Intermedaries

Part I : The Investment Environment
C5
Intermediaries
New Issue Market
Chapt
er
Intermediaries
Copyright 2008, Sudhindra Bhat
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat
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C5 Intermediaries
Brokers
The gazette of India extraordinary Part II - Section 3 - Sub-section (II) was
published by the authority in Bombay on the 20th day of August 1992
notification securities and exchange board of India (stock brokers and subIssue
Market
brokers)New
rules,
1992.
In exercise of the powers conferred by Section 29 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992), the Central Government
hereby makes the following rules, namely
Definitions
In these rules, unless the context otherwise requires:
a)
"Act" means the Securities and Exchange Board of India Act,

1992 (15 of 1992);
b)
"certificate" means a certificate of registration issued by the

Board;
Cont.
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c)
"Rules" mean the Securities and Exchange Board of India (Stock

Brokers and Sub-Brokers) Rules, 1992;
d)
"stock exchange" means a stock exchange which is for the time

being
recognised
by the Central Government under Section 4 of the
New
Issue Market
Securities Contracts (Regulation) Act, 1956 (42 of 1956);
e)
"stock broker" means a member of a stock exchange;
f)
"sub-broker" means any person not being a member of a stock

exchange who acts on behalf of a stock-broker as an agent or
otherwise for assisting the investors in buying, selling or dealing in
securities through such stock-brokers;
g)
"Regulations" mean the Securities and Exchange Board of India

(Stock Brokers and Sub- Brokers) Regulations, 1992.
Cont.
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Conditions for grant of certificate to stockbroker.

The Board may grant a certificate to a stock-broker subject to the following
conditions, namely:
a) he holds the membership of any stock exchange;
New Issue Market
b) he shall abide by the rules, regulations and bye-laws of the stock
exchange or stock exchanges of which he is a member;
c) in case of any change in the status and constitution, the stock broker shall
obtain prior permission of the Board to continue to buy, sell or deal in
securities in any stock exchange;
d) he shall pay the amount of fees for registration in the manner provided in
the regulations; and
e) he shall take adequate steps for redressal of grievances of the investors
within one month of the date of the receipt of the complaint and keep the
Board informed about the number, nature and other particulars of the
complaints received from such investors.
Cont.
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Conditions of grant of certificate to sub-broker.

The Board may grant a certificate to a sub-broker subject to the
following conditions, namely:
a) he shall pay the fees in the manner provided in the regulations;
b) he New
shallIssue
takeMarket
adequate steps for redressal of grievances of the
investors within one month of the date of the receipt of the complaint
and keep the Board informed about the number, nature and other
particulars of the complaints received;
c) in case of any change in the status and constitution, the sub-broker
shall obtain prior permission of the Board to continue to buy, sell or deal
in securities in any stock exchange; and
d) he is authorised in writing by a stock-broker being a member of a stock
exchange for affiliating himself in buying, selling or dealing in securities:
Provided such stockbroker is entitled to buy, sell or deal in securities.
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Trading System
Trading on stock exchanges is carried out through brokers and dealers. All
members can act as brokers and for this purpose they have to maintain
security New
deposits.
Brokers act as agents buying and selling or others for
Issue Market
which they receive brokerage commission at stipulated rates. Dealers act
as principals and sell securities on their own accounts.
However, members cannot enter into contract with any person other that
member without prior permission from the Governing Body. The stock
exchange rules, bye-laws and regulations have identified eight major
functional specializations for the members.
Cont.
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1.
Commission Broker
2.
Floor Broker
3.
Tataniwala
New Issue Market
4.
Dealer in Non-cleared securities
5.
Odd-lot Dealer
6.
Budiwalas
7.
Security Dealer
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Primary Dealers
The primary dealers have two major roles to play that of an underwriter in
the primary market and that of a market maker in the secondary market
New Issue Market
for the government
instruments.
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Banking Services
Universal Banking
Universal banks are the one-stop shops, who deal with a wide portfolio of
Issue Market
financialNew
products
integrating commercial banking, term lending, retail
operations investment banking, mutual funds, pension funds, insurance,
underwriting of issues securities issuance etc. Universal banks derive
benefit from economies of scale, direct mobilisation of funds from the
general public through bank deposits, using such deposit funds for the term
lending and retail business. As the universal banks would serve more
customers with the same existing network, and the customers would be
ultimately benefited with the low cost of services.
Cont.
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Correspondent Banking
Services provided by correspondent bank include cheque collection, data
processing, federal funds trading, securities safekeeping or sale of
securities, loans to directors and officers, international transactions
Newbanking
Issue Market
investment
advice on mergers and acquisitions, loan participation
and many others.
Retail Banking
It is a subset of commercial banking. A retail banker provides banking
service for individuals.
Private Banking
In private banking, the banking services, including lending and investment
management, are offered only for wealthy individuals.
Cont.
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CHIPS
The Clearing House Interbank Payment System (CHIPS) is a computerised
fund transfer system for international dollar payments linking major US and
New Issue Market
foreign banks with offices in New York.

