electricity Boards, all India and State level institutions and public sector enterprises
are dealt in this market.

The role of brokers in marketing these securities is practically limited and the major
participant in this market is commercial banks.

The secondary market for these securities is very narrow since most of the investors
tend to retain these securities until maturity. Example -stock certificates, promissory
notes, Bearer bond.

III) Long Term Loans Market:

Development banks and commercial banks play a significant role in this market by
supplying long term loans to corporate customers.

Long term loans market may further be classified into

1. Term Loans Market

Many industrial financing institutions have been created by the Government. both at
the national level and regional levels to supply long term and medium term loans to
corporate customers. Industrial financing is done by developmentbanks. Institutions
like IDBI, IFCI, ICICI and other state financial corporations come under this
category. These institutions meet the growing and varied long term financial
requirement of industries by supplying long term loans.They also help in identifying
investment opportunities, encourage new entrepreneurs and support modernization
efforts.

2. Mortgages market:

The mortgages market refers to those centers which supply mortgage loan mainly to
individual customers. A mortgage loan is a loan against the security of immovable
property.LIC & HUDC [Housing and urban development corporation] play a
dominant role in financing residential projects.

3. Financial Guarantees market:

A guarantee market is a centre where finance is provided against the guarantee of a
reputed person in the financial circle.Guarantee is a contract to discharge the liability
of a third party in case of his default. If the borrower fails to repay the loan, the
liability falls on the shoulders of the guarantor. The guarantor must be known to both
the borrower and the lender.

MONEY MARKET

Money market is a market for dealing with financial assets and securities which have
a maturity period of up to one year.It is a market for purely short term funds.

The money market may be out divided into four. They are:

1)Call Money Market- The call money market is a market extremely short period
loans say one day to fourteen days, so it is highly liquid. Call money market is for
inter-bank lending and borrowing. The loans are repayable on demand at the option
of either the lender or the borrower.

In India call money markets are associated with the presence of stock exchange and
hence they are located in major industrial towns.The Special feature of this market
is that the interest rate varies from day today and even from hour to hour and centre
to centre.[Bill of exchange or trade bill is an instrument containing an unconditional
order signed by the maker, directing a certain person to pay a sum of money to the
bearer of the instrument]. It is very sensitive to changes in demand and supply of
call loans.

2) Commercial Bills Market - It is a market for bill of Exchange arising out of

genuine trade transactions. In case of credit sale the seller may draw a bill of
exchange on the buyer. The buyer accepts such a bill promising to pay at a later date
specified in the bill. The seller need not wait until the due date of the bill. Instead he
can get immediate payment by discounting the bill.The commercial banks play a
significant role in this market.
 3) Treasury Bills Market - It is a market for treasury bills which have short term
maturity. A treasury bill is a promissory note or a finance bill issued by the
government. [They were issued for 91 days but now they there are issuance for 182
and 364days]. It is highly liquid because its repayment is guaranteed by the
Government.[These treasury bills are floated through auction and conducted by
RBI]. It is an important instrument for short term borrowing of the Government [RBI
as the leader and controller of money market buys and sells treasury bills].

4) Short-Term Loan Market- It is a market where short loans are given to corporate
customers for meeting their working capital requirements. Commercial banks play
a significance roll in this market.

Commercial banks provide short term loans in form of cash credit and overdraft over
graft facility is mainly given to business people whereas cash credit is given to
industrialists. Over draft is given in the current account itself. Cash credit is for a
period of one year and it is sanctioned in a separate account.

Foreign Exchange Market-The term foreign exchange refers to the process of

converting home currencies into foreign currencies. According to PaulEinzing,“
Foreign exchange is the system or process of converting one nationalcurrency into
another and of transferring money from one country to another”.The market where
foreign exchange transactions take place called a foreign exchange market. It
consists of number of dealers and banks and brokers engaged in the business of
buying and selling foreign exchange.

The foreign exchange business are controlled by the foreign exchange regulation act
(FERA).

