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RESERVE BANK OF INDIA The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of 100 each fully paid, which was entirely owned by private shareholders in the beginning. Following India's independence in 1947, the RBI was nationalised in the year 1949. Functions of RBI ( The India's Central Bank ) As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions. For simplification, the functions of the Reserve Bank are classified into the traditional functions, the development functions and supervisory functions. Traditional Functions of RBI Traditional functions are those functions which every central bank of each nation performs all over the world. Basically these functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks. 1. Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These
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currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds. 2. Banker to other Banks : The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort. 3. Banker to the Government : The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch.

4. Exchange Rate Management : It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other. 5. Credit Control Function : Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools. 6. Supervisory Function : The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new braches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections an audit of the commercial banks in India.

Developmental / Promotional Functions of RBI Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country. The RBI has been performing as a promoter of the financial system since its inception. Some of the major development functions of the RBI are maintained below. 1. Development of the Financial System : The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. 2. Development of Agriculture : In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs). 3. Provision of Industrial Finance : Rapid industrial growth is the key to faster economic development. In this regard, the adequate and timely availability of credit to small, medium and large industry is very significant. In this regard the RBI has always
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been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc. 4. Provisions of Training : The RBI has always tried to provide essential training to the staff of the banking industry. The RBI has set up the bankers' training colleges at several places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to mention. 5. Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers. 6. Publication of the Reports : The Reserve Bank has its separate publication division. This division collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates. 7. Promotion of Banking Habits : As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964,
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NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. 8. Promotion of Export through Refinance : The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

Supervisory Functions of RBI The reserve bank also performs many supervisory functions. It has authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below. 1. Granting license to banks : The RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches. 2. Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. 3. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. 4. Implementation of the Deposit Insurance Scheme : The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

SEBI Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was not able to exercise complete control over the stock market transactions. It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate having a separate legal existence and perpetual succession. Reasons for Establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set up to meet the needs of three groups. 1. Issuers: For issuers it provides a market place in which they can raise finance fairly and easily. 2. Investors: For investors it provides protection and supply of accurate and correct information. 3. Intermediaries: For intermediaries it provides a competitive professional market. Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock exchange and to regulate the activities of stock market. The objectives of SEBI are: 1. To regulate the activities of stock exchange. 2. To protect the rights of investors and ensuring safety to their investment. 3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations. 4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

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Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These are: i. Protective functions ii. Developmental functions iii. Regulatory functions. Protective Functions: These functions are performed by SEBI to protect the interest of investor and provide safety of investment. As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practice because this can defraud and cheat the investors. (ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc. These insiders have sensitive information which affects the prices of the securities. This information is not available to people at large but the insiders get this privileged information by working inside the company and if they use this information to make profit, then it is known as insider trading, e.g., the directors of a company may know that company will issue Bonus shares to its
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shareholders at the end of year and they purchase shares from market to make profit with bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading. (iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to induce the sale or purchase of securities by any other person. (iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot change terms in midterm. (b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment. (c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.

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Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental categories following functions are performed by SEBI: (i) SEBI promotes training of intermediaries of the securities market. (ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way: (a) SEBI has permitted internet trading through registered stock brokers. (b) SEBI has made underwriting optional to reduce the cost of issue. (c) Even initial public offer of primary market is permitted through stock exchange. Regulatory Functions: These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed: (i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc. (ii) These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive. (iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.
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(iv) SEBI registers and regulates the working of mutual funds etc. (v) SEBI regulates takeover of the companies. (vi) SEBI conducts inquiries and audit of stock exchanges.

