Professional Documents
Culture Documents
Services ( MFS )
Prof. Anand D. Mehta
Ch. 1 Introduction
The Indian Financial
System
Markets, Institutions and
Services
1
Financial System: An Introduction
Chapter Objectives
To understand the
Types of Financial
System
Formal financial system organized,
and regulated
Informal financial system
Advantages
Low transaction costs
Minimum default risk
Transparency of procedures
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated
institutional
Financial Institutions
Financial Markets
Financial Instruments
Financial Services
Types of Financial
Institutions
Functions of Financial
Institutions
Provide three transformation services
Liability, asset and size transformation
Maturity transformation
Risk transformation
Financial Markets
Types
Money Market A market for short-term debt
instruments
Segments
Primary Market A market for new issues
Secondary Market A market for trading outstanding issues
the
secondary
Financial Instruments
Types
Primary
Secondary
Distinct Features
Marketable
Tradable
Tailor-made
Financial Services
Major Categories
Funds intermediation
Payments mechanism
Provision of liquidity
Risk management
Financial engineering
Functions of Financial
System
Mobilise and allocate savings
Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and reduction
Disseminate prize related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening and
broadening
Market-based Financial
System
Advantages
Provide attractive terms to both investors and borrowers
Facilitate diversification
Allow risk sharing
Allow financing of new technologies
Drawbacks
Prone to instability
Exposure to market risk
Free-rider problem
Bank-based Financial
System
Advantages
Close relationships with parties
Provide tailor-made contracts
Efficient inter-temporal risk sharing
No free-rider problem
Drawbacks
Retards innovation and growth
Impedes competition
Functions of Financial
Markets
Enabling economic units to exercise their time preference
Separation, distribution, diversification and reduction of risk
Efficient payment mechanism
Providing information
Enhancing liquidity
Providing portfolio management services
4
Module 1Ch. 4.Money
Market
Chapter Objectives
To understand
characteristics, functions and benefits
of money market
development of money market in India
different money market instruments
money market intermediaries
link between money market and
monetary policy
tools for managing liquidity in the
money market
money market derivatives.
Characteristics of Money
Market
A collection of markets for several shortterm debt
instruments
Wholesale market
Principal feature is honour
Need-based market
a balancing mechanism
the focal point for central bank
an intervention
reasonable access to short-term funds
Money Market
Instruments
Treasury bills
Commercial paper
Call/Notice money market
Certificates of deposit
Commercial bills
Collateralised borrowing and lending
obligation
Features of T-bills
Short-term instruments issued by RBI on
behalf of the
government
Types of T-bills
On tap bills
Ad hoc bills
Auctioned T-bills
91-day, 182-day, and 364-day T-Bills
Sale of T-bills
Conducted through an auction
Non-competitive bids also accepted
Types of auctions
Multiple price auction
Uniform price auction
2004-05 2005-06
27792
16318
47132
45018
9771
5.24%
5.63%
6.51%
6.66%
6.42%
Commercial Paper
An unsecured short-term promissory note
issued at a
discount
Issuers
creditworthy corporates
primary dealers
All India financial institutions
Largest issuers of CPsLeasing and Finance
companies
Usually privately placed with investors
Attracts stamp duty
Underwriting not mandatory
2002-03
2003-04
2004-05
2005-06
5749
9131
14235
12693
Commercial Bills
A short-term, negotiable and self liquidating
instrument with low risk.
Types
Demand bill
Usance bill
Clean bill
Documentary bill
Inland bill
Foreign bill Hundi
Derivative Usance Promissory Note
Certificates of Deposit
A short- term tradable time deposit issued by
commercial banks and financial institutions.
Issued at a discount to face value.
Minimum amount Rs 1 lakh and in multiples
thereof
Maturity period
7 days to one year for banks
1 to 3 years for FIs
No lock-in period
Transferable by endorsement
Banks to maintain appropriate reserve
requirement on issue of CDs.
