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Financial Markets & Institutions

Reference Material for Students to learn the basics of Financial


markets and Institutions.

Prepared and compiled by Dr. Vedantam Seetha Ram, Assistant


Professor (Senior), VIT, Vellore
Economic Highlights of India
• Economic Value of India is $ 2.3 Trillion for the FY 2018-19 and is expected to be $5
Trillion Economy by 2024-2025 FY
• Foreign exchange reserves are $ 427.678 Billion and Gold Reserves are $ 22.958 Billion
as on 28th June, 2019
• Growth in GDP is 6.8% (4.5% July–Sept. 2019 Period) and is projected to be @ 8% over
next 5 years. (Real GDP Projection is 5.6% for 2019. Moody’s Estimation)
• Per capita net national income in INR 126406/-
• Current Inflation rate is 3.4% and planned to not to cross 4% in next 5 years
• Gross NPA ratio @ 10.1% (March to December, 2018)
• Social Spending Trend is 26% as % of total expenditure
• Social Spending Trend is 7.5% as % of GDP

Also Refer:
https://www.indiabudget.gov.in/economicsurvey/
https://www.thehindu.com/business/budget/economic-survey-2019-in-six-charts/article28284058.ece
https://economictimes.indiatimes.com/news/economy/indicators/consumer-confidence-plunges-2-9-percentage-points-in-june-report/articleshow/70207205.cms
Organisation of IFS
Regulatory Structure of IFS
Role of RBI
Monetary Policy of RBI
Fiscal policy of RBI
• Inflation check
• Tax assessment
• Revenue deficit information
• Development role etc.
Capital Market Instruments – Two Types
Equity – Features/characteristics
Equity Share Capital
• Voting rights Ownership Right of firm & Perpetuity
• Par Value condition Limited liability
• Transferability Profit potentiality
• Purchase power risk is low (Compared to Preference shares & Debt Instruments).
• Only one single type (Right Shares are also treated on Par with Equity Shares Only)

Preference share Capital


• A Hybrid Instrument with features of equity & debt
• Fixed rate of returns Limited liability
• No voting rights Winding-up conditions
• Limitations: No tax advantage Redemption is not scientific & Acceptable
Types of preference shares
•Redeemable Irredeemable
• Participatory Non- Participatory
• Convertible Non- Convertible
• Cumulative Non- Cumulative
Capital Market Instruments – Two Types
Private Placement
Advantages
• Few regulatory norms
• Direct allocation of instrument (s)
• Start-up firm friendly
• Used as a source of long term capital prior to debt and
equity from market
• Commonly issued to promoters and underwriters
Limitations
• Ask for high rates of returns than market rate/actual rate
paid to other stakeholders of the company
• High ownership right than the contribution or investment
made
• Risk involved in decision making is high
• Threat in taking over of firm is high for start-ups
Capital Market Instruments – Two Types
Features of debt:
Pre-determined interest rates (Low compared to equity)
Collateral is mandatory
Redemption time or period is pre-determined (Re-payment when-ever cash or high
liquidity prevails)
High legal protection to purchaser/investor, so easy to mobilise money
Lock-in period can be fixed as per the requirement of firm
Gestation period can be offered for start-up firms as per the lender’s choice
Tax advantage or tax shield
Debt – Two types
Instrument based Non-instrument based
Bonds Loans
Debentures Lease/Hire Purchase
Types of Debentures
• Redeemable Irredeemable
• Participatory Non- Participatory
• Convertible Non- Convertible
• Cumulative Non- Cumulative
For further Information refer: https://www.wisdomjobs.com/e-university/financial-management-tutorial-
289/characteristics-of-long-term-debt-6584.html
https://kfknowledgebank.kaplan.co.uk/financial-management/corporate-financing/debt-finance
SEBI Functions & Responsible to
Functions:
• Quasi Legislative Regulatory
Formulates Rules & Regulations for Corporates

