You are on page 1of 42


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

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.


It has successfully rendered service in this direction by increasing the flow of credit to this sector. Development of Agriculture : In an agrarian economy like ours. 1.Developmental / Promotional Functions of RBI Along with the routine traditional functions. The sound and efficient financial system is a precondition of the rapid economic development of the nation. the RBI has to provide special attention for the credit need of agriculture and allied activities. 3. the adequate and timely availability of credit to small. Development of the Financial System : The financial system comprises the financial institutions. 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. central banks especially in the developing country like India have to perform numerous functions. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit. In this regard. Provision of Industrial Finance : Rapid industrial growth is the key to faster economic development. medium and large industry is very significant. Some of the major development functions of the RBI are maintained below. The RBI has been performing as a promoter of the financial system since its inception. financial markets and financial instruments. These functions are country specific functions and can change according to the requirements of that country. In this regard the RBI has always 5 . National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

e NIBM. savings and investments etc. This information is made available to the public also at cheaper rates. 6. Promotion of Banking Habits : As an apex organization.e BSC and College of Agriculture Banking i. This data proves to be quite useful for researchers and policy makers. 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. It includes RBI weekly reports. 6 .e CAB are few to mention. The reports and bulletins are regularly published by the RBI. 5. It includes interest rate. Collection of Data : Being the apex monetary authority of the country. inflation. It has set up many institutions such as the Deposit Insurance Corporation-1962. 4. the RBI always tries to promote the banking habits in the country. Publication of the Reports : The Reserve Bank has its separate publication division. SIDBI and EXIM BANK etc. National Institute of Bank Management i. Bankers Staff College i. RBI Annual Report. IDBI. Report on Trend and Progress of Commercial Banks India. 7.. the RBI collects process and disseminates statistical data on several topics. UTI-1964. etc. IDBI-1964.been instrumental in setting up special financial institutions such as ICICI Ltd. This division collects and publishes data on several sectors of the economy. It institutionalizes savings and takes measures for an expansion of the banking network.

These organizations develop and promote banking habits among the people. 8. 7 . During economic reforms it has taken many initiatives for encouraging and promoting banking in India. NHB-1988. etc. 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.NABARD-1982. Promotion of Export through Refinance : The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India.

Some of its supervisory functions are given below. 3. new branches. it can control the NBFIs. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. 2. 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. 8 . All bank deposits below Rs. Granting license to banks : The RBI grants license to banks for carrying its business. 1. Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. 4. One lakh are insured with this corporation. even to close down existing branches.Supervisory Functions of RBI The reserve bank also performs many supervisory functions. License is also given for opening extension counters. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. Through periodic inspection. It has authority to regulate and administer the entire banking and financial system. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning.

SEBI Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI was granted legal status. As a result in May 1992. 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). „unofficial premium on new issue. and delay in delivery of shares. lot of malpractices also started in stock markets such as price rigging. 9 . 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. SEBI is a body corporate having a separate legal existence and perpetual succession. It was left as a watch dog to observe the activities but was found ineffective in regulating and controlling them. Reasons for Establishment of SEBI: With the growth in the dealings of stock markets.

Intermediaries: For intermediaries it provides a competitive professional market. etc. 4. Investors: For investors it provides protection and supply of accurate and correct information. Issuers: For issuers it provides a market place in which they can raise finance fairly and easily. The objectives of SEBI are: 1. 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. 3. underwriters. 2. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations. 10 .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. To regulate and develop a code of conduct for intermediaries such as brokers. 1. 3. It was set up to meet the needs of three groups. To regulate the activities of stock exchange. To protect the rights of investors and ensuring safety to their investment. 2.

g. then it is known as insider trading. Protective functions ii. promoters etc. To meet three objectives SEBI has three important functions. the directors of a company may know that company will issue Bonus shares to its 11 .. Regulatory functions.Functions of SEBI: The SEBI performs functions to meet its objectives. (ii) It Prohibits Insider trading: Insider is any person connected with the company such as directors. SEBI prohibits such practice because this can defraud and cheat the investors. 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. 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. e. Protective Functions: These functions are performed by SEBI to protect the interest of investor and provide safety of investment. Developmental functions iii. These are: i.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices. 12 . (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. (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. This is known as insider trading. (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. SEBI keeps a strict check when insiders are buying securities of the company and takes strict action on insider trading. (b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and imprisonment.shareholders at the end of year and they purchase shares from market to make profit with bonus issue.

