INVESTMENT

1. A. CONCEPT OF INVESTMENT
An investment is essentially an asset that is created with the intention of allowing money to
grow. The wealth created can be used for a variety of objectives such as meeting shortages in
income, saving up for retirement, or fulfilling certain specific obligations such as repayment
of loans, payment of tuition fees, or purchase of other assets.

According to Fisher, investment may be defined as “a commitment of funds made in the

expectation of some positive rate of return”. Expectation of return is an essential element of
investment. Since the return is expected to be realized in future, there is a possibility that the
return actually realized is lower than the return expected to be realized. This possibility of
variation in the actual return is known as investment risk. Thus, every investment involves
return and risk.

Understanding the investment definition is crucial as sometimes, it can be difficult to choose

the right instruments to fulfill your financial goals. Knowing the investment meaning in your
particular financial situation will allow you to make the right choices.

Investment may generate income for you in two ways. One, if you invest in a saleable asset,
you may earn income by way of profit. Second, if Investment is made in a return generating
plan, then you will earn an income via accumulation of gains. In this sense, ‘what is
investment’ can be understood by saying that investments are all about putting your savings
into assets or objects that become worth more than their initial worth or those that will help
produce an income with time.

Financially speaking, an investment definition is an asset that is obtained with the intention of
allowing it to appreciate in value over time.

B. TYPES OF INVESTMENT

The question ‘what is investment’ is mostly followed by understanding your investment

objectives and identifying where to invest. Keeping aside investments in real estate and assets
like jewellery and all, when it comes to different instruments, another aspect of understanding
‘what is investment meaning’ is to know about different types of investments. The first refers
to equity investments, and the second category includes debt instruments. If your investment
objectives match, equity investments can offer greater returns and carry relatively higher risk.
While debt instruments are less risky, but offer relatively low returns.

Further, what is investment meaning can also be understood from the perspective of how they
are acquired.

Following are different types of investments in India:

1. STOCKS
Stocks, also known as shares or equities, may be the most well-known and simple type of
investment. Investments in equity markets or stocks provide avenue for wealth creation over
a long period of time. It takes a great deal of research and prudence to identify the right
stocks to invest in. You also need to time your entry and exit prudently, and it involves
continuous monitoring of investments. Capital appreciation happens over long period of time
and is dependent upon market volatility. The good news is that in the long run, some of the
stocks has been shown to deliver greater inflation-adjusted returns when compared with many
other classes of assets.

2. CERTIFICATE OF DEPOSIT

Certificate of Deposit is a money market instrument which is issued against the funds
deposited by an investor. It is invested with the bank in a dematerialized form for a certain
period of time. Certificate of Deposit is issued by Federal Deposit Insurance Corporation
(FDIC) and regulated by the Reserve Bank of India (RBI). A certificate of deposit (CD) is a
very low-risk investment. You give a bank a certain amount of money for a predetermined
amount of time. When that time period is over, you get your principal back, plus a
predetermined amount of interest. The longer the loan period, the higher your interest rate.

3. BONDS

Bond is one of the types of debt investments available in India. Investors lend money to the
issuer company in exchange of a bond and in return of the bond, the issuer is obliged to pay
interest on the principal amount. The issuer is required to repay money borrowed along with a
fixed rate of interest on the amount borrowed. Nowadays, variable rate of interest is also
quite common. Generally, this is a business or a government entity. Companies issue
corporate bonds, whereas local governments issue municipal bonds. The rate of return for
bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There
is some risk involved, of course. The company you buy a bond from could fold, or the
government could default. Treasury bonds, notes and bills, however, are considered a very
safe investments.

4. REAL ESTATE

Investing in real estate involves purchasing residential or commercial properties to allow your
capital to appreciate or to generate regular rental income. This way, you get to enjoy a steady
stream of income in the form of rent. Another strategy is to purchase real estate units, hold
them, and then sell them at a later point in time for a higher price, thus earning a significant
return on your initial investment.

5. FIXED DEPOSITS

Mutual funds (MFs) invest in market-linked instruments such as stocks, bonds, or a mix of
both equity and debt instruments. You can choose between equity funds, debt funds, and
balanced funds depending on your financial goals and requirements. Furthermore, you can
also invest small amounts periodically in MFs using a Systematic Investment Plan (SIP).
 6. MUTUAL FUNDS

Mutual funds (MFs) invest in market-linked instruments such as stocks, bonds, or a mix of
both equity and debt instruments. You can choose between equity funds, debt funds, and
balanced funds depending on your financial goals and requirements. Furthermore, you can
also invest small amounts periodically in MFs using a Systematic Investment Plan (SIP).

A mutual fund is a pool of many investors’ money that is invested broadly in a number of
companies. Mutual funds can be actively managed or passively managed. An actively
managed fund has a fund manager who picks securities in which to put investors’ money.
Fund managers often try to beat a designated market index by choosing investments that will
outperform such an index. A passively managed fund, also known as an index fund, simply
tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500.
Mutual funds can invest in a broad array of securities: equities, bonds, commodities,
currencies and derivatives.

Mutual funds carry many of the same risks as stocks and bonds, depending on what they are
invested in. The risk is often lesser, though, because the investments are inherently
diversified.