SWIFT
Society
for
Worldwide
Interbank
Financial
Telecommunications,
cooperative company that transmits financial messages, payment orders,

foreign exchange confirmations and delivery of securities to nearly 7,000
financial institutions on the network, located in 190 countries.
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INVESTMENT MANAGEMENT COMPANY

The investment management company has to undertake only the
management of the scheme; act as a trustee of any scheme; launch any
scheme for the purpose of investing in securities but not invest in any
New Issue Market
schemes floated by it. An investment management company appoints a
trustee who holds the assets of the scheme for the benefit of unit-holders. The
investment management company may launch only those schemes that are
approved by the trustee. The scheme has to obtain a rating from a credit
rating agency. The company has to get the scheme appraised by an
appraising agency.
Cont.
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The investment management company has to issue unit certificates to

accepted scheme applicants, at the most six weeks from the date of
closure of the subscription list. A unit certificate issued under the scheme is
freely transferable. The investment management company, on production
New Issue Market
of the instrument
of transfer, together with relevant unit certificates,
registers the transfer and returns the unit certificate to the transferee within
30 days of the date of such production.
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Merchant Bankers/Investment Banks

Definition
Merchant
banking
may be defined as, 'an institution which covers a wide
New
Issue Market
range of activities such as management of customer services, portfolio
management, credit syndication, acceptance credit, counselling, insurance

etc.
Origin
Merchant banking originated through the entering of London merchants in
financing foreign trade through acceptance of bill.
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Services of Merchant Banks
The services of merchant bankers are described in detail in the following
section.
i) Corporate Counselling
NewCounselling
Issue Market
ii) Project
iii) Loan Syndication
iv) Issue Management
The pre-issue management is divided into as following:
a) Issue through prospectus, offer for sale and private placement
b) Marketing and underwriting
c) Pricing of Issues
d) Post-issue Management
e) Underwriting of Public Issue
f) Managers, Consultants or Advisers to the Issue
g) Portfolio Management
h) Off-shore Finance
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Fund Manager
Fund managers sell the units of funds to investors at the net asset value
(NAV) and are also ready to purchase units from the investors at the net
New Issue Market
asset value. In case of a "no-load" fund, the fund manager sells the units by
mail to the investors. Since there are no other intermediaries, this type of
fund does not have a sales commission. In terms of a loaded fund, the
units are sold through a salesperson. When investors purchase units, a
part of the investor's equity is removed as the load at the beginning of the
contract. This is called the front-end loading. By adding the commission at
the time of sale of units by the investors, exit fees or back-end loading can
also be charged.
Cont.
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The commission to be paid to the salesperson is added to the net asset

value. Apart from this, the fund managers also charge a management fee
for the cost of operating the portfolios. These costs include expenses that
will be borne by the fund manager such as brokerage fees, transfer costs,
New Issue Market
book-keeping expenses, and fund managers' salaries.
Mutual Funds
"A mutual fund is a trust that pools the savings of a number of investors
who share a common financial goal. Anybody with an investible surplus of
as little as a few thousand rupees can invest in mutual funds. These
investors buy units of a particular mutual fund scheme that has a defined
investment objective and strategy."
Cont.
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ENTITIES IN A MUTUAL FUND OPERATION

