Financial system and its role: A financial system is a network of financial institutions, financial markets, financial instruments and

financial services to facilitate the transfer of funds. The system consists of savers, intermediaries, instruments and the ultimate user of funds. The level of economic growth largely depends upon and is facilitated by the state of financial system prevailing in the economy. Efficient financial system and sustainable economic growth are corollary. The financial system mobilises the savings and channelizes them into the productive activity and thus influences the pace of economic development. Economic growth is hampered for want of effective financial system. Broadly speaking, financial system deals with three inter-related and interdependent variables, i.e., money, credit and finance. The functions of financial system can be enumerated as follows: • Saving function: Public saving find their way into the hands of those in production through the financial system. Financial claims are issued in the money and capital markets which promise future income flows. The funds with the producers result in production of goods and services thereby increasing society living standards. • • Liquidity function: The financial markets provide the investor with the opportunity to liquidate investments like stocks bonds debentures whenever they need the fund. Payment function: The financial system offers a very convenient mode for payment of goods and services. Cheque system, credit card system etc are the easiest methods of payments. The cost and time of transactions are drastically reduced. • Risk function: The financial markets provide protection against life, health and income risks. These are accomplished through the sale of life and health insurance and property insurance policies. The financial markets provide immense opportunities for the investor to hedge himself against or reduce the possible risks involved in various investments. • Policy function: The government intervenes in the financial system to influence macroeconomic variables like interest rates or inflation so if country needs more money government would cut rate of interest through various financial instruments and if inflation is high and too much money is there in the system then government would increase rate of interest. • • • Financial system works as an effective conduit for optimum allocation of financial resources in an economy. It helps in establishing a link between the savers and the investors. Financial system allows ‘asset-liability transformation’. Banks create claims (liabilities) against themselves when they accept deposits from customers but also create assets when they provide loans to clients. • Economic resources (i.e., funds) are transferred from one party to another through financial system.

The financial system ensures the efficient functioning of the payment mechanism in an economy. All transactions between the buyers and sellers of goods and services are effected smoothly because of financial system.

• • •

Financial system helps in risk transformation by diversification, as in case of mutual funds. Financial system enhances liquidity of financial claims. Financial system helps price discovery of financial assets resulting from the interaction of buyers and sellers. For example, the prices of securities are determined by demand and supply forces in the capital market.

Financial system helps reducing the cost of transactions.

Financial assets and its role: Financial assets serve two principal economic sfunctions. First, financial assets transfer funds from those parties who have surplus funds to invest to those who need funds to invest in tangible assets. As their second function, they transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing funds. However, the claims held by the final wealth holders generally differ from the liabilities issued by the final demanders of funds because of the activity of entities operating in financial markets, called financial intermediaries, who seek to transform the final liabilities into different financial assets proffered by the public. Mrinalini Shankar (FK-1847)

CAPITAL MARKET Defination:A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year[1], as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. CAPITAL MARKET INTERMEDEIRES.

CAPITAL MARKET

Industrial Securities Market

Govt. Securities Market

Long Term Loan Market

Foreign Exchange Market

Primary Market

Secondary Market

Term Loan Market

Mortgage Market

Financial Guarantees Market

Public Issue

Industrial Securities Market: - Private equity shares, debentures, long term loans, preference shares, It includes mortgage loans etc. It is further sub divided into i) Primary market or New issue market: - The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary market creates long term instruments through which corporate entities borrow from capital market. It is further subdivided into 3 parts:(A) Public Issue: - when company needs long term funds they sell shares to the public like IPO. (B) Right Issue: - When a company coming up with second offer a portion of shares is to offer to the existing share holders. It is mandatory according to the rules of SEBI. (C) Private Placement: - When the company needs funds in a short period of time, they cannot offer IPO due to lack of time & other constraints. So they offer to certain groups for to raise their funds. This is called private placement. ii) Secondary Market: - The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. The term "secondary market" is also used to refer to the market for any used goods or assets,

Right Issue

Placement

or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production). Another commonly referred to usage of secondary market term is to refer to loans which are sold by a mortgage bank to investors. Govt Securities Market: - Govt. accepts & sells securities in the securities market . It includes govt. institutions, RBI. Long term Loan Market :- It is further subdivided into 3 parts: (A) Term loan market:- those loans whose maturity varies between 10-15 years. (B) Mortgage Market: - The loans which are given to the public by mortgaging any fixed assets. E.g.: housing loans. (C) Financial guarantee Market: - Takes active role in export transactions. It facilitates the transactions in the financial market.

Foreign Exchange Market: - The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries.

MONEY MARKET Defination:-

The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-backed securities.[1] It provides liquidity funding for the global financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. COMMODITY MARKET Defination: - commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency markets cover those concerns separately and in more depth. Debanil Chakraborty Roll no: - FK-1848

COMMERCIAL BILL MARKET A commercial bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a ‘self-liquidating’ paper and negotiable/; it is drawn always for a short period ranging between 3 months and 6 months. Definition of a bill Section 5 of the negotiable Instruments Act defines a bill exchange a follows:

Generally D/A bills are drawn on parties who have a good financial standing. On the order hand. These bills are payable immediately after the expiry of time period mentioned in the bills. Inland and foreign bills. Accommodation bills and supply bills. Usince bills are called time bills. .“an instrument in writing containing an unconditional order. signed by the maker. Till the payment o0f such bills. 3. the documents accompanying bills have to be delivered to the drawee immediately after acceptance. receipt. documents will be directly sent to the drawee. 2. 5. These bills can be further classified into D/A bills and D/P bills. Inland and Foreign Bills Inland bills are those drawn upon a person resident in India and are payable in India. They may be drawn upon a person resident in India also. No time of payment is specified and hence they are payable at sight. 4. These bills are payable immediately as soon as they are presented to the drawee. Types of Bills: Many types of bills are in circulation in a bill market. The period varies according to the established trade custom or usage prevailing in the country. The documents will be retained by the banker. Foreign boils have their origin outside India. Demand and usince bills. Indigenous bills. Clean Bills and Documentary Bills When bills have to be accompanied by documents of title to goods like Railways. 6. In such a case. They can be broadly classified as follows: 1. or to the order of a certain person ort to the beater of the instrument”. Foreign bills are drawn outside India an they may be payable either in India or outside India. Bill of Lading etc. the documents have to be handed over to the drawee only against payment in the case of D/P bills. In the case of D/A bills. Export bills and import bills. Lorry receipt. They also include bills drawn on India made payable outside India. Demand and Usince Bills Demand bills are others called sight bills. directing a certain person to pay a certain sum of money only to. Clean bills and documentary bills. the bills are called documentary bills. When bills are drawn without accompanying any documents they are called clean bills.

Jokhani’. the bill market can be classified into two viz. They are known as ‘kite bills’ or ‘wind bills’. These bills are popular among indigenous bankers only. When credit sales are effected. These bills are useful only for the purpose of getting advances from commercial banks by creating a charge on these bills. the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. These bills are discounted with bankers and the proceeds are shared among themselves. So. But. ‘Nam Jog’. Indigenous Bills Indigenous bills are those drawn and accepted according to native custom or usage of trade. they are paid. On the due dates. Termainjog’. the presence of a bill market enables him to get payment immediately. and so an. ‘Darshani’. Accommodation Bills and Supply Bills If bills do not arise out of genuine trade transactions. • • Discount Market Acceptance Market Discount Market Discount market refers to the market where short-term genuine trade bills are discounted by financial intermediaries like commercial banks. the intermediary claims the amount of the bill from the person who has accept6ed the bill. Operations in Bill Market: From the operations point of view. The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called ‘Discount rate’ on the date of maturity.Export and Foreign Bills Export bills are those drawn by Indian exports on importers outside India and import bills are drawn on Indian importers in India by exports outside India. . Supply bills are those neither drawn by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. they called ‘hundis’ the hundis are known by various names such as ‘Shah Jog’. they are called accommodation bills. In India. Two parties draw bills on each other purely for the purpos4 of mutual financial accommodation. they are not considered as negotiable instruments. ‘Dhanijog’.

bills can be converted into cash readily by means of rediscounting them with the central bank. In London. commercial banks can invest their funds on bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits.In some countries. bills would be honored on the due date. • Ideal Investment: Bills are for periods not exceeding 6 months. Moreover. the legal remedy is simple. They represent advances for a definite period. Bills are self-liquidating in character since they have fixed tenure. there are no acceptance houses. commercial banks lay a significant role in this market due to the following advantages: • Liquidity: Bills are highly liquid assets. the DFHI has been established to activate this market. In India. they are negotiable instruments and hence they can be transferred freely by a mere delivery or by endorsement and delivery. Generally. there are specialist firms called acceptance house which accept bills drawn by trades and import greater marketability to such bills. the bills earn a good name and reputation and such bills can readily discounted anywhere. It provides liquidity and activates the money market. Hence. However. • Simple Legal Remedy: In case the bills are dishonored\. All trade bills cannot be discounted easily because the paties to the bills may not be financially sound. For instance. Hence. The commercial banks undertake the acceptance business to some extant. interest is payable only when it is due. In times of necessity. business people are used to keeping their words and the use of the bills imposes a strict financial discipline on them. For instance. • High And Quick Yield: The financial institutions earn a high quick yield. there are some financial intermediaries who specialize in the field of discounting. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. However. in London Money Market there are specialise in the field discounting bills. • Certainty Of Payment: Bills are drawn and accepted by business people. The discounts rate is also comparatively high. Acceptance Market The acceptance market refers to the market where short-term genuine trade bills are accepted by financial intermediaries. The discount is dedicated at the time of discounting itself whereas in the case of other loans and advances. In India. In case such bills are accepted by financial intermediaries like banks. commercial banks in India have to undertake the work of discounting. Advantages of commercial bills: Commercial bill market is an important source of short-term funds for trade and industry. Such dishonored bills have to be simply noted and protested and the whole amount should be debited to the customer’s accounts. Such institutions are conspicuously absent in India. . their importance has declined in recent times.

