Development since 1991

The legal & institutional framework for bank supervision in India was provided under the Banking Regulation Act,1949 Different department of RBI were giving supervision on banking & nonbanking financial institution & companies. The board were setup under the control of RBI Regulation 1994 Until 1993, the Dept. of Banking Operations & Development (DBOD) had handled the supervision & regulation of commercial bank in India. In Dec. 1993 dept. of supervision has been segregated from the dept. of supervision of RBI The dept. of supervision was split into Dept. of Banking Supervision(DBS) & Dept. of Non Banking Supervision(DNBS)on July 29,1997

DBS
Preparing independent inspection programme for different institution Scheduled & special onsite inspection & offsite surveillance Criteria for appointment of statuory & special auditors

DNBS
Formulating regulatory framework & issuing directions to NBFCs RBI Act to unincorporated bodies, the Chit fund Act to chit fund companies Identification & classification of NBFCs On site inspection & follow up Off site surveillance & scrutiny of various returns Attending to complaints relating to NBFCs

Coverage of Financial Sector Reforms

The components of the financial markets that were chosen for effecting measure under the reforms are 1.Money Market 2.The securities market(it is also called as debt market or Govt. securities market)

Objectives of financial sector reforms by Govt. of India & RBI

To widen, deepen & integrate the different segment of financial sector, namely the money market, debt market & foreign exchange market.

Condition of Money Market In the pre reform period(before 1991)

Financial system functioned in an environment of restriction, driven primarily by fiscal complusion. It was geared to provide significant support for Govt. expenditure. The monetary & debt mgmt. policy was underlined by excessive supervision of central Govts fiscal defict Money & Govt. securities market did not display any vibrancy & had limited significance in the indirect conduct of monetary policy. Money market instrument were few. Market had a narrow base & limited to a few participant commercial bank six all indian financial institution. Rate of interest on money market instrument was regulated. Money market instrument consisted of T-bill & term securities of different maturity issued by the central & state govt.

The above maturity of securities remain very long i.e. above 20 years Govt. borrowing were done at rates, which were far below the market rate.

 The term finance in our simple understanding it is perceived as equivalent to money But finance exactly is not the money it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Govt. but it refers to sources of raising revenues for the activities & functions of Govt.

 Indian Financial systemThe economic devedlopment of a nation is reffered by the progress of various economic units, broadly classified into corporate sector, Govt. sector & household sector There are areas or people with surplus funds & there are those with a deficit A financial system or financial sector functions as an intermediary & facilitates the flow of funds from the areas of surplus to the area of deficit

Recommendations of the Committee on financial system (The Narsimhan Committee)

In persuance of the recommendations of the Narsimhan Committee II, the RBI has taken a decision to restrict the Call, Notice term money market as a pure inter-bank market with additional access only to PDs, steps have been taken to phase out non-bank participant from the market by granting them permission to operate in the repo market.

Earlier steps by RBI to reduce instability in the Call Money market In December 1992,RBI injected liquidity through the DFHI & Securities Trading Corporation of India. In subsequent years, RBI has been moderating liquidity through continous use of repo & refinance operation & changes in the procedures for the maintainence of CRR requirement.

Government Securities- Reform process in Debt mgmt. As part of the reform process, debt mgmt. underwent significant changes. The principal objective of Debt mgmt. were defined as under To smooth the maturity structure of Debt. To enable debt to be raised at close to market rates To improve the liquidity of govt. securities by developing an active secondary market To make the govt. securities market vibrant, broad-based & efficient in view of its role in setting a bench mark for the development of the financial market as a whole bringing about an effective reliable channel for the use of indirect instrument of monetary control.

Reforms in the primary market

Auctions system of issuing securities has been introduced for both treasury bills & term securities since 1992-1993, in order to pave the way for market related rate of interest for Govt. papers. The base for treasury bill market was widened with auctioning of different types , introduction of 364-dayTB in April 1992, & 91 days TB in January 1995, & reintroduction of 182- day TBs in May 1999 New instrument such as zero coupon bonds, tap stock partly paid tap & floating Zero rate bond were introduced. Bringing down the maximum maturity rate Govt. securities from 30 yrs to 20 Yrs. Development of instrument for the repurchase agreement between RBI & commercial bank beginning from December 1997 Since April 1997, anew approach was followed by the RBI in its open market operations in govt. securities In setting its price, the RBI responded to market operations

 The auction system contributed a new treasury culture progressive development of bidding & portfolio mgmt. skills

Reforms in secondary market in Govt. securities A phased reduction in SLR requirement from an effective 37.4% in March 1992 to a little over 28% in march 1996. It has since been reduced to the statuory benchmark level of 25% The DFHI was authorised to deal in govt. securities in1992-1993 The securities trading corporations of India (STCI) was set up in 1994 by the RBI jointly with public sector banks& all india financial institutions with the main objectives of fostering the development of the govt. securities in market. Market transparency was achieved through regular publications of detail of SGL transactions in Govt. securities put through Mumbai PDO since September 1994 After its establishment & becoming operational in june 1994, the national stock exchange provided secondary market trading facilities through its wholesale debt market segment.