• Quasi Judicial Protective


Judgements and Rulings of penalties for fraudulent practices

• Quasi Executive Developmental


Formulates Rules & Regulations for Investors

• SEBI got the power of regulating and approving the by-laws of stock exchanges.
• It can inspect the accounting books of the recognized stock exchanges in the country. It could also
call for periodical returns from such stock exchanges.
• SEBI is empowered to inspect the books and records of financial Intermediaries.
• It constrains companies from getting listed on any stock exchange.
• It also handles the registration of stockbrokers.
Responsible to:
Issuers of securities Investors Market Intermediaries
Example Cases/Scenarios
https://www.sebi.gov.in/sebiweb/home/HomeActio
n.do?doListing=yes&sid=2&ssid=9&smid=6

https://economictimes.indiatimes.com/markets/stoc
ks/news/sebi-bars-nse-from-securities-market-for-6-
months-in-co-location-
case/articleshow/69117458.cms?from=mdr
Functions of IRDA
• Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;
• Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of
insurance;
• Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and
agents
• Specifying the code of conduct for surveyors and loss assessors;
• Promoting efficiency in the conduct of insurance business;
• Promoting and regulating professional organisations connected with the insurance and re-insurance business;
• Levying fees and other charges for carrying out the purposes of this Act;
• Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the
insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business;
• Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act,
1938 (4 of 1938);
• Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered
by insurers and other insurance intermediaries;
• Regulating investment of funds by insurance companies;
• Regulating maintenance of margin of solvency;
• Adjudication of disputes between insurers and intermediaries or insurance intermediaries;
• Supervising the functioning of the Tariff Advisory Committee;
• Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional
organisations referred to in clause (f);
• Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the
rural or social sector; and
• Exercising such other powers as may be prescribed
PFRDA
• Instituted in 1999
• Formulate new schemes of pension, monitor
the existing schemes, suggest govt. in floating
the new pension schemes etc.
• Atal Pension Yojana, National Pension Scheme
• Contributory pension scheme of government
employees (State/Central)
Registrar of Companies
ROC & ACTs

http://www.mca.gov.in/MinistryV2/registrarofco
mpanies.html
http://www.mca.gov.in/MinistryV2/companiesact
2013.html
Primary Markets
The financial market is a broad term describing any
marketplace where trading of securities including equities,
bonds, currencies and derivatives occurs. Although some
financial markets are very small with little activity, some
financial markets including the New York Stock Exchange
(NYSE) and the forex markets trade trillions of dollars of
securities daily.
Types of Financial Markets
Stock Markets
Over the Counter Market
Bond Market
Money Market
Derivative Market and
Forex or Currency Market
Features of Primary Market
• This is the market for new long term equity capital. The primary
market is the market where the securities are sold for the first time.
Therefore, it is also called the new issue market (NIM).
• In a primary issue, the securities are issued by the company directly
to investors.
• The company receives money and issues new security certificates to
the investors.
• Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating
capital formation in the economy.
• The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions.
Borrowers in the new issue market may be raising capital for
converting private capital into public capital; this is known as "going
public."
• its share can be issued at face value, premium value & discount
value.
Means of raising capital through Primary Markets

Prospectus
Rights Issue
Private Placement
Bonus Issue
Listing Mechanism: Eligibility Criteria
Qualifications for listing Initial Public Offerings (IPO) are as below:
• Paid up Capital
The paid up equity capital of the applicant shall not be less than 10 crores * and the
capitalisation of the applicant's equity shall not be less than 25 crores**

* Explanation 1: For this purpose, the post issue paid up equity capital for which listing is
sought shall be taken into account.

** Explanation 2: For this purpose, capitalisation will be the product of the issue price and the
post issue number of equity shares. In respect of the requirement of paid-up capital and
market capitalisation, the issuers shall be required to include, in the disclaimer clause of the
Exchange required to put in the offer document, that in the event of the market capitalisation
(Product of issue price and the post issue number of shares) requirement of the Exchange not
being met, the securities would not be listed on the Exchange.
• Conditions Precedent to Listing:

The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia
from Securities Contracts (Regulations) Act 1956, Companies Act 1956, Securities and
Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing
statutes, as also any circular, clarifications, guidelines issued by the appropriate authority
under foregoing statutes.
Listing Mechanism: Eligibility Criteria
• At least three years track record of either:
– the applicant seeking listing; or
– the promoters****/promoting company, incorporated in or outside India or
– Partnership firm and subsequently converted into a Company (not in existence as a
Company for three years) and approaches the Exchange for listing. The Company
subsequently formed would be considered for listing only on fulfilment of conditions
stipulated by SEBI in this regard.

For this purpose, the applicant or the promoting company shall submit annual reports of three
preceding financial years to Stock Exchange and also provide a certificate to the Exchange in
respect of the following:

– The company has not been referred to the Board for Industrial and Financial
Reconstruction (BIFR).
– The net worth of the company has not been wiped out by the accumulated losses
resulting in a negative net worth. (Provided this criteria shall not be applicable to
companies whose proposed issue size is not less than Rs.500 crores)
– The company has not received any winding-up petition admitted by a court.