• Absence Of Rediscounting Among Banks: There is no practice of re-discounting of bills between banks who need funds and those who have surplus funds.D and cash credit to bill financing therefore. Hence specialised services are not available in the field of discounting or acceptance. The reasons for the slow growth are the following: • Absence Of Bill Culture: Business people in India prefer O. treasury bills represent short-term borrowings of the Government. Rediscounting facility is available in important centers and that too it restricted to the apex level financial institutions. bill markets have been established mainly for financing foreign trade. Treasury bill market refers to the market where treasury bills are brought and sold. It involves additional work. • Limited Foreign Trade: In many developed countries. Suitable monetary policy can be taken by adjusting the bank rate depending upon the monetary conditions prevailing in the market. TREASURY-BILL MARKET Just like commercial bills which represent commercial debt. Unfortunately. • • Absence Of Acceptance Services: There is no discount house or acceptance house in India. In order to enlarge the rediscounting facility. banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Moreover. Again. the bill market has not been well developed in India. UTI. Even then. Attitude Of Banks: Banks are shy rediscounting bills even the central bank. Treasury bills are very popular and enjoy higher degree o9f liquidity since they are issued by the government. For this purpose. . They have a tendency to hold the bills till maturity and hence it affects the velocity of circulation of bills. • • Stamp Duty: Stamp duty discourages the use of bills. GIC and ICICI to rediscount genuine eligible trade bills of commercial banks. • Difficulty In Ascertaining Genuine Trade Bills: The financial institutions have to verify the bills so as to ascertain whether they are genuine trade bills and not accommodation bills. foreign trade as a percentage to national income remains small and it is reflected in the bill market also. banks prefer to purchase bills instead of discounting them. in India. bill financial is not popular. invoices have to be scrutinized carefully.• Easy Central Bank Control: The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. the RBI has permitted financial institutions like LIC. the size of the bill market has bee curtailed to a large extant. Absence Of Secondary Market: There is no active secondary market for bills. stamp papers of required denomination are not available. Drawbacks of commercial bills: In spite of these merits. Hence. Hence bills are not popular.

91 days treasury bills (top basis) can be rediscounted with the RBI at any time after 14 days of their purchase. In the same way. On the other hand ‘ad hocs’ are always issued in favour of the RBI only. 364 days bills do not carry any fixed rate. Types of Treasury Bills In India. Ad hocs serve the Government in the following ways: • They replenish cash balances of the central Government.Meaning and Features of Treasury Bills: A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. the Central Government can raise finance through these ad hocs. . The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security. 2. there are two types of treasury bills viz. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is clams against the Government. It is purely a finance bill since it does not arise out of any trade transaction. On the basis of periodicity. Treasury bill are issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits. (I) ordinary or regular and (ii) ‘ad hoc’ known as ‘ad hocs’ ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. Before 14 days a penal rate is charged. Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. semi-government departments and foreign central banks. They are not sold through tender or auction. • They also provide an investment medium for investing the temporary surpluses of State Government. 182 Days treasury bills. 3. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also. The period does not exceed a period of one year. the rate is fixed for 91 days treasury bills sold through auction. Such a rate is called cut off rate. They are purchased by the RBI on top and the RBI is authorised to issue currency notes against them. Just like State Government get advance (ways and means advances) from the RBI. and 364 Days treasury bills. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. 91 Days treasury bills. treasury bills may be classified into three they are: 1. They are marketable sell them back to the RBI.

maintain a subsidiary General Ledger (SGL) account with the RBI. 364 days TBs are sold through auction which is conducted once in a fortnight. Investors can submit more than one bid also. The DFHI is actively participating in the auctions of TBs. UTI. The DFHI announces daily buying and selling rates for TBs. They . 7. Corporate customers Public Through many participants are there. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results. 5. However. 2. 4. NABARD. the accepted bids with prices are displayed. IDBI. The participants in this market are the followers: 1. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. 6. It accounts for nearly 90 % of the annual sale of TBs. IFCI. On the next working day of the date auction. 8. etc. 3. • Liquidity: Investments in TBs are also highly liquid because they can be converted into cash at any time at the option of the inverts. Institutional investors like commercial banks. The establishment of the DFHI has imported greater liquidity in the TB market. RBI and SBI Commercial banks State Governments DFHI STCI Financial institutions like LIC. It is playing a significant role in the secondary market also by quoting daily buying and selling rates. GIC. ICICI. DFHI. The DFHI does this function on behalf of investors with the helps of SGL transfer forms. in actual practice. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rate of interest to institutional investors. this market is in the hands at the banking sector. STCI. etc. They carry zero default risk since they are issued by the RBI for and on behalf of the Central Government. Importance of Treasury Bills: • Safety: Investments in TBs are highly safe since the payment of interest and repayment of principal are assured by the Government. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI.Operations and Participants The RBI holds day’s treasury bills (TBs) and they are issued on top basis throughout the week.

• Non-Inflationary Monetary Tool: TBs enable the Central Government to support its monetary policy in the economy. It is a source of cheap finance to the Government since the discount rates are very low. TBs are eligible securities for SLR purposes. competitive bids are competitive bids are conspicuously absent. active trading in TBs is adversely affected . money can be raised quickly against TBs and invested in the call money market and vice versa. The yield on TBs is also assured. in actual practice. Hence there is a market for TBs. to maintain CRR (Cash Reserve Ratio). For instance excess liquidity. When the call rates are very high. in the economy can be absorbed through the issue of TBs.can be discounted with the RBI and further refinance facility is available from the RBI against TBs. They are also available in the secondary market. Hence they cannot be mentioned and their issue does not lead to any inflationary pressure at all • Hedging Facility: TBs can be used as a hedge against heavy interest rate fluctuations in the call loan market. TBs are subscribed by investors other than the RBI. TBs are available on top throughout the week at specified rates. Moreover. commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio investments in TBs are taken into account. Financial institutions can employ their surplus funds on any day. Fund managers of financial institutions build portfolio of TBs in such a way that the dates of maturities of TBs may be matched with the dates of payment on their liabilities like deposits of short term maturities. the investors hold TBs till maturity and they do not come for circulation. Absence Of Competitive Bids: Though TBs are sold through auction in order to ensure market rates for the investors. • Source Of Short-Term Funds: The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. TBs are very helpful. • Absence Of Active Trading: Generally. • Ideal Short-Term Investment: Idle cash can be profitably invested for a very short period in TBs. if any. Defects of Trasury Bills: • • Poor Yield: The yield form TBs is the lowest. TBs can be used in ready forward transitions. Hence adequate return is not available. Hence. • Ideal Fund Management: TBs are available on top as well through periodical auctions. TBs help financial manager’s it manage the funds effectively and profitably. Thus. Long term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times. The RBI is compelled to accept these non-competitive bids. They can be readily converted into cash and thereby CRR can be maintained. • Statutory Liquidity Requirement: As per the RBI directives. Moreover. It makes TBs unpopular.

with the exception of weekends. In a typical foreign exchange transaction. leading to high liquidity.e. FX. which remained fixed as per the Bretton Woods system. and which (it has been claimed) may lead to loss of competitiveness in some countries. and facilitates the carry trade. and the use of leverage to enhance profit margins with respect to account size. trading from 20:15 GMT on Sunday until 22:00 GMT Friday.98 trillion. The foreign exchange market determines the relative values of different currencies.21 trillion daily volume as of April 2007. For example. its continuous operation: 24 hours a day except weekends.FOREX MARKET The foreign exchange market (forex. in which investors borrow low-yielding currencies and lend (invest in) high-yielding currencies. It also supports speculation. as of April 2010. According to the Bank for International Settlements. notwithstanding currency intervention by central banks. it has been referred to as the market closest to the ideal of perfect competition. i. a party purchases a quantity of one currency by paying a quantity of another currency. by allowing businesses to convert one currency to another currency. even though the business's income is in US dollars. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime. or currency market) is a worldwide decentralized over-thecounter financial market for the trading of currencies. As such. average daily turnover in global foreign exchange markets is estimated at $3. The foreign exchange market is unique because of • • • • • • its huge trading volume. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock. a growth of approximately 20% over the $3. the variety of factors that affect exchange rates. its geographical dispersion. it permits a US business to import British goods and pay Pound Sterling. The primary purpose of the foreign exchange is to assist international trade and investment. the low margins of relative profit compared with other markets of fixed income. Market size and liquidity .

