Professional Documents
Culture Documents
MEANING
As per section 65(10) of the Finance Act, 1994, “banking and financial services”
means the following services provided by a banking company or a financial institution
including a non banking financial company, namely :
(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii) credit card services;
(iii merchant banking services;
)
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund
management, custodial depository and trust services, but does not include cash management;
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice,
advice on mergers and acquisition and advice on corporate restructuring and strategy; and
vii) provision and transfer of information and data processing.
DEFINATION
Financial services can be defined as the products and services offered by institutions
like banks of various kinds for the facilitation of various financial transactions and
other related activities in the world of finance like loans, insurance, credit cards,
investment opportunities and money management as well as providing information on
the stock market and other issues like market trends
Financial services refer to services provided by the finance industry. The finance
industry encompasses a broad range of organizations that deal with the management
of money. Among these organizations are banks, credit card companies, insurance
companies, consumer finance companies, stock brokerages, investment funds and
some government sponsored enterprises.
Functions of financial services
iii) Concomitant: Production of financial services and supply of these services have
to be concomitant. Both these functions i.e. production of new and innovative
financial services and supplying of these services are to be performed simultaneously.
iv) Tendency to Perish: Unlike any other service, financial services do tend to perish
and hence cannot be stored. They have to be supplied as required by the customers.
Hence financial institutions have to ensure a proper synchronization of demand and
supply.
Financial services cover a wide range of activities. They can be broadly classified into
two, namely:
• i. Traditional. Activities
• ii. Modern activities.
Scope of Financial
Services
Traditional Activites
Fund based activities: The traditional services which come under fund based
activities are the following:
Modern Activities
• Rendering project advisory services right from the preparation of the project
report till the raising of funds for starting the project with necessary
Government approvals.
• Planning for M&A and assisting for their smooth carry out.
• Guiding corporate customers in capital restructuring.
• Acting as trustees to the debenture holders.
• Recommending suitable changes in the management structure and
management style with a view to achieving better results.
• Structuring the financial collaborations / joint ventures by identifying suitable
joint venture partners and preparing joint venture agreements.
• Rehabilitating and restructuring sick companies through appropriate scheme of
reconstruction and facilitating the implementation of the scheme.
• Hedging of risks due to exchange rate risk, interest rate risk, economic risk,
and political risk by using swaps and other derivative products.
• Managing In- portfolio of large Public Sector Corporations.
• Undertaking risk management services like insurance services, buy-hack
options etc.
• Advising the clients on the questions of selecting the best source of funds
taking into consideration the quantum of funds required, their cost, lending
period etc.
• Guiding the clients in the minimization of the cost of debt and in the
determination of the optimum debt-equity mix.
• Undertaking services relating to the capital market, such as
a. Clearing services
• b. Registration and transfers,
• c. Safe custody of securities
• d. Collection of income on securities
• Promoting credit rating agencies for the purpose of rating companies which
want to go public by the issue of debt instrument.
The financial services sector has gone through a period of significant changes over the
last few decades.
These changes have been due to the interplay of a number of factors, such as:
Technological developments
Consolidation
Financial services have become increasingly internationalized over the years. The
presence of foreign financial services providers in national markets has grown
significantly in the last two decades. As shown by recent studies, market shares of
majority foreign-owned banks increased dramatically in East Asia, Eastern Europe
and Latin America, sometimes exceeding 50 per cent of the market. Cross-border
trade in financial services is also an important component of services exports
worldwide. In 2005, financial services and insurance accounted for 18 per cent of
world exports of ‘other commercial services’. Financial services trade has
experienced rapid growth in recent years. For example, between 2000 and 2005,
insurance was among the top three fastest growing sectors, with a rate of 14 per cent
(WTO International Trade Statistics 2007).
With falling barriers to entry in the financial services industry, the differences
between financial institutions have been eroded, and an increasing number of
competitive services and products are being offered by different types of institutions.
For example, commercial banks have been allowed to enter into investment banking,
finance companies provide banking products, and insurance companies also provide
different forms of financing.