****Promoters mean one or more persons with minimum 3 years of experience of each of them in
the same line of business and shall be holding at least 20% of the post issue equity share capital
individually or severally.
Listing Mechanism: Eligibility Criteria
• The applicant desirous of listing its securities should satisfy the exchange on the following:
– No disciplinary action by other stock exchanges and regulatory authorities in past three years

There shall be no material regulatory or disciplinary action by a stock exchange or regulatory


authority in the past three years against the applicant company. In respect of promoters/promoting
company(ies), group companies, companies promoted by the promoters/promoting company(ies) of
the applicant company, there shall be no material regulatory or disciplinary action by a stock exchange
or regulatory authority in the past one year.
– Redressal Mechanism of Investor grievance

The points of consideration are:

• The applicant, promoters/promoting company(ies), group companies, companies promoted by


the promoters/promoting company(ies) track record in redressal of investor grievances
• The applicant's arrangements envisaged are in place for servicing its investor.
• The applicant, promoters/promoting company(ies), group companies, companies promoted by
the promoters/promoting company(ies) general approach and philosophy to the issue of investor
service and protection
• defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit
holders by the applicant, promoters/promoting company(ies), group companies, companies
promoted by the promoters/promoting company(ies) shall also be considered while evaluating a
company's application for listing. The auditor's certificate shall also be obtained in this regard. In
case of defaults in such payments the securities of the applicant company may not be listed till
such time it has cleared all pending obligations relating to the payment of interest and/or
principal.
Listing Mechanism: Eligibility Criteria
– Distribution of shareholding

The applicant's/promoting company(ies) shareholding pattern on March 31 of last three calendar years
separately showing promoters and other groups' shareholding pattern should be as per the regulatory
requirements.
– Details of Litigation

The applicant, promoters/promoting company(ies), group companies, companies promoted by the


promoters/promoting company(ies) litigation record, the nature of litigation, status of litigation during
the preceding three years period need to be clarified to the exchange.
– Track Record of Director(s) of the Company

In respect of the track record of the directors, relevant disclosures may be insisted upon in the offer
document regarding the status of criminal cases filed or nature of the investigation being undertaken
with regard to alleged commission of any offence by any of its directors and its effect on the business
of the company, where all or any of the directors of issuer have or has been charge-sheeted with
serious crimes like murder, rape, forgery, economic offences etc.
• Note:
a) In case a company approaches the Exchange for listing within six months of an IPO, the securities may
be considered as eligible for listing if they were otherwise eligible for listing at the time of the IPO. If the
company approaches the Exchange for listing after six months of an IPO, the norms for existing listed
companies may be applied and market capitalisation be computed based on the period from the IPO to the
time of listing.
Listing Mechanism:
https://www.nseindia.com/corporates/content/eli
gibility_criteria.htm
Process:
https://www.nseindia.com/corporates/content/list
ing_process.htm
Listing Fees:
https://www.nseindia.com/corporates/content/list
ing_fees.htm
Issues in Listing:
https://www.nseindia.com/corporates/content/cap
ital_market.htm
Secondary Markets –Stock Exchange
Registrar or (Share) Transfer Agents
Definition: Registrar or transfer agents are the trusts or institutions that
register and maintain detailed records of the transactions of investors
for the convenience of Investment houses.
Description: Investors' transactions like buying, exchange, processing
of mails and related information, changes in personal data etc. occur
frequently and have to be recorded. Registrar & transfer agents have
skilled expertise for maintenance of such data on a professional basis,
thereby contributing to saving costs and time involved in keeping
detailed accurate records of the investor transactions.
Their role also extends to providing information to the investors about
new offers, maturity dates and all other investor-friendly information at
one place for their reference.
Some of the RTAs operating in India are Computer Age Management
Services (CAMS), Karvy, and Deutsche Investor Services etc.
Reference:
https://nseindia.com/content/ncfm/Curriculum_NISM_IIA_RTACorp.p
df
Role of Technology in Stock Markets
High frequency trading:
 In financial markets, high-frequency trading (HFT) is a type of algorithmic trading characterized by
high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency
financial data and electronic trading tools.
 HFT is complex algorithmic trading in which large numbers of orders are executed within
seconds.It adds liquidity to the markets and eliminates small bid-ask spreads.
Algorithmic trading:
 Terrence Hendershott (faculty director at Berkeley -Haas) described them thus ―Algorithms
typically determine the timing, price, quantity, and routing of orders, dynamically monitoring
market conditions across different securities and trading venues, …..‖

