Capital

market is generally understood as a market for long term funds and investments in long term instruments available in this market. However now this market also includes short term funds. Capital markets mean the market for all the financial instruments, short term and long term, as also commercial, industrial and government paper.

capital market deals with the capital and hence it is a market where borrowing and lending of long term funds takes place. In other words, capital market refers to all the institutes and mechanisms of raising medium and long term funds, through various instruments available like shares, debentures, bonds, etc.
The

 Capital

market requires many intermediaries who are responsible to transfer funds from those who save to those who require these funds for investments. Such intermediaries are known as the constituents of capital markets.

stock exchange. Banks. The investment trusts and companies. Specialized financial institutions or developments banks. Mutual funds. Post office saving banks. Non banking financial institutions. International financial investors and institutions.
The

 Individuals. Corporate. Governments. Foreign Banks. Provident

countries.

funds. Financial institutions.

 The

Securities and Exchange Board of India was set up on April 12, 1988, following the recommendations of the high powered G.S.Patel committee on stock exchange reforms.

 SEBI

seeks to create an environment, which would facilitate mobilization of adequate resources through the securities market and its efficient allocation. This environment would includes rules and regulations, institutions and their interrelationships, instruments, practices, infrastructure within an appropriate policy framework, should have an overall air of freshness. The market must create confidence in the minds of the investors.

 SEBI

shall create a power and conducive atmosphere required for raising money from the capital market. SEBI shall educate investors and make them aware of their rights in clear and specific terms. SEBI shall create proper investment climate to enable corporate sector to raise industrial securities easily, efficiently and at affordable cost. SEBI shall make more effective the laws in the existing statues.

 It

can ask any intermediary or market participant for information. It can inspect books of depository participants, issuers or beneficiary owners. It can suspend or cancel a certificate of registration granted to a DP or issuer. It can suspend or cancel registration granted to FIIs. It can investigate the affairs of mutual funds, their trustees and AMC.

the business in stock exchanges. Registering and regulating the working of stock brokers, etc. Registering and regulating the working of the mutual funds. Promoting and regulating self regulatory organization. Prohibiting fraudulent and unfair trade practices. Prohibiting insider trading in securities. Regulating mergers and acquisitions.
Regulating

1.

2.

3.

4.

Credit rating for these instruments is mandatory, irrespective of maturity or conversion period. The credit rating has to be disclosed in the offer document. For an issue equal to or greater than Rs.100crore two ratings from two different credit rating agencies have to be obtained. In case of issue of debentures with maturity of more than 18 months the issuer shall appoint a debenture trustee. Trustees shall obtain a certificate from the companys auditors in respect of utilization of funds during the implementation period of the project.

company has to create DRR in case of issue of debentures with a maturity period of more than 18 months. DRR shall be treated as a part of general reserve for consideration of bonus issue proposals. A company shall create DRR equivalent to 50% of the amount of debenture issue before debenture redemption commences.

 The

investors in the past have suffered at the hands of inefficient stock exchanges and greedy and unprofessional brokers. This was one of the reasons why SEBI was created. The investor today can look forward to redressal of his grievances through SEBI.

1. 2. 3. 4.

5.

6.

The introduction of screen based trading. The ban on Badla. The dematerialization of shares. The method of postal ballots so that small investors views are heard. The book building process in buy back of shares by the companies. The capital adequacy norms for brokers.

As per the regulations Insider means any person who is or was connected with the company or is deemed to be so connected and who is reasonably expected to have access, by virtue of such connection to unpublished price sensitive information, in respect of such securities of such company. A person is deemed to be a connected person if such a person is a group company or any subsidiary, an official of stock exchange or stock brokers, merchant banker or a director or an official of the company, banker of the company, or relatives of any of the persons mentioned above.

 If

such persons have access to the unpublished price sensitive information and is proved to have used it for personal gain or profits or price manipulation, they are liable to be penalized under these regulations. CASE STUDIES..

1. 2. 3. 4. 5. 6. 7. 8. 9.

Proper disclosure to investors through prospectus made mandatory. Guidelines for merchant bankers. Advertising code for mutual funds. Mutual funds required to publish balance sheets. Takeover code formulated. Portfolio management services guidelines issued. Guidelines on insider trading. Registration of stock brokers and sub brokers. Underwriting made mandatory.