Issued in demat form
Key investors--Mutual Funds
Cost attractive vis--vis time deposits
Size of CD Market
O/S
2002-03
908
2003-04
4764
2004-05
12078
2005-06
36931
Money Market
Intermediaries
The Discount and Finance House of India--set
up in
1988 by RBI.
Role is to stimulate activity in money
market.
DFHI is an accredited primary dealer.
Money Market Mutual Funds: Introduced in
April 1991.
Mobilize savings from small
investors.
Invest in money market instruments
5
Ch. 5 Capital
Market
Chapter Objectives
To understand the
Capital Market
A market for long term funds
Aids economic growth through capital
formation
by:
Issue of primary securities
Issue of secondary securities
Secondary market transactions
Functions of a Capital
Market
Mobilise savings
Provide risk capital
Provide liquidity
Lower costs
Disseminate information
Enable valuation of assets
Insurance against risk
Provide operational efficiency
Develop integration among markets and
segments
Channelise funds to productive sectors
Primary Market
A market for new issues
Leads to capital formation
Nature of fund raising
Domestic
External
GDRs, ADRs and ECBs
FII
In the form of portfolio investment; augments the pool
of investible funds; volatile.
Data for 2003-05
India(in
bn)
11
29
25
US
Private placement
Rights issues
Preferential issues
Secondary Market
A market for outstanding securities
Facilitates liquidity, marketability, and valuation
of securities
Helps in price discovery
Creates a wealth effect
Segregation of Indian
Secondary Market
Secondary market for corporate and financial
intermediaries
Secondary market for government securities and
PSU bonds
banned
The 2001 Ketan Parekh Scam
Specialised Regulator
Emergence of specialised intermediaries
Entry to FIIs
Pricing of securities through book building
Access to international markets
Emphasis on corporate governance
Screen-based trading system
Rolling settlement
Dematerialisation of securities
Derivatives trading
Comprehensive risk management systems
banned
The 2001 Ketan Parekh Scam
Specialised Regulator
Emergence of specialised intermediaries
Entry to FIIs
Pricing of securities through book building
Access to international markets
Emphasis on corporate governance
Screen-based trading system
Rolling settlement
Dematerialisation of securities
Derivatives trading
Comprehensive risk management systems
6
Ch. 6 - The
Primary Market
Chapter Objectives
To understand
fund raising
book-building
green-shoe option
online IPOs
trends in resources mobilised from the primary market
trends in resources mobilised from international capital
markets
Primary Issues
Intermediaries to an
Issue
Merchant banker
Registrars to the issue
Bankers to the issue
prices
Book-building Process
The company appoints a book runner
Book runner submits draft documents to SEBI
Offer of shares at a specified price range
Based on the bids, cut-off rate is decided
Public subscription, allotment and listing
Allotment of a Book-built
Issue
Category % of issue to be allotted on a proportionate
QIB
HNI
15%
basis
Reverse Book-building
Green-shoe Option
Rights Issue
Issue of new shares to existing shareholders on a
rata basis
To be kept open for at least 30 days and not more
than 60 days
Why rights?
to reward shareholders
to reflect the stocks true worth
to hike promoters stake
pro-
Preferential Allotment
An issue of shares to a select group of persons
under
Section 81 of the Companies Act.
Select group
consists of
Promoters
Foreign partners
Technical collaborators
Private equity funds
2005-06
2004-05
No.
Amount
(Rs.cr.)
No.
Amount
(Rs. cr.)