By 2010. In particular. A large bank may trade billions of dollars daily. however. and Tokyo accounted for 6.9%.5 trillion was spot foreign exchange transactions and $2. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms. much of this business has moved on to more efficient electronic systems.[The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class. FX swaps and other currency derivatives. Some of this trading is undertaken on behalf of customers. but much is conducted by proprietary desks. The average daily turnover in the global foreign exchange and related markets is continuously growing. In second and third places respectively.The foreign exchange market is the largest and most liquid financial market in the world.7% of the total. making London by far the most important global center for foreign exchange trading. the increased trading activity of high-frequency traders. currency speculators. corporations. governments. institutional investors. trading for the bank's own account. central banks. and retail investors.2%. Today. The growth of electronic execution methods and the diverse selection of execution venues have lowered transaction costs. Of this $3. According to the 2010 Triennial Central Bank Survey.5 trillion was traded in outright forwards. and attracted greater participation from many customer types. FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years. and the emergence of retail investors as an important market segment. retail trading is estimated to account for up to 10% of spot FX turnover. average daily turnover was US$3. coordinated by the Bank for International Settlements. Banks The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. trading in New York City accounted for 17. reaching $166 billion in April 2010 (double the turnover recorded in April 2007). other financial institutions. electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. increased market liquidity. Trading in London accounted for 36. or $150 billion per day .98 trillion in April 2010 (vs $1. facilitating interbank trading and matching anonymous counterparts for large fees. Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004. Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover.7 trillion in 1998). foreign exchange brokers did large amounts of business. $1. Traders include large banks. Commercial companies .98 trillion. Until recently. but turnover is noticeably smaller than just a few years ago.

They try to control the money supply. an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Hedge funds have gained a reputation for aggressive currency speculation since 1996. In other words. trade flows are an important factor in the long-term direction of a currency's exchange rate.An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants. They control billions of dollars of equity and may borrow billions more. Commercial companies often trade fairly small amounts compared to those of banks or speculators. Banks. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. inflation. like other traders would. dealers and online foreign exchange traders use fixing rates as a trend indicator. and/or interest rates and often have official or unofficial target rates for their currencies. For example. and there is no convincing evidence that they do make a profit trading. Nevertheless. rather. the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end. Central banks National central banks play an important role in the foreign exchange markets. Forex Fixing Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. Hedge funds as speculators About 70% to 90% of the foreign exchange transactions are speculative. the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses. if the economic fundamentals are in the hedge funds' favor. Fixing exchange rates reflects the real value of equilibrium in the forex market. . Nevertheless. they were solely speculating on the movement of that particular currency. and thus may overwhelm intervention by central banks to support almost any currency. They can use their often substantial foreign exchange reserves to stabilize the market. Investment management firms Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. and their trades often have little short term impact on market rates.

the NFA and CFTC began (as of 2009) imposing stricter requirements. particularly in relation to the amount of Net Capitalization required of its members.e. I. Retail brokers. they participate indirectly through brokers or banks. It is estimated that in the UK. To deal with the issue.. Whilst the number of this type of specialist firms is quite small. Non-bank foreign exchange companies Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. Send Money Home offers an in-depth comparison into the services offered by all the major non-bank foreign exchange companies. by contrast. while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. and perhaps questionable brokers are now gone. both in size and importance. by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. which manage clients' currency exposures with the aim of generating profits as well as limiting risk.Some investment management firms also have more speculative specialist currency overlay operations. There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. typically act as principal in the transaction versus the retail customer. Retail foreign exchange brokers Retail traders (individuals) constitute a growing segment of this market. Currently. 14% of currency transfers/payments are made via Foreign Exchange Companies. Dealers or market makers. Brokers serve as an agent of the customer in the broader FX market. Money transfer/remittance companies . They charge a commission or mark-up in addition to the price obtained in the market. there is usually a physical delivery of currency to a bank account. As a result many of the smaller.[13] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services. and hence can generate large trades. many have a large value of assets under management (AUM). These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments.

but New York. the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth. The largest and best known provider is Western Union with 345. a particular currency's quoted price is usually the London market price. excluding weekends. The four largest markets (India. yet these theories falter as they are based on . Domestic Fisher effect. as the Asian trading session ends. In practice the rates are often very close. there are rather a number of interconnected marketplaces. This implies that there is not a single exchange rate but rather a number of different rates (prices). interest rates (interest rate parity. Tokyo.[citation needed] Trading characteristics There is no unified or centrally cleared market for the majority of FX trades. Currency trading happens continuously throughout the day.000 agents globally followed by UAE Exchange & Financial Services Ltd. so many people have access to the same news at the same time. followed by the North American session and then back to the Asian session. often on scheduled dates. A joint venture of the Chicago Mercantile Exchange and Reuters. they can see their customers' order flow. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates. the large banks have an important advantage. Domestic Fisher effect.Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. large cross-border M&A deals and other macroeconomic conditions. called Fxmarketspace opened in 2007 and aspired but failed to the role of a central market clearing mechanism The main trading center is London. interest rate parity. Due to the over-the-counter (OTC) nature of currency markets. International Fisher effect. and there is very little crossborder regulation. Mexico and the Philippines) receive $95 billion. the European session begins. and where it is. inflation (purchasing power parity theory). budget and trade deficits or surpluses. Banks throughout the world participate. International Fisher effect). where different currencies instruments are traded. Due to London's dominance in the market. FX rates are decided by its government): (a) International parity conditions: Relative Purchasing Power Parity. otherwise they could be exploited by arbitrageurs instantaneously. Major news is released publicly. China. However. In 2007. Hong Kong and Singapore are all important centers as well. Determinants of FX rates The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime. depending on what bank or market maker is trading..

which in turn depends on their expectations on the future worth of these assets. services and capital] which seldom hold true in the real world. free flow of goods. (c) Asset market model :views currencies as an important asset class for constructing investment portfolios. and other economic indicators. These elements generally fall into three categories: economic factors. • Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money. (b)economic conditions. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. • Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits. . but rather by several. and the price of one currency in relation to another shifts accordingly.” None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. generally revealed through economic reports. political conditions and market psychology. Economic factors These include: (a)economic policy.g. disseminated by government agencies and central banks. and thus its value. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of. The impact is reflected in the value of a country's currency. and positively to narrowing budget deficits. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets. which is reflected by the level of interest rates). Supply and demand for any given currency. however. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. focuses largely on tradable goods and services.challengeable assumptions [e. supply and demand factors are constantly shifting. For shorter time frames (less than a few days) algorithm can be devised to predict prices. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit. Large and small institutions and professional individual traders have made consistent profits from it.. and demand for. ignoring the increasing role of global capital flows. (b) Balance of payments model : This model. assets denominated in those currencies. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events. are not influenced by any single element.

and the more demand for it there will be. This is because inflation erodes purchasing power. events in one country in a region may spur positive/negative interest in a neighboring country and. detail the levels of a country's economic growth and health. All exchange rates are susceptible to political instability and anticipations about the new ruling party. retail sales. thus demand. • Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. • . the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Financial instruments • • • • • Spot Forward Swap Future Option Speculation. Similarly. in the process. Its effects are more prominent if the increase is in the traded sector. Generally. destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. For example. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. the better its currency will perform. trade deficits may have a negative impact on a nation's currency. regional. However. in a country experiencing financial difficulties. For example. for that particular currency. • Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. employment levels.• Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services. affect its currency. a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. • Economic growth and health: Reports such as GDP. which in turn indicates demand for a country's currency to conduct trade. and international political conditions and events can have a profound effect on currency markets. the more healthy and robust a country's economy. capacity utilization and others. Political upheaval and instability can have a negative impact on a nation's economy. Also. Political conditions Internal.

Therefore it is also called the new issue market (NIM). This is typically done through a syndicate of securities dealers.   The primary market performs the crucial function of facilitating capital formation in the economy." . such as loans from financial institutions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty Srilakshmy Srikumar FK-1855 PRIMARY EQUITY MARKETS AND DEBT MARKETS By. Features of primary markets are:  This is the market for new long term equity capital.Risk aversion in forex Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions.   In a primary issue. In the case of a new stock issue. Borrowers in the new issue market may be raising capital for converting private capital into public capital. Primary markets create long term instruments through which corporate entities borrow from capital market. which can be found in the prospectus. Dealers earn a commission that is built into the price of the security offering.JOBIN JOY. FK-1856 PRIMARY EQUITY MARKETS The primary market is that part of the capital markets that deals with the issuance of new securities. the securities are issued by the company directly to investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. this sale is an initial public offering (IPO). The new issue market does not include certain other sources of new long term external finance. The primary market is the market where the securities are sold for the first time. Companies can obtain funding through the sale of a new stock issue. this is known as "going public.