7. PUBLIC PROVIDENT FUND (PPF)

Considered to be one of the safest types of investment in India, Public Provident Fund (PPF)
is an instrument backed by the government. You can invest in PPF by opening an account
with any bank or post office. While opening the account, the minimum investment amount is
as low as Rs.100 in some of the banks (can vary for every bank). Thereafter, the annual limits
for PPF deposits range from a minimum of Rs.500 to a maximum of Rs.1.5 lakh. The amount
invested in your PPF account comes with a lock-in period of 15 years and is eligible for tax
deductions under section 80C of the Income Tax Act, 1961.

8. NATIONAL PENSION SYSTEM

The National Pension System (NPS) is another investment plan backed by the government of
India. It’s a product that focuses on saving for the long term, making it the perfect addition to
your retirement investment plan. The amount you park in this scheme is invested in a variety
of other investment vehicles like equity, deposits, government securities, corporate bonds,
and other funds. You can remain invested till you reach the age of 60.

9. UNIT LINKED INSURANCE PLANS (ULIP)

Unit Linked Insurance Plans (ULIPs) are among types of investments that come with tax
benefits as well. It’s an instrument that offers you the advantage of investment combined with
insurance. The premium you pay to remain invested is divided into two portions. One part
goes towards providing you a protective life cover, while the other is invested in market-
linked instruments or funds. ULIPs also provide deductions under Income Tax Act 1961 as
per prevailing tax laws, since the premium paid is deductible, and the maturity benefits and
long-term capital gains are tax-free.
 10. SENIOR CITIZENS’ SAVINGS SCHEME

Senior Citizens’ Savings Scheme (SCSS) is one of the types of investments backed by the
Government of India. Indian residents over 60 years of age can open an SCSS account and
invest in this scheme for a block of 5 years. Thereafter, the investment can be extended by
another 3 years, if needed. You can deposit up to Rs.15 lakh in your SCSS account in
multiples of Rs.1,000 only. Deposits up to Rs.1 lakh can be made in cash. However, deposits
over Rs.1 lakh need to be made using a demand draft or cheque. Investments in SCSS also
qualify for deduction under section 80C, up to a limit of Rs.1.5 lakh.

11. CRYPTOCURRENCIES

Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous
cryptocurrency, but there are countless others, such as Litecoin and Ethereum. These are
digital currencies that don’t have any government backing. You can buy and sell them on
cryptocurrency exchanges. Some retailers will even let you make purchases with them.

C. NECESSITY OF INVESTMENT IN PRESENT CONTEXT AND GROWING

IMPORTANCE OF INVESTMENT.

Over the years, India has emerged as one of the fastest growing economies in the world and
an attractive investment destination driven by economic reforms and a large consumption
base. India’s gross domestic product (GDP) at current prices stood at Rs. 51.23 lakh crore
(US$ 694.93 billion) in the first quarter of FY22, as per the provisional estimates of gross
domestic product for the first quarter of 2021-22.

In a country like India, the seven major infrastructural factors that are most significant in
accelerating the pace of economic development are: energy, transport, irrigation, finance,
communication, education, and health. The first five refer to economic infrastructural
facilities, while the latter two relate to social infrastructure.

India has the second largest road network in the world, spanning a total of 5.5 million
kilometres (kms).

With a generation of 1,561 terawatt-hour (TWh), India is the third largest producer and the
third largest consumer of electricity in the world. As of August 2021, India had a total
installed power-generation capacity of 388,133.75 MW, of which 97,636.93 MW was
contributed by central utilities, 103,920.64 MW (state utilities) and 186,576.19 MW (private
utilities).

The Indian banking system consists of 20 public sector banks, 22 private sector banks, 44
foreign banks, 44 regional rural banks, 1,542 urban cooperative banks and 94,384 rural
cooperative banks in addition to cooperative credit institutions. As of March 2021, the
number of ATMs in India increased to 2.39 lakh compared with 2.35 lakh ATMs in March
2020. According to the Reserve Bank of India, in June 2021, the total debit cards in
circulation stood at 906 million, while credit cards in circulation stood at 62 million.

A host of factors has enabled this growth, which includes a highly developed financial
system, infrastructure requirement and proactive Government initiatives. Domestic and
foreign investment has made an impact on the country’s growth.

Recent Developments/Investments

 India’s merchandise exports between April 2021 and August 2021 were estimated at
US$ 164.10 billion (a 67.33% YoY increase). Merchandise imports between April
2021 and August 2021 were estimated at US$ 219.63 billion (an 80.89% YoY
growth).

 As of August 27, 2021, foreign exchange reserves in India increased to US$ 633.5
billion.

 The private equity-venture capital (PE-VC) sector recorded investments worth US$
10.7 billion across 137 deals in August 2021, registering a 5x YoY growth.

 Foreign portfolio investors (FPIs) invested US$ 2.5 billion in India in August 2021.

 The gross GST (Goods and Services Tax) revenue collection stood at Rs. 112,020
crore (US$ 15.21 billion) in August 2021.

 In the first half of 2021, ~344 M&A deals worth US$ 21.6 billion were
signed/concluded.