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COMPETITION COMMISSION OF INDIA Competition commission of India is a body of the government of India responsible for enforcing the competition Act 2002 throughout India and to prevent activities that have an adverse effect on competition in India. It was established on 14 October 2003. It became fully functional in May 2009. The provision with respect to the same is contained in section7 to 17. 1) The competition commission of India is a body corporate having common seal and thereby can enter into a contract, hold, acquire and dispose off the property. 2) The Commission shall consist of a chairperson and not less than two and not more than ten members to be appointed by the Central Government. 3) The jurisdiction, powers and authority of the Commission may be exercised by Benches thereof. The Benches shall be constituted by the chairperson and each Bench shall consist of not less than two members(section 21) 4) The Chairperson and every other Member shall be a person of ability, integrity and standing and who, has been, or is qualified to be, a judge of a High Court; or, has special knowledge of and professional experience of not less than fifteen years in international trade, economics, business, commerce, law, finance, accountancy, management. 5) The maximum term of office of chairperson and members is 5 year and maximum age limit for chairman is 67 years and for other members is 65 years. 6) Members, Director General, Registrar, officers and other employees, etc. of the Commission are deemed to be public servants. 7) The Chairperson or any Member may, by notice in writing under his hand addressed to the Central Government, resign his office.
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The objectives of the Act are sought to be achieved through the Competition Commission of India (CCI), which has been established by the Central Government with effect from 14 October 2003. CCI consists of a Chairperson and 6 Members appointed by the Central Government. Ashok Chawla is the current Chairperson of the CCI. It is the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade in the markets of India. The Commission is also required to give opinion on competition issues on a reference received from a statutory authority established under any law and to undertake competition advocacy, create public awareness and impart training on competition issues.

The Competition Commission strives to:1. Make the markets work for the benefit and welfare of consumers. 2. Ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of economy. 3. Implement competition policies with an aim to effectuate the most efficient utilization of economic resources. 4. Develop and nurture effective relations and interactions with sectoral regulators to ensure smooth alignment of sectoral regulatory laws in tandem with the competition law. 5. Effectively carry out competition advocacy and spread the information on benefits of competition among all stakeholders

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Power and functions of the commission: Functions of Commission Section 18: The main duty of the Competition Commission is to: Eliminate practices having adverse effect on competition, Promote and sustain competition, Protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India.

To achieve the above objects, the commission is endowed with following powers: (I) Power to Inquire into certain agreement and dominant position of enterprise: 1) The Commission may inquire into any alleged contravention of the provision contained in Section 3(1) (Prohibition of anti- competitive agreements) or Section 4(1) (abuse of dominant positions) either 2) On receipt of any information from any person, consumer or their association or trade association; or 3) On a reference made to it by the Central Government or State Government or a statutory authority. 4) The Commission shall, consider the following factors: creation of barriers to new entrants in the market; Driving existing competitors out of the market; accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
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The Commission shall, consider the following factors: while inquiring whether an enterprise enjoys a dominant position or not under section 4: market share of the enterprise; size and resources of the enterprise; size and importance of the enterprise dependence of consumers on the enterprise; Market structure and size of market.

(II) Power to Inquire into combination Section 20: 1) The Commission may, upon its own knowledge or information relating to acquisition referred to in section 5(a) or acquiring of control referred to in section 5(b) or merger or amalgamation referred to in section 5(c), inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition in India:

2) The Commission shall not initiate any inquiry after the expiry of one year from the date on which such combination has taken effect.

3) For the purpose of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall consider the following factors:

a) Actual and potential level of competition through imports in the market: b) Extent of barriers to entry into the market: c) Level of combination in the market;

d) Degree of countervailing power in the market: e) Extent of effective competition likely to sustain in a market;

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f) Nature and extent of vertical integration in the market:

(III) Power to give opinion on Reference by statutory authority Section 21: 1) Where in the course of a proceeding before any statutory authority an issue is raised by any party that any decision which such statutory authority has taken or proposes to take is or would be, contrary to any of the provisions of this Act, then such statutory authority may make a reference in respect of such issue to the Commission.

2) On receipt of a reference the Commission shall give its opinion, within sixty days of receipt of such reference, to such statutory authority which shall consider the opinion of the Commission and thereafter, give its findings recording reasons therefore on the issues referred to in the said opinion.

3) Any statutory authority, may, suo motu, make such a reference to the Commission.