4. Explain the Role of SEBI in primary market.

1. To file Draft offer document:

A company making a public issue, or a value of more than Rs.50 lakhs is required
to file a draft offer document with SEBI for its observation.The company can
proceed observations from SEBI.
The validity period of SEBI’s observation letter is three months only. i.e. the
company has to open its issue within three months period.
2. SEBI does not recommend any Issue:
SEBI does not recommend any issue nor does it take any responsibility either for
the financial soundness of any scheme or the project for which the issue is
proposed to be made or for the correctness of the statements made or opinion
expressed in the offer document.

3. Submission of offer document not deemed to be approved: Submission of offer

document to SEBI cannot in any way be deemed or construed that the same has been
cleared or approved by SEBI.

4. Lead Manager to certify:

The lead manager certifies that the disclosures made in the offer document are
generally adequate and are in conformity with SEBI guidelines for disclosures and
investor protection in force for the time being. This requirement is to facilitate
investors to take an informed decision for making investment in proposed issue.

5. SEBI does not associate itself with any issue/issuer

SEBI does not associate itself with any issue/issuer and should in no way be
construed as a guarantee for the funds that the investor proposes to invest through
the issue.

6.SEBI guides investors to take action by themselves.

The investors are expected to make an informed decision purely by themselves based
on the contents disclosed in the offer documents.

7. Investors to study all material facts.

Investors are generally advised to study all the material fact pertaining to the issue
including the risk factors before considering any investment they are strongly
warned against any tips or news through unofficial means.
5. Explain the Role of SEBI in secondary market.

1. Market Intermediaries Registration and Supervision Department (MIRSD)

This department takes care of the registration of all market intermediaries related to
all segments of the market namely the equity and derivative segments. It also
supervises monitors and inspects all the intermediaries.

2. Market Regulation Department(MRD)

The main function of this department is to formulate new policies except relating to
derivatives for stock exchanges, their subsidiaries and market institutions such as
clearing and settlement organizations and Depositories. It also supervises their
functioning and operations

3. Derivatives and New Products Departments (DNPD):

The function of this department is mainly related to the supervision of derivatives

segments of the stock exchanges and introduction of new products to be traded. It
also takes care of the consequent policy changes.

6. Explain the Process for buying shares through IPO.

The process of public issue of securities is described below.

1. Obtaining issue information: The information pertaining to primary issues of

securities such as name of the issuer, total issue size the intermediaries etccan be had
from the SEBI’s monthly bulletin.A digital version of the same is available on the
SEBI website.

2.Obtaining Application form:The form for applying / bidding of shares is available

with all collection centers, the brokers to the issue and the bankers to the issue.
3.Collecting offer information:The document is prepared by an independent
specialized agency called merchant Bankers, which is registered with SEBI. They
are required to offer due diligence while preparing an offer document.The draft offer
document submitted to SEBI is put on the website for public comment.

4. Demat Account - As per the requirement all the public issues of size in excess of
Rs.10 crores are to be made compulsorily in the demat mode.Thus if an investor
choose to apply for an issue that is being made in a compulsory demat mode, he has
to have a demat account and has the responsibility to put the correct ID in the bid
application forms.

5. Bidding/Applying - The investors are generally advised to study all the material
facts pertaining to the issue including the risk factors, before considering any
investment they are strongly warned against any tips or relying on news obtained
through official means.

6. Qualified Institutional Buyers (QIB) - Qualified Institutional buyers constitute an

important segment of investors who bid in a new issue of securities.

QIB’s are those institutional investors who are generally perceived to possess
expertise and financial muscle to evaluate and invest in the capital markets.

7. Issue open

Subscription list for public issues is kept open for at least three working days and
not more than ten working days. in case of book-built issues, the minimum and
maximum period for which bidding will be open is three to seven working days
extended by three days in case of a revision in the price band.

8. Bid Revision

It is possible for the investor to change or revise the quantity or price in the bid,
using the form for changing/ revising the bid that is available along with the
application form However, the entire process of changing of revising the bids shall
be completed within the date of closure of the issue.