• Along with the benefits there will also be fraudsters manipulating the price of stocks. In April, 2019
Commodities trader Navinder Singh Sarao was arrested at his home in London in connection with
the 2010 ―Flash Crash‖ that rocked global markets. According to the Commodities Futures Trading
Commission, Sarao spoofed S&P futures, called ―E-Minis,‖ from 2010 to 2014 by layering
algorithms. E-minis are electronically traded futures contracts that represent a percentage of a
corresponding standard futures contract.

Refer: https://www.princeton.edu/~ota/disk3/1984/8411/841105.PDF
Secondary Markets - Intermediaries
Those institutions that act as a bridge between fund providers and
fund seekers is known as an intermediary.
Example: Commercial banks, Insurance Companies, Factoring
companies, leasing companies, non-banking financial institutions
etc.
Money market in India
For short term needs: 1 day to less than an year
T – Bills
Commercial paper
Call money
Certificate of deposit
Repo
Interest rate swaps
Forward rate agreements
Money market in India: T–Bills
T–Bills: Issued by RBI through auction process
Who can purchase?: Individuals, corporates, trusts,
institutions and Banks.
Volume of T-Bills: INR 25,000 and multiples
Periodicity: 91days, 182 days and 364 days.
& Intermediate 14days T-Bills
Issued at discount and to be repaid at face value,
earning the difference as returns to the issuer.
Money market in India – Commercial Paper
An unsecured money market instrument issued by
corporates to mobilise short term funds.
Denomination of INR 5 lakhs or multiples
Time period is min. 7 days and max. up to 1 year or Credit
rating period which ever is earlier.
A-2 Rating is mandatory as per SEBI guidelines and rating
needs to be done by agencies specified by RBI.
Fluctuating interest rates prevail but are less than bank rates.
Individuals, banks, incorporated or un-incorporated bodies,
NRIs and FIIs (As per SEBI guidelines) can purchase CPs.

Refer: https://m.rbi.org.in/Scripts/FAQView.aspx?Id=25
Money market in India – Call Money
Helps RBI understand the liquidity conditions of
money market.
Helps banks cover–up their CRR or SLR norms.
Money lent for 1 day: Call Money
Money lent for >1 day but<15 days: Notice Money
Money lent for >15 days: Term Money
Negotiated trading system (NDS) deals with call
money auction process.
Two call rates are prevailing: Inter-bank call rate &
lending rate of Discount and Finance House of India.
Money market in India – CDs
CDs: Issued by all commercial banks or Financial
Institutions as per RBI guidelines.
Issued to individuals (NRI or FIIs), corporates,
trusts, associations etc.
Issued in INR 1 lakh or multiples with 7days to
one year maturity (For Fin Insti. maturity period is
>1 year but < 3 years).
Money market in India – Repo
Repo Market: Daily liquidity adjustment facility is possible
Floated to manage volatility in market

All banks, cooperative banks, Primary Dealers (by name) and Satellite Dealers
(by name) are permitted to undertake ready forward transactions in all Central
Government securities including Treasury Bills provided the transactions are
settled through SGL Accounts maintained at Public Debt Office, Mumbai.
Nonbank entities as notified by the Central Government are permitted to
undertake reverse repos subject to restrictions on counterparties and instruments.
Varying maturities helps non-bank financial entities in both directions while
making investment (Repo-Reverse Repo)
OTC & Exchange Traded REPOs are prevailing

Refer: https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=36
http://www.fimmda.org/uploads/general/handbookfinal.pdf
Money market in India – IRS & FRA
• Interest rate swaps: Fixed to Floating or
Floating to Floating interest rates are Swapped.
• Minimum lot size is INR 5 Crore
• Forward rate agreements: A derivative
instrument used for a prospective cash
requirements in foreign currency.
• Except Primary Dealers, RRBs every one else can
deal with IRSs
• Time period is not a defined one, however,
interest rate is determined based on basis points
of interest/365.
Merchant Banking

• Merchant banking is similar to Investment


banking (for reference purpose)
• Don’t accept deposits but help in mobilisation
of large sums of funds from market
Merchant Banking
• Help issue letters of credit in export business
• Are seen playing role in M&A process, takeovers, loan syndication
etc.
• Takes part in underwriting process.
• Rates of interest is higher than market prevailing rates.