(IV) Power to inquire into acts taking place outside India but having an effect on competition in India- Section 32: The Commission shall, irrespective of the fact that: 1) An agreement referred to in section 3 has been entered into outside India; or 2) Any party to such agreement is outside India; or 3) Any enterprise abusing the dominant position is outside India; or 4) A combination has taken place outside India; or 5) Any party to combination is outside India; or

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6) Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India.

(V) Power to grant interim relief- Section (33): Interim relief is a relief (order) issued by the court during the course of proceeding. It is a temporary relief i.e it is valid only till the further orders. The commission can grant interim relief if an inquiry is pending before it or it is proved to its satisfaction that an act in contravention of section 3, 4 or 6 has been committed and continues to be committed or that such act is about to be committed. (VI) Power to award compensation Section (34): 1) Commission has power to grant compensation to any person who files an application to commission for any loss or damage suffered as a result of contravention of the provisions of Chapter II (anti competitive agreements, abuse of dominant position and combinations) having been committed by such enterprise.

2) Order for compensation shall be passed after conducting an inquiry into the allegations mentioned in the application.

If any loss or damage referred above is caused to numerous persons having the same interest, one or more of such persons may, with the permission of the Commission, make an application for and on behalf of, or for the benefit of, the persons so interested

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FOREIGN EXCHANGE MANAGEMENT ACT, 1999 Meaning: An Act to consolidate and amend the law relating foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

Background of FEMA: In 1999, the Indian Government formulated the Foreign Exchange Management Act (FEMA).

On the 1st of June, 2000, FEMA came into force replacing the Foreign Exchange Regulation Act (FERA), which was formulated in 1973. FERA was enacted in the backdrop of acute shortage of Foreign Exchange in the country and had a controversial 27 year stint during which many bosses of the Indian Corporate world found themselves in the mercy of the Enforcement Directorate (E.D.).

Extensive economic reforms were undertaken in India in the early 1990s and this led to the deregulation and liberalization of the country's economy. Foreign Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies of pro liberalization of the Indian government.

FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organization (WTO).

Enactment of FEMA brought with it Prevention of Money Laundering Act, 2002 which came into effect from 1st July, 2005.
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Scope of FEMA:

It is applicable to the entire country.

Agencies, branches, and offices, outside India, that are owned by Indian residents, also fall under the jurisdiction of this act.

It also extends to any dispute that is committed in offices, agencies and branches outside India that are owned by individuals covered by this act.

Objectives of FEMA:

One of its important objectives is to revise and unite all the laws that relate to foreign exchange.

Further FEMA aims to promote foreign payments and trade in the country.

Another important objective of the Foreign Exchange Management Act (FEMA) is to encourage the orderly maintenance and development of the foreign exchange market in India.

FERA

Under FERA, nothing was permitted unless specially permitted. It provided for imprisonment of even a very minor offence.

A person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty.

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RBI Guidelines:

1) A general or special permission of the Reserve Bank of India is required to:1. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; 2. Make any payment to or for the credit of any person resident outside India in any manner; 3. Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; 4. Reasonable restrictions for current account transactions as may be prescribed.

2) RBI can, by regulations, regulate:1. Transfer or issue of any foreign security by a person resident in India; 2. Transfer or issue of any security by a person resident outside India; 3. Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; 4. Any borrowing or lending in foreign exchange in whatever form or by whatever name called; 5. Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; 6. Deposits between persons resident in India and persons resident outside India; 7. Export, import or holding of currency or currency notes; 8. Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India;

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9. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; 10.Giving of a guarantee or surety in respect of any debt, obligation or liability incurred a. By a person resident in India and owed to a person resident outside India or b. By a person resident outside India.

3) Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify:1. Any class or classes of capital account transactions which are permissible; 2. The limit up to which foreign exchange shall be admissible for such transactions.