 P-notes

are instruments used by foreign funds and investors who are not registered with SEBI but are interested in taking exposure in Indian securities. P-notes are generally issued overseas by the associates of India based foreign brokerages and domestic institutional brokerages. Foreign institutional investors who do not wish to register with the SEBI but would like to take exposure in Indian securities also use P-notes.

 Participatory

notes have attracted significant market attention recently because of huge inflow of foreign funds into Indian stock markets through this route. Since the ultimate beneficiary of transactions carried out using participatory notes is not known to the market regulator and the tax authorities, there is scope for misuse and tax avoidance. Also, since participatory notes do not attract the attention of the market regulators of the countries in which they are issued, the entities holding participatory notes virtually go unregulated.

 The

SEBI is set to further tighten its FIIs regulations to ensure that P-notes are not misused by NRIs, overseas corporate bodies controlled by Indians or by Indian promoters. The SEBI board has taken an in principle decision to restrict the issue of participatory notes by FIIs to only regulated entities.

 The

money market is a market for overnight to short term funds, and for short term money and financial asset that are close substitutes for money. Short term in Indian context means a period up to one year. Close substitute for money means any financial asset, which can be quickly converted into money.

mechanism for evening out short term surpluses and deficiencies. A focal point of central bank intervention for influencing liquidity in the economy. A reasonable access to the users of short term funds to meet their requirements at realistic cost.

 The

RBI jointly with the public sector banks and the all India financial institutions set up DFHIL as an autonomous financial intermediary. It was conceived with the main objective of increasing the transactions of the money market assets. The main function of DFHIL is to smoothen the short term liquidity imbalances by developing an active secondary market. DFHIL participates in call/notice/term money markets both as borrower and lender, and purchases and sells T bills, commercial bills, commercial paper and certificate of deposits.

participants in these bills are state governments, foreign central banks and specified bodies. These are non transferable instruments and are issued only in the book entry forms and would be redeemed at par.
The

 The

CP is a short term negotiable instrument, consisting of usance primary notes with a fixed maturity, indicating the short term obligation of an issuer. Companies as a means of raising short term debt, issue it. It is issued at a discount to face value basis but can also be issued in interest bearing form. The issuer promises the buyer a fixed amount at a future date but pledges no assets.

CD is a document title to a time deposit and can be distinguished from the conventional time deposit in respect of its free negotiability and hence marketability. CDs are a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer instruments and are readily negotiable.

enable the small investors to participate in the money market, a money market mutual fund is a conduit through which they can earn market related yield. MMMFs invest the funds collected from the investors in instruments like: 1. Treasury bills and government securities. 2. Call/notice money. 3. Commercial bills. 4. Commercial paper 5. Certificate of deposit.
To

 Repo/ready/forward/purchase

transaction is an agreement between a seller and buyer stipulating the sale and later repurchase of securities at a particular price and a date. It is essentially a short term loan to the seller with securities issued as collateral. similarly, the buyer purchases securities with an agreement to sell the same to the seller on an agreed date in future at a prefixed price. For the buyer of the securities it is a reverse repo deal.

 Due

to the immense inflow of the foreign exchange in India the RBI has to issue bonds to suck out this excess liquidity from the markets. This helps RBI to maintain stability in the forex markets. However this borrowing adds the government's borrowing. The government therefore decided to launch new bonds from fiscal 2004-05 named Market Stabilization Bonds. These bonds will be used only to suck out the excess liquidity from the market. This has been done on the advice of a working group formed by the RBI.

 What

is credit rating?????

reflects the borrowers accountability, expected capability and inclination to pay interest and principal in a timely manner. Rating is an isolated function of a credit risk evolution. Rating is useful in differentiating credit quality. Rating will involve issue specific evaluation.
Rating

is not a general purpose evaluation of the issuer. It is not a recommendation to buy/sell/hold a security. Rating is not an extensive audit of the issuing company. Rating is not a one time assessment of creditworthiness valid over the future life of the security.
Rating

 Following

are some of the key factors generally considered by the rating agencies for the purpose of ratings: 1. Business analysis. 2. Market position of the company. 3. Operating advantages of the company. 4. Financial risk analysis. 5. Working capital indicators. 6. Project risk. 7. Management evaluation.