Resource mobilization through New Issue Market. Since private placements do not . Private placements offer small businesses a number of advantages over IPOs. The sale of securities can be either through book building or through normal public issue. but directly to an individual or a small group of investors. during the period for which the IPO is open. Private placements are generally considered a cost-effective way for small businesses to raise capital without "going public" through an initial public offering (IPO). Such offerings do not need to be registered with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting requirements.Domestic Market  New Issue. This paves way for listing and trading of the issuer’s securities. Book Building is basically a process used in IPOs for efficient price discovery. which are above or equal to the floor price. There are two types of issues. It is a mechanism where.international market  GDRs  ADRs  FCCBs  ECBs  Euro Issues IPO An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. one where company and Lead Merchant Banker fix a price (called fixed price) and other.IPO  Private Placement market  Preferential issue Resource Mobilization through New issue Market . where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process). Fixing prices The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. The offer price is determined after the bid closing date PRIVATE PLACEMENT OF SHARES Private placement occurs when a company makes an offering of securities not to the public. bids are collected from investors at various prices. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.

In short. In addition. i. GDR • It is equity instrument issued in abroad market by overseas corporate bodies against the shares/bonds of Indian companies held with domestic custodian bank. 1 GDR – 10 shares. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act. they are considerably less expensive and time consuming. in addition to the requirements specified in the Companies Act.require the assistance of brokers or underwriters. which is neither a rights issue nor a public issue. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. • • • They are listed and traded on foreign stock exchange and OTC market. • An issuing company can raise funds through ordinary equity shares but these shares would be transferred in GDRs in some ratios. 1956.e. the private placement offering remains one of the most viable alternatives for capital formation available to companies PREFERENTIAL ISSUE When a listed company doesn't want to go for further public issue and the objective is to raise huge capital by issuing bulk of shares to selected group of people. This is a faster way for a company to raise equity capital. • GDRs are freely transferable outside Indian and divided in respect of shares GDR is paid in Indian rupees only. "With loan criteria for commercial bankers and investment criteria for venture capitalists both tightening. • Most of Indian companies have their GDRs issues listed on Luxembourg stock exchange and the London stock exchange. The holder of GDR can convert it into no of shares at any time. preferential allotment is a good option. private placements may be the only source of capital available to risky ventures or start-up firms. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines. Till conversion GDR does not have any voting rights but once converted it is listed on Indian stock exchange. ECB . preferential issue means allotment of equity to some selected people by a company which has its share already listed.

viz. The market for government securities is the most dominant part of the debt market in terms of outstanding securities. EURO ISSUES • • Euro issue market comprises FCCB.com was the first dot company to list nearly at 100% premium on NASDAQ even bypassing BSE. It carries fixed interest or coupon rate and is convertible into a certain number of ordinary shares at preferable price. Infosys was the first company to tap international market in March 1999 (listed on NASDAQ).• Indian companies are free to raise ECBs from any internationally recognized source such as bank. than ICICI (NYSE) and satyam (NASDAQ). The short-term instruments in this segment are used by RBI as instrument of . FCCB (Foreign currency convertible bonds) • • It is issued by Indian companies and subscribed by non-resident in foreign currency. Only companies with low debt equity ratios and large forex earnings potential opt for FCCB. • It can be converted into ordinary shares of issuing company either in whole or in pat on the basis of any equity related warrants attached to the debt instruments. • Indian companies can go directly for ADRS without domestic offering as the scrip appreciates more in US market as concept of futuristic stocks is stronger in US. suppliers of equipment. • • Interest rate is low but exchange risk is more. GDRs/ADRs. Satyam then was not listed any of Indian stock exchange. INDIAN DEBT MARKETS The debt market in India comprises of two main segments. foreign collaborators. the redemption is also made in dollars. foreign equity holders and international capital markets.. market capitalization. • Till conversion. the company has to pay interest in dollars and if conversion option is not exercised. export credit agencies. • • Investors (From abroad) respond highly to Indian ADRs Rediff. the government securities market and the corporate securities market. trading volume and number of participants. It sets benchmark for the rest of the market.

· The Indian corporate sector relies. infrastructure-related institutions and the PSUs. treasury bills and the state government bonds. most of the bond issues are being placed through the private placement route. bonds issued by public sector units (PSUs) and bonds issued by development financial institutions (DFIs). The preferred mode of raising capital by these institutions has been private placement. This segment comprises of call and notice money markets. Banks. The main instruments in the government securities market are fixed rate bond. there has been an increase in issuance of corporate bonds with embedded put and call options. insurance companies and financial institutions. on raising capital through debt issues. The gradual withdrawal of budgetary support to PSUs by the government since 1991 has increased their reliance on the bond market for mobilising resources. where players are able to lend and borrow amongst themselves. mostly in the form of certificates of deposit (CDs). In the recent past. which generally do so to meet statutory requirements. and include a variety of tailor made features with respect to interest payments and redemption. also constitute a major part of the debt market. including securitized products. · The Indian debt market also has a large non-securitised. state governments and statesponsored entities. Of late. barring an occasional public issue. and a variety of floating rate instruments with floors and caps. The market for debt derivatives has not yet developed appreciably. corporate bond strips. transactions based segment. This segment is not very deep and liquid. which comprises of short term paper issued by banks. Corporate bond market has seen a lot of innovations. This segment is. While some of these securities are traded on the stock exchanges. partly paid securities. In the recent years. securities with embedded derivatives. to a great extent. the secondary market for corporate debt securities is yet to fully develop. which comprise of bonds and Commercial Papers (CPs). inter- .Monetary policy. comparatively less dominant. floating rate bonds. local bodies such as municipal corporations have also begun to tap the debt market for funds. · Bonds issued by government-sponsored institutions like DFIs. The Central Government mobilises funds mainly through issue of dated securities and T-bills. however. financial institutions and other corporate have been the major subscribers to these issues. there is another segment. · In addition to above. These bonds are structured to suit the requirements of investors and the issuers. Market Subgroups The various subgroups in debt market in India are discussed below: · Government securities form the oldest and most dominant part of the debt market in India. The major investors in sovereign papers are banks. while State Governments rely solely on State Development Loans. The market for government securities comprises the securities issued by the central government. The corporate debt segment includes private corporate debt. zero coupon bonds and inflation index bonds.

and the repayment of the principal amount borrowed. In some segments. market makers in the form of primary dealers have emerged. Term to maturity of a bond changes every day. Participants Debt markets are pre-dominantly wholesale markets. and market for ready forward deals (repos). Secondary market dealings are mostly done on telephone. and OISs (Overnight Index Swaps) is emerging to enable banks. such as the government securities market. mutual funds. market for inter-corporate loans. on the other hand. Principal: Principal is the amount that has been borrowed. refers to the number of years remaining for the bond to mature. or the date on which the borrower has agreed to repay (redeem) the principal amount to the lender. provident funds. Term to maturity. Banks. Many of these participants are also issuers of debt instruments. The principal features of a bond are: Maturity: In the bond markets. insurance companies and corporates are the main investors in debt markets. the periodicity of such interest payment. financial institutions. Coupon: Coupon refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond). are used quite frequently. and the bond ceases to exist after that date. IRSs. the terms maturity and term-to-maturity. Coupon rate is the rate at which interest is paid. In this workbook the terms bonds. Maturity of a bond refers to the date on which the bond matures. Debt funds of the mutual fund industry. The borrowing is extinguished with redemption. from the date of issue of the bond until its maturity. which enable a broader holding of treasury securities. · The market for interest rate derivatives like FRAs. short-term instruments are traded in this segment. we use the term ‘bond’ for debt instruments issued by the Central and State governments and public sector organisations. The coupon is the product of the principal and the coupon rate. and evolving into a wholesale negotiated dealings market.bank market for term money. debentures and debt instruments have been used inter-changeably. with institutional investors being major participants. and is usually represented as a percentage of the par value of a bond. . PDs and FIs to hedge interest rate risks. Most debt issues are privately placed or auctioned to the participants. Typically. In the Indian securities markets. Instruments Debt instruments represent contracts whereby one party lends money to another on pre-determined terms with regard to rate of interest to be paid by the borrower to the lender. through negotiations. The small number of large players has resulted in the debt markets being fairly concentrated. and is also called the par value or face value of the bond. and the term ‘debentures’ for instruments issued by private corporate sector.