Investigation under the Act: 1) The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices:1. Remittances of Indians abroad otherwise than through normal banking channels, i.e. through compensatory payments. 2. Acquisition of foreign currency illegally by person in India. 3. Non repatriation of proceeds of the exported goods. 4. Unauthorized maintenance of accounts in foreign countries. 5. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. 6. Siphoning off of foreign exchange against fictitious and bogus imports. 7. Illegal acquisition of foreign exchange through Hawala.
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8. Secreting of commission abroad.

Implementation of FEMA:

Extensive efforts have been undertaken to ensure the effective implementation of FEMA in India. Proper implementation measures and efficient supervision are important preconditions for the success of the Act.

Difference between FERA and FEMA Sl. No. Nature FEMA Foreign Exchange Management Act 1 Objective To facilitate external trade and payments and maintenance of foreign exchange market in India. 2 Violation Its violation is a civil offence. 3 Compounding of offences 4 Residential status Offences under it are compoundable. A stay of more than 182 days in India is the criteria to decide the residential status of a person under it. Its violation is a criminal offence. Offences under it were not compoundable. Citizenship was a criterion to determine the residential status of a person under it. FERA Foreign Exchange Regulation Act To conserve foreign exchange and prevent its misuse in India.

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FOREIGN INSTITUTIONAL INVESTOR (FII) Foreign Institutional Investor (FII) means an institution established or incorporated outside India which proposes to make investment in securities in India. They are registered as FIIs in accordance with Section 2 (f) of the SEBI (FII) Regulations 1995. FIIs are allowed to subscribe to new securities or trade in already issued securities. This is just one form of foreign investments in India, as may be seen from the graph below: TYPES OF INSTITUTIONAL INVESTOR Institutional investors include public and private pension funds, insurance companies, savings institutions, closed- and open-end investment companies, and foundations. Endowment fund A financial endowment is a transfer of money and/or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust. Among the institutions that commonly manage an endowment are academic institutions (e.g., colleges, universities, private schools), cultural institutions (e.g., museums, libraries, theaters, hospitals), and religious establishments. An endowment may come with stipulations regarding its usage. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested, with the principal to remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

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Mutual Fund A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities.[1] While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies." Most mutual funds are "open-ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund. The term mutual fund is less widely used outside of the United States and Canada. For collective investment vehicles outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAVs, unitized insurance funds,unit trusts and Undertakings for Collective Investment in Transferable Securities, which are usually referred to by their acronym UCITS. In the United States, mutual funds must be registered with the Securities and Exchange Commission, overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation or partnership) and managed by a registered investment adviser. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances, most notably in retirement planning. There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end. The most common type, the open-end fund, must be willing to buy

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back shares from investors every business day. Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity. Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed. Investors in a mutual fund pay the funds expenses, which reduce the fund's returns/performance. There is controversy about the level of these expenses. A single mutual fund may give investors a choice of different combinations of expenses (which may include sales commissions or loads) by offering several different types of share classes.

Pension Fund A pension fund is any plan, fund, or scheme which provides retirement income. Pension funds are important to shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold about $6 trillion in assets. In January 2008, The Economist reported that Morgan Stanley estimates that pension funds worldwide hold over US$20 trillion in assets, the largest for any category of investor ahead of mutual funds,insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity. Although the (Japan) Government Pension Investment Fund (GPIF) lost 0.25 percent, in the year ended March 31, 2011 GPIF was still the world's largest public pension fund which oversees 114 trillion Yen ($1.5 trillion).

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Hedge Fund A hedge fund is a collective investment scheme, often structured as a limited partnership, that invests private capital speculatively to maximize capital appreciation.[1]Hedge funds tend to invest in a diverse range of markets, investment instruments, and strategies; today the term "hedge fund" refers more to the structure of the investment vehicle than the investment techniques. Though they are privately owned and operated, hedge funds are subject to the regulatory restrictions of their respective countries.[2] U.S. regulations, for example, limit hedge fund participation to certain classes of investors (see accredited investors,[2] qualified purchasers) and also limit the total number of investors allowed in the fund. Hedge funds are often open-ended and allow additions or withdrawals by their investors. A hedge fund's value is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw. Because hedge funds are not sold to the general public or retail investors, the funds and their managers have historically been exempt from some of the regulation that governs other funds and investment managers with regard to how the fund may be structured and how strategies and techniques are employed. Regulations passed in the United States and Europe after the 2008 credit crisis were intended to increase government oversight of hedge funds and eliminate certain regulatory gaps.