The syndicate member returns the counter foil with the signature, date and stamp of
the syndicate member. The investor can retain this as a sufficient proof that the bids
have been taken into account.Syndicate members are mainly appointed to collect the
entire old forms in a book built issue.

9. Allotment

An investor would get confirmatory allotment note (CAN) / Refund order within 30
days of the closure of the issue.

In case of book-built issues, the basis of allotment is finalized by the book running
lead managers within two weeks from the date of closure of the issue.

The registrar then ensures that the demat credit or refund as applicable is completed
within 15 days of the closure of the issue.

The listing on the stock exchanges is done within seven days from the finalization
of the issue.

10. Book-building

Book-building is a process by which corporate determine the demand and the price
of a proposed issuer of securities through public bidding.

11. Listing

The listing on the stock exchanges is done within seven days from the finalization
of the issue. Ideally, it would be around three weeks after the closure of the book
built issue. In case of fixed price issue, it would be around 37 days after the closure
of the issue.

12. Issue complaints

Most of the issue complaints pertain to non – receipt of refund or allotment or delay
in receipt of fund or allotment and payment of interest thereon. These complaints
shall be made to the post- issue lead manager, who in turn will face up the matter
with the registrar to redress the complains.

In case the investor does not receive any reply within a reasonable time, investor
may complain to SEBI, office of investors assistance.
7. Explain in detail the Participants of secondary market.

Index is a system by which changes in the value of something and rate at which it
changes can be recorded or interpreted. Participants of the secondary market mainly
consist of

I. Investors

The investors can be broadly classified into

1. Retail Investors

They are individual investors with a limited access to funds they invest their surplus
funds in securities to earn returns.

Equity investment is considered to be high risk high return proposal as compared to

other investment instruments like fixed deposits and post office savings scheme.

High net worth individual [HNI] is used to refer to individuals and families who are
affluent in their wealth holding and consequently have a higher risk profile.

2. Foreign Institutional Investors [FIIs]

They are venture capital funds, pension funds, hedge funds, mutual funds and other
institutions registered outside the country of the financial market in which they take
an investment exposure.
They are allowed to invest in the primary and secondary capital markets in India
through the portfolio investment scheme (PIS).

Under this scheme, FII’s can acquire shares/ debentures of Indian companies through
the stock exchange in India. The ceiling for the overall investment for FII’s is 24
percent of the paid up capital of the Indian comp.

The number of FII’s registered with the securities and exchange Board of India has
doubled.The Indian capital market has attracted many global majors like HSBC,
Citigroup, crown capital, Fidelity, UBS, ABN Amro, Morgan Stanley.

3. Institutional Investors

Mutual funds, unit Trust, Insurance Companies, banks and other large institutions
which invest their members money in shares and bonds are known as Institutional
Investors.

They have professional analyst and advisors who usually analyse the stock market
trends much better than individual investors.They trade in large volumes and play a
major role in the stock market.

II. MarketIntermediaries

Intermediaries such as

1) Stock Exchange Members/Brokers

A stock broker is a member of the stock exchange and he is permitted to trade on the
screen- based trading system of the stock exchange.The brokers have to register with
SEBI and should keep a registration certificate.

A Sub-broker is a person who is affiliated to a member of a recognized stock

exchange. He also has to register himself with SEBI.

2) Depository

A depository is an organization which maintains investors securities in electronic

form. In simple terms a depository is a bank for securities.
National Securities Depository Limited (NSDL) Central Depository Services (India)
Limited (CDSL)

are functioning as depositories in India.NSDL was first set up by NSE with UTT
and IDBI.CSDL is a depository managed by professional and it was promoted by
the Bombay Stock Exchange (BSE) Limited along with a cross section of several
leading Indian and foreign banks.

3) Depository participants

Agents to depository are called depository participants(DP). They are intermediaries

below the depository and the investors.The relationship between the DPs and the
depository is governed by an agreement made between the two under the
Depositories Act.

