Main Features of Foreign Exchange Management Act, 1999

1. gives powers to the Central Government to regulate the flow of payments to and from
a person situated outside the country.
2. All financial transactions concerning foreign securities or exchange cannot be carried
out without the approval of FEMA.
3. All transactions must be carried out through “Authorised Persons.”
4. In the general interest of the public, the Government of India can restrict an
authorized individual from carrying out foreign exchange deals within the current
account.
5. Empowers RBI to place restrictions on transactions from capital Account even if it is
carried out via an authorized individual.
6. As per this act, Indians residing in India, have the permission to conduct a foreign
exchange, foreign security transactions or the right to hold or own immovable
property in a foreign country in case security, property, or currency was acquired, or
owned when the individual was based outside of the country, or when they inherit the

SARFAESI Act 

SARFAESI Act or Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 was formulated with an intent to empower
banks to recover Non-Performing Assets (NPAs) without the intervention of a
court. SARFAESI Act 2002 is a milestone in the recovery of NPAs. 

 Registration and regulation of Asset Reconstruction Companies (ARCs) by the

Reserve Bank of India (RBI). 

 Facilitating the securitization of the several financial assets of the financial

institutions and banks or without the benefit of any underlying securities. 

 Promoting the seamless transferability of financial assets by means of ARC

 SARFAESI Act is also responsible for Entrusting the Asset Reconstruction

Companies (ARCs) for raising funds by issuing security receipts to the set of
qualified buyers. 

 Facilitating the overall reconstruction of several financial assets

 SARFAESI Act enables the classification of the borrower’s account as a non-

performing asset in accordance with the different directions that are given or under
the guidelines being issued by the Reserve Bank of India (RBI)
Nostro and Vostro Account

 Nostro comes from the Latin word for "ours," as in "our money that is on deposit at
your bank."
 Vostro comes from the Latin word for "yours," as in "your money that is on deposit
at our bank."
 Definition: A Nostro Account is said to be a record of deposits held by a bank with a
foreign bank in the currency of the country holding the funds.
 A Vostro Account is one that is managed by a correspondent bank on another
bank’s behalf.

 Example: If an Indian bank like the SBI wants to open an account in the United
States, it will get in touch with a bank in the US, which will open a Nostro account
and accept payments for SBI in dollars.
 The account opened by the Indian bank in the US will be a Nostro account for the
Indian bank, while for the US bank, the account will be considered a Vostro account.
 In the Indian context, the accounts opened by IndusInd and UCO are Vostro, and the
ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts.
 They help in executing large foreign exchange transactions without having any
physical presence in other countries.
 They enable banks to keep funds in foreign currency without any exchange rate risk.
 It is easy to operate since it is a mere transfer of funds from one account to another in
the same bank.

Smurfing Money Laundering

A smurf is a colloquial term for a money launderer who seeks to evade scrutiny from
government agencies by breaking up large transactions into a set of smaller
transactions that are each below the reporting threshold. Smurfing is an illegal
activity that can have serious consequences.

Self-Help Group (SHG)

A Self-Help Group refers to a group of 10-20 people who come from similar socio-economic
backgrounds for various development programs or to solve common problems. Such groups
are recognized by the governments and banks and can open bank accounts in the name of the
SHG. These groups tend to be autonomous and tend to involve themselves in various
activities, including social causes. So if a group of fifteen women in a village would like to
apply for a loan start a small enterprise selling bags and cushions, they would be considered
an SHG. These SHGs, by way of enterprise, tend to create more employment opportunities
and inspire others to get involved in small enterprises as well.

Joint Liability Group (JLG)

A Joint Liability Group is usually a group of five to ten who come together to borrow from an
MFI. The members in a JLG are also from similar socioeconomic backgrounds and usually
the same village. A JLG is different from SHGs in that the members share liability or stand
guarantee for each other. If any of the member's default, the other members need to pool in
money to repay the MFI. This ensures a greater effort on part of the members to ensure that
everyone repays, thus ensuring resulting in better accountability and security for the MFI
involved.

What is Cluster financing?

Cluster based approach to lending is intended to provide a full-service approach to cater to

the diverse needs of the MSE sector which may be achieved through extending banking
services to recognized MSE clusters.

A cluster-based approach may be more beneficial.

(a)in dealing with well-defined and recognized groups.