102
23168.74
34
24640.14
IPOs
79
10918.82
23
12382.04
Listed
23
12249.92
11
12258.10
36
4125.85
26
3615.69
138
27249 59
60
28255 83
Public
issues
Rights
issues
Total
GDRs / ADRs
FCCBs
ECBs
GDRs and ADRs
equity instruments issued abroad
represent one or more shares of the issuing
company
two- way conversion
GDRs sold to institutional investor
ADRs sold both to institutional and retail
investors
Listed and traded on a foreign stock exchange
GDRs can be converted into ADRs
FCCBs
currency
ECBs
Automatic
Approval
7
Ch. 7 - The
Secondary Market
Chapter Objectives
To understand
Functions of Secondary
Market
Facilitate liquidity and marketability
Channelise funds to the efficient sector
Provide valuation of securities
Protect investors interests
Induce companies to improve
performance
Stock Exchanges
BSE
19 regional
Indonext
1875
State exchanges
January 2005
OTCEI
Sept 1990
NSE
Nov 1992
ICSE
1999
Organisation of Stock
Exchanges
Regional including BSE
Voluntary non profit making
associations/Section 25 companies under
the Companies Act
Trading members own and manage the
exchanges
OTCEI and NSE
demutualised exchanges
BSE in the process of demutualisation
Demutualisation of Stock
Exchanges
Listing of Securities
Basic norms for listing uniform
Companies to pay listing fees annually
SEBI has setup a Central Listing Authority (CLA)
Trading Arrangements
Open-outcry system replaced by online screen based
electronic trading system. Online screen based
ensures transparency
increases information efficiency
increases operational efficiency
improves depth and liquidity
provides a single trading platform
system
Order-driven
Quote-driven
Margin system
Intra-day trading limit
Exposure limit
Circuit breakers
halt /suspension in trading to contain volatility in
prices
Index -wide circuit breakers
Risk Management
Trading rules and regulations
Market Surveillance System
Trade / Settlement Guarantee Fund
A Clearing Corporation
Price-weighted index
Equal-weighting index
BSE Sensex
Badla
A unique feature of Indian stock exchanges
Carrying forward the transaction from one
to another
Facilitated share financing and lending
Risk hedging instrument
Completely banned from July 2001
Types of Badla transactions
settlement
BSE
NSE
2004-05
200506
2004-05
2005-06
Index (Avg)
5741
8280
1805
2517
Volatility
(CV)
11.16
16.68
11.28
15.59
P/E ratio
15.61
20.92
14.60
20.26
Turnover
518716
816074
1140071
1569558
Mkt. Cap.
1698429
302218
1585585
2813201
OTCEI
Promoted jointly by financial institutions and insurance
companies in Sept. 1990
Based on the model of NASDAQ
The first ring less, electronic and national exchange with
a screen-based system for SMEs.
Commenced operations from Oct. 6, 1992
Trading documents on OTCEI: initially counter receipts
later share certificates
Languishing stock exchange
Promoted by 15 RSEs
INDOnext
Enterprise market for SMEs.
Launched by BSE on Jan 7, 2005 as S Group
Set up on the lines of Euronext
Creates a nationwide electronic order
4200 companies trade with a uniform trading
cycle
recorded a daily average volume of 59 lakh
shares in November 2005 as against 3.5 crore
shares in August 2005
200506
2004-05
2003-04
787
685
540
Buyback of Shares
Why buyback?
Surplus cash
Threat of hostile takeover
Target capital structure
Arrest in fall of share prices
An exit route to investors
Methods of share buyback
Tender offer
Open market repurchase
auctions
An avenue to earn income for lenders
Aids in development of derivatives market
Failed to take off Absence of short selling
Rolling Settlement
Introduced in January 2000
Initially T + 5 and now moved to T + 2
Advantages
Simplicity
Margin Trading
through
Volatility
Liquidity
Size
Transaction cost
Speculation
Settlement system
Government budget
Inflation
Rumours
Day trading
External factors
Short selling
Measures of Liquidity
Two measures
Turnover ratio
53.1%
2005-06
67.6%
2005-06
54.4%
85.6%
Transaction Cost
Transaction cost = Explicit cost + Implicit cost
brokerage
cost
stamp duty
spread
A drastic reduction in transaction cost due to
liquidity.
impact
bid-ask
improved
Rs
Depository Participants
Issuing companies
Clearing corporations/houses
Clearing Members
NSDLs pioneering systems
SPEED e
STeADY
IDeAS
NSDL and CDSL at a glance (February 2005)
NSDL
NSDL
DPs
215
258
Demat custody
(number in
millions)
1,25,238
18,050
Investor accounts
61,61,909
9,56,130
Ch. 9 - Debt
Market
Chapter Objectives
To understand the
and on
GSM dormant
1980s
STRIPS
Conversion of one underlying security into a
of zero coupon securities
Improves liquidity
Benefits both issuers and investors
number
inflation
passive internal debt management
RBI.