(ii) These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive. share transfer agents. sub-brokers. Under developmental categories following functions are performed by SEBI: (i) SEBI promotes training of intermediaries of the securities market. underwriters. brokers. etc. Regulatory Functions: These functions are performed by SEBI to regulate the business in stock exchange. (c) Even initial public offer of primary market is permitted through stock exchange. trustees. 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. (iii) SEBI registers and regulates the working of stock brokers. merchant bankers and all those who are associated with stock exchange in any manner.Developmental Functions: These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. (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. 13 . (b) SEBI has made underwriting optional to reduce the cost of issue.

(vi) SEBI conducts inquiries and audit of stock exchanges. (v) SEBI regulates takeover of the companies. 14 .(iv) SEBI registers and regulates the working of mutual funds etc.

powers and authority of the Commission may be exercised by Benches thereof. has special knowledge of and professional experience of not less than fifteen years in international trade. law. management. It became fully functional in May 2009. has been.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. Registrar. hold. business. or. 3) The jurisdiction. acquire and dispose off the property. 7) The Chairperson or any Member may. It was established on 14 October 2003. 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. 6) Members. of the Commission are deemed to be public servants. economics. finance. a judge of a High Court. 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. 15 . etc. 1) The competition commission of India is a body corporate having common seal and thereby can enter into a contract. resign his office. integrity and standing and who. or is qualified to be. 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. commerce. The provision with respect to the same is contained in section7 to 17. officers and other employees. by notice in writing under his hand addressed to the Central Government. accountancy. Director General.

It is the duty of the Commission to eliminate practices having adverse effect on competition. CCI consists of a Chairperson and 6 Members appointed by the Central Government. protect the interests of consumers and ensure freedom of trade in the markets of India. 5. Make the markets work for the benefit and welfare of consumers. 4. create public awareness and impart training on competition issues. Develop and nurture effective relations and interactions with sectoral regulators to ensure smooth alignment of sectoral regulatory laws in tandem with the competition law. Implement competition policies with an aim to effectuate the most efficient utilization of economic resources. promote and sustain competition. 2. 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.The objectives of the Act are sought to be achieved through the Competition Commission of India (CCI). Effectively carry out competition advocacy and spread the information on benefits of competition among all stakeholders 16 . Ashok Chawla is the current Chairperson of the CCI. Ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of economy. The Competition Commission strives to:1. 3. which has been established by the Central Government with effect from 14 October 2003.

competitive agreements) or Section 4(1) (abuse of dominant positions) either 2) On receipt of any information from any person.  Driving existing competitors out of the market.  Promote and sustain competition. consider the following factors: creation of barriers to new entrants in the market. 17 . To achieve the above objects.  promotion of technical. 4) The Commission shall. scientific and economic development by means of production or distribution of goods or provision of services. consumer or their association or trade association.  Protect the interests of consumers and ensure freedom of trade carried on by other participants. 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.  accrual of benefits to consumers. or 3) On a reference made to it by the Central Government or State Government or a statutory authority.  improvements in production or distribution of goods or provision of services.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. in markets in India.

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. d) Degree of countervailing power in the market: e) Extent of effective competition likely to sustain in a market.  size and importance of the enterprise  dependence of consumers on the enterprise. 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.  Market structure and size of market. 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).The Commission shall. 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. 18 . 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. (II) Power to Inquire into combination – Section 20: 1) The Commission may.

contrary to any of the provisions of this Act. make such a reference to the Commission.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. 2) On receipt of a reference the Commission shall give its opinion. may. irrespective of the fact that: 1) An agreement referred to in section 3 has been entered into outside India. then such statutory authority may make a reference in respect of such issue to the Commission. or 5) Any party to combination is outside India. 3) Any statutory authority.Section 32: The Commission shall. or 3) Any enterprise abusing the dominant position is outside India. or 2) Any party to such agreement is outside India. or 4) A combination has taken place outside India. or 19 . within sixty days of receipt of such reference. to such statutory authority which shall consider the opinion of the Commission and thereafter. suo motu. give its findings recording reasons therefore on the issues referred to in the said opinion. (IV) Power to inquire into acts taking place outside India but having an effect on competition in India.