(b) availability of appropriate information for risk assessment

(c) monitoring by the lending institutions and

(d) reduction in costs. 

The banks have, therefore, been advised to treat it as a thrust area and increasingly adopt the
same for SME financing.

United Nations Industrial Development Organisation (UNIDO) has identified 388 clusters
spread over 21 states in various parts of the country. The Ministry of Micro, Small and
Medium Enterprises has also approved a list of clusters under the Scheme of Fund for
Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster
Development Programme (MSE-CDP) located in 121 Minority Concentration Districts.
Accordingly, banks have been advised to take appropriate measures to improve the credit
flow to the identified clusters.  Banks have also been advised that they should open more
MSE focused branch offices at different MSE clusters which can also act as counselling.

Small Finance Bank- Key Points

SFBs have been introduced in India on the recommendation of an internal group of the RBI.

It recommended like microfinance institutions (MFIs), banks should begin viewing the poor
as profitable customers.

The idea became reality during the governorship of Raghuram Rajan.

SFBs are registered as a public limited company under the Companies Act, 2013.
Mandate of Small Finance Banks: SFBs are established to primarily undertake basic banking
activities of acceptance of deposits and lending to unserved and underserved sections like-

Small business units,

Small and marginal farmers,

Micro and small industries and

Unorganized sector entities.

Small Finance Bank- Eligibility Criteria for Application

Eligibility for Promoters:

Resident individuals/professionals with 10 years of experience in banking and finance.

Companies and societies owned and controlled by residents will be eligible to set up small
finance banks.

Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and
Local Area Banks (LABs) that are owned and controlled by residents can also opt for
conversion into small finance banks.

Capital Requirement: The minimum paid-up equity capital for small finance banks shall be
Rs. 100 crores.

Promoter must contribute a minimum of 40% equity capital and should be brought down to
30% in 10 years.

Small Finance Bank- Key Features

Priority sector lending requirement: 75% of total adjusted net bank credit.

Foreign shareholding: It is capped at 74% of paid capital and Foreign Portfolio Investors
(FPIs) cannot hold more than 24%.

Loan Disbursement: 50% of loans must be up to Rs 25 lakh.

Maximum loan size: maximum 10% of capital funds to a single borrower and maximum 15%
to a group.

Capital adequacy ratio (CAR): It should be 15% of risk-weighted assets and Tier-I should be
7.5% of risk-weighted assets.
Other Allowed Activities: Along with taking small deposits and disburse loans, SFBs are
allowed to distribute mutual funds, insurance products, and other simple third-party financial
products.

NABARD
 NABARD is a development bank focussing primarily on the rural sector of the
country. It is the apex banking institution to provide finance for Agriculture and
rural development.
o It headquarters is in Mumbai, the country’s financial capital.
 It is responsible for the development of the small industries, cottage industries,
and any other such village or rural projects.
 It is a statutory body established in 1982 under Parliamentary Act-National
Bank for Agriculture and Rural Development Act, 1981.
 Objectives of nabard
 supporting capital formation in agriculture and allied activities, thereby promoting
growth of Agriculture, AH, Fishery, Forestry etc. sectors.
 Directing flow of credit for promotion of thrust activities of GoI and NABARD.
 To meet the credit requirement of JLGs and SHGs.
 Support for non-farm sector activities (MSME, Rural Housing & Commercial
Vehicles), thereby promoting alternate employment opportunities in rural and semi-
urban areas.
 Support for Climate Adaptation and Mitigation projects.
 Refinance support for credit linked capital subsidy schemes of GoI, whose subsidy is
channelized through NABARD.
Functions of NABARD

 The NABARD scheme aims to provide funds for India’s rural infrastructure to
enable long term irrigation practices.
 Generally offering financial services and aid for the development and
improvement of rural India.
 Planning, implementing, and managing any funding programs for farming and
agricultural activities.
 Offering lending services, cold chain, and storage infrastructure to rural
warehouses.
 Marketing federations can receive credit facilities from the NABARD scheme.
 Creating new policies for India’s rural financial institutions.

Functions of Reserve Bank of India

Reserve Bank of India works as:
Monetary Authority

 Implementation of monetary policies.

 Monitoring the monetary policies
 Ensuring price stability in the country considering the economic growth of the country
Also, read about the Monetary Policy Committee (MPC) and know more about this six-
member committee.
Regulator and Administrator of the Financial System

 The RBI determines the comprehensive parameters of banking operations.