 In September 2021, Union Minister for Commerce & Industry, Textiles, Consumer
Affairs & Public Distribution, Mr. Piyush Goyal launched a ‘National Single Window
System’ to provide a more enhanced and efficient service and experience for
businesses and investors.

 In September 2021, Union Cabinet approved a FDI proposal of Anchorage

Infrastructure Investment Holding Ltd., for a proposed investment worth Rs. 15,000
crore (US$ 2.04 billion) in India.

 In June 2021, Finance Minister, Ms. Nirmala Sitharaman, announced relief funds
worth Rs. 628,993 crore (US$ 84.73 billion) to support economic recovery. Key
highlights are as follows:

o The government announced an additional Rs. 1.5 lakh crore funding for
Emergency Credit Line Guarantee Scheme, taking the overall cap of
permissible assurance to Rs. 4.5 lakh crore.

o To support the National Export Insurance Account (NEIA) Trust, the

government announced an additional Rs. 33,000 crore for project exports over
the next five years through the Exim Bank of India.
 o The government announced to extend the production-linked incentive (PLI)
scheme for mobile phones by one year until FY26, lending a boost mobile
phone manufacturers including domestic players such as Micromax, Dixon
and Lava and iPhone manufacturers such as Foxconn and Wistron.

o In June 2021, Finance Minister, Ms. Nirmala Sitharaman, announced an

additional outlay of Rs. 19,000 crore (US$ 2.56 billion) for the BharatNet
project—to expand broadband penetration in rural areas through the PPP
model and boost the ‘Digital India’ initiative.

 In June 2021, Defence Minister, Mr. Rajnath Singh, invited Swedish companies to
invest in defence corridors in Tamil Nadu and Uttar Pradesh.

 In June 2021, Mr. Mukesh Ambani, Chairman, Reliance Industries Ltd., announced
that the company (Reliance) plans to invest Rs. 750 billion (US$ 10.10 billion) in a
new energy business over the next three years.

 In May 2021, the Government of India signed a finance agreement with the European
Investment Bank for second tranche of EUR 150 million (US$ 178.58 million) for the
Pune Metro Rail project.

Impact of Inflation and the Importance of Investing

Inflation, in simple terms, is a surge in the price of materials and services. It decreases the
worth of your money and reduces your purchasing power. When there is a rise in the inflation
rate, you buy fewer things with the same amount of money. You have no control over the
inflation rate. If you are to stay ahead of inflation, you need to have more money to purchase
the extent of the goods you intend to in the future with the money you have today. But,
money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To
earn returns, you need to invest. Therefore, making investments is necessary to tackle
inflation. Inflation at the rate of 8% means that you need 8% more money than what you have
to purchase the same item next year. It is very important to earn inflation-beating returns, if
not, you may not be able to afford materials and services in the future from the savings you
are making now.

Road Ahead

India is presently known as one of the most important players in the global economic
landscape. The country is on a fast-paced growth and is expected to become a US$ 5 trillion
economy by 2022. Going by the estimates of Government of India, the country will need
investment of US$ 4.5 trillion to build sustainable infrastructure by 2040. The Union Budget
2021-22 highlights a 34.5% increase in capital expenditure—Rs. 142,151 crore (US$ 19.58
billion)—compared with BE 2020-21 to boost economic growth through infrastructure
development. Increased government investment is expected to attract private investments,
coupled with the government's key Production-linked Incentive Scheme providing significant
support.
Further, as per a Deloitte report published in September 2021, India remains an attractive
market for international investors both in terms of short-term and long-term prospects.
As per the data published in a Department of Economic Affairs report, in the first quarter of
FY22, India’s real gross value added (GVA) also recorded an 18.8% YoY increase in the first
quarter of FY22, posting a recovery of >92% of its corresponding pre-pandemic level (in the
first quarter of FY20). India’s output recorded a 20.1% YoY growth, recovering >90% of the
pre-pandemic output in the first quarter of FY20. Also, in FY21, India recorded a current
account surplus at 0.9% of the GDP. The growth in the economic recovery is backed by the
government’s continued efforts to accelerate vaccination coverage among citizens. This also
provided an optimistic outlook to further revive industrial activities.

2. CHAPTER IV- COMPANIES ACT, 2013 (SHARES, STOCKS AND

DEBENTURES)
Every company limited by shares must have a share capital. Share capital of a company refers
to the amount invested in the company for it to carry out its operations. The share capital may
be altered or increased, subject to certain conditions. A company’s share capital may be
divided into small shares of different classes. The different classes of share capital and the
rights attached to these classes are different. Section 2(84) of the Companies Act, 2013
(hereinafter referred to as Act) “share” means a share in the share capital of a company and
includes stock. It represents the interest of a shareholder in the company, measured for the
purposes of liability and dividend. It attaches various rights and liabilities.

TYPES OF SHARE CAPITAL

Section 43 of the Act provides that the share capital of a company limited by shares shall be
of two kinds:

1. Equity share capital (with voting rights or with differential dividend and voting rights)
2. Preference share capital
• Equity share capital (for any company limited by shares) means all share capital which is
not preference share capital.
• Preference share capital (for any company limited by shares) means that part of the issued
share capital of the company which carries or would carry a preferential right with respect
to payment of dividend, repayment (in the case of a winding up or repayment of capital).