A system of Delivery versus payment (DVP) was introduced in

Various Financial Intermediary

Merchant Banker/lead managers Underwriters Banker to issue Broker to an issue Debenture Trustee Registrar to issue & Share transfer agent Portfolio Managers Prohibition of fraudulent & Unfair Trading Practices Relating to the securities market Prohibition on dealing/Communicating/Counselling on Matters Relating to insider trading

Merchant Bankers/Lead manager

A set of financial institutions that are engaged in providing specialist services, which generally include the acceptance of bill of exchange, corporate finance, portfolio management & other banking services are known as merchant banker. The importance of merchant banker as sponser of capital issues is reflected in their major services such as determining the composition of the capital structure(type of securities), draft of prospectus, applications form, appointment of registrar to dealt with share application & transfer, listing of securities, arrangement of underwritting, selection of broker & banker to an issue & so on Registration:- Merchant banker should have compulsory registration with SEBI There are four categories of merchant banker SEBI grants certificate of registration to the Merchant banker if they fullfil the criteria that they should have

Proper space Equipment & manpower to conduct their activities Capital adequacy requirement of a minimum networth of Rs. 5 Crore A merchant banker has to pay to SEBI application fee of rs. 25,000,registration Rs 10 lakhs & renewal fees of Rs 5 lakhs every three year from the four year from the date of initial registration

Role of merchant Banker

Restriction on business :- No merchant banker, other than bank/public financial institution is permitted to carry on business other than that in securities market. Is depend on RBI Responsibilities of lead manager: Lead manager has to enter into an agreement with the issuing company in issuing the share in allotment & refund It is necessary for a lead manger to accept minimum underwriting of 5% of total underwriting commitment or Rs.25 lakhs whichever is lesser Due diligence certificate:-submit due diligence certificate to the SEBI, at least two week before the opening of the issue for the subscriptions Submission of Document:-submit the document to the registrar of the companies, regional stock exchange, & to SEBi two week before

Acquistion of share:-A merchant banker is restricted from acquiring securities of any company on the basis of unpublished price sensitive information obtained during the course of any professional assignment Disclosure to the SEBI:- his responsibilities with regard to the management to the issue, any change in the information, etc Compliance officer:-Every merchant banker should appoint a compliance officer who would responsible for monitoring SEBI act

Underwriters
Underwriters has to agrees to take up the securities which are not fully subscribed . They are appointed by merchant banker of the issuing company Registration:- A certificate of registration must be obtained from SEBI. Merchant banker who are registered with SEBI can also act as merchant banker Underwriter should have Necessary infrastructure Past experience in underwriting Capital adequacy requirement of not less than 20 lakhs Fee:-The application fee for registration is 25000 Rs. Every underwriter has to pay registration fee of Rs. 10 lakhs at he time of grant of certificate Renewal fee of Rs. 5 lakhs after four year of registration at every 3 yr.

Role of underwriter
Agreement with the client:-The agreement b/w the issuer company & the underwriter provides for the period during which the agreement is in force, the amount of underwriting, obligations, the period under which underwriter has to subscribe the issue General responsibilities :- An underwriter cannot derive any direct or indirect benefit from underwriting the issue other than by the underwriting commission. Underwriter has to subscribe the securities within the 45 days, after the intimation given by the issuer company Compliance Officer:- underwriter appoint the compliance officer who are responsible the monitoring the SEBI act Power to call for information:- SEBI can call the underwriter at any time with respect to underwriting

Bankers to an issue
The bankers to an issue are engaged in activities such as acceptance of applications alongwith application money from the investor in respect of issue of capital & refund of application money Registration:- Banker to an issue must have obtain a certificate of registration with SEBI the applicant has the infrastructure , communication & data processing facilities. The applicant is a scheduled bank Fee:-Application fee for registration is 25000 Rs. Banker to an issue has to pay to the SEBI an annual fee of RS.10 lakhs as annual registration fee,& 5 lakhs fee after every 5 years, after the day of registration.