 These methods are responsible for the functioning of the country’s banking and
financial system. Methods such as:

 License issuing

 Liquidity of assets

 Bank mergers

Branch expansion, etc.

Managing Foreign Exchange

 RBI manages the FOREX Reserves of India.

 It is responsible for maintaining the value of the Rupee outside the country. 
 It aids foreign trade payment. 
Issuer of currency
  The Reserve Bank of India is responsible for providing the public with a sufficient
supply of currency notes and coins. 
 The quality of currency notes and coins is also taken care of by the RBI.
 RBI oversees issuing and exchanging of currency and coins. 
 Also, the destruction of currency and coins that are not fit for circulation.

Composition of RBI

 Reserve Bank of India is controlled by a central board of directors. The directors are
appointed for a 4-year term by the Government of India in keeping with the Reserve
Bank of India Act.
 The Central Board consists of:

 Governor 

 4 Deputy Governors

 2 Finance Ministry representatives

 4 directors to represent local boards headquartered at Mumbai, Kolkata,

Chennai, and New Delhi

 The executive head of RBI is Governor.

 The Governor is accompanied by 4 deputy governors.
The government through the reserve bank of India employs the monetary policy as an
instrument of achieving the objectives of general economic policy. The main objectives of the
monetary policy are as follows:
1. Regulation of monetary growth and maintenance of price stability
2. Ensuring adequate expansion of credit
3. Assist economic growth.
4. Encourage flow of credit into priority and neglected sectors.
5. Strengthening of the banking system of the country

The quantitative measures of credit control are:

1. Bank Rate Policy: The bank rate is the Official interest rate at which RBI rediscounts
the approved bills held by commercial banks. For controlling the credit, inflation and
money supply, RBI will increase the Bank Rate. Current Bank Rate is 6%.
2. Open Market Operations: OMO The Open market Operations refer to direct sales
and purchase of securities and bills in the open market by Reserve bank of India. The
aim is to control volume of credit.
3. Cash Reserve Ratio: Cash reserve ratio refers to that portion of total deposits in
commercial Bank which it must keep with RBI as cash reserves. The current Cash
reserve Ratio is 6%.
4. Statutory Liquidity Ratio: It refers to that portion of deposits with the banks which
it has to keep with itself as liquid assets (Gold, approved govt. securities etc.) . the
 current SLR is 25%.
If RBI wishes to control credit and discourage credit it would increase CRR & SLR.

Qualitative measures:

Qualitative credit is used by the RBI for selective purposes. Some of them are
1. Margin requirements: This refers to difference between the securities offered and
amount borrowed by the banks.
2. Consumer Credit Regulation: This refers to issuing rules regarding down payments
and maximum maturities of instalment credit for purchase of goods.
3. Guidelines: RBI issues oral, written statements, appeals, guidelines, warnings etc. to
the banks.
4. Rationing of credit: The RBI controls the Credit granted / allocated by commercial
banks.
5. Moral Suasion: psychological means and informal means of selective credit control.
6. Direct Action: This step is taken by the RBI against banks that don’t fulfil conditions
and requirements. RBI may refuse to rediscount their papers or may give excess
credits or charge a penal rate of interest over and above the Bank rate, for credit
demanded beyond a limit.

What is SEBI
SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that
was established by the Government of India in 1992 for protecting the interests of investors
investing in securities along with regulating the securities market. SEBI also regulates how
the stock market and mutual funds function.

Objectives of SEBI
Following are some of the objectives of the SEBI:
1. Investor Protection: This is one of the most important objectives of setting up SEBI. It
involves protecting the interests of investors by providing guidance and ensuring that the
investment done is safe.
2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such as underwriters,
brokers, etc.
4. To maintain a balance between statutory regulations and self-regulation.

Functions of SEBI
SEBI has the following functions.
1. Protective Function
2. Regulatory Function
3. Development Function
The following functions will be discussed in detail
Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To
prevent such trading SEBI has barred the companies to purchase their own shares from the
secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price
of securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.
d. financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.
Regulatory Function: Regulatory functions involve establishment of rules and regulations
for the financial intermediaries along with corporates that helps in efficient management of
the market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.
Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.
3. By making the underwriting an optional system in order to reduce cost of issue.
Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.
It meets the needs of the following groups:
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a
regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for
proper infrastructure.