Turnover increased
Outright transactions predominant
Factors inhibiting the growth
Higher inflation
Rigid regulations
A bearish outlook
Open-market sales
Open-market purchase
Infrastructure Development of
the GSM
Primary dealer system
all
repos
Module 2
Ch. - 5
(b) Essentials of Contract of Sale It is contract, i.e. all requirements of contract must be fulfilled
It is of goods
"goods" means every kind of moveable property other than actionable
claims and money; and includes stock and shares, growing crops,
grass, and things attached to or forming part of the land
Transfer of property is required
General property - means full ownership
and not special property means hire, lease, hire purchase or pledge
Contract is between buyer and seller
Sale should be for price
in case of contract of sale of goods, the consideration should be price
i.e. money consideration
Contract may be absolute or conditional.
(c) How Contract of sale is made By an offer to buy or sell goods for a price and the acceptance of such
offer.
May provide for the
immediate delivery of the goods
immediate payment of the price or both,
for the delivery or payment by installments,
delivery or payment or both shall be postponed. [section 5(1)]
A contract of sale may be made in writing or by word of mouth, or partly
in writing and partly by word of mouth or may be implied from the
conduct of the parties. [section 5(2)]
Credit sale is also a sale
A verbal contract or contract by conduct of parties is valid. e.g. putting
goods in basket in super market or taking food in a hotel.
(e) Sale Vs Mortgage, Pledge & Hypothecation Sale Transfer Of general property in goods &
Purpose Is transfer Of Ownership
Under following contracts, purpose is to secure a
debt
Mortgage Transfer of Interest in the goods from a
mortgagor to a mortgagee to secure a debt.
Pledge Is a bailment of goods by one person to
another to secure a payment of a debt
Hypothecation Is an equtable charge on goods
without possession, but not amounting to
mortgage
(f) Sale Vs HP -
1. Ownership - Transfer
Immediately from
Seller to buyer
2.Possession May or maynot
given to buyer immediately
Transfer
on payment of
last Instalments.
Is Immediately
given to Hire
Purchaser
3.Type of Contract- Executed
Executory
4. Position- of buyer Is owner of hire purchaser is
of bailee
5. Payment In Instalment In Instalment is for
is for goods price hire / rental charge.
(j) Document of Title to Goods Entitles the Rightful holder to deal with the
goods represented by it as if were the Owner
(n)Time Stipulations for Payment Of Price Parties May agree to pay the Price
Immediately In Installments or at a future
date and buyer is obliged to make the
payment at the time of delivery of goods.
(o) Conditions and Warranties Conditions (sec 12(2)) is a stipulation essential to the main
purpose of the contract. Breach of which gives rise to a right to
treat the contract as broken
Warranty (Sec 12(3)) is a stipulation collateral to the main
purpose of the contract. The breach of which gives rise to claim
for damages and not to reject the whole contract
Remedies available to the buyer on breach of
Condition
Reject the goods
Elect to treat as breach of warranty
Waive the condition
Warranty
File a suit for extinction of prices
File a suit for damages
Sale by description:
Goods shall correspond with the description
Breach of this will give buyer the right to reject the goods
Sale by Sample:
Goods should correspond with the sample shown
Cont..
Warranty as to Quality or Fitness
The buyer makes known to the seller the particular
purpose for which the goods are required,
The buyer relies on the seller's skill or judgment,
The goods are of a description which the sellers ordinarily
supplies in the course of his business, and
The goods supplied are not reasonably fit for the buyer's
purpose.