The market participants in the debt market are described below: (a) Central Government raises money through bond and T-bill issues to fund budgetary deficits and other short and long-term funding requirements. RBI also regulates the bank rates and repo rates. Banks arrange CP issues of corporates and are active in the inter-bank term markets and repo markets for their short term funding requirements.comprising of liquid funds. underwrite and make market in government securities by providing two way quotes. Most FIs hold government securities in their investment and trading portfolios. They are also the main participants in the call money and overnight markets. raises funds for the government through dated securities and T-bill issues. Their performance is assessed by RBI on the basis of their bidding commitments and the success ratio achieved at primary auctions. and have access to the call and repo markets for funds. They raise funds to meet the long term and working capital needs. Banks also issue CDs and bonds in the debt markets. In the secondary market. (b) Reserve Bank of India (RBI). represent a recent mode of intermediation of retail investments into the debt markets. (e) Public Sector Undertakings (PSUs) and their finance corporations are large issuers of debt securities. as investment banker to the government. particularly the government securities market due to SLR requirements. (j) Mutual funds have emerged as important players in the debt market. who are market intermediaries appointed by RBI. (h) Banks are the largest investors in the debt markets. (g) Development Financial Institutions (DFIs) regularly issue bonds for funding their financing requirements and working capital needs. They also issue bonds to raise funds for their Tier-II capital requirement. municipal and local bodies issue securities in the debt markets to fund their developmental projects as well as to finance their budgetary deficits. (c) Primary Dealers (PDs). Satellite dealers constituted the second tier of market makers till December 2002. They also invest in bonds issued by other entities in the debt markets. (d) State governments. They are also investors in debt securities issued in the market. RBI also conducts daily repo and reverse repo to moderate money supply in the economy. bond funds and gilt funds. Changes in these benchmark rates directly impact debt markets and all participants in the market as other interest rates realign themselves with these changes. (i) The investment norms for insurance companies make them large participants in government securities market. and uses these rates as tools of its monetary policy. owing to the growing number of debt funds that have mobilized significant amounts from the investors. These corporations are also investors in bonds issued in the debt markets. their outright turnover has to three times their holdings in dated securities and five times their holdings in treasury bills. (f) Corporates issue short and long-term paper to meet their financial requirements. and also participates in the market through open-market operations in the course of conduct of monetary policy. Most mutual funds also have specialised .

and trade on their portfolios quite regularly. they participate in the debt markets pre-dominantly as investors. investors. (o) NDS. except for meeting very short-term liquidity requirements. The noncompetitive bids upto a maximum of 5% of the notified amount are accepted at the weighted average cut off price / yield. 10. instruments in the debt market and their maturities are presented below . within certain limits.debt funds such as gilt funds and liquid funds. The matrix of issuers. as they are not permitted to sell their holdings. retail investors have been permitted submit noncompetitive bids at primary auction through any bank or PD. unless they have a funding requirement that cannot be met through regular accruals and contributions. however. trusts and societies are also large investors in the debt markets. They submit bids for amounts of Rs. Mutual funds are not permitted to borrow funds. CCIL and WDM are other participants which are discussed in greater detail in subsequent sections. subject to the condition that a single bid does not exceed Rs. The prudential regulations governing the deployment of the funds mobilized by them mandate investments pre-dominantly in treasury and PSU bonds. (k) Foreign Institutional Investors (FIIs) are permitted to invest in treasury and corporate bonds. 1 crore. (m) Charitable institutions. (l) Provident and pension funds are large investors in the debt markets. Therefore. however. They are. (n) Since January 2002. not very active traders in their portfolio.000 and multiples thereof. governed by their rules and byelaws with respect to the kind of bonds they can buy and the ma nner in which they can trade on their debt portfolios. They are.

Participants and Products in Debt Markets Issuer Instruments Maturity Investors .

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provident fund. The auctions for issue of securities (on either yield basis or price basis) are held either on ‘Uniform price’ method or on ‘Multiple price’ method.10. Government issues securities through the following modes: (a) Issue of securities through auction: The securities are issued through auction either on price basis or on yield basis. Government securities are issued for a minimum amount of Rs. company. the coupon is pre-determined and the bidders quote price per Rs. These are repaid at Public Debt Offices of RBI or any other institution at which they are registered at the time of repayment. including in electronic form. as determined by RBI. are accepted. On the basis of the bids received.10. Any person including firm.100 face value of the security. These are issued to the investors by credit to their SGL account or to a Constituents’ SGL account of the institution as specified by them.000/. Other bids tendered at lower than the maximum rate of yield or higher than the minimum offer price are accepted at the rate of yield or price as quoted in the respective bid. RBI determines the maximum rate of yield or the minimum offer price as the case may be at which offers for purchase of securities would be accepted at the auction. Where an auction is held on ‘Multiple price’ method. Bids quoted higher than the maximum rate of yield or lower than the minimum . competitive bids offered with rates up to and including the maximum rate of yield or the prices up to and including the minimum offer price.thereafter. the coupon of the security is decided in an auction and the security carries the same coupon till maturity. Bids quoted higher than the maximum rate of yield or lower than the minimum price are rejected. OCB predominantly owned by NRIs and FII registered with SEBI and approved by RBI can submit offers. Payment for the securities are made by the applicants on such dates as mentioned in the specific notification.PRIMARY MARKET Issuance Process-Government securities The issue of government securities is governed by the terms and conditions specified in the general notification of the government and also the terms and conditions specified in the specific notification issued in respect of issue of each security. institution. The terms and conditions specified in the general notification are discussed in this section. competitive bids offered at the maximum rate of yield or the minimum offer price. are accepted at the maximum rate of yield or minimum offer price so determined. at which they desire to purchase the security. Where an auction is held on ‘Uniform price’ method. for purchase of government securities. by means of cash or cheque drawn on RBI or Banker's pay order or by authority to debit their current account with RBI or by Electronic Fund Transfer in a secured environment. the payment for securities and the repayment thereof can be made in specified installments. or in the form of physical certificate. state government. as determined by RBI. NRI.(face value) and in multiples of Rs. trust. maintained with RBI or by credit to their Bond Ledger Account maintained with RBI or with any institution authorised by RBI. Where the issue is on yield basis. Where the issue is on price basis.000/. corporate body. If specified in the specific notification.

(c) Zero Coupon Bonds: These are issued at a discount and redeemed at par. The description of the base rate and the manner in which the coupon rate is linked to it is announced in the specific notification. at par or at a premium to the face value and are redeemed at par. RBI may participate in auctions as a ‘non-competitor’ or subscribe to the government securities in other issues. Such privately placed securities and securities that devolve on RBI are subsequently offloaded through RBI’s open market operations. Allotment of securities to RBI are made at the cut off price/yield emerging in the auction or at any other price/yield decided by the government. before the specified redemption date. In case the total subscription exceeds the aggregate amount offered for sale. RBI may make partial allotment to all the applicants. The new securities could be issued on an auction/pre-announced coupon basis. (b) Issue of securities with pre-announced coupon rates: The coupon on such securities is announced before the date of floatation and the securities are issued at par. The nominal amount of securities that would be allocated to retail investors on non-competitive basis is restricted to a maximum 5 percentage of the aggregate nominal amount of the issue. Allocation of the securities to non-competitive bidders are made at the discretion of RBI and at a price not higher than the weighted average price arrived at on the basis of the competitive bids accepted at the auction or any other price announced in the specific notification. (d) Securities with Embedded Derivatives: These securities are repaid at the option of government/holder of the security. Government issues the following types of Government securities: (a) Securities with fixed coupon rates: These securities carry a specific coupon rate remaining fixed during the term of the security and payable periodically. (c) Issue of securities through tap sale: No aggregate amount is indicated in the notification in respect of the securities sold on tap. (d) Issue of securities in conversion of maturing treasury bills/dated securities: The holders of treasury bills of certain specified maturities and holders of specified dated securities are provided an option to convert their holding at specified prices into new securities offered for sale. RBI accepts private placement of government securities. within or outside the nominal amount which is issued at the weighted average price of the issue at the auction. These may be issued at a discount. (b) Floating Rate Bonds: These securities carry a coupon rate which varies according to the change in the base rate to which it is related. Individuals and specified institutions (read ‘retail investors’) can participate in the auctions on ‘non-competitive’ basis. On the basis of the bids received through tenders. The coupon rate may be subject to a floor or cap. Sale of such securities may be extended to more than one day and the sale may be closed at any time on any day.price are rejected. In order to maintain a stable interest rate environment. RBI determines the cut-off price at which tenders for purchase such bonds would be accepted at the auction. where a ‘call option’/‘put option’ is specified in the . No interest payment is made on such bonds before maturity.