Section 44: Nature of shares or debentures • The shares or debentures or other interest of any
member in a company shall be movable property transferable in the manner provided by the
articles of the company.

Section 45: Numbering of shares • Every share in a company having a share capital shall be
distinguished by its distinctive number.

Sector 46: Certificate of shares

• A certificate specifying the shares held by any person will be an evidence of the title of
the person to such shares.
• A duplicate certificate of shares may be issued, if such certificate have been lost,
destroyed/mutilated/torn.
• If a share is held in depository form, the record of the depository is the evidence of the
interest of the beneficial owner.
• If a company issues a duplicate certificate of shares with intent to defraud, the company
shall be punishable with fine ‘five times the face value of the shares involved, which may
extend to ten times the face value of such shares or rupees ten crores whichever is higher.
And every officer of the company who is in default shall be liable for action under section
447.

Section 47: Voting rights

• Every member of a company (limited by shares) who holds equity share capital therein,
shall have a right to vote on every resolution placed before the company; and his voting
right on a poll shall be in proportion to his share in the paid-up equity share capital of the
company.
• Every member of a company (limited by shares) who holds any preference share capital
therein shall have a right to vote only on resolutions placed before the company which
directly affect the rights attached to his preference shares and, any resolution for the
winding up of the company; and his voting right on a poll shall be in proportion to his
share in the paid-up preference share capital of the company.

Section 48: Variations of shareholders‘ rights

• If a share capital of the company is divided into different classes of shares, the rights
attached to the shares of any class may be varied with the consent of the 3/4th
shareholders that class.
• If the 10% or more holders of the issued shares of a class did not consent to such variation
or vote in favour of the special resolution for the variation, they may apply to the Tribunal
(within 21 days) to have the variation cancelled.
• The decision of the Tribunal on any application shall be binding on the shareholders.
• The company shall, within 30 days of the date of the order of the Tribunal, file a copy
thereof with the Registrar.
• Where any default is made in complying with the provisions of this section, the company
shall be punishable with fine of Rs 50,000 or more and extend to Rs 5 Lakh. Every officer
of the company who is in default shall be punishable with imprisonment upto 6 months or
with fine Rs. 25,000 to 5 Lakh, OR both.

Section 49: Calls on shares of same class to be made on uniform basis

• If any calls for further share capital are made on the shares of a class, such calls shall be
made on a uniform basis on all shares falling under that class.
• Shares of the same nominal value on which different amounts have been paid-up shall not
be deemed to fall under the same class.

Section 50: Company to accept unpaid share capital, although not called up

• A company may accept from any member, the whole or a part of the amount remaining
unpaid on any shares held by him, even if no part of that amount has been called up.

Section 51: Payment of dividend in proportion to amount paid-up

• A company may, if so authorised by its articles, pay dividends in proportion to the

amount paid-up on each share.

Section 52: Application of premiums received on issue of shares.

• If a company issues shares at a premium, whether for cash or otherwise, a sum equal to
the aggregate amount of the premium received on those shares shall be transferred to a
―securities premium account and securities premium account will be treated as the paid-
up share capital of the company.
• The securities premium account may be applied by the company towards the issue of
unissued shares of the company to the members of the company as fully paid bonus
shares.

Section 53: Prohibition on issue of shares at discount

• Except as provided in section 54, a company shall not issue shares at a discount.
• Any share issued by a company at a discounted price shall be void.
• If a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees.
• Every officer who is in default shall be punishable with imprisonment for a term which
may extend to six months or with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees, or with both.

Section 54: Issue of sweat equity shares

• A company may issue sweat equity shares of a class of shares already issued, if the
following conditions are fulfilled:

o the issue is authorised by a special resolution passed by the company.

o the resolution specifies the number of shares, the current market price, consideration,
if any, and the class or classes of directors or employees to whom such equity shares
are to be issued.
o not less than one year has, at the date of such issue, elapsed since the date on which
the company had commenced business.
 o If the equity shares of the company are listed on a recognised stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the
Securities and Exchange Board in this behalf.
o The rights, limitations, restrictions and provisions as are for the time being applicable
to equity shares shall be applicable to the sweat equity shares issued under this section
and the holders of such shares shall rank equal with other equity shareholders.

55. Issue and redemption of preference shares

• No company limited by shares shall, after the commencement of this Act, issue any
preference shares which are irredeemable.
• A company limited by shares may, if so authorised by its articles, issue preference shares
which are liable to be redeemed within a period of twenty years from the date of their
issue.
• If a company is not in a position to redeem any preference shares or to pay dividend, if
any, on such shares, it may issue further redeemable preference shares equal to the
amount due (with the consent of the holders of three-fourths in value of such preference
shares and with the approval of the Tribunal on a petition made by it in this behalf). And
on the issue of such further redeemable preference shares, the unredeemed preference
shares shall be deemed to have been redeemed.
• The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.