 Industry

risk. Industry structure. Industry size and importance to economy. Determinates of revenue growth. Entry barriers.

 Nature

and basis of competition. Threat from imports and substitutes. Presence of unorganized sector. Market share. Competitive advantages like brand equity and pricing flexibility. Product and customer diversity.

 Cost

structure. Manufacturing efficiency. Production flexibility. Technology risk. Raw material sourcing. Location factors.

 Income

recognition. Expense capitalization. Depreciation and inventory valuation policies. Off balance sheet and contingent liabilities. Non operating income. Profitability measures. Capital structure.

on capital employed. Adequacy of cash flows. Debt servicing requirements. Sustainability of funds from operations. Ability to raise equity and debt funds.
Return

 Project

risk in relation to existing operations. Means of financing. Funding tie up. Extent of completion. Adherence to implementation schedules.

 Strength

of linkage to parent/group operational, financial and managerial support. Systems and track record. Project implementation record. Management talent and succession.

 AAA

: Highest safety. AA : High safety. A : Adequate safety. BBB : Moderate safety. BB: Inadequate safety. B : High risk. C : Substantial risk. D : Default.

will supplement the investors credit evaluation process. It facilitates comparison of relative value between competing securities. It helps in recognizing the risk involved in the investment.
Rating

company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting less interest rates. A company with rating can approach a wider section of investors for resource mobilization. Smaller and not so well known companies can access markets. Rating encourages the companies to come out with more disclousers.

 Since

October 1998, the public limited companies in India are allowed to buy back their shares from the shareholders. A company can buy back their own shares or other specified securities from out of: 1. Its free reserves. 2. The securities premium account. 3. The proceeds of an earlier issue other than fresh issue of shares made specifically for buy back purposes. The buy back of shares falls under section 77 of the companies act, 1956.

articles of association must permits such buy back. A special resolution in general meeting authorizing buy back should be passed. The company in the notice to shareholders must give an explanatory statement about the need for buy back, the amount required for it, the time limit and completion of the process.
The

letter of offer, the public announcement should contain true, factual and material information. The company should not issue any securities including by way of bonus till the date of closure of the offer made under these regulations. The company must pay the consideration only by way of cash.
The

company should not withdraw the offer after the draft letter of the offer is filed with SEBI or the public announcement in this regard is made. The promoter or the person in control should not deal in the securities of the company in the stock exchange during the period when the buy back offer is open.
The

1.

2. 3.

4.

From the existing shareholders on a proportionate basis. From the open market. Through the purchase of odd lot shares held by the shareholders. By purchasing the securities issued to the employees of the company under the stock options scheme or sweat equity scheme.

 It

is a way of returning surplus cash to shareholders. It increases the underlying value of the shares. It helps to support the prices during a period of temporary weakness in the stock markets. It helps the company to maintain target capital structure. It can also be used as the mechanism against a possible hostile takeover bid.

1. 2. 3.

Open market purchases. Tender offer. Dutch auction.

 This

is done by giving notice to the shareholders at least seven days prior to buy back. The company has to disclose the total number of shares it intends to buy back. Since the process is carried out in the open market no minimum price is mentioned for the buy back. This is easy, quick and simple process.

 The

buying company has to disclose the total number of shares and the price at which it wishes to buy back. The maximum price offered is 20% above the average price. The offer period could be between 15/30 days. If shares tendered are more than the total number to be bought back, then buy back is done on the proportionate basis.

 In

this method the price of buy back is done by the shareholders themselves. This is like the process of book building.

A portfolio is a collection of assets. In portfolio management these assets are financial in nature. The portfolio manager invests the money in diverse assets with the aim of maximizing return and minimizing the risk. According to SEBI, Portfolio means the total holdings of securities belonging to one person. Portfolio manager means any person who pursuant to a contract with a client undertakes the management of a portfolio of securities or the funds of the client.

1.

2.

3.

4.

To frame invest strategy and select an investment mix. To provide a balanced portfolio, which will hedge against inflation and also optimize returns. To make timely decisions regarding sale and purchase of securities. To maximize after tax return by investing part of the portfolio in tax savings investments.

1.

2.

The discretionary portfolio management service. The non discretionary portfolio management service.