PDs can also raise funds through CPs and have access to finance from commercial banks as any other corporate borrower. trading in government securities through a nationwide. PDs are collectively offered to underwrite up to 100% of the notified amount in respect of all issues where amounts are notified. Normally. where neither a ‘call option’ nor a ‘put option’ is specified/ exercised. the Satellite Dealers Scheme was discontinued since December 2002. Participants Primary dealers (PDs) are important intermediaries in the government securities markets. Several facilities have been extended to PDs given their special role in the government debt market. (e) Indexed Bond: Interest payments of these bonds are based on Wholesale Price Index/ Consumer Price Index. The Bombay Stock Exchange. RBI provides liquidity support to the PDs through LAF against collateral of government securities and through repo operations/refinance. They were given the facility of SGL. and as market makers in the secondary market. The underwriting commitment of each PD is broadly decided on the basis of its size in terms of its net owned funds. PDs underwrite a portion of the issue of government security that is floated for a pre-determined amount.specific notification and repaid on the date of redemption specified in the specific notification. trading of dated Government of India (GOI) securities in dematerialized form has started on automated order driven system of the National Stock Exchange (NSE). liquidity support through reverse repo. its holding strength. Mumbai (BSE) and the Over the Counter Exchange of India (OTCEI). issue of CPs. in the same manner in which trading takes place in equities. the committed amount of bids and the volume of turnover in securities. anonymous. PDs are permitted to borrow and lend in the money market. CSGL. They were expected to further strengthen the infrastructure of distribution. They act as underwriters in the primary market for government securities.This . has been introduced with effect from January 16. including retail. SECONDARY MARKET Trading of Government Securities on Stock Exchanges With a view to encouraging wider participation of all classes of investors. provide a retail outlet and encourage holding among a wider investor base. Accordingly. current accounts. There are 19 PDs operating in the market. etc. enhance liquidity. PDs are also given favoured access to the RBI’s open market operations. including call money market. 2003. However. Satellite dealers (SDs) formed the second tier of trading and distribution of Government securities. order driven screen based trading system on stock exchanges and settlement through the depositories.

. while dealing with pension funds. There are two main lines of business in investment banking. mutual funds. Primary Dealers (PDs) are expected to play an active role in providing liquidity to the government securities market and promote retailing. or the promotion of securities (i.e.trading facility is in addition to the reporting/trading facility in the Negotiated Dealing System.JOBIN JOY. hedge funds. By. investment banking also offers advice for a wide range of transactions a company might engage in. They may. marketmaking). PDs may open demat accounts with a Depository Participant (DP) of NSDL/CDSL in addition to their accounts with RBI. The trades of RBI regulated entities have to be settled either directly with clearing corporation/clearing house (in case they are clearing members) or else through clearing member custodian.e. etc. research. EVOLUTION OF INVESTMENT BANKS IN INDIA The origin of investment banking in India can be traced back to the 19th century when European merchant banks set-up their agency houses in the country to assist in the setting of new projects. Trading securities for cash or for other securities (i. FK-1856 NATURE AND SCOPE OF INVESTMENT BANKING EVOLUTION AND BUSINESS PORTFOLIO’S An investment bank is a financial institution that assists individuals. facilitating transactions. therefore.. underwriting. The peculiar feature of these agencies was that their services were restricted only to the companies of the . large business houses followed suit by establishing managing agencies which acted as issue house for securities. In the early 20th century. In addition to the acquisition of new funds.) is the "sell side". Being a parallel system. promoters for new projects and also provided finance to Greenfield ventures. the trades concluded on The exchanges will be cleared by their respective clearing corporations/clearing houses. An investment banking firm also does a large amount of consulting. and the investing public (who consume the products and services of the sell-side in order to maximize their return on investment) constitutes the "buy side". Value free transfer of securities between SGL/CSGL and demat accounts is enabled by PDO-Mumbai subject to operational guidelines being issued by our Department of Government and Bank Accounts (DGBA). corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. Unlike commercial banks and retail banks. make full use of proposed facility to distribute government securities to all categories of investors through the process of placing and picking-up orders on the exchanges. investment banks do not take deposits.

etc. The banking committee. Several new players entered into the field. The advent of economic reforms in 1991 resulted in sudden spurt in both the primary and secondary market. JM finance was set-up by Mr. The capital market witnessed some buoyancy in the late eighties. The low entry barriers coupled with lucrative opportunities lured many new entrants into this industry. SBI capital markets. It was soon followed by Citibank. leading private sector players involved in the scam included Fairgrowth financial services and Champaklal investments and finance (CIFCO). The registration norms with the SEBI were quite liberal. In 1972. started entering into joint ventures with the foreign banks. Nimesh Kampani as an exclusive merchant bank in 1973. The foreign banks monopolized merchant banking services in the country. but theirs was limited due to their small capital base. The market turned bullish again in the end of 1993 after the tainted shares problem was substantially resolved. ANZ Grindlays bank set . State bank of India ventured into this business by starting a merchant banking bureau in 1972. In 1967. There was a phenomenal surge of activity in the primary market. 1992 was a major set back to the industry. took note of this with concern and recommended setting up of merchant banking institutions by commercial banks and financial intuitions. financial institutions and private sector. both in public and private sector were found to be involved in various irregularities.group to which they belonged. in its report in 1972. By 1980. ICICI became the first financial institution to offer merchant banking services. A few small brokers also started rendering Merchant banking services.up a separate merchant banking division to handle new capital issues. Some of the prominent public sector players involved in the scam were Can bank financial services. This energy resulted in synergies as their individual strength complemented each other . Several leading merchant bankers. which started rendering these services. The securities scam in may. the number of merchant banks rose to 33 and was set-up by commercial banks. Many of the top rung Indian merchant banks. Andhra bank financial services. who had string domestic base. The growth of the industry was very slow during this period.

Besides. debt market activity and merger and acquisitions. they come in as investors in management buy-outs and management buy-in transactions. Investment banks handle significant fund-based business of their own in the capital market along with their non-fund services portfolio which is offered to clients. Investment bank plays a lead advisory role in this booming segment of financial advisory business. The global mergers and acquisitions business is very large. All these activities are segmented across three broad platforms-equity market activity. they take the positions and make a market for many securities both in equity and derivatives segments.BUSINESS PORTFOLIO OF INVESTMENT BANKS Globally. . Investment bank plays a major role as institutional investors in trading and having large holdings of capital market securities. On other occasions wherein investment banks manage private equity fund and they also represent their investors such buy-out deals. As a dealer. They hold large inventories and therefore influence the direction of market.

corporate advisory. project advisory EQUITY PORTFOLIO— Underwriting. Core Business portfolios of Investment Banking (Equity Portfolio and Debt Portfolio) Ans: Globally. Parvathy FK-1858 Q. market making DEBT PORTFOLIO—Underwriting. structured finance issuances such as securitisation M&A-.SUBMITTED BY: Nimi K. They are: • • Core Business Portfolio Support Activity portfolio INVESTMENT BANKING CORE BUSINESS PORFOLIO NON-FUND BASED FUND BASED EQUITY PORTFOLIO—Merchant Banking (Issue management). Business Portfolio of Investment Banking: Investment banking mainly is divided into two portfolios. investment banks handle significant fund-based business of their own in the capital market along with their non-fund service portfolio which is offered to clients.Mergers and acquisitions advisory. market making M&A PORTFOLIO—Investing in private equity. LBOs and MBOs . Private placements DEBT PORTFOLIO—Issue management. private placement.

asset management .Derivative broking.proprietary trading and portfolio investing. Investment banks have been managing the public offers and hand holding them in the private placements as well. Financial institutions have been raising funds via public offer of unsecured bonds. managing hedge funds Core Services: Merchant Banking.Equity broking. It consists of assisting the issuers to raise capital by placement of securities issued by them with investors. distribution. . risk management. underwriting. Mergers and Aquisitions Adivisory: One of the creamy activities of investment banks has always been M&A advisory.Proprietary trading.Trading. market making and investment on own account in debt instruments and securitised instruments Derivative Portfolio. The larger investment banks specialize in M&A as a core activity. distribution. managing equity and asset management Debt portfolio.SUPPORT ACTIVITY PORTFOLIO NON-FUND BASED FUND BASED Equity portfolio. asset management. custodial services Derivative portfolio. underwriting and book running: The function of merchant banking is to provide intermediation in the capital market. research Debt Portfolio.Debt market broking. research and analysis Equity Portfolio.

It is now even more critical for private equities to identify the right deals. as well as enabling organisations to focus on core competencies. Just as importantly. structuring joint-ventures and strategic partnerships and other value added specialized areas. The proliferation of private equities in Asia is increasing competition for investments and pushing up valuation. acquisitions and divestures. raising private equity. At the same time. Well-planned and strategic M&As are transforming a number of corporations into global or regional powerhouses and enabling unprecedented growth beyond geographical market limitations. Advisory services are dedicated to understanding clients investment . In recent years. FK-1870 MERGERS AND ACQUISITION ADVISORY In an increasingly globalised world. corporations need to evaluate investment opportunities carefully.Corporate Advisory: Investment banks in India also have a large practice in corporate advisory services relating to project financing. corporate restructuring. capital restructuring through equity. private equity (PE) has emerged as an important source of capital. capacities and technologies. Post-deal value creation and the right exit strategy are also crucial to achieving the desired returns. Corporations need to secure the right deal at the right time and price. Focus is on creating value for clients by serving as an intermediary to manage and facilitate the acquisition process. M&A is facilitating access to new markets. it is no surprise that many acquisitions fall short of what acquirers looked for. and integrate the acquisition to realise their strategic objectives. M&As are not without risks. Mergers and Acquisition advisory services provided relates to the planning and execution of mergers. M&As are essential mechanisms of shareholder value enhancement. carry out due diligence thoroughly and know when to walk away. Name: Budi Kalpana Roll no. With so many moving parts to get right. understand the target’s potential and maximise the value in deal structuring.