Section 56: Transfer and transmission of securities

• A company shall not register a transfer of securities of the company (or the interest of a
member in the company in the case of a company having no share capital) other than the
transfer between persons both of whose names are entered as holders of beneficial interest
in the records of a depository.
• If an application is made by the transferor alone and relates to partly paid shares, the
transfer shall not be registered, unless the company gives the notice of the application, in
such manner as may be prescribed, to the transferee and the transferee gives no objection
to the transfer within two weeks from the receipt of notice.
• Every company shall deliver the certificates of all securities allotted, transferred or
transmitted:
o within a period of two months from the date of incorporation, in the case of
subscribers to the memorandum
o within a period of two months from the date of allotment, in the case of any allotment
of any of its shares
o within a period of one month from the date of receipt by the company of the
instrument of transfer
o within a period of six months from the date of allotment in the case of any allotment
of debenture
• The transfer of any security or other interest of a deceased person in a company made by
his legal representative shall be valid as if he had been the holder at the time of the
execution of the instrument of transfer.
• If any default is made in complying with the provisions of this section, the company shall
be punishable with fine of twenty-five thousand rupees which may extend to five lakh
rupees And every officer of the company who is in default shall be punishable with fine
of ten thousand rupees which may extend to one lakh rupees.
• If any depository or depository participant, with an intention to defraud a person, has
transferred shares, it shall be liable under section 447.

Section 57: Punishment for personation of shareholder

• If any person deceitfully personates as an owner of any security or interest in a company

and thereby obtains or attempts to obtain any such security or interest (or receives or attempts
to receive any money due to any such owner) shall be punishable with imprisonment for a
term which shall not be less than one year but which may extend to three years and with fine
which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Section 58: Refusal of registration and appeal against refusal

• If a private company limited by shares refuses to register the transfer of any securities or
interest of a member in the company, it shall send notice of the refusal to the transferor
and the transferee within a period of thirty days from the date on which the instrument of
transfer was delivered to the company.
• The securities or other interest of any member in a public company shall be freely
transferable provided it is enforceable as a contract.
• The transferee may appeal to the Tribunal against the refusal within a period of thirty
days from the date of receipt of the notice or in case no notice has been sent by the
company, within a period of sixty days from the date on which the instrument of transfer
or the intimation of transmission was delivered to the company.
• If a public company without sufficient cause refuses to register the transfer of securities
within a period of thirty days from the date on which the instrument of transfer is
delivered to the company, the transferee may, within a period of sixty days of such refusal
may appeal to the Tribunal.
• The Tribunal either dismiss the appeal, or by order direct that the transfer or transmission
shall be registered by the company and the company shall comply with such order within
a period of ten days of the receipt of the order. OR direct rectification of the register and
also direct the company to pay damages, if any, sustained by any party aggrieved.
• If a person contravenes the order of the Tribunal under this section, he shall be punishable
with imprisonment for a term which shall not be less than one year but which may extend
to three years and with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.

Section 59: Rectification of register of members

• If the name of any person is, without sufficient cause, entered in the register of members
of a company, or after having been entered in the register, is without sufficient cause,
omitted therefrom, the person aggrieved may appeal to the Tribunal.

Section 60: Publication of authorised, subscribed and paid-up capital

• If any notice, advertisement or other official publication contains a statement of the

amount of the authorised capital of the company, such notice, advertisement or other
official publication shall also contain a statement of the amount of the capital which has
been subscribed and the amount paid-up.
• If any default is made in complying with the requirements of this section, the company
shall be liable to pay a penalty of ten thousand rupees and every officer of the company
who is in default shall be liable to pay a penalty of five thousand rupees, for each default.

Section 61: Power of limited company to alter its share capital

• A limited company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting to—
(a) increase its authorised share capital by such amount as it thinks expedient
(b) consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares
(c) convert all or any of its fully paid-up shares into stock, and reconvert that
stock into fully paid-up shares of any denomination
• The cancellation of shares shall not be deemed to be a reduction of share capital.

Section 62: Further issue of share capital

• If a company having a share capital proposes to increase its subscribed capital by the
issue of further shares, such shares shall be offered—
(d) to persons who, at the date of the offer, are holders of equity shares of the
company in proportion to the paid-up share capital on those shares by sending
a letter of offer subject
(e) to employees under a scheme of employees‘ stock option, subject to special
resolution passed by company and subject to such conditions as may be
prescribed; or
(f) to any persons, if it is authorised by a special resolution.
• If any debentures have been issued, or loan has been obtained from any Government by a
company, and if that Government considers it necessary in the public interest, it may
direct that such debentures or loans or any part thereof shall be converted into shares in
the company.

Section 63: Issue of bonus shares

• A company may issue fully paid-up bonus shares to its members, out of— its free
reserves; the securities premium account; or the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created by
the revaluation of assets.
• No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares except certain exception.
• The bonus shares shall not be issued in lieu of dividend.

Section 64: Notice to be given to Registrar for alteration of share capital

• If a company alters its share capital in any manner or a company redeems any redeemable
preference shares, the company shall file a notice in the prescribed form with the
Registrar within a period of thirty days of such alteration or increase or redemption, along
with an altered memorandum.
• If a company and any officer of the company who is in default contravene the provisions
of this section, it shall be punishable with fine which may extend to one thousand rupees
for each day during which such default continues, or five lakh rupees, whichever is less.