Types of Merger:
• Vertical Horizontal Conglomirate
• Market Extension Product Extension

• Types of Acquisition:
• Cross acquisitions and Cross Border Acquisitions
• Hostile (Forceful) acquisitions or takeover
• Reverse takeover
• Backflip takeover
Loan or Credit syndication
• Is a process of forming into a group to extend
loans of large volumes. Also when banks capacity
to extend loan amounts is insufficient as well.
• Credit syndication is common to provide very
large scale loans and also helps in risk mitigation.
• In the instances of mergers, acquisitions, buyouts
and large capital intensive projects, this procedure
is followed.
Case of Banks Merger in 2019
• The merger has not come as a surprise. The various committees set up
earlier for banking reforms had also suggested mergers. These
committees include Narasimham committee (1991 and 1998) and Khan
committee in 1997. The Reserve Bank of India had set up a Verma
committee in 1999 to identify and examine the problems of weak banks
and their restructuring. The Verma panel had also suggested bank merger
as a step for financial restructuring among the weak banks. It was only a
matter of time before the government stepped in to consolidate the
banking structure.
• BASEL III Norms can be implemented with this merger process. Ex:
Sale of more products through banks, Volumes of loans, Minimal legal
implications in lending with credible borrowers, Inter bank transactions
and decisions of conglomerate loans etc.

• Source: https://www.cnbctv18.com/finance/bank-mergers-to-help-india-
get-closer-to-5-trillion-economy-dream-4494471.htm
Credit syndication process
• Lead financial institution is selected to coordinate
the deal. The lead institution is called syndicate
agent.
• Interest rates are higher than market rates of
interest
• Additional fee is paid to the syndicate agent for
leading the whole process throughout.
Credit Rating
• A credit rating is an evaluation of the credit
risk of a prospective debtor.
• predicting their ability to pay back the debt,
and an implicit forecast of the likelihood of the
debtor defaulting.
• an evaluation of a credit rating agency of the
qualitative and quantitative information for the
prospective debtor, including information
provided by the prospective debtor and other
non-public information obtained by the credit
rating agency's analysts.
Credit Rating
• Credit ratings can address a corporation's
financial instruments i.e. debt security such as
a bond, but also the corporations itself. Ratings
are assigned by credit rating agencies, the
largest of which are S&P, Moody’s and Fitch
Ratings. They use letter designations such as
A, B, C. Higher grades are intended to
represent a lower probability of default.
Ratings given by different agencies
• Moody's S&P Fitch Rating description
• Long-term Short-term Long-term Short-term Long-term Short-term
• Aaa P-1 AAA A-1+ AAA F1+ Prime
• Aa1 AA+ AA+ High grade
• Aa2 AA AA
• Aa3 AA− AA−
• A1 A+ A-1 A+ F1 Upper medium grade
• A2 A A
• A3 P-2 A− A-2 A− F2
• Baa1 BBB+ BBB+ Lower medium grade
• Baa2 P-3 BBB BBB F3
• Baa3 BBB− A-3 BBB−
• Ba1 Not Prime BB+ B BB+ B Non-investment grade speculative
• Ba2 BB BB
• Ba3 BB− BB−
• B1 B+ B+ Highly speculative
• B2 B B
• B3 B− B−
• Caa1 CCC+ C CCC+ C Substantial risks
• Caa2 CCC CCC
• Caa3 CCC− CCC−
• Ca CC CC Extremely speculative
• C C C Default imminent
• C RD D DDD D In default
• / SD DD
• / D D
Mutual Funds
Definition: A mutual fund is a professionally-managed investment scheme, usually
run by an asset management company that brings together a group of people and
invests their money in stocks, bonds and other securities.

• Open Ended schemes ---- Bought by the issuer only at NAV


• Close Ended schemes ---- Issued only once and are traded in open money
market
• Unit Investment Trusts ----- a type of Open ended funds issued only once and
with maturity period.
• ETFs ----------- Two Types ------- Open Ended or Unit Investment Trust

• NAV: the market price of the fund traded. It is closing price of previous day’s
price which remains constant through out the day unlike shares price.