A mutual fund represents a vehicle for collective investment. In India, the
following entities are involved in a mutual fund operation.
1.
Sponsor
New Issue Market
2.
Mutual Fund
3.
Trustees
4.
Asset Management Company (AMC)
5.
Custodian
6.
Registrars and Transfer Agents
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Mutual Funds and SEBI
The Unit Trust of India was the first mutual fund set up in India in the year
1964. In the year 1992, the Securities and Exchange Board of India (SEBI)
Act wasNew
passed.
The objectives of SEBI are to protect the interest of
Issue Market
investors in securities and to promote the development of and to regulate
the securities market. All mutual funds whether promoted by public sector
or private sector entities, including those promoted by foreign entities are
governed by the same set of regulations. There is no distinction in
regulatory requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI.
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REGULATORY BODIES
There are four regulatory bodies for the Indian capital market. The main
capital market regulator is
Issue Market
TheNew
Securities
and Exchange Board of India
The Reserve Bank of India (RBI)
Department of Company Affairs (DCA)
Department of Economic Affairs (DEA)
Other regulatory bodies are CLB, RBI, SEBI, DEA, DCA, SEC, FRB, etc.
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AUDITING BODIES
Good corporate governance stipulates that all public companies having a
paid-up capital of Rs 5 crores or more have to constitute a committee of
New
Market
the Board
of Issue
Directors
known as the audit committee, which will consist of
not less than three directors. At least two-thirds of the total number of the
members of such a committee should not be managing or whole time
directors. The members have to elect a chairman from amongst
themselves.
Cont.
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Credit Rating
Credit Rating is a symbolic indication of the current opinion regarding the
relative capability of a corporate entity to service its debt obligations in
Issue Market
time withNew
reference
to the instrument being rated. It enables the investor
to differentiate between debt instruments on the basis of their underlying
credit quality. To facilitate simple and easy understanding, credit rating is
expressed in alphabetical or alphanumerical symbols.
Credit Rating
1.
Financial Instruments Rating
a) Bond Rating
b) Equity Rating
c) Short-term Instruments Rating
Cont.
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2.
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a)
Customer Rating
b)
Sovereign Rating
c)
Borrower Rating
Newpurposes
Issue Market
The various
for which credit rating is applied are:
1.
Long-term/medium-term debt obligations such as debentures, bonds,

preference shares or project finance debts are considered long-term
and debts ranging from 1 to 3 years like fixed deposits are considered
medium-term;
2.
Short-term debt obligations the period involved in one year or less and
cover money market instruments such as commercial paper, credit
notes, cash certificates etc.;
Cont.
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3.
Intermediaries
Equity Grading and Assessment, structured obligations, municipal

bonds, mutual fund schemes, plantation schemes, real estate
projects, infrastructure-related debts, ADR, GDR issues, bank
securities etc.
New Issue Market
Uses of Credit Rating
Credit rating is useful to investors, issuers, intermediaries and regulators.
Credit Rating Agencies
Credit Rating and Information Services of India Ltd. (CRISIL)
Credit Analysis and Research (CARE)
Investment Information and Credit Rating Agency of India Ltd.

(ICRA)
Duff & Phelps Credit Rating India (DCR)

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TECHNOLOGY/INTERNET PROVIDERS
In order to smoothen the online trading and terminal updating, technology
is a must. For Internet trading to succeed, good business models as well
New Issue Market
as a comprehensive technology strategy are imperative. With net trading

in securities and rapid consolidation between multiple stock exchanges,
the securities marketplace is fast becoming an international market place.
Cont.
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Investment Companies
Investment companies are firms that invite individual investors to subscribe

to their capital, combine the capital thus collected into a common pool of
investible
resources
and then seek to accomplish the investment objectives
New
Issue Market
of the investors by investing these resources in an appropriate portfolio of
securities. Investment companies may have a number of different schemes

(or 'funds' as they are sometimes called; we shall use the terms
interchangeably) catering to the specific investment objectives of different
classes of investors. These investment schemes, offered by investment
companies, can be categorized based either on the nature of their
capitalization or based on their investment objectives or based on the types
of assets held by them.
Cont.
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Investment Companies in India
Unit Trust of India (UTI)
Mutual Funds of Commercial Banks (MFS)
Issue Market
LifeNew
Insurance
Corporation of India (LIC)
Investment Options for Investment Companies In India
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Part I : The Investment Environment

New Issue Market

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

"Act" means the Securities and Exchange Board of India Act,

"certificate" means a certificate of registration issued by the

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Copyright 2008, Sudhindra Bhat

Part I : The Investment Environment

"Rules" mean the Securities and Exchange Board of India (Stock

"stock exchange" means a stock exchange which is for the time

"stock broker" means a member of a stock exchange;

"sub-broker" means any person not being a member of a stock

"Regulations" mean the Securities and Exchange Board of India

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

Conditions for grant of certificate to stockbroker.

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Copyright 2008, Sudhindra Bhat

Part I : The Investment Environment

Conditions of grant of certificate to sub-broker.

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

Dealer in Non-cleared securities

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

foreign banks with offices in New York.

cooperative company that transmits financial messages, payment orders,

financial institutions on the network, located in 190 countries.

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

INVESTMENT MANAGEMENT COMPANY

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

The investment management company has to issue unit certificates to

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

Merchant Bankers/Investment Banks

management, credit syndication, acceptance credit, counselling, insurance

Copyright 2008, Sudhindra Bhat

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment

The commission to be paid to the salesperson is added to the net asset

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT Sudhindra Bhat

Part I : The Investment Environment