Underwriters guarantee the price for a certain number of shares of the new issue. not subscribed by public. As we have already explained that underwriters satisfy themselves with the financial integrity of the company and viability of the plan. In case of an existing company. Advisory services includes : • Identifying opportunities and counterparties • Assisting with the negotiation of letters of intent and purchase agreements • Managing the transaction process The issues unique to undertaking these transactions are understood and they help clients succeed in getting the deal they want at the best possible price UNDERWRITING Underwriting involves the issuing company using one or (usually) more companies who are each responsible for placing a certain amount of the new issue. An underwriter of repute would go into the soundness of the plan put forward by the company before entering into an agreement and suggest changes wherever necessary. 4) Geographical Dispersion of Securities. it will have to go. it may have to postpone its projects for which the issue was meant. runs much less risk when they buy shares or debentures which have been underwritten by them. The good underwriters being men or firms of financial integrity an established reputation. IMPORTANCE OF UNDERWRITING Underwriting is a good technique of marketing the securities. enabling the company to avid certain pitfalls. 2) Benefit of Expert Advice An incidental advantage of underwriting is that the issuing company gets the benefit of expert advice. Thus. good underwriters increase the goodwill of the company. 3) Increase in Goodwill of the Company. As a result of an underwriting contract. the investors therefore. In the absence an underwriting agreement. The underwriting firms contact potential investors to gauge interest and sell the issue. The importance of under-writing can be adjudged by the following advantages 1) Assurance of Adequate Finance. They assure of the soundness of eh company. . Thus. a company may face a situation where even minimum subscription is not received and. Underwriting is a guarantee given buy the underwriters to take up the whole issue or remaining shares. into liquidation. it can go ahead with its plan confidently. underwriting agreement assures of the required funds within a reasonable or agreed time.criteria and proactively identifying valuable acquisition targets that have tremendous growth opportunity. a company has not to wait till the shares have been subscribed before entering into the required contracts for purchase of fixed assets etc. while promising a smooth transaction process.

5) Service to Prospective Buyers. 6) Other Services. Thus. 3) Supplying Information of Companies.A. In this way marketability of securities increases and geographical dispersion of shares and debentures in promoted. Sometimes they publish information and their expert opinion in respect of various companies. they render useful services to the buyers of securities too. Underwriters distribute the securities to the real investors after entering the agreement with the issuing company. underwriters maintain working arrangement with other underwriters and broken throughout the country and in other countries too and as such. Sometimes their expert advice are published in journals etc. The main functions of underwriters are as follows:1) Purchase of Securities. Underwriters provide stability in the price of securities by purchasing and selling the various securities by maintaining equilibrium in the demand and supply position of the securities and thus keep the market alive. 2) Distribution of Securities. It is much popular in U. 5) Exchange in Securities. They also inform the investors about opportunities but this type of service is not popular in India. Underwriters sometimes finance the projects of the company. The main function of underwriters is to purchase the securities of financially sound Companies either direct from the company or from the market. they are able to tap the financial resources for the company not only in on particular area but also in other areas as well. Underwriters render useful services to the perspective buyers of securities by giving them expert advice regarding the safe investment in sound companies. .Generally. to the issuing company and to suggest necessary changes in their financial plans. 4) Supplying Information of Companies Customers or investors in securities get valuable information from underwriters regarding the financial position and the policies of different companies. The underwriters take up securities under an obligation under underwriting contract or sometimes make firm underwriting and distribute such securities to the investors by selling them into the market at the earliest. they maintain their goodwill in the market a stockists of good securities. Underwriters supply important information in regard to investor’s attitude. market conditions etc.S. Thus.

and M/s Wright and Co. Birds Investment Ltd. which had been underwriting the issues of companies managed mostly by their managing agents. 4) Life Insurance Corporation. Calcutta. . The underwriting operation was included into the objects of the Corporation but it took interest in the field on underwriting only after 1957.. M/s Kothari and Co. managing agents organised a number of investment banks and trusts. Now Managing Agency system has been abolished in April 1970 but these firms are still working. Some important firms of stock brokers are busy in underwriting the issues. M/s Batiliwala and Karni. and In vestment Trust of India Ltd. The start of underwriting business has been with the start of the corporation in 1955 and it played a significant role in the field of underwritings. 6) Industrial Credit and Investment Corporation of India. 3) Indian Commercial Banks.. Devkaran nanji Investment co.UNDERWRITING AGENCIES IN INDIA The following underwriting agencies have been working in India 1) Private Firms. These are M/s Place. Since independence. 5) Industrial Finance Corporation. 2) Investment Companies and Trusts. Siddons and Gough. commercial banks have also participated in the race of underwriting and played an important role in this field. M/s Dalal and Co... In the late thirties. like Industrial Investment Trusts of Bombay. They have been working at present as group underwriters.

Underwriting (Public Cash offerings) and Distribution. investigation is the testing of the investment credit of the prospective security issuer. Analysis and Research (Origination): Origination includes the subsidiary operations of discovery. function of investment banking is . a survey of its physical property by engineers. the offering is called a primary issue. Discovery is the finding of a prospective issue of securities. and negotiation. the price. investigation of legal factors. it may seek out venture capitalists or private equity to become stakeholders in the company. The purpose of investigation and analysis is to determine whether a proposed issue has sufficient merit to be offered to investment community. Almost in every state. 9) State Financial Corporations. negotiation is the determination of the amount. It is now the largest institutional underwriter in India. and in-depth review of operations. and the terms of the proposed issue. It is also one of the four largest underwriters in India. there is a financial corporation of the lines of Industrial Finance Corporation of India. The investment banker purchase primary issue from corporation and arranges immediate resell of these securities to the investors. These corporations have also shown interest in underwriting. FUND BASED PORTFOLIO OF INVESTMENT BANKER When corporation sells new securities to raise funds. It may draw on public funds through the capital market by selling its stock. and the intrinsic soundness of the issue. The agent responsible for finding buyers for these securities is called the investment banker. Analysis and Research (Origination). With the advice of investment bankers. Investigation. investigation. Broadly investment bankers (investment banking firms) perform three functions: Investigation. however some investment bankers are specialized in certain functional areas only. They also notify their client companies on when to make public offerings and how best to manage the assets. Investment banking firms also engage in financial consulting and offer advice to companies on how to handle acquisitions and mergers. an institution can generate funds in two different ways. 8) Unit Trust of India.7) Industrial development Bank of India. The function of mergers and acquisitions come under the corporate finance function of an investment bank. Alternatively. Most of time a single investor banker performs all functions. In other words. Investigation usually involves an analysis of the financial history of the corporation by accountants.

Underwriting also refers to the guarantee by the investment banker that the issuer will receive a certain minimum amount of cash for their new securities. they are referred to as syndicate. and markets the securities. Most large corporations work with investment bankers with whom they have long-term relationship. Distribution: Another function of investment banker it to market the security issues. the firm awards offering to investment banker that bid the highest price. Invest banker offers security to both corporation issuing securities and investors buying securities. and the price paid to the company for the securities. in undivided syndicate. known as underwriting. which govern the value of investment securities. One investment banker is selected to manage the syndicate called the originating house. In a divided syndicate. . It can be very expensive and ineffective for a corporation to sell an issue by establishing marking and selling organization by its own. A negotiated underwriting is a negotiated agreed arrangement between the issuing firm and its investment banker. There are two types of underwriting syndicates. The investment banker buys a new security issue. The underwriter’s compensation is the difference between the price at which the securities sold to the public. and further increases the efficiency with which securities can be sold.careful analysis of the soundness and reliability of the corporation whose securities are seeking the investment market. In certain cases. Underwriting (Public Cash offerings): When a corporation wishes to issue new securities and sell them to the public. divided and undivided. with its past history of selecting good companies and pricing securities builds a broad client base over time. Investment banker has established marketing and sales network to distribute securities. The task of investigation and analyzing the numerous factors. The corporation runs no risk of the uncertainties of the market and do not have to spend on resources with which it is not equipped with. Underwriting can be done either through negotiations between underwriter and the issuing company (called negotiated underwriting) or by competitive bidding. which does underwriting of the major amount of the issue. However. The investment banker acts as a specialist to distribute securities efficiently for the corporation. it makes an arrangement with an investment banker whereby the investment banker agrees to purchase the entire issue at a set price. each member group is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that group have sold. For corporations investment banker offers definite price guaranty on a certain date for securities to offer. varies considerably with the different types of issuing bodies. For a reputed invest banker. In competitive bidding. A syndicate is a temporary association of investment bankers brought together for the purpose of selling new securities. pays the issuer. for large or risky issues a number of investment bankers get together as a group. each member group has liability of selling a portion of offerings assigned to them.