Cost reduction has become a priority for institutions in the new competitive
environment, and one of the responses to cost pressures within the sector has been the
outsourcing of specific functions to other countries, a process usually referred to as
‘offshoring’. Outsourcing/offshoring has become a significant feature of the
international financial services sector.
Though financial services sector is growing very fast, it has its own set of problems
and challenges. The financial sector has to face many challenges in its attempt to
fulfill the ever growing financial demands of the economy. Some of the important
challenges are briefly explained hereunder
1. Lack of qualified personnel: The financial services sector is fully geared to the
task of 'financial creativity'. However, this sector has to face many challenges.
The dearth of qualified and trained personnel is an important impediment in its
growth.
2. Lack of investor awareness : The introduction of new financial products and
instruments will be of no use unless the investor is aware of the advantages
and uses of the new and innovative products and instruments,
3. Lack of transparency: The whole financial system is undergoing a phenomenal
change in accordance with the requirements of the national global
environments. It is high time that this sector gave up their orthodox attitude of
keeping accounts in a highly secret manner.
4. Lack of specialization: in the Indian sense, each financial intermediary seems
to deal in different financial service lines without specializing in one or two
areas. In other countries , FI specialize in one or two areas only and provide
expert service
5. Lack of recent data: most of the fi do not spend more on research. It is very
vital that one should build up a proper data base on the basis of which one
could embark upon financial creativity.
6. Lack of efficient risk management system: with the opening of the economy to
multinationals and exposure of Indian companies to international competition,
much importance is given to foreign portfolio flows. It involves the utilization
of multi currency transactions which exposes the client to exchange rate risk,
interest rate risk and economic and political risk.
MUTUAL FUNDS
Introduction
The investors who invest their money in the Mutual fund of any Investment
Management Company receive an Equity Position in that particular mutual fund.
When after certain period of time, whether long term or short term, the investors sell
the Shares of the Mutual Fund, they receive the return according to the market
conditions.
Other than some specific mutual funds which carry certain Maturity Term, Investors
can generally sell the shares of their mutual funds at any time they want. But, the
return will vary according to market value of the stocks and bonds in which that
particular mutual fund made investment. But, generally the share holders of mutual
fund sell their share when the prices are up and Capital Gain is sure to happen.
A mutual fund is a company that brings together money from many people and
invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or
other assets the fund owns are known as its portfolio. Each investor in the fund owns
shares, which represent a part of these holdings and its commonly known as units.
Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier),
who thinks of starting a mutual fund. The Sponsor approaches the Securities &
Exchange Board of India (SEBI), which is the market regulator and also the regulator
for mutual funds. Not everyone can start a mutual fund. SEBI checks whether the
person is of integrity, whether he has enough experience in the financial sector, his
networth etc.
Once SEBI is convinced, the sponsor creates a Public Trust (the Second tier) as per
the Indian Trusts Act, 1882. It is important to understand the difference between the
Sponsor and the Trust. They are two separate entities. Sponsor is not the Trust; i.e.
Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund.
Trustee
Trusts have no legal identity in India and cannot enter into contracts, hence the
Trustees are the people authorized to act on behalf of the Trust. Contracts are entered
into in the name of the Trustees. Once the Trust is created, it is registered with SEBI
after which this trust is known as the mutual fund.
The Trustees role is not to manage the money. Their job is only to see, whether the
money is being managed as per stated objectives. Trustees may be seen as the internal
regulators of a mutual fund.
Compliance Officer
If any fund manager, analyst intends to buy/ sell some securities, the permission of the
Compliance Officer is a must. A compliance Officer is one of the most important
persons in the AMC. Whenever the fund intends to launch a new scheme, the AMC
has to submit a Draft Offer Document to SEBI. This draft offer document, after
getting SEBI approval becomes the offer document of the scheme. The Offer
Document (OD) is a legal document and investors rely upon the information provided
in the OD for investing in the mutual fund scheme. The Compliance Offic er has to
sign the Due Diligence Certificate in the OD. This certificate says that all the
information provided inside the OD is true and correct. This ensures that there is
accountability and somebody is responsible for the OD. In case there is no compliance
officer, then senior executives like CEO, Chairman of the AMC has to sign the due
diligence certificate. The certificate ensures that the AMC takes responsibility of the
OD and its contents.