2) Order for compensation shall be passed after conducting an inquiry into the allegations mentioned in the application. 4 or 6 has been committed and continues to be committed or that such act is about to be committed. 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. make an application for and on behalf of. with the permission of the Commission.Section (33): Interim relief is a relief (order) issued by the court during the course of proceeding. If any loss or damage referred above is caused to numerous persons having the same interest. (V) Power to grant interim relief. one or more of such persons may. the persons so interested 20 . or for the benefit of. abuse of dominant position and combinations) having been committed by such enterprise.e it is valid only till the further orders.6) Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India. It is a temporary relief i. (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.

D. 2000. On the 1st of June. Foreign Exchange Management Act (FEMA) was thus formulated in order to be compatible with the policies of pro – liberalization of the Indian government. Enactment of FEMA brought with it Prevention of Money Laundering Act. which was formulated in 1973. 21 . the Indian Government formulated the Foreign Exchange Management Act (FEMA). 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. 2005.FOREIGN EXCHANGE MANAGEMENT ACT. Extensive economic reforms were undertaken in India in the early 1990s and this led to the deregulation and liberalization of the country's economy. 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. Background of FEMA: In 1999. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging frame work of the World Trade Organization (WTO). FEMA came into force replacing the Foreign Exchange Regulation Act (FERA). 2002 which came into effect from 1st July.).

A person was presumed guilty unless he proved himself innocent whereas under other laws. also fall under the jurisdiction of this act. FERA Under FERA. 22 . nothing was permitted unless specially permitted. outside India. that are owned by Indian residents. agencies and branches outside India that are owned by individuals covered by this act.Scope of FEMA: It is applicable to the entire country. Further FEMA aims to promote foreign payments and trade in the country. It provided for imprisonment of even a very minor offence. It also extends to any dispute that is committed in offices. a person is presumed innocent unless he is proven guilty. branches. 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. and offices. Agencies. Objectives of FEMA: One of its important objectives is to revise and unite all the laws that relate to foreign exchange.

2. Deposits between persons resident in India and persons resident outside India. 3. office or agency in India of a person resident outside India. 5. any payment by order or on behalf of any person resident outside India in any manner. 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. 4. 23 . 2) RBI can. Make any payment to or for the credit of any person resident outside India in any manner.RBI Guidelines: 1) A general or special permission of the Reserve Bank of India is required to:1. other than a lease not exceeding five years. 7. 2. 3. 6. Transfer of immovable property outside India. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person. regulate:1. Transfer or issue of any foreign security by a person resident in India. Receive otherwise through an authorized person. Transfer or issue of any security by a person resident outside India. Export. 8. 4. by a person resident in India. Any borrowing or lending in foreign exchange in whatever form or by whatever name called. by regulations. Reasonable restrictions for current account transactions as may be prescribed. import or holding of currency or currency notes. Transfer or issue of any security or foreign security by any branch.

6. 2.e. 24 . 7. 3) Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. By a person resident outside India. The limit up to which foreign exchange shall be admissible for such transactions. Illegal acquisition of foreign exchange through Hawala. in consultation with the Central Government. obligation or liability incurred a. i. by a person resident outside India. 10. Under-invoicing of exports and over-invoicing of imports and any other type of invoice manipulation. Siphoning off of foreign exchange against fictitious and bogus imports. 4. through compensatory payments. specify:1.Giving of a guarantee or surety in respect of any debt. Investigation under the Act: 1) The Directorate of Enforcement investigate to prevent leakage of foreign exchange which generally occurs through the following malpractices:1. Acquisition of foreign currency illegally by person in India. Acquisition or transfer of immovable property in India. 2. By a person resident in India and owed to a person resident outside India or b.9. 3. The Reserve Bank may. other than a lease not exceeding five years. Unauthorized maintenance of accounts in foreign countries. Non – repatriation of proceeds of the exported goods. Remittances of Indians abroad otherwise than through normal banking channels. 5. Any class or classes of capital account transactions which are permissible.