(q) Caveat Emptor ( Buyer Beware) Buyer is expected to be careful while purchasing the goods
and seller is not liable for any defects in goods sold by him
Exceptions in case of implied warranties under following
circumstances
Custom or usage of trade
Fraud
For the specific purpose known to seller and buyer relies on
sellers judgment
Merchantable quality or commercially sellable
DUTIES
1.
2.
To reject the goods when they are not of 2 To pay the price in exchange for
the description, quality or quantity as . possession of the goods
specified in the contract (Sec 37).
3.
4.
5.
6.
To sue the
performance
specific 7
8.
9.
10
seller
for
DUTIES
1
.
2
.
To assume that the buyer has 2 To ascertain and appropriate the goods
accepted the goods , where the . to the contract of sale
buyer
I)
Conveys
his
acceptance;
ii)Does an act adopting the sale; or
iii) Retains the goods without giving
a notice of rejection, beyond the
specified date (or reasonable time),
in a sale on approval. ( sec 24)
3
.
To deliver the goods only when 3 To pass an absolute and effective title to
applied for by the buyer ( sec 35) . the goods, to the buyer.
4
.
5.
To
exercise
lien
and
retain 5.
possession of the goods, until
payment of the price ( sec 47 (1))
6.
(d) Performance Of a Sale Contract Seller delivers the goods and buyer
accepts the goods and makes payment as
per agreed terms of contract
(b) Buyers Right Of Examination Where Buyer has not Examined goods
previously he is not deemed to have accepted
them unless and until he had a reasonable
opportunity of examining them for the purpose
of ascertaining whether they are in conformity
with the contract.
When Seller tenders delivery goods he is
bound on request to afford the buyer a
reasonable opportunity to examine the goods.
(d) Buyer Not Reqd to Return Rejected Goods Where buyer rightfully rejects the goods
delivered to him he is not bound to return
them to seller and is sufficient if he
intimates his intention to Seller for
rejection by him.
OR
A Seller Is Said to be Unpaid Vendor
when the whole of the Price Is Not paid to
him or when he has recd. a B/E, but B/E
has been returned dishonoured when the
goods are sold on Credit and the period of
Credit has expired and the buyer has not
paid the price
Inshort,
Unpaid Seller Refers to
1.The price Is due & seller Is Unpaid.
2.The whole Or part of the Price Is Not paid.
3.The B/E or any NI was received but the
same has been dishonoured.
Here, Seller Includes Actual Seller & Any
Person who is in Position Of Seller i.e
Agent.
3. Comes to an End
3. Commences when
when the possession
the goods have left
of goods Is surrendered the possession of the
by the Seller.
Seller & Continues
until the Buyer Or his
Agent has Acquired
their Possession.
4. Is to Retain
4. Is to Regain/Resume
Possession.
Possession.
(4) Right Of Withholding Delivery Where the Property in Goods has not
passed to the Buyer, an Unpaid Seller
has, In addition to his Other Remedies,
a Right Of Withholding delivery of Goods
similar to and Co-existence with his rights
of Lein and Stoppage In Transit where the
property has Passed to the Buyer.
(12) HP Agreement -
Income Tax
Tax Planning in Hire-purchase :
Interest-tax
In the Books of the Hirer:
The cash purchase price less down payment, if any, is
recorded as liability. The depreciation is based on the
cash purchase price of the asset in conformity with the
policy regarding similar owned assets. The total charge
for credit is allocated over the hire-period, using one of
the several alternative method,
Effective rate of Interest Method
Sum-of-the-years-digits method and
Straight-line Method
Interest-tax
In the Books of Hire-Vendor (Finance
Company)
The finance company should record the hire-purchase
installments receivables as a current asset and the (unearned)
finance income component of these installments as a current
liability under the head Unmatched Finance charages.