 In

this type, the client gives his money for investment to the manager, who handles the paperwork, makes all investment decisions and gives a good return to the investors and charges a fee for the services rendered.

 In

this scheme, the manager functions as a counselor, but the investor is free to accept or reject the managers advise; the paperwork is also undertaken by the manager for a service charge. The manager concentrates on stock market instruments with a portfolio tailor made to the risk taking ability of the investor

1. 2. 3. 4.

Sound general knowledge. Analytical ability. Marketing skills. Experience.

1.

2.

3.

4.

5.

Specification and quantification of investors objective, constraints and preferences in the form of policy decisions. Determination and quantification of capital market expectations for the economy, market sectors, industries and individual securities. Allocation of assets and selection of individual securities. Monitoring the performance and responding to the changes in the investors objective. Rebalancing the portfolio whenever necessary.

1. 2. 3. 4. 5. 6. 7. 8.

Investors characteristics. Liquidity needs. Tax considerations. Safety of principle. Assurance of income. Investment risk. Interest rate risk. Business and market risk.

 Todays

world is known as the world of plastic money. In modern times people have started using this money instead of cash, in the form of credit cards, debit cards and charged cards. As these cards are very convenient they have become very popular over the last few years in India. Today we find that most banks are offering these cards to their customers.

1. 2. 3. 4.

Card issuer. Card holders. Member establishments. Clearing agencies.

 The

issuers are mainly banks. Banks are interested in this business because of the high margins available to them. The banks charges upto3% from the member establishments. They charge an annual fees from their customers and also earn very high interest on the credit made available to the user.

 The

cardholders include both the individuals and the business organizations.

are the establishments enlisted by the card issuers, who accept payment through the cards for goods sold and services rendered. MEs are enlisted after taking into consideration their reputation, integrity, standing and popularity. The volume of the business that is likely to be generated by them is also a crucial factor of consideration.
These

card issuer affiliates itself with the master card international or Visa international the two leading international card issuers, which act as clearing agencies. The advantage of this is affiliation is that it enables cardholder of one affiliate to use his card at the member of the other affiliate also. These companies also allow the issuing banks to use their logo on their cards.

a credit card that is a pay later product, a debit card is a pay now product where the customers account with the issuer is immediately debited to the extent of the value of the transaction. The debit card program needs terminal, known as the point of sale terminal. For making the payment the card is inserted in this machine. The machine places an automatic call, checks the balance in the account and reduces the balance to the extent of the invoice.
Unlike

 These

days housing finance is in limelight. Not long ago the housing finance means HDFC. It is no more so. Virtually all banks led by new private sector banks and even public sector banks have become very active in this field. There is no doubt whatsoever shortage of housing in our that there is tremendous shortage of housing in our country. With the interest on housing loans at historical low, many people are willing to take loans today.

 Housing

finance is offered by many specialized housing finance companies approved by the regulator national housing bank, a subsidiary of the Reserve Bank of India. It is also offered by public and private sector banks along with many co-operative banks.

 The

NHB specifies various norms to be followed by the HFCs (Housing Finance Companies) and regulates the industry. It specifies the interest rates to be followed in lending and borrowing, income recognition and prudential norms, borrowing limits and audit to the housing finance companies. It provides refinance facility to the HFCs and facilitates promotion of these companies on the specified lines.

1.

2.

To promote, establish, support or aid in the promotion, establishment and support of housing finance institutions. To make loans, advances or render any other form of financial assistance whatsoever to housing finance institutions, scheduled banks and to any authority established under any central/state act engaged in slum clearance.

subscribe to or purchase stocks, shares, bonds, debentures and securities of every other description. To guarantee the financial obligations of these institutions and underwrite their issues of securities.
To

1. 2.

3.

4.

5.

6.

Minimum paid up capital has to be Rs.1crore. At least two directors have to be nominated by banks, financial institutions or by NHB. Any appointment of auditors has to be done with the approval of NHB. At least 75% of the loans have to long term in nature. Promoters contribution has to be minimum of 30% of the paid up capital. The proposed HFC should not promote a real estate companies.