• NAV = (Current Market Value of a Fund's Holdings) – (Fund's liabilities)

• Equity Based Funds


• Debt Based Funds
• Hybrid Funds
Types of Mutual Funds
• Money Market or Liquid funds: Also called as liquid
funds. Fund manager invests money on CDs, CPs, short
term investments etc.
• Fixed income funds
• Asset allocation: shares, bonds and cash equivalent
composition is asset allocation funds
• Fund of Funds: Fund investment on another fund
• Gilt Funds: Highly secured government investment option
schemes.
• Speciality: Debt or Equity specific
• Index: Broad market exposure, low operating costs and
low portfolio turnover.
• Hedge funds: Not sold to general public. Subject to
government regulations.
Market capitalization
• Mega cap - companies worth $200 billion or more
• Big/large cap - companies worth between $10 billion
and $200 billion
• Mid cap - companies worth between $2 billion and
$10 billion
• Small cap - companies worth between $300 million
and $2 billion
• Micro cap - companies worth between $50 million
and $300 million
• Nano cap - companies worth less than $50 million
Advantages
• Increased diversification: A fund diversifies holding many securities,
this diversification decreases risk.
• Daily liquidity: Shareholders of open-end funds and unit investment
trusts may sell their holdings back to the fund at regular intervals at a
price equal to the NAV of the fund's holdings. Most funds allow
investors to redeem in this way at the close of every trading day.
• Professional investment management: Open-and closed-end funds hire
portfolio managers to supervise the fund's investments.
• Ability to participate in investments that may be available only to larger
investors. For example, individual investors often find it difficult to
invest directly in foreign markets.
• Service and convenience: Funds often provide services such as cheque
writing.
• Government oversight: Mutual funds are regulated by a government
body.
• Transparency and ease of comparison: All mutual funds are required to
report the same information to investors, which makes them easier to
compare
Limitations
• High fund management fee and distribution costs
• Less control over timing of recognition of gains
• Less predictable income
• No opportunity to customize
Lease Finance
• A contract by which one party conveys land, property, services, etc. to another for a specified
time, usually in return for a periodic payment.
Terms of Lease Contract:
• Names of the parties of the agreement.
• The starting date and duration of the agreement.
• Identifies the specific object (by street address, VIN, or make/model,serial number) being
leased.
• Provides conditions for renewal or non-renewal.
• Has a specific consideration (a lump sum, or periodic payments) for granting the use of
object.
• Has provisions for a security deposit and terms for its return.
• May have a specific list of conditions which are therein described as Default Conditions and
specific Remedies.
• May have other specific conditions placed upon the parties such as:
– Need to provide insurance for loss.
– Restrictive use.
– Which party is responsible for maintenance.
• Termination clause (describing what will happen if the contract is ended early or cancelled,
stating the rights of parties to terminate the lease, and their obligations)
Hire Purchase
A system by which one pays for a thing in regular instalments
while having the use of it.
Hirer obligations:
• to pay the hire instalment
• to take reasonable care of the goods (if the hirer damages the
goods by using them in a non-standard way, he or she must
continue to pay the instalments and, if appropriate, re-
compensate the owner for any loss in asset value)
• to inform the owner where the goods will be kept.
• A hirer can sell the products if, and only if, he/she has
purchased the goods finally or else not to any other third party.
Hire Purchase
Hirer rights:
• To buy the goods at any time by giving notice to the owner and paying the balance of the HP
price less a rebate (each jurisdiction has a different formula for calculating the amount of this
rebate)
• To return the goods to the owner—this is subject to the payment of a penalty to reflect the
owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a
balance between the need for the buyer to minimize liability and the fact that the owner now
has possession of an obsolete asset of reduced value
• With the consent of the owner, to assign both the benefit and the burden of the contract to a
third person. The owner cannot unreasonably refuse consent where the nominated third party
has good credit rating
• Where the owner wrongfully repossesses the goods, either to recover the goods plus damages
for loss of quiet possession or to damages representing the value of the goods lost.
Owner’s rights
• Hiree can terminate the agreement where the hirer defaults in paying the instalments or
breaches any of the other terms in the agreement.
• to forfeit the deposit
• to retain the instalments already paid and recover the balance due
• to repossess the goods (which may have to be by application to a Court depending on the
nature of the goods and the percentage of the total price paid)
• to claim damages for any loss suffered.
Bill Discounting
Factoring & Forfeiting
Venture capital
Housing finance
Insurance Premium Calculation

Term Insurance Premium =


(Amount of Insurance) X (Probability of Death)
X (Present Value of 1 Rupee for the period funds
are held)
OR
Ip = I x Pd x PVIF
All the Best