Unmatured finance income should be recognised as current
income for the period. It would be allocated over the relevant
accounting periods on the on the basis of any of the following
methods,
Effective rate of Interest Method
Sum-of-the-years-digits method and
Straight-line Method
Financial Evaluation
From the viewpoint of Finance Company
(Hire-Vendor):
The decision-criterion, is based on a comparison of the
net present values of the two alternatives, namely, hirepurchase and lease financing. The alternative with a
higher net present value would be selected and the
alternative having a lower net present value would be
rejected.
(14) CONSUMER CREDIT CC Includes all asset based financing plans offered to
primarily individuals to acquire durable consumer
goods.
CC transaction the individual consumer buyer pays a
fraction of the cash purchase price at the time of the
delivery of the asset and pays the balance with Interest
over a specified period of time.
Main Suppliers of CC are Foreign/MN Banks,
Commercial Banks, Finance Cos.
Items like Cars, Scooters, DVDs, TVs, Refregerators,
Washing Machines, Computers, cooking ranges, food
processors, home appliances etc
(d) Payment Period & Rate of Interest(1)Repayment Period ranges between 12-60
monthly instalments
(2) Rate of Interest is expressed at a flat rate &
effective rate of interest is not disclosed
(3) In some schemes rate of interest is not
disclosed but EMI associated with different
repayment periods is mentioned
(4) Most of Schemes provide for easy repayment
with either a rebate for prompt payment and
charge for delayed payment
(e) Security -
18
Chapter Objectives
To understand the
Mutual Funds
A financial intermediary that pools the savings of
investors for collective investment in a diversified portfolio
of securities.
Meaning:
Benefits
Professional management
Portfolio diversification
Reduction in transaction cost
Liquidity
Convenience
Flexibility
Tax benefits
Transparency
Stability of the stock market
Equity research
Stock IPO
MF IPO
Phase I (1964-87) Setting up of the UTI, launch of US64 and Master share
Phase II (1987-92) Entry of mutual fund companies
sponsored by banks and insurance companies; popularity of
assured return schemes
Phase III (1992-97) Entry of private sector mutual
funds, 1995 the beginning of the sluggish phase
Phase IV (after 1997) Significant growth till 2001,
trend reversed in 2000-01, due to debacle of US-64
UTI lost to private sector players, record growth from new
offerings during 2004-05, cumulative assets under
management as on March 31, 2006, Rs 2,17,707 crore.
Index Funds
Invests in securities in the index on which it is based
Follows a passive investment strategy
Mirrors the performance of its benchmark index
Tracking error can occur but gains over the index owing to
stock-lending and index arbitrage
Exchange-traded Funds
Hybrid of open-ended mutual funds and listed individual stocks
traded on stock exchanges
Passively managed funds
Advantages
Role of Intermediaries in MF
Industry
Offer two levels of services
Value-added
Basic
UTI
First mutual fund organisation
Single largest mutual fund
Set up in 1964 as a trust
54 branch offices, 266 chief representatives,
67000 agents, 72 schemes, 20.02 million investors
UTIs associates
UTI
UTI
UTI
UTI
UTI
bank limited
Securities Exchange Limited
Institute of Capital Markets
Investment Advisory Services Ltd
International Limited
US-64
The flagship open-ended scheme
Around 20 mn investors
Launched as a debt fund
Administered pricing and high dividend payments depleted
reserves
A bail out package in the form of SUS1999
Failure to implement recommendations of Deepak Parekh
Committee
Repurchase and Sale of US64 units freezed in July 2001. NAV
dipped to a low of Rs 9.60. Government set up two committees
Tarapore and Malegam Committee
US 64 moved to NAV basis on Jan. 1, 2002
In 2002, problems of liquidity and redemption pressures
surfaced again
UTI bifurcated into UTI-I and UTI-II on Feb 1,2003
UTI Iall the assured return schemes
UTI IIother schemes and under the regulatory ambit of SEBI
US 64 shortfall wiped out by stock market rally in Oct. 2003.