Structure of SEBI
SEBI board comprises nine members. The Board consists of the following members.

1. One Chairman of the board who is appointed by the Central Government of India
2. One Board member who is appointed by the Central Bank, that is, the RBI.
3. Two Board members who are hailing from the Union Ministry of Finance
4. Five Board members who are elected by the Central Government of India.

Types of Pre-Offer Defense Mechanisms

The pre-offer defense is a preemptive strategy. It is primarily used to either make the
company’s shares less attractive for a potential bidder (e.g., increase the overall acquisition
costs) or set restrictions in corporate governance to limit the benefits to the potential bidder.
The pre-offer defense mechanisms include the following strategies:

1. Poison pill

The poison pill defense includes the dilution of shares of the target company in order to make
it more difficult and expensive for a potential acquirer to obtain a controlling interest in the
target. The flip-in poison pill is the issuance of additional shares of the target company,
which existing shareholders can purchase at a substantial discount.

The flip-over poison pill provides an opportunity for target company shareholders to purchase
shares in the acquiring company at a significantly discounted price.

2. Poison put

The poison put defense can be considered as a variation of a poison pill, as this defense

mechanism also aims to increase the total cost of acquisition. The poison put strategy
involves the target company issuing bonds that can be redeemed before their maturity date in
the event of a hostile takeover of the company. The potential acquirer must then take into
account the extra cost of repurchasing bonds when that obligation changes from being a
future obligation to a current obligation, following the takeover.
Unlike the poison pill, the poison out strategy does not affect the number of outstanding
shares or their price. However, it may create significant cash flow problems for the acquirer.

3. Golden parachutes

Golden parachutes refer to benefits, bonuses, or severance pay due to the company’s top
management staff in case of termination of their employment (such as might occur as part of
a hostile takeover. Thus, they can be employed yet another takeover defence mechanism that
aims to increase the total acquisition cost for a bidder.

4. Supermajority provisions

A supermajority provision is an amendment in the corporate charter stating that a merger or

acquisition of the company can only be approved by the board if a very large percentage of
its shareholders (typically 70% to 90%) vote in favour of it. The supermajority provision
supersedes the usual simple majority provision that only requires approval from more than
50% of voting shareholders.

Types of Post-Offer Defence Mechanisms

Post-offer defense mechanisms are employed when a target company receives a bid for a
hostile takeover. The examples of post-offer defense mechanisms are:

1. Greenmail defense

Greenmail defense refers to the target company buying back shares of its own stock from a
takeover bidder who has already acquired a substantial number of shares in pursuit of a
hostile takeover. The term “greenmail” is derived from “greenbacks” (dollars) and
“blackmail”. It’s a costly defense, as the target company is forced to pay a substantial
premium over the current market price in order to repurchase the shares.

The potential acquirer accepts the greenmail profit it makes from selling the target company’s
shares back to the target at a premium, in lieu of pursuing the takeover any further. Although
this strategy is legal, the acquirer is, effectively, sort of blackmailing the target company, in
that the target must pay the acquirer a premium – through the share buybacks – in order to
persuade it to cease its takeover attempt.

2. Crown jewel defense

The crown jewel defense strategy involves selling the most valuable assets of a target
company to a third party or spinning off the assets into a separate entity. The main goal of the
crown jewel defense strategy is to make the target company less attractive to the corporate
raider.

3. Pac-Man defense

The Pac-Man defense occurs when a target company attempts to acquire its potential acquirer
when a takeover bid has already been received. Just as the acquirer is attempting to buy up a
controlling amount of shares in the target company, the target likewise begins buying up
shares of the acquirer in an attempt to obtain a controlling interest in the acquirer.

Of course, such a strategy is only workable if the target company has enough financial
resources to purchase the required number of shares in the acquirer. The acquirer, seeing
control of its own firm threatened, will often cease attempting to take over the target.

4. White knight defense

The white knight defense is a strategy that involves the acquisition of a target company by its
strategic partner, called a white knight, as it is friendly to the target company. This is
generally a strategy of last resort. The target company accepts the fact of being taken over,
but can at least opt to be taken over or merged with a friendly company, as opposed to being
the victim of a hostile takeover.