Citizenship was a criterion to determine the residential status of a person under it. Offences under it were not compoundable. FERA Foreign Exchange Regulation Act To conserve foreign exchange and prevent its misuse in India. Its violation is a criminal offence. Difference between FERA and FEMA Sl. Secreting of commission abroad. Proper implementation measures and efficient supervision are important preconditions for the success of the Act. No. A stay of more than 182 days in India is the criteria to decide the residential status of a person under it. Nature FEMA Foreign Exchange Management Act 1 Objective To facilitate external trade and payments and maintenance of foreign exchange market in India. Implementation of FEMA: Extensive efforts have been undertaken to ensure the effective implementation of FEMA in India. 25 . 2 Violation Its violation is a civil offence. 3 Compounding of offences 4 Residential status Offences under it are compoundable.8.

insurance companies. libraries. savings institutions. FIIs are allowed to subscribe to new securities or trade in already issued securities. Endowment fund A financial endowment is a transfer of money and/or property donated to an institution. theaters. and religious establishments.g.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..g. closed. private schools). private foundation. universities. This is just one form of foreign investments in India.and open-end investment companies. Among the institutions that commonly manage an endowment are academic institutions (e. colleges.. museums. 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. cultural institutions (e. and foundations. with the principal to remain intact in perpetuity or for a defined time period. as may be seen from the graph below: TYPES OF INSTITUTIONAL INVESTOR Institutional investors include public and private pension funds. or trust. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested. 26 . This allows for the donation to have an impact over a longer period of time than if it were spent all at once. They are registered as FIIs in accordance with Section 2 (f) of the SEBI (FII) Regulations 1995. hospitals). An endowment may come with stipulations regarding its usage.

The most common type. Hedge funds are not considered a type of mutual fund. most notably in retirement planning. unitized insurance funds. it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. and closed-end. Internal Revenue Code. unit investment trust.S. the open-end fund. Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. must be willing to buy 27 .unit trusts and Undertakings for Collective Investment in Transferable Securities. The term mutual fund is less widely used outside of the United States and Canada." Most mutual funds are "open-ended. mutual funds: open-end.Mutual Fund A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. For collective investment vehicles outside of the United States. In the United States. see articles on specific types of funds including open-ended investment companies. They have a long history in the United States. 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." meaning investors can buy or sell shares of the fund at any time. Today they play an important role in household finances. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U. which are usually referred to by their acronym UCITS.S. There are 3 types of U.[1] While there is no legal definition of the term "mutual fund". mutual funds must be registered with the Securities and Exchange Commission. They are sometimes referred to as "investment companies" or "registered investment companies. SICAVs.

insurance companies. bond or fixed income funds. in the year ended March 31. but exchange-traded funds have been gaining in popularity. the largest for any category of investor ahead of mutual funds. fund.back shares from investors every business day. They are especially important to the stock market where large institutional investors dominate. Pension Fund A pension fund is any plan. Open-end funds are most common. The four main categories of funds are money market funds. 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. The Economist reported that Morgan Stanley estimates that pension funds worldwide hold over US$20 trillion in assets. or scheme which provides retirement income. 2011 GPIF was still the world's largest public pension fund which oversees 114 trillion Yen ($1. Funds may also be categorized as index or actively managed. Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment trusts that trade on an exchange. sovereign wealth funds. Investors in a mutual fund pay the fund‟s expenses. Mutual funds are generally classified by their principal investments. currency reserves.25 percent. The largest 300 pension funds collectively hold about $6 trillion in assets. 28 . or private equity.5 trillion). stock or equity funds and hybrid funds. In January 2008. Pension funds are important to shareholders of listed and private companies. Although the (Japan) Government Pension Investment Fund (GPIF) lost 0. There is controversy about the level of these expenses. hedge funds. which reduce the fund's returns/performance.

Because hedge funds are not sold to the general public or retail investors. hedge funds are subject to the regulatory restrictions of their respective countries. A hedge fund's value is calculated as a share of the fund's net asset value. 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. 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. and strategies. today the term "hedge fund" refers more to the structure of the investment vehicle than the investment techniques.S. for example. 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. Though they are privately owned and operated.[2] qualified purchasers) and also limit the total number of investors allowed in the fund. regulations. Hedge funds are often open-ended and allow additions or withdrawals by their investors.[2] U.[1]Hedge funds tend to invest in a diverse range of markets. that invests private capital speculatively to maximize capital appreciation. 29 . investment instruments. limit hedge fund participation to certain classes of investors (see accredited investors.Hedge Fund A hedge fund is a collective investment scheme. often structured as a limited partnership.