In a strictly legal sense, a DP is an entity who is registered with SEBI under the
provisions of the SEBI Act. As per the provisions of this Act, a DP can offer
depositors related services only after obtaining a certificate of registration from
SEBI.SEBI (D and P) regulations 1996 prescribe a minimum net worth of Rs. 50
lakh for stock brokers, registrars, transfer agent and non-banking finance companies
(NBFC’s) for granting them a certificate of registration to act as DP’s.

III. Regulatory Bodies

Regulatory Authorities of Secondary Market

MINISTRY OF FINANCE

In the ministry of Finance, the capital market is regulated by the capital markets
division of the department of economic affairs.

This division is responsible for formulating and development of the securities

markets i.e. share, debt, derivatives as well as protecting of the interests of the
investors. In particular it is responsible for

Institutional reforms in the securities market

 Building regulatory and market institution.

Strengthening investor protection mechanism

Providing efficient legislative framework for securities markets.

Ministry of Finance administers legislation such as securities and Exchange Board

of India Act 1992 (SEBI Act 1992). Securities contracts (Regulation). Act 1956 and
the Depositories Act 1996.

THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The SEBI was established under the SEBI Act 1992, as a regulatory authority of
Securities market with the objective to protect the interest of the investors in the
securities market and promote the development of the capital market.

8. Explain the Functions of Depository

The principal function of a depository is to dematerialize the securities and enable

their transactions in book entry form.

Dematerialization of securities occurs when securities issued in physical form are

destroyed and an equivalent number of securities are credited into the beneficiary
owners account.

A depository established under the depositaries act can provide any service
connected with recording of allotment of securities or transfer of ownership of
securities in the recon of a depository.

A depository cannot directly open accounts and provide services to clients. Any
person who is willing to avail the services of the depository can do so by entering
into an agreement with the depository through any of its depository participants.
9. Explain Functions of underwriting

Adequate funds

Underwriting being a kind of a guarantee for subscription of a guarantee for

subscription of a public issue of securities enables a company to raise the necessary
capital funds. By undertaking to take up the whole issue of the remaining shares not
subscribed by the public, it helps a company to undertake project investments with
the assurance of adequate capital funds.

Expert advice

Underwriters of repute often help the company by providing advice on matters

pertaining to the soundness of the proposed plan etc thus enabling the company
avoid certain pitfalls. It is therefore possible for an issuing company to obtain the
benefit of expert advice through underwriting before entering into an agreement.

Enhanced Goodwill

The fact that the issues of securities of a firm are underwritten would help the firm
achieve a successful subscription of securities by the public.This is because
intermediaries of financial integrity and established reputation usually do the
underwriting.Such an activity therefore helps to enhance the goodwill of the issuing
company.

Assurance to investors

Underwriters before underwriting the issue satisfy themselves with the financial
integrity of the company and viability of the plan.The underwriting firms assure this
way the soundness of the company.Theinvestors are therefore assured of having low
risk when they buy sharesof debentures which have been underwritten by them.

Better Marketing

Underwriters ensure efficient and successful marketing of the securities of a firm

through their networks arrangements with other underwriters and brokers at national
and global level.This promotes a wide geographical dispersion of securities and
facilities tapping of financial resources for the company.
 Benefits to Buyers

Underwriters are very useful to the buyers of securities due to their ability to give
expert advice regarding the safety of the investment and the soundness of companies.
The information and the expert opinion published by them in various newspapers
and journal are also helpful.

Price Stability

Underwriters provide stability to the price of securities by purchasing and selling

various securities.This ultimately benefits the stock market.

10. Explain Features of Stock Invest

Following are the salient features of stock-invest as operated by banks

Additional Mode Stock-invest serves as an additional mode of payment of

application money besides the traditional modes such as cash, cheque or draft.

No Locking up of funds By this mechanism ,making payment for the public issue of
securities does not involve any locking up of the investor funds.This way,the scheme
ensures effective utilization of investor funds.

Denominations The instrument was issued in five denominations, with ceiling for
drawing upto Rs.250,Rs.500,Rs.2,500,Rs.5,000 and Rs.10,000.Later on stock-
invests came to be issued with the RBI directives upto a maximum it Rs.50,000.