Section 65: Unlimited company to provide for reserve share capital on conversion into
limited company.

• An unlimited company having a share capital may do either or both of the following
things, namely—
(a) increase the nominal amount of its share capital by increasing the nominal
amount of each of its shares,
(b) provide that a specified portion of its uncalled share capital shall not be
capable of being called up except for the purposes of the company being
wound up.

Section 66. Reduction of share capital

• Subject to confirmation by the Tribunal on an application by the company, a company

limited by shares or limited by guarantee and having a share capital may reduce the share
capital and, may—
(c) extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up; or
(d) either with or without extinguishing or reducing liability on any of its shares,
—
i. cancel any paid-up share capital which is lost or is unrepresented by
available assets; or
ii. pay off any paid-up share capital which is in excess of the wants of the
company,
• The Tribunal shall give notice of every application made to it to the Central Government,
Registrar and to the Securities and Exchange Board, in the case of listed companies.
• The Tribunal may make an order confirming the reduction of share capital on such terms
and conditions as it deems fit.
• The order of confirmation of the reduction of share capital by the Tribunal shall be
published by the company in such manner as the Tribunal may direct.
• The company shall deliver a certified copy of the order of the Tribunal and of a minute
approved by the Tribunal showing:
 (e) the amount of share capital
(f) the number of shares into which it is to be divided
(g) the amount of each share and
(h) the amount, if any, at the date of registration deemed to be paid-up on each
share, to the Registrar within thirty days of the receipt of the copy of the order,
who shall register the same and issue a certificate to that effect.
• If a company fails to comply with the provisions of this section, it shall be punishable
with fine which shall not be less than five lakh rupees but which may extend to twenty-
five lakh rupees.

Section 67: Restriction on purchase by company or giving of loans by it for purchase of its
shares

• No company limited by shares or by guarantee and having a share capital shall have
power to buy its own shares unless the consequent reduction of share capital is effected
under the provisions of this Act.
• No public company shall give guarantee, the provision of security or otherwise, any
financial assistance for the purpose of subscription of any shares in the company or in its
holding company.
• Nothing in this section shall affect the right of a company to redeem any preference
shares issued by it under this Act or under any previous company law.
• If a company contravenes the provisions of this section, it shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees
• And every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years and with fine which shall not be
less than one lakh rupees but which may extend to twenty five lakh rupees.

Section 68: Power of company to purchase its own securities.

• A company may purchase its own shares or other specified securities (hereinafter referred
to as buyback) out of—
o its free reserves; o the securities premium account; or
o the proceeds of the issue of any shares or other specified securities: Provided
that no buy-back of any kind of shares or other specified securities shall be
made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.
• No company shall purchase its own shares or other specified securities unless— the buy-
back is authorised by its articles;
o a special resolution has been passed at a general meeting of the company
authorising the buyback.
o the buy-back is twenty-five per cent (of total paid-up equity capital) or less of
the aggregate of the ratio of the aggregate of secured and unsecured debts
owed by the company after buy-back is not more than twice the paid-up
capital and its free reserves.
 o all the shares or other specified securities for buy-back are fully paid-up; o the
buy-back of the shares or other specified securities listed on any recognised
stock exchange is in accordance with the regulations made by the Securities
and Exchange Board in this behalf; and every buy-back shall be completed
within a period of one year from the date of passing of the special resolution.
• The buy-back under may be—
o from the existing shareholders or security holders on a proportionate basis o
from the open market
o by purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity.
• If a company buys back its own shares or other specified securities, it shall extinguish and
physically destroy the shares or securities so bought back within seven days of the last
date of completion of buy-back.
• If a company completes a buy-back of its shares or other specified securities under this
section, it shall not make a further issue of the same kind of shares or other securities
including allotment of new shares within a period of six months except by way of a bonus
issue or in the discharge of subsisting obligations such as conversion of warrants, stock
option schemes, sweat equity or conversion of preference shares or debentures into equity
shares.
• If a company buys back its shares or other specified securities, it shall maintain a register
of the shares or securities so bought, the consideration paid for the shares or securities
bought back, the date of cancellation of shares or securities, the date of extinguishing and
physically destroying the shares or securities and such other particulars as may be
prescribed.
• A company shall, after the completion of the buy-back under this section, file with the
Registrar and the Securities and Exchange Board a return containing such particulars
relating to the buy-back within thirty days of such completion.
• If a company makes any default in complying with the provisions of this section or any
regulation made by the Securities and Exchange Board, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to three lakh
rupees
• And every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be
less than one lakh rupees but which may extend to three lakh rupees, or with both.

Section 69: Transfer of certain sums to capital redemption reserve account.

• If a company purchases its own shares out of free reserves or securities premium account,
a sum equal to the nominal value of the shares so purchased shall be transferred to the
capital redemption reserve account and details of such transfer shall be disclosed in the
balance sheet.
• The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.
Section 70: Prohibition for buy-back in certain circumstances

• No company shall directly or indirectly purchase its own shares or other specified
securities—
(a) through any subsidiary company including its own subsidiary companies;
(b) through any investment company or group of investment companies; or
(c) if a default, is made by the company, in the repayment of deposits accepted either
before or after the commencement of this Act.
• No company shall, directly or indirectly, purchase its own shares or other specified
securities in case such company has not complied with the provisions of sections 92, 123,
127 and section 129.