Role of banker to an issue

Furnish information:- Banker of an issue has to furnish the following information to the SEBI The number of issues for which it is engaged as a banker The number of application money received The dates on which applications from investor were forwarded to the issuing company The date/amount of the refund to the investor Book to account/record/Document:- They have to maintain this record for three year in respect of the number of application received, the names of the investor, the time within which applications received were forwarded Agreement with issuing company:- the agreement provides for the number of collection centre at which application money is received is forwarded to the registrar of the companies Disciplinary action by the RBI:- If RBI takes any action then they should inform to SEBI

Brokers to an issue
Brokers are the persons mainly are concerned with the procurement of subscription to the issue from the prospective investor Companies are free to appoint numerous number of broker Broker help in distribution of securities & procurement of direct subscription Merchant banker who act as manger to an issue also act as broker to an issue The company in consultation with the stock exchange writes to all active broker of all exchanges & obtain their consent to act as broker to an issue A copy of the consent letter should be filed along with the prospectus to the ROC The name & address of the broker to an issue is are required to disclose in the prospectus The brokerage rate applicable to all types of public issue of industrial securities is fixed at 1.5%,whether the issue is underwritten or not

 Mailing cost & other out of pocket expenses have to be bear by broker The issuing company is expected to pay brokerage within two months from the date of allotment

Registrar to an issue & share transfer agent

Registrar to an issue collects applications, keeps proper record of applications & money received, determine basis of allotment of securities, finalise allotment , dispatch letters, refund orders, &certificate in respect of issue capital The share transfer agents maintain the record the record of holder of securities on behalf of companies ,& deal with all matters connected with the transfer /redemptions of securities They must be registered with securities They are of two category Category 1:- to carry on the activities as a registrar to an issue & share transfer agent Category 2:- carry on activities either as registrar or share transfer agent Capital adequacy & fee:- Rs. 6 lakhs for category, rs 3 lakhs for category 2 Category 1 has to pay a registration fees of Rs. 3,00,000& renewal fees of Rs. 1,00,000

 Responsibilities: Maintenance of record:-They have to maintain record relating to all applications received from investor in respect to an issue, all rejected applications together with reason, basis of allotments, of securities in consultation with the stock exchange, terms & conditions of purchase of securities & so on Compliance officer:-they should have to appoint a compliance officer Inspection:-the SEBI is authorised to undertake the inspection of the books of accounts, other record document to registrar to ensure that they are being maintained in a proper manner

Debenture Trustee
Debenture trustee is a trustee for a trust deed needed for securing any issue of debenture or any private placement of debenture of debentures by a body corporate listed company Registration from the SEBI is granted Capital adequacy should be of 1 crore rs. Debenture trustee is mainly bank, financial institutions, insurance companies SEBI taken into account The necessary infrastructure, manpower, The initial registration is for the period of 3 yrs. & is renewed before the three months following the period of expiry Initial registration fee is 10 lakhs & while the renewal fees is rs. 5 lakhs every year

Responsibilities
Call for period reports from the body corporate Take provision of trust property in accordance with the provision of trust deeds Take appropriate measures for protecting the interest of the debenture holder as soon as any breach of trustee deed law comes to its notice Communicate to the debenture holder on half yearly basis Maintenance of book of record:-keep & maintain proper book record , document relating to trusteeship Compliance officer:-every trustee should appoint compliance officer to see the compliance of the SEBI regulation Information to SEBI:-the trustee has to submit the documents when required by SEBI

Portfolio manager
Portfolio managers are person who advice, directs undertake the management of portfolio of securities fund on behalf of clients Registration from SEBI is mandatory The application fees is Rs.1,00,000,the registration fee, & renewal fee after every three year is Rs. 10 lakhs & Rs. 5 Lakhs

Custodian
Custodian is one who keeps the safe custody of the valuables of somebody else a customer or client or investor Thus stock exchange authorities provide safe custody lockers for keeping the valuables share securities, bonds etc. In the capital market custodial services are used in the OTC exchange of INDIA,NSE,BSE SHCIL provide custodial service to FIs & mutual fund & bank The SHCIL has been providing the custodial services to its sponser like UTI, IDBI,ICICI,LIC,GIC,many mutual funds & banks

Functions of custodians:-\ Safe custody & account maintenance MIS services on corporate Trade settlement & clearance Corporate action support services after trade Transfer agent

Chapter 2 Capital Market

Instrument, Traditional & emerging (ECB,ADR, GDR), Capital Marketing in India, Operations in Primary markets Instrument involved role of SEBI

Capital market
Capital market is generally understand as a mkt. for long term funds & investment in long term instrument available in this market. Now this market also include short term funds. Capital market mean the market for all the financial instruments, short term & also long term as also commercial, industrial & govt. The capital market deals with capital The capital market is a market where borrowing & lending of long term funds takes place. Capital market deals in both debt & equity In this market productive capital is raised & made available to the corporate The govt. both central & state raise money in the capital market through the issue of Govt. securities. Capital market refers to all the institute & mechanism of raising medium & long term funds through various instrument available like share, debenture, bond etc.