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Insurance Companies Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

Investment Banking An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (Glass Steag all Act) until 1999 (GrammLeachBliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8 countries,
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have historically not maintained such a separation. As part of the Dodd-Frank Act 2010, Volcker Rule asserts full institutional separation of investment banking services from commercial banking. There are two main lines of business in investment banking. Trading securities for cash or for other securities (i.e. facilitating transactions, market-making), or the promotion of securities (i.e. underwriting, research, etc.) is the "sell side", while buy side is a term used to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities. An investment bank can also be split into private and public functions with an information barrier which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information. An advisor who provides investment banking services in the United States must be a licensed broker-dealer and subject to Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulation.

Investment Trust An investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies. The name is somewhat misleading, given that (according to law) an investment "trust" is not in fact a "trust" in the legal sense at all, but a separate legal

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person or a company. This matters for the fiduciary duties owed by the trustees and the equitable ownership of the fund's assets.

Sovereign Wealth Fund A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets. Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management. The accumulated funds may have their origin in, or may represent, foreign currency deposits, gold, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and (such as the dollar, euro, pound, and yen). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others. There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term "currency stabilization", and liquidity management.
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Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed most have diversified hugely into assets other than short-term, highly liquid monetary ones, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like overnight interest rate swaps)

Regulation of FIIs The regulations for foreign investment in India have been framed by the Reserve Bank of India in terms of Sections 6 and 47 of the Foreign Exchange Management Act, 1999 and notified vide Notification No. FEMA 20/ 2000-RB dated 3rd May 2000 viz. Foreign Exchange Management (Transfer or issue of Security by a person Resident outside India) Regulations 2000, as amended from time to time. In line with the said regulations, since 2003, the Securities and Exchange Board of India (SEBI) has been registering FIIs and monitoring investments made by them through the portfolio investment route under the SEBI (FII) regulations 1995. SEBI acts as the nodal point in the registration of FIIs.

Who can get registered as FII? Following foreign entities / funds are eligible to get registered as FII: 1. Pension Funds 2. Mutual Funds 3. Investment Trusts 4. Banks 5. Insurance Companies / Reinsurance Company
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6. Foreign Central Banks 7. Foreign Governmental Agencies 8. Sovereign Wealth Funds 9. International/ Multilateral organization/ agency 10.University Funds (Serving public interests) 11.Endowments (Serving public interests) 12.Foundations (Serving public interests) 13.Charitable Trusts / Charitable Societies (Serving public interests)

Thus it may be seen that sovereign wealth funds (SWFs) are also regulated under FII regulations only, and no separate regulation exists for SWFs. Further, following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs: 1. Asset Management Companies 2. Investment Manager/Advisor 3. Institutional Portfolio Managers 4. Trustee of a Trust 5. Bank

Foreign individuals can register as sub-accounts of FII to make investments in Indian securities.

What FIIs can do? A Foreign Institutional Investor may invest only in the following:-

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i.

securities in the primary and secondary markets including shares, debentures and warrants of companies unlisted, listed or to be listed on a recognised stock exchange in India; and

ii.

units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognised stock exchange or not

iii. iv. v. vi. vii. viii.

units of scheme floated by a collective investment scheme dated Government Securities derivatives traded on a recognised stock exchange commercial paper Security receipts Indian Depository Receipt

FIIs are allowed to trade in all exchange traded derivative contracts subject to the position limits as prescribed by SEBI from time to time. Clearing Corporation monitors the open positions of the FII/ sub-accounts of the FII for each underlying security and index, against the position limits, at the end of each trading day. Why FIIS required?

FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient.

Following are the some advantages of FIIs. It lowers cost of capital, access to cheap global credit. It supplements domestic savings and investments. It leads to higher asset prices in the Indian market. And has also led to considerable amount of reforms in capital market and financial sector.
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Procedure for registration:

The Procedure for registration of FII has been given by SEBI regulations. It states- no person shall buy, sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations. An application for grant of registration has to be made in Form A, the format of which is provided in the SEBI (FII) Regulations, 1995.

The eligibility criteria for applicant seeking fii registration is as follows :

Good track record, professional competence and financial soundness. Regulated by appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Permission under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) from the RBI. Legally permitted to invest in securities outside country or its incorporation/establishment. The applicant must be a fit and proper person. Local custodian and designated bank to route its transactions.

Eligible securities

A FII can make investments only in the following types of securities:

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 Securities in the primary and secondary markets including shares, debentures and warrants of unlisted, to- be-listed companies or companies listed on a recognized stock exchange. Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed on a recognized stock exchange or not, and units of scheme floated by a Collective Investment Scheme. Government Securities Derivatives traded on a recognized stock exchange like futures and options. FIIs can now invest in interest rate futures that were launched at the National Stock Exchange (NSE) on 31st August, 2009. Commercial paper. Security receipts

EFFECTS OF FII ON INDIAN ECONOMY

Let us study the positive and negative impacts of this rise of investments by FIIs:

POSITIVE IMPACT:

It has imphasized upon the fact that the stock market reforms like improved market transparency, automation, dematerialization and regulations on reporting
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and disclosure standards were initiated because of the presence of FIIs. But FIIs flows can be considered both as the cause and the effect of stock market reforms. The market reforms were initiated because of the presence of them and this in turn has led to increased flow.

a). Enhanced flows of equity capital: FIIs are well known for greater appetite for equity than debt in their asset structure. For example, pension fund in the United Kingdom and United States had 68 per cent respectively of their portfolios in equity in1998. Not only it can help in supplementing for domestic saving for the purpose of development project like building economic and social infrastructure but can also help in growth of rate of investment, it boosts the production, employment and income of the host country.

b). Managing uncertainty and controling risks: FIIs promote financial innovation and development of hedging instruments. These because of their interest in hedging risks, are known to have contributed to the development of zero-coupon bonds and index futures. These impacts made the Indian stock market more attractive to FII & also domestic investors.The impact of FII is so high that whenever FII tend to withdraw the money from market, thedomestic investors fearful and they also withdraw from market.

c). Improving capital markets: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to supply more information about them, the FIIs can help in the process of economic development.
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d). Improved corporate governance: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. Bad corporate governance makes equity finance a costly option. With boards often captured by managers or passive, ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy. Incentives for shareholders to monitor firms and enforce their legal rights are limited and individuals with small share-holdings often do not address the issue since others can free-ride on their endeavor. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Among the four models of corporate control - takeover or market control via equity, leveraged control or market control via debt, direct control via equity, and direct control via debt or relationship banking-the third model, which is known as corporate governance movement, has institutional investors at its core. In this third model, board representation is supplemented by direct contacts by institutional investors.

NEGATIVE IMPACT:

If we see the market trends of past few recent years it is quite evident that Indian equity markets have become slaves of FIIs inflow and are dancing to their tune. And this dependence has to a great extent caused a lot of trouble for the Indian economy. Some of the factors are:

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a) Potential capital outflows: Hot money refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. Hot money can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

b). Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods.

c). Problem to small investors: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.

d). Adverse impact on exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee.

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CONCLUSION

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BIBLIOGRAGHY

DYNAMICS OF INDIAN FINANCIAL SYSTEM BY - PREETY

SINGH
INDIAN FINANCIAL SYSTEM BY BHARATI V. PATHAK

FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY

WEBLIOGRAPHY www.rbi.org.in www.investopedia.com. www.sebi.gov.in www.economics.indiatimes.com www.cci.gov.in

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