Section 71: Debentures

• A company may issue debentures with an option to convert such debentures into shares
(either wholly or partly) at the time of redemption: Provided that the issue of debentures
with an option to convert such debentures into shares, wholly or partly, shall be approved
by a special resolution passed at a general meeting.
• No company shall issue any debentures carrying any voting rights.
• Secured debentures may be issued by a company subject to such terms and conditions as
may be prescribed.
• Where debentures are issued by a company under this section, the company shall create a
debenture redemption reserve account out of the profits of the company available for
payment of dividend and the amount credited to such account shall not be utilised by the
company except for the redemption of debentures.
• No company shall issue a prospectus or make an offer or invitation to the public or to its
members exceeding five hundred for the subscription of its debentures, unless the
company has, before such issue or offer, appointed one or more debenture trustees and the
conditions governing the appointment of such trustees shall be such as may be prescribed.
• A debenture trustee shall take steps to protect the interests of the debenture-holders and
redress their grievances in accordance with such rules as may be prescribed.
• A company shall pay interest and redeem the debentures in accordance with the terms and
conditions of their issue.
• If at any time the debenture trustee comes to a conclusion that the assets of the company
are insufficient to discharge the principal amount as and when it becomes due, the
debenture trustee may file a petition before the Tribunal and the Tribunal may impose
restrictions on the incurring of any further liabilities by the company, if the Tribunal
consider it necessary in the interests of the debenture-holders.
• If a company fails to redeem the debentures on the date of their maturity or fails to pay
interest on the debentures when it is due, the Tribunal may direct the company to redeem
the debentures forthwith on payment of principal and interest due thereon.
• If any default is made in complying with the order of the Tribunal under this section,
every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to three years or with fine which shall not be less than two lakh
rupees but which may extend to five lakh rupees, or with both.
• A contract with the company to take up and pay for any debentures of the company may
be enforced by a decree for specific performance.
• The Central Government may prescribe—
o the procedure for securing the issue of debentures, o the form of debenture trust deed,
o the procedure for the debenture-holders to inspect the trust deed and to obtain copies
thereof,
o quantum of debenture redemption reserve required to be created and such other
matters.

Section 72: Power to nominate

• Every holder of securities of a company may nominate any person to whom his securities
shall vest in the event of his death.
• If the securities of a company are held by more than one person jointly, the joint holders
may together nominate any person to whom all the rights in the securities shall vest in the
event of death of all the joint holders.
• If the nominee is a minor, it shall be lawful for the holder of the securities, making the
nomination to appoint any person to become entitled to the securities of the company, in
the event of the death of the nominee during his minority.

3. SEBI ACT, 1992

PLEASE REFER TO THE FOLLOWING SECTIONS FROM THE SEBI ACT
ITSELF.

SECTION 2(ba), (c), (d), 3, 11, 11AA, 12, 12A, 14, 15, 15A, 15F, 15K, 15L, 15U, 15Y,
15Z, 16, 17, 30.

4. COLLECTIVE INVESTMENT
Collective Investment Schemes is a particular scheme of investment where different
individuals invest in a particular asset. This form of scheme is something similar to a mutual
fund. However, it is not a mutual fund. Such provision is present under Section 11AA (2) of
the Securities and Exchange Board of India (SEBI) Act, 1992, where a company offers some
form of arrangement to collect the contributions made by different investors. The main
objective of having this form of collective investment scheme is to get some form of income
or profit as a result of this investment.

As per the SEBI Ordinance, 2013 if there is a collection or corpus of funds which exceeds the
value of 100 crore, then it would be considered as a collective investment scheme. This
would be considered as a CIS even if it is not registered with the SEBI. Such CIS is
understood as a deemed CIS.
In the UK, Unit Trusts which are offered by different forms of financial companies are
considered as CIS. However, in India, any form of mutual fund or unit trust is not considered
as a collective investment scheme.

 Benefits of Collective Investment Schemes

The following are the benefits of investing in a collective investment schemes:

 Portfolio of Securities

An investor considering investing in a CIS would have a wide range of portfolio to consider.
Hence an investor can choose a suitable portfolio to invest as per his requirements.

 Maximisation of Profits

Through this scheme profits can be maximised. Having different forms of investments in
various collective investment schemes would definitely maximise the profits.

 Diversification

One of the main aims of investing in such scheme is diversification of the portfolio. Through
diversification, one can achieve good returns and reduce the risk avenues in the investment.

 Liquidity

Collective investment schemes are highly liquid and marketable. Hence considering investing
in such scheme would maximise the income of the investor.

 Which are not considered as a collective investment schemes?