investment banks do not take deposits. called the insurance policy. 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. and FICC services (fixed income instruments. has evolved as a discrete field of study and practice. the insured. Investment Banking An investment bank is a financial institution that assists individuals. is the person or entity buying the insurance policy. including G8 countries. 30 . The amount of money to be charged for a certain amount of insurance coverage is called the premium. currencies. It is a form of risk management primarily used to hedge against the risk of a contingent. From 1933 (Glass– Steag all Act) until 1999 (Gramm–Leach–Bliley Act). An investment bank may also assist companies involved in mergers and acquisitions and provide ancillary services such as market making. from one entity to another in exchange for payment. or policyholder. An insurer. the practice of appraising and controlling risk. the United States maintained a separation between investment banking and commercial banks. Other industrialized countries. is a company selling the insurance. Risk management. and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. and commodities). The insured receives a contract. Unlike commercial banks and retail banks. corporations. which details the conditions and circumstances under which the insured will be financially compensated. uncertain loss.Insurance Companies Insurance is the equitable transfer of the risk of a loss. or insurance carrier. trading of derivatives and equity securities.

but a separate legal 31 . 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. unit trusts. 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. and hedge funds are the most common types of buy side entities. Investment trusts are closed-end funds and are constituted as public limited companies. given that (according to law) an investment "trust" is not in fact a "trust" in the legal sense at all. facilitating transactions. while the public areas such as stock analysis deal with public information. while buy side is a term used to refer to advising institutions concerned with buying investment services.have historically not maintained such a separation. The name is somewhat misleading. market-making). As part of the Dodd-Frank Act 2010. or the promotion of securities (i.) is the "sell side". mutual funds. The private areas of the bank deal with private insider information that may not be publicly disclosed. etc. Volcker Rule asserts full institutional separation of investment banking services from commercial banking. Private equity funds. life insurance companies. There are two main lines of business in investment banking. Trading securities for cash or for other securities (i. research. Investment Trust An investment trust is a form of collective investment found mostly in the United Kingdom.e.e. underwriting.

Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return. Such investment management entities may be set up as official investment companies. oil funds. Sovereign wealth funds invest globally. There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. This matters for the fiduciary duties owed by the trustees and the equitable ownership of the fund's assets. or sovereign oil funds. 32 . special drawing rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities. Sovereign wealth funds can be characterized as maximizing long-term return. and yen). These are assets of the sovereign nations that are typically held in domestic and (such as the dollar. Sovereign Wealth Fund A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks. Most SWFs are funded by foreign exchange assets. or other financial instruments. The accumulated funds may have their origin in. euro. state pension funds. gold. pound.person or a company. or may represent. which accumulates the funds in the course of its management of a nation's banking system. and liquidity management. with foreign exchange reserves serving short-term "currency stabilization". precious metals. along with other national assets such as pension investments. this type of fund is usually of major economic and fiscal importance. foreign currency deposits. or other industrial and financial holdings. property. and that may not have a significant role in fiscal management. among others. Some sovereign wealth funds may be held by a central bank. bonds.

Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. or derivatives of differing ilk (even if fairly safe ones. 1999 and notified vide Notification No. 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. since 2003. as amended from time to time. Some central banks have even begun buying equities. 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. Insurance Companies / Reinsurance Company 33 . Foreign Exchange Management (Transfer or issue of Security by a person Resident outside India) Regulations 2000. Pension Funds 2. Moreover it is widely believed most have diversified hugely into assets other than short-term. 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. highly liquid monetary ones. Investment Trusts 4. In line with the said regulations. though almost no data is publicly available to back up this assertion. Banks 5. FEMA 20/ 2000-RB dated 3rd May 2000 viz. Mutual Funds 3.

following entities proposing to invest on behalf of broad based funds. Institutional Portfolio Managers 4.Charitable Trusts / Charitable Societies (Serving public interests) Thus it may be seen that sovereign wealth funds (SWFs) are also regulated under FII regulations only. Foreign Central Banks 7. Trustee of a Trust 5. Asset Management Companies 2.6. Further. Investment Manager/Advisor 3.Endowments (Serving public interests) 12.University Funds (Serving public interests) 11.Foundations (Serving public interests) 13. International/ Multilateral organization/ agency 10. are also eligible to be registered as FIIs: 1. What FIIs can do? A Foreign Institutional Investor may invest only in the following:- 34 . Sovereign Wealth Funds 9. Foreign Governmental Agencies 8. Bank Foreign individuals can register as sub-accounts of FII to make investments in Indian securities. and no separate regulation exists for SWFs.