there will be tremendous scope for investment bankers. Entry of Foreign Investors: Now India capital market directly taps foreign capital through euro issues. Changing policy of Financial Institutions: Now the lending policies of financial institutions are based on project orientation. and hence loss of business. the responsible investment banker offers protection against unsafe securities. If more and more NRIs participate in capital market. RAMYA RANJITH FK1871 Q) Growth of investment banks in India. Development of debt markets: If the debt market is enhanced. So investment bankers are required to advice them for their investment in India.To the investor. FDI is increased in capital market. The increasing number of joint ventures also requires expert services of investment Bankers. the scope of investment banking will be enhanced. Growth of investment banks in India Growth of Primary market: If the primary market grows and number of issues increases. Corporate restructuring: . investment banker play very important role in issuing new security offerings. Structure of investment banks in India & Regulatory Framework. Now NSE and OTCEI are planned to raise their fund through debt instruments. Therefore. so the investment banker services will be needed by corporate enterprise to provide expert guidance. there will be great demand for investment banker services. The offering of a few unsound issues can caused serious loss to its reputation.

printers. Structure of Investment banks in India An investment bank is split into the so-called front office. they have to go for restructuring. Planning and industrial policy of the country i. Advising the company on the instrument to be offered to the public. 5. merger. and hence loss of business. 4. investment bankers play a very important role in issuing new security offerings. India in this case 2. respectively. marketers. advertising agency. Therefore. investment bankers offer information on when and how to place their to an investment bank's reputation. both sell side and buy side. smaller ones sell side investment firms such as boutique investment banks and small broker-dealers focus on investment banking and sales/trading/research. They may offer good opportunities to merchant bankers The scope could be extended to: 1. Investment banks offer services to both corporations issuing securities and investors buying securities. Assisting the company in marketing the issue. To ensure the compliance with rules and regulations governing the securities market THE FACTORS ON WHICH GROWTH OF INVESTMENT BANKING DEPENDS: 1. 8. Competition among the existing players and the upcoming entrance of new companies. Regulatory system of the market and economy prevailing in India 4. Advising the company on designing of its Capital Structure. While large service investment banks offer all of the lines of businesses. 6. 3. Pricing of the instrument. 6. The economic environment of the outside world.e. 2. and back office. Advising the company on Legal/ regulatory matters and interaction with SEBI/ROC/ Stock Exchanges and other regulatory authorities. underwriters. Prevailing Economic condition of the country 3.Due to liberalization and globalization Companies are facing lot of competition. In channelizing the financial surplus of the general public into productive investment avenues. For corporations. 7. middle office. Front Office: . brokers etc. To coordinate the activities of various intermediaries to the share issue such as the registrar. bankers. buyers. In order to compete. acquisitions or disinvestments. business houses. financial institutions etc 5. Confidence of the people. traders.

investment banks came under pressure as a result of selling complex derivatives contracts to local municipalities in Europe and the US. Another term for the investment banking division is corporate finance. traders will buy and sell financial products with the goal of making money on each trade. equity. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. or structure new products that fit a specific need. mathematics and engineering Ph. This may involve subscribing investors to a security issuance. restructuring. or negotiating with a merger target. In market making. Sales and trading: On behalf of the bank and its clients. and maintain relationships with corporations within the industry to bring in business for a bank. coordinating with bidders. The necessity for numerical ability in sales and trading has created jobs for physics. Industry coverage groups focus on a specific industry. or technology. Sales desks then communicate their clients' orders to the appropriate trading desks. Banks seek to maximize profitability for a given amount of risk on their balance sheet. Research also serves outside clients with investment advice . and investment bankers by covering their clients. leveraged finance. and its advisory group is often termed mergers and acquisitions. In 2010. if the pitch is successful. such as healthcare. which can price and execute trades. Product coverage groups focus on financial products. whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on a caveat emptor basis) and take orders. with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.D. Ranging from derivatives to specific industries. Structuring has been a relatively recent activity as derivatives have come into play. such as mergers and acquisitions. project finance.Investment banking (corporate finance) is the traditional aspect of investment banks which also involves helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). the direction it would like to take in terms of its proprietary and flow positions. A pitch book of financial information is generated to market the bank to a potential M&A client. Research is the division which reviews companies and writes reports about their prospects. a large investment bank's primary function is buying and selling products.s who act as quantitative analysts. Banks also undertake risk through proprietary trading. While the research division may or may not generate revenue (based on policies at different banks). The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. and high-grade debt and generally work and collaborate with industry groups on the more intricate and specialized needs of a client. structured finance. industrials. often with "buy" or "sell" ratings. asset finance and leasing. This strategy often affects the way the firm will operate in the market. Sales is the term for the investment bank's sales force. its resources are used to assist traders in trading. the bank arranges the deal for the client. the suggestions salespersons give to clients. as well as the way structurers create new products. performed by a special set of traders who do not interface with clients and through "principal risk"— risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. the sales force in suggesting ideas to customers.

etc. real estate).g. Other businesses that an investment bank may be involved in  Global transaction banking is the division which provides cash management.  Merchant banking is a private equity activity of investment banks. There is a potential conflict of interest between the investment bank and its analysis. "merchant bank" was the British English term for an investment bank. Investors may be institutions (insurance companies. bonds. in that published analysis can affect the bank's profits.) and other assets (e. Hence in recent years the relationship between investment banking and research has become highly regulated.)  Commercial banking Middle office:  Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades. as seen in the "run on the bank" with Bear Stearns in 2008. requiring a Chinese wall between public and private functions.(such as institutional investors and high net worth individuals) in the hopes that these clients will execute suggested trade ideas through the sales and trading division of the bank.g. as well as risky. Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. and thereby generate revenue for the firm. and setting limits on the amount of capital that they are able to trade in order to prevent "bad" trades having a detrimental effect on a desk overall. often known as Private Wealth Management and Private Client Services. (Originally. correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). Prime brokerage with hedge funds has been an especially profitable business. lending. to meet specified investment goals for the benefit of investors.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.. mutual funds). and securities brokerage services to institutions. corporations etc.  Investment management is the professional management of various securities (shares. custody services.. Another key Middle Office role is to ensure that the economic risks are captured accurately (as per agreement of commercial terms with the counterparty). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes . pension funds. The investment management division of an investment bank is generally divided into separate groups.

Every major investment bank has considerable amounts of in-house software. often reporting to the Chief Financial Officer.measures to address this risk. treasury.  Technology refers to the information technology department. who are also responsible for technical support. A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank. college degrees are now mandatory at most Tier 1 investment banks. In the United States and United Kingdom. market and credit risk analysis can be unreliable and open to deliberate manipulation. however. along with risk.  Compliance areas are responsible for an investment bank's daily operations compliance with government regulations and internal regulations. and transacting the required transfers. Due to increased competition in finance related careers. created by the technology team.  Corporate strategy. While some believe that operations provide the greatest job security and the bleakest career prospects of any division within an investment bank.  Corporate treasury is responsible for an investment bank's funding. the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses.  Financial control tracks and analyzes the capital flows of the firm. and liquidity risk monitoring. When this assurance is not in place. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. a Financial Controller is a senior position. Back office:  Operations involve data-checking trades that have been conducted. also often falls under the finance division. ensuring that they are not erroneous. Some trades are initiated by complex algorithms for hedging purposes. Often also considered a back-office division. Regulatory Framework for Investment Banking in India . and controllers. a critical part of the bank. It is. many banks have outsourced operations. capital structure management.

Functionally. 3. 2000 issued there under as amended from time to time through circulars issued by the RBI. they are also regulated by SEBI. 1999 and the Foreign Exchange Management (Transfer or issue of Security by a person Resident outside India) Regulations.Investment Banking in India is regulating in its various facets under separate legislations or guidelines issued under statute. 7. The Regulatory powers are also distributed between different regulators depending upon the constitution and status of Investment Bank. Universal banks and NBFC investment banks are regulated primarily by the RBI in their core business of banking or lending and so far as the investment banking segment is concerned. property law. IDBI is in the process of being converted into a company under the Companies Act. all invest banking companies incorporated under the Companies Act. At the constitutional level. 6. PURBADRI DAS . Investment Banks that are incorporated under a separate statute such as the SBI or IDBI are regulated by their respective statute. 1934 and the Banking Regulation Act which put restrictions on the investment banking exposures to be taken by banks. accounts and administrative controls. Investment Banks that are set up in India with foreign direct investment either as joint ventures with Indian partners or as fully owned subsidiaries of the foreign entities are governed in respect of the foreign investment by the Foreign Exchange Management Act. 4. Universal Banks that are regulated by the Reserve Bank of India under the RBI Act. Investment banking companies that are constituted as non-banking financial companies are regulated operationally by the RBI under sections 45H to 45QB of Reserve Bank of India Act. arbitration law and the other general laws that are applicable in India. contract law. Pure investment banks which do not have presence in the lending or banking business are governed primarily by the capital market regulator (SEBI). 2. Under these sections RBI is empowered to issue directions in the areas of resources mobilization. 5. However.1956 are governed by the provisions of that Act. Apart from the above specific regulations relating to investment banking. 1934. 1992 and guidelines and regulations issued there under. local state laws. An overview of the regulatory framework is furnished below: 1. different aspects of investment banking are regulated under the Securities and Exchange Board of India Act. investment banks are also governed by other laws applicable to all other businesses such as – tax law.

FK – 1874 .