 Annual

limits are fixed for the HFCs based on various parameters such as average refinance drawn during the previous years, repayment of refinance earlier availed from it and the overall borrowing limit prescribed under the refinance policy. The refinance made available to any HFC is not be more than 60% of its outstanding housing loans at any point of time.

main objective of this is to assess the applicants sustained repayment capacity over the period. The main points that are considered are: 1. Income. 2. Age. 3. Academic background and employment stability. 4. Family background. 5. Assets & liabilities. 6. Number of dependents.
The

 After

credit appraisal is done, legal appraisal is done wherein all other documents like original title deeds, revenue receipts, encumbrance(search) certificates for the past 30 years are verified by a lawyer to confirm that the withholder can create an equitable mortgage in favor of the HFC by simple deposits of the title deeds.

technical officer will verify the original documents and counter check all the furnished information. Following documents are generally required: 1. Layout plan. 2. Approved plan. 3. No-encumbrance certificate. 4. Clearance under the act. 5. A detail estimate of the cost of construction. 6. NOC for mortgage of the property.
The

 To

obtain an investment rating and make the transaction attractive to the investors, some type of credit enhancement procedure is usually necessary. In order to cover the possibility that the loan portfolio will generate insufficient payment to fund payments of notes, interest when due, some form of liquidity support is provided, usually by a credit facility from a third party lender.

 An

equipment lease can be defined as a contractual arrangement where the lessor of the equipment transfers the right to use the equipment to the lessee for an agreed period of time in future in return for rental. At the end of the period the asset is revert back to the lessor, unless there is a provision for the renewal of the contract or there is a provision for transfer of ownership to the lessee.

1. 2. 3. 4.

5. 6. 7.

Flexibility. User oriented variants. Tax benefits. Less paper work and expeditious disbursement. Convenience. 100% financing. Better utilization of own funds.

1. 2. 3. 4. 5. 6. 7. 8.

Description clause. Period clause. Rental clause. Exemption clause. Ownership clause. Repairs and alteration clause. Insurance. Surrender clause.

hire purchase can be defined as a contractual arrangement under which the owner lets his goods on hire to the hirer and offers an option to the hirer for purchasing the goods in accordance with the terms of the contract.

1.

2.

3. 4.

The finance company purchases the equipment from the supplier and lets in on hire to the hirer. The hirer may be required to make a down payment and balance can be repaid in maximum 60 months. The interest is calculated on the basis of flat rate of interest. During the tenure of the contract the hirer can opt for an early repayment and purchase the assets. The hire, exercising this option, is required to pay the remaining amount of hire purchase installments less interest rebate.

 Venture

capital means, providing seed, star up and first stage financing and funding the expansion of companies that have already demonstrated their business potential but do not have access to the public securities market or to credit oriented institutional funding sources. Venture capital is an equity, equity featured capital seeking investment in new ideas, new companies, new products, new processes or new services, that offer the potential of high returns on investment. It may also include investment in turnaround situations.

1. 2.

3.

4. 5.

Investment are made in equity or equity featured instruments of investments. Young companies that do not have access to public sources of equity or other forms of capital. Industry, products or services that hold potential of better than normal or average revenue growth. Companies with better than normal or average profitability. Product/services in the early stages of their life cycle.

are mainly three categories of venture capital funds: 1. Funds promoted by All India Development Financial Institutions and State development financial institutions. 2. Funds promoted by commercial banks. 3. Funds promoted by private sector financial services companies.
There

 Seed

financing. Start up financing. First stage financing. Second stage financing. Third stage financing or mezzanine finance. Bridge financing. Acquisition financiang.

 Relatively

small amount of capital is provided to an entrepreneur to prove his concept.

 This

is provided to companies completing product development and initial marketing. Usually such firms will have made market studies and assembled the key management, developed a business plan and are ready to do the business.

 This

is provided to companies that have expanded their initial capital and require funds to initiate full scale manufacturing and sales.

 This

is the working capital for the initial expansion of a company that is producing and shipping and has growing accounts receivables and inventories.

 This

is provided for major expansion of a company when sales volume is increasing and that is breaking even and profitable. These funds are used for further plant expansion, marketing, working capital or development of an improved product.

 This

type of financing is required at times when a company plans to go public within six months to a year. Often it is structured so that it can be repaid from the proceeds of a public underwriting.

 This

kind of funding provides funds to finance an acquisition of another company. Management/leveraged buyout funds enable an operating management group to acquire a product line or business from either a public or private company.