Clearing Corporation monitors the open positions of the FII/ sub-accounts of the FII for each underlying security and index.i. v. vii. 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. • And has also led to considerable amount of reforms in capital market and financial sector. against the position limits. Following are the some advantages of FIIs. iv. debentures and warrants of companies unlisted. whether listed on a recognised stock exchange or not iii. access to cheap global credit. Why FIIS required? FIIs contribute to the foreign exchange inflow as the funds from multilateral finance institutions and FDI (Foreign direct investment) are insufficient. 35 . • It leads to higher asset prices in the Indian market. and ii. • It lowers cost of capital. at the end of each trading day. viii. vi. listed or to be listed on a recognised stock exchange in India. • It supplements domestic savings and investments. units of schemes floated by domestic mutual funds including Unit Trust of India. securities in the primary and secondary markets including shares.

• The applicant must be a „fit and proper‟ person. • Regulated by appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. sell or otherwise deal in securities as a Foreign Institutional Investor unless he holds a certificate granted by the Board under these regulations”. the format of which is provided in the SEBI (FII) Regulations. • Local custodian and designated bank to route its transactions. 1999 (FEMA) from the RBI. • Permission under the provisions of the Foreign Exchange Management Act. • Legally permitted to invest in securities outside country or its incorporation/establishment.Procedure for registration: The Procedure for registration of FII has been given by SEBI regulations. It states. 1995. The eligibility criteria for applicant seeking fii registration is as follows : Good track record.“no person shall buy. An application for grant of registration has to be made in Form A. professional competence and financial soundness. Eligible securities A FII can make investments only in the following types of securities: 36 .

debentures and warrants of unlisted. • 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.• Securities in the primary and secondary markets including shares. whether listed on a recognized stock exchange or not. • 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. • Commercial paper. and units of scheme floated by a Collective Investment Scheme. • Units of schemes floated by domestic mutual funds including Unit Trust of India. automation. companies or companies listed on a recognized stock exchange. dematerialization and regulations on reporting 37 . 2009.

and increasing firms‟ incentives to supply more information about them.and disclosure standards were initiated because of the presence of FIIs. thedomestic investors fearful and they also withdraw from market. By increasing the availability of riskier long term capital for projects. a). it boosts the production. The market reforms were initiated because of the presence of them and this in turn has led to increased flow. 38 . But FIIs flows can be considered both as the cause and the effect of stock market reforms.The impact of FII is so high that whenever FII tend to withdraw the money from market. b). employment and income of the host country. pension fund in the United Kingdom and United States had 68 per cent respectively of their portfolios in equity in1998. These because of their interest in hedging risks. are known to have contributed to the development of zero-coupon bonds and index futures. the FIIs can help in the process of economic development. For example. These impacts made the Indian stock market more attractive to FII & also domestic investors. Managing uncertainty and controling risks: FIIs promote financial innovation and development of hedging instruments. Improving capital markets: FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. Enhanced flows of equity capital: FIIs are well known for greater appetite for equity than debt in their asset structure. c). 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.

Among the four models of corporate control . FIIs constitute professional bodies of asset managers and financial analysts. by contributing to better understanding of firms‟ operations. improve corporate governance. has institutional investors at its core. Some of the factors are: 39 . and direct control via debt or relationship banking-the third model. Improved corporate governance: Good corporate governance is essential to overcome the principal-agent problem between share-holders and management. 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. board representation is supplemented by direct contacts by institutional investors. leveraged control or market control via debt. which is known as corporate governance movement. who. Bad corporate governance makes equity finance a costly option. direct control via equity. Information asymmetries and incomplete contracts between share-holders and management are at the root of the agency costs. And this dependence has to a great extent caused a lot of trouble for the Indian economy.takeover or market control via equity. In this third model. 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. With boards often captured by managers or passive.d). ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any economy.

b). whose fortunes get driven by the actions of the large FIIs. the banking institution will experience a shortage of funds. If the cap on FII is high then they can bring in huge amounts of funds in the country‟s stock markets and thus have great influence on the way the stock markets behaves. while the exchange rate for the country losing the money weakens. and the RBI pumps the amount of Rupee in the market as a result of demand created. These investors scan the market for short-term. the exchange rate for the country gaining the money strengthens. Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee. 40 . When money is injected into a country. c).a) Potential capital outflows: “Hot money” refers to funds that are controlled by investors who actively seek short-term returns. This creates problems for the small retail investor. 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. “Hot money” can have economic and financial repercussions on countries and banks. Problem to small investors: The FIIs profit from investing in emerging financial stock markets. If money is withdrawn on short notice. This situation leads to excess liquidity thereby leading to inflation where too much money chases too few goods. going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. high interest rate investment opportunities. d).