Interest income The scheme provided for the benefit of earning interest income for
the investors by allowing the money to remain with bank,which is highly
advantageous.

Participation All investor and banks may take part in the scheme and be benefited
by its merits
 Release of funds Funds are released from the stock-invest account by the bank only
in the event of successful allotment of securities to the subscriber customer.

Nature Stock-invest combines the characteristics of a guaranteed cheque and a letter

of authority and is therefore considered as good as cash.

Validity The instrument of stock –invest has a validity of 4months from the date of
issue by the bank concerned

Bank Charges Banks levy a charge to the extent of utilization of the money in the
stock invest account. This is to the tune of Rs.5 for every Rs.1,000.

11. Explain the Characteristics of Book Building

1. Tendering process
Book Building involves inviting subscriptions to a public offer of securities,
essentially through a tendering process. Eligible investors are required to
place their bids for their number of shares to be issued and the price at which
they are willing to invest, with the lead manager running the book. At the end
of the cut-off period, the lead manager determines the response to the issue in
terms of the quantum of shares and the highest price at which the demand is
sufficient to match the size of the issue.
2. Floor Price
Floor price is the minimum price set by the lead manager in consultation with
the issuer. This is the price at which the issue is open for subscription.
Investors are free to place a bid at any price higher than the floor price.
3. Price Band
The range of price (The Highest and the lowest price) at which offer for the
subscription of securities is made is known as price band. Investors are free to
bid any price within the Price band.
 4. Bid
The Investor can place a bid with the authorized lead manager- merchant
banker. In case of equity shares usually several brokers in the stock exchange
are also authorized by the lead manager. The investor fills up a bid-cum-
application form, which gives a choice to bid upto three optional prices. The
price and demand options submitted by the bidder are treated as optional
demands and are not cumulated.

5. Allotment

The lead manager in consultation with the issuer, decides the price at which
the issue will be subscribed and proceeds to allot shares to the investors who
have bid at or above the fixed price. All investors are allotted shares at the
same fixed price. For any allottee, therefore, the price will be equal to or less
than the price bid.

6. Participants

Generally, all investors including, eligible to invest in a particular issue of

securities can participate in the book building process. However, if the issue
is restricted to qualified institutional investors, as in the case of government
securities, then only those eligible can participate.

12. Explain in detail STAGES OF VENTURE CAPITAL FINANCING

Seed capital

This is an early stage financing.This stage involves primarily R&D financing.The

European Venture capital Association defines seed capital as the financing of the
initial product development or the capital provided to an entrepreneur to provide the
feasibility of a project and qualify for start up capital.

This stage involves serious risk as there is no guarantee for the success of the
concept,idea,and process pertaining to high technology or innovation. This stage
requires constant infusion of funds in order to sustain the research and development
work and establish the process to successful adaptation going into the
commencement of commercial production and marketing. Venture financing
constitutes financing of ideas developed by research and development wings of
companies or at university centers.Chances of success in hi-tech projects are meager.

Start – up financing

The European venture capital association defines start up capital as capital needed
to finance the product development, initial marketing and the establishment of
product facilities.This too falls under the category of early stage financing.The start
–up refers tothe stage where a new activity is launched. The activity may be one
emanating from the R&D stage,or arising from transfer of technology from overseas-
based business.Venture capital finance is provided to projects which have been
selected for commercial production.

Early –stage Financing

The European Venture capital association defines early stage finance as finance
provided to companies that have completed development stage and require further
funds to initiate commercial manufacturing and sales.They will not yet be generating
profit. This is the kind of financing required for completed the project.It is required
immediately after the start up stage of a project.The enterprises may need further
investment before completion of the project.

Follow on Financing

The European Venture capital association defines follow on financing or second

round finance as the provision of capital to a firm which has previously been in
receipt of external capital but whose financial needs have subsequently
expanded.Later stage in a project implies that the projects has passed the test of
acceptability and has proved to be successful. Since project at this stage promises to
be attractive in terms of earning potential,it is considered to be the most attractive
stage for venture capital financing.