(Source: SEBI)
3424
6378
42977
52779
231863
Debt
Total
16981 17429
36481
149600
231863
Diversification
Diversification is nothing but spreading out your
money across available or different types of
investments.
(Mutual funds are set up to buy many stocks.
Beyond that, you can diversify even more by
purchasing different kinds of stocks, then adding
bonds, then international stocks, and so on.)
3. Interval Schemes
RISK-RETURN MATRIX
BY NATURE
1.Equity funds
BY NATURE
2.Debt funds
BY NATURE
3.Balanced funds
BY INVESTMENT OBJECTIVE
OTHER SCHEMES
TYPES OF RETURN
There are three ways, where the total returns provided by mutual funds can be
enjoyed by investors:
1.Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all income it receives over the year to fund owners in the form of a
distribution.
2.If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.
3.If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or
to reinvest the earnings and get more shares.
ADVANTAGES
DISADVANTAGES
REFERENCES
Module - 4
Ch. 8
Depositories and
Custodians
Chapter Objectives
To understand the
Depository
Organisation holding securities in an
electronic form
Acts as a securities bank
Forms
Dematerialised or Immobilised
Services Provided by
Depository
Distinct Features of a
Demat Share
Holding and handling electronically
Does not have a folio number
No stamp duty on transfer
Interface: Depository Participant
Benefits of a Depository
System
physical
Depository Participants
Issuing companies
Clearing corporations/houses
Clearing Members
NSDLs pioneering systems
SPEED e
STeADY
IDeAS
NSDL and CDSL at a glance (February 2005)
NSDL
NSDL
DPs
215
258
Demat custody
(number in
millions)
1,25,238
18,050
Investor accounts
61,61,909
9,56,130
Custodians
Services
Safekeeping of shares
Physical transfer of certificates
Collecting dividends
Collecting interest warrants
Updating clients
Keeping a track of book closures
Clearing Members
13
Ch. 13 - Credit
Rating
Chapter Objectives
To understand the
rating methodology
Credit Rating
Meaning
service
India
Rating Methodology
Based on objective and subjective analysis
Business analysis
Industry risk
Market position
Operating efficiency
Legal position
Financial analysis
Accounting quality
Earnings potential
Adequacy of cash flows
Financial flexibility
Management evaluation
Track record, goals, philosophies and strategies of
management
Fundamental analysis
Liquidity management
Asset quality
Profitability
Interest and tax sensitivity
Rating Symbols
AAA, AA, BBB, B, C, D
Symbols convey safety grade to the investor
Three grades
Investment grades
Speculative grades
CRISIL
First credit rating agency in India set up in January
Prominent provider of rating and advisory services:
leader
Strategic tie up with Standard and Poors USA
Publicly listed company
Crisils Subsidiaries
CRIS Infac
Crisil.com
Crisil Market wire
Global Data service of India Ltd
The EconoMatters Group of Companies
Crisils Centre for Economic Research
Crisils Investment and Risk Management
Services
India Index Services and Products Limited
1988
market
ICRA
Incorporated on January 16, 1991
Tied up with Moody Investor Services
Earnings Prospects and Risk Analysis (EPRA)
Launched Corporate Governance Rating Services
Launched two services in 1992
Credit Assessment
General Asessment
Group offers two services
Equity Assessment
Equity Grading
CARE
Launched in Nov. 1993
Main Services
Credit rating of debt instruments
Information services
Equity research
Tied up with Fitch Ratings
14
Ch. 14 - Factoring and
Forfaiting
Chapter Objectives
To understand the
Factoring
A continuing arrangement between a factor and a
business concern to provide services such as:
purchase of accounts receivables
credit management
prepayment of funds
collection of debts
administration of the sales ledger
Types of Factoring
Recourse factoring
Advance recourse factoring
Old line factoring
Cross-border factoring
Invoice
Factoring Mechanism
1.