 Corporate both in private sector as well as in public sector raise crore of money in this market The govt. through reserve bank of India as well as financial institutes also raise a lot of money through this market The capital market serves a very useful purpose by pooling the saving of individual & making them available in the business world All financial instrument are financial assets A well developed capital market can solve the problem of paucity of funds for the business enterprises Capital market instrument generally have secondary market Transaction takes place through the stock market generally Transaction in this market is conducted only through authorised dealer

 Constituent of Indian Capital market Gilt edged market:-Gilt edged market also known as govt.
security market, is the market for govt. & semi govt. securities An important feature of the securities traded in this market is that they are stable in value Some feature of it are as such Guaranteed return on investment Industrial based investor which are compelled by law to invest a portion of their fund in these securities Industrial security market:-The market for industrial security is known as Industrial securities market It offers an ideal mkt. for corporate securities such as bond & equities In it there are following segment Primary market Secondary market

Primary market
Primary mkt. also known as New Issue mkt. is a market for raising fresh capital in the form of share & debenture Corporate enterprises which are desirous of raising capital fund through the issue of securities approach the primary market Issuer exchange financial securities for long term fund The primary market allows for the formation of capital in the country & the accelerated industrial & economic growth

Modes of raising capital

Public issue:- where the securities are issued to the member of the general public ,it takes the form of public issue. It is the most important method of raising long term Right issue:- where the issue of equity shares of a body corporate is made to the existing shareholder as a pre emptive right,it takes the form of right issue Private Placement:- where the shares of body corporate are sold to a group of small investor, it takes the form of private placement

The secondary market

A market which deals in securities that have been already issued by the companies is known as the secondary market It is also called as the stock exchange or share market Importance:- for the efficient growth of the primary market, a sound secondary market is an essential requirement This is becoz the secondary market offers an important facility of transfer of securities.

Stock Exchange
The activities of buying & selling of securities in a secondary mkt. are carried out through the mechanism of stock exchange Stock exchanges form an integral part of secondary market in india There are at present 24 stock exchanges in india recognised by the Govt. Mumbai, Calcutta, Delhi, Banglore, Hyderabad, Indore, Pune, Kanpur, Cochin, Ludhiana, Manglore, Patna, Guwahati, Bhuwaneshwar, Jaipur, Saurashtra, Surat, Baroda, Coaimbatore, Rajkot, Meerut & OTC exchange in India & NSE at Mumbai The supply in this market comes from saving from different sector of the economy Industrial, Government, Corporate, Foreign countries,Bank, Provident fund , Financial instution

Indian capital market growth & evolution

Infrastructure stage :- (1947-1973) This stage saw the process of strengthening of capital market through the establishment of network of development of financial institution such as IFCI, ICICI, IDBI, UTI, SFCs & SIDCs The regulation at this time was controlled by Capital Issues Act1947, Securities Contract Acts1956, & companies Act 1956 In the starting there was not clear demarcation of development of capital market due to following factor Demand for long term fund were not too much becoz of it there were not too much good development of industries &saving rate was also too much low Dependence of foreign companies upon the London Capital market for raising funds rather than on Indian Capital market Bank offered credit at relatively lower rate of interest becoz of it Indian corporate were issuing there share & debenture

 New Issue Stage:- (1973-1980)

Foreign exchange regulation act(FERA) came at this stage , under which shareholding of foreign firm in joint venture was restricted 40% if the companies wanted to be recognised as Indian Companies This encouraged a large number of public domestic limited companies to come out with the offer of new Capital issues for public subscription Becoz of it Stock market exhibit an upward trend with share prices displaying a higher level of buoyancy The SEBI stage:- (1980-1992) Debenture emerged as a powerful instrument of resource mobilization in the primary market Public sector bond also came into existenceduring 1985-1986 Number of stock exchange increased Increase in the listed companies with a quantam jump in their paid up capital & market capitalization Becoz of it there were a tremendous growth in the secondary mkt.

 New Financial Services: SEBI emerged at this stage New financial services such as CRISIL,CARE, ICRA were setup Stock Holding corporation of India Ltd. Was set up to provide custodial services The OTCEI was established to provide screen based stock exchange facility to investor Mutual fund, Venture fund/companies were also set up