Custodian
A custodian’s role is safe keeping of physical securities and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by the companies in which
the fund has invested. The Custodian is appointed by the Board of Trustees. The
custodian also participates in a clearing and settlement system through approved
depository companies on behalf of mutual funds, in case of dematerialized securities.
In India today, securities (and units of mutual funds) are no longer held in physical
form but mostly in dematerialized form with the Depositories. The holdings are held
in the Depository through Depository Participants (DPs). Only the physical securities
are held by the Custodian. The deliveries and receipt of units of a mutual fund are
done by the custodian or a depository participant at the instruction of the AMC and
under the overall direction and responsibility of the Trustees. Regulations provide that
the Sponsor and the Custodian must be separate entities.
Registrars and Transfer Agents (RTAs) perform the important role of maintaining
investor records. All the New Fund Offer (NFO) forms, redemption forms (i.e. when
an investor wants to exit from a scheme, it requests for redemption) go to the RTA’s
office where the information is converted from physical to electronic form. How
many units will the investor get, at what price, what is the applicable NAV, what is
the entry load, how much money will he get in case of redemption, exit loads, folio
number, etc. is all taken care of by the RTA.
WHAT IS AN NFO?
Once the 3 – tier structure is in place, the AMC launches new schemes, under the
name of the Trust, after getting approval from the Trustees and SEBI. The launch of a
new scheme is known as a New Fund Offer (NFO). We see NFOs hitting markets
regularly. It is like an invitation to the investors to put their money into the mutual
fund scheme by subscribing to its units. When a scheme is launched, the distributors
talk to potential investors and collect money from them by way of cheques or demand
drafts. Mutual funds cannot accept cash. (Mutual funds units can also be purchased
on-line through a number of intermediaries who offer on-line purchase / redemption
facilities). Before investing, it is expected that the investor reads the Offer Document
(OD) carefully to understand the risks associated with the scheme.
WHAT IS THE PROCEDURE FOR INVESTING IN AN NFO?
The investor has to fill a form, which is available with the distributor. The investor
must read the Offer Document (OD) before investing in a mutual fund scheme. In
case the investor does not read the OD, he must read the Key Information
Memorandum (KIM), which is available with the application form. Investors have the
right to ask for the KIM/ OD from the distributor. Once the form is filled and the
cheque is given to the distributor, he forwards both these documents to the RTA. The
RTA after capturing all the information from the application form into the system,
sends the form to a location where all the forms are stored and the cheque is sent to
the bank where the mutual fund has an account. After the cheque is cleared, the RTA
then creates units for the investor. The same process is followed in case an investor
intends to invest in a scheme, whose units are available for subscription on an on-
going basis, even after the NFO period is over.
Mutual
Fund
On the On the
basis of basis of
Execution yield
and investment
operation Pattern
Under this scheme, the corpus of the fund and its duration are prefixed. In other
words, the corpus of the fund and the number of units are determined in advance.
Once the subscription reaches the predetermined level, the entry of investors is closed.
After the expiry of the fixed period, the entire corpus is distributed to the various unit
holders in proportion to their holding. Thus the fund ceases to be a fund after the final
distribution.
Features
1. The Period and / or the target amount of the fund is definite and fixed
beforehand.
2. Once the period is over and/ or the target is reached, the door is closed for the
investors. They cannot purchase any more units.
3. These units are public traded through stock exchange and generally there is no
repurchase facility by the fund.
4. The main objective of this fund is capital appreciation.
5. From the investors point of view it may attract more tax since, the entire
capital appreciation is realized at one stage itself.
6. If market condition is not favourable, it may also affect the investor since, he
may not get the full benefit of capital appreciation in the value of the
investment.
7. Generally, the prices of closed end scheme units are quoted at a discount of
upto 40% below the net asset value(NAV).
It is just opposite to close ended fund. Under this scheme the size of the fund and/or
period of the fund is not predetermined. The investors are free to buy any number of
units at point of time. For instance, the unit scheme(1964) of the UTI is an open ended
fund, both in term of period and target amount. Anybody can buy this unit at any time
and sell it also at any time at his discretion.
Features