2.
3.
4.
5.
6.
multiple
Advantages of Factoring
To the client
Conversion of credit sales into cash
Competitive credit terms to buyers
Free from tensions of monitoring sales ledger
Close interaction among working capital components
Expand business
To the customer (buyers)
Facilitates credit purchases
Save on bank charges
Less paperwork
Does not impinge on the customers rights
Less expensive
Less paperwork
Higher grace period
Only copies of such
No upfront charges
May be domestic or
Assignment of debts
Prepayments made as
factored
to both
customer
client and
International Factoring
Seller and Buyer located in different countries with a factoring
arrangement. A two factor system: export factor and import factor
Benefits to exporter
Dealing with only one factor
Benefit of experience of the factor
Reduction in risk and bad debts
Can explore new markets
Benefits to importer
Payment in his own country
Gets access to open account credit terms
International Factoring
Transaction
Forfaiting
Meaning: A non recourse long-term financing of
trade.
Characteristics
A non recourse 100% financing
Credit periods range from 60 days to 10 years
Flexible and tailor-made
Importers obligation supported by local bank
aval
Suitable for high value exports
international
guarantee or
Benefits of Forfaiting
Factoring
facility
tailor-made and on a case to
case basis
A forfaiter and a bank involved
bank involved
19
Module 5
Ch. 9- Insurance
Chapter Objectives
To understand the
Chapter Objectives
general insurance
reinsurance
micro-insurance
General Insurance Corporation of India
non-life insurance sector
life insurance
Life Insurance Corporation of India
life insurance industry.
Insurance
A social device to reduce and eliminate risk of loss to life
and property
Principles
Principle of Indemnity
Doctrine of Subrogation
IRDA
Constituted on April 19, 2000
IRDA Act enacted in 1999
Objectives of IRDA
Registration of insurers
Conduct of insurers
IRDA
Steps taken to protect the interest of policy holders
Notified the regulations in 2002
Specified the file and use procedure
Constitution of a cell to look into public grievances
Customers consulted for policy decisions
Consumer representative on Insurance companys board
Disclosure of Information
Introduced Third Party Administrators
Brokers licensed as intermediaries
Ombudsman in insurance
Health Insurance
Minimum capital of Rs100 crore for a stand-alone health
insurance business
Companies offer riders
Third Party Administrators (TPAs) are distributors
Insurance Intermediaries
Agents
Surveyors and Loss Assessors
Brokers
Third party Administrators
Bancassurance
Alternate channels
Direct marketing
Forex dealers
Internet
Risk Management
Risk emanating from both internal and external environment
Unanticipated changes such as
information explosion
General Insurance
For short- term coverage
Nationalised on January 1, 1973
At present four nationalised and nine private sector general
insurance companies
GIC now an Indian reinsurer
Products
Fire Insurance
Motor Insurance
Weather insurance
Pattern of Investment
Reinsurance
Primary insurer transfers a part or all of the risks to another
insurer
Uses
To increase the companys underwriting Capacity
To spread risks
To obtain advice and assistance
To stabilise profits
To provide protection against catastrophic losses
To retire from the business
Types of Reinsurance
Facultative and Treaty
Reinsurance Treaties
Reinsurance pool
GIC is the official Reinsurer
Micro-insurance
Insurance to the poor
Draft regulations
Term and endowment insurance: minimum sum assured Rs
10,000 and a maximum of Rs 50,000
Health insurance: Maximum sum assured Rs 15,000
Life Insurance
A long-term contract which provides a sense of security to
the assured and his family
Satisfies five needs: Dying young, living too long,
disability, care for children and wealth generation
Total players 14 (1 public sector and 13 private sector)
Endowment plan
Money back plan
Whole life policies
Term insurance policies
Pension plans
Unit-linked insurance plans
Mobilising savings
LIC (International) EC
Overseas Ventures
Individual Plans
Group Schemes
Pension Plans
Market leader