Expansion Financing
The European Venture Capital Association defines expansion capital or financing as
the finance provided to fund the expansion or growth of a company which of
breaking even or trading at a small profit.Expansion or development capital will be
used to finance increased production capacity,market or product development and
or to provide additional working capital.This is one of the later stage financing
methods whereby finance is provided by the venture capitalists for adding
productioncapacity,once it has successfully gained a market share and faces
increased demand for adding production capacity,once it has successfully gained a
market share and faces increased demand for the product.

Replacement Financing

A later-stage financing methods also known as money-out deal where by venture

capitalists extend financing for the purchase of the existing shares from an
entrepreneur or their associates in order to reduce their holdings in the unlisted
company is known as replacement financing.

Turnaround Financing

This is the type of financing provided by the venture capitalists in the event of an
enterprises becoming unprofitable after launch of commercial production.This is
provided in the form of a relief package from the existing venture capital investors
and the enterprises is provided with specialists skills to recover.

Management Buy- outs

The European Venture Capital association of a company defines management buy

outs as the acquisition of a company (or the shares in that company) from the owners
by a team of existing management/ employees.The vending shareholder may or may
not have been actively involved in the day to day running of the company,the
acquiring group are presumed to be actively involved in the day to day running of
the company.Deals pertaining to the purchase of management holding of an
enterprises is called Buy-out deals.

Management Buy – In
A management buy in involves bringing in a management team comprising of
outsiders who are strangers to the company as opposed to a buy out where they are
part of the existing team.The European Venture Capital association defines
management buy in as funds provided to enable a manager or group of managers
from outside the company to buy in the company with the support of venture capital
investors.

Mezzanine Finance

The last stage of equity related funding is known mezzanine financing.It is often the
last type of financing supplied to a private company in the final run upto a trade sale
or a public floatation.

13. Enumerate the Reason for preferring Securitized Financial Instrument

1.Helping small investor – Financial claims often involves sizeable sum of money,
clearly outside the reach of the small investor. The initial response to this was the
development of financial intermediation, where by an intermediary such as bank
would pool together the resources of the small investors and use the same for a larger
investment need of the user.

2.Facilitating Liquidity – Small investors are typically not in the business of

investments and hence liquidity of investments is most critical for them. Marketable
instruments provides the liquidity of investments.

3.Utility of Instruments- Generally instruments are easily understood than financial

transaction. An instrument is a homogenous, usually made in a standard form and
generally containing standard issuer obligations. Besides an important part of
investor information is the quality and price of the instrument and both are easier in
case of the instruments than in case of financial transactions.
14. Explain in detail Various Options available for Investment or Various
Investment Alternatives:

1. BankDeposits

These are high on liquidity and convenience. The risk involve is negligible, the
return is also moderate only a few tax concessions are available.

2. Equity shares

The potential for high returns is more because of capital appreciation. Equity shares
rank high on risk, liquidity and convenience. Returns however are uncertain and
subject to market forces.

3. Mutual Funds

High on liquidity and convenience. Good tax concessions available which differ
from scheme to scheme. Returns and risk may vary according to the scheme.

4. Life Insurance Policies

Tax benefits are high, life insurance policies rank high on convenience, but the
returns are modest. Liquidity and risk are low.

5. Company Deposits

These provide higher returns but are also high on risk. No tax concessions are
available Liquidity and convenience are also low.

6. Bonds and corporate Debentures

Returns and risk are both high with no tax concessions available these are low on
liquidity and convention.

7. Post office Deposit Schemes:

Returns are moderate but risk is low. Various tax concessions are available but
liquidity is low.

8. Gold, Silver, Other Precious Metals:

Potential exists for high returns with good quality. With only a few tax concessions
available, the risk is moderate to high convenience is medico.

9. Real Estate:

High on returns with high risk, but liquidity is low. Tax concessions are available
for self occupies houses convenience is low.