There are several schemes which are not classified as collective investment schemes. The
following are the schemes which are not considered as a CIS:

•Any insurance transaction or insurance contract for which the provisions of the
Insurance Act, 1938 would operate.
• Any form of deposits which are accepted by Non Banking Financial Companies
(NBFC).
• Any scheme which is developed by a Co-operative Society or a Society under the
Society Registration Act.
• Any contributions which are donated to a particular portfolio which comprises a
mutual fund
• Any form of pension fund or insurance scheme in accordance with the
requirements of the Employee Provident Fund and Miscellaneous Provisions Act,
1952.
• Any form of chit funds under the provisions of the Chit Fund Act, 1982.
• Any form of deposits which come under section 73 to 76 of the Companies Act,
2013.
 Parties involved in Collective Investment Schemes
The following parties are involved in collective investment schemes:

 Shareholders

These individuals are also known as ‘Unit Holders’. Such individuals would subscribe to the
asset. Unit holders would have the right to receive any form of return from the asset. Apart
from this, any other return which is eligible to be received by the unit holder is the rightful
property of the unit holder. This would depend on the initial agreement entered into by the
unit holder and the company.

 Collective Investment Management Company

This form of company has the sole purpose to manage the schemes related to CIS. Such
entities can either be an entity which is registered under:

• The provisions of the Companies Act, 2013

• The provisions of the Securities Exchange Board of India, 1992.

Unit holders under the scheme would enter into agreements with the companies to manage
their securities.

 Trustee

As this scheme is a portfolio of investments of different individuals; such CIS would be

formed as a trust. To safeguard the interests of the unit holders a trustee would be appointed
to act in the benefit of the unit holders. It is the responsibility of the collective investment
management company to appoint a trustee to safeguard and act in the beneficence of the unit
holders.

 Manager of the Fund

Such a scheme would be managed by a fund manager. This individual would be responsible
for advising the unit holders of the fund. Valuation of the fund and other functions would be
carried out by the manager of the fund. Apart from this, the main responsibility of the fund
manager is to manage the portfolio of securities.

 Eligibility Criteria for Registering under Collective Investment Schemes

The following eligibility criterion has to be sufficed by the applicant for registering under
Collective Investment Schemes:

• The company must be set up either under the provisions of the Companies Act,
2013 or the Companies Act, 1956.
• The main objects of the Memorandum of Association (MOA) must be to manage
collective investment schemes.
• The net worth of the applicant must be 5 crores or more. At the time of filing the
application, the net worth of the applicant can be 3 crores. However, within 3
years from the date of registering the application, the net worth should be 5 crores.
 • The applicant has to satisfy the requirements as per the fit and proper person test.
• Infrastructural Facilities should be present with the applicant. This would mean,
the applicant should have a leased premises or an own premises to carry out the
activities under the CIS.
• Directors and other key management individuals of the company must have
integrity.
• Directors and other key management individuals should not be convicted or
charged with any offences involving moral turpitude or criminal convictions under
any form of securities law.
• 50% of the directors should be independent. They must be related to the
controllers of the Collective Investment Management Company.
• The applicant for registering under collective investment schemes must not be
rejected in the past.
• One of the directors of the collective investment management company must be a
representative of the trust. Such director should not be retired.
• The company (Collective Investment Management Company) must not be or act
as a representative of any other form of scheme.
• Any applicant who already has an existing collective investment scheme should
comply with the provisions of Chapter IX.
 Procedure for Registering as a Collective Investment Management Company
(Collective Investment Schemes)

If an applicant wants to handle collective investment schemes, then they must first set up a
collective investment management company. As per section 3 of the Securities and Exchange
Board of India (Collective Investment Schemes) Regulations, 1999, an applicant cannot
manage a CIS without having an effective certificate of registration.

Application

An applicant must first make an application in ‘Form A’ to secure the certificate and grant of
registration to act as a CIS company. Any applicant wanting to start a scheme, which would
be deemed as a CIS should also make an application in ‘Form A’. This would be in
accordance with the requirements of section 11AA of the act.

Fee

As per section 6 of the act, the applicant must also pay the fees for registering as a collective
investment management company. The fees to be paid by the application is a non-refundable
amount of Rs. 25,000/-. Provisional registration fee has to be paid is Rs. 5 Lakh. An
application for grant of Collective Investment Management Company is Rs. 10 Lakh. Apart
from this, the filing fees for the offer document is Rs. 25,000/-.

Mode of Payment of the Fee

The fee must be paid as a Bank Draft in favour of ‘The Securities and Exchange Board of
India’ Mumbai or any of the regional offices where the application is submitted.
Confirmation

The application for registering under Collective Investment Schemes must confirm with the
requirements of the board. If there are any forms of discrepancies with the application, then
the application would be rejected.

Appeal

If the application is rejected, then the applicant has to provide reasonable cause as to why the
application should be accepted. This must be carried out within a period of 30 days from the
date of rejection of the application. The board may ask the applicant to provide other
documents.

Certificate

If the application confirms with the requirement, then the board would ask the applicant to
pay the registration fee for the certificate. Once the registration fee is remitted to the board,
they would provide a certificate in ‘Form B’.

Terms and Conditions

There are several terms and conditions which have to be followed by the company. This
would be placed by the board for the applicant to follow.

Restriction on Activities of the CIS Company under Collective Investment Schemes

• This form of company cannot take part in any other activity other than managing
the scheme.
• This company must not act as a trustee for any other collective investment
scheme.
• This company cannot launch any form of scheme for active investing. However,
the company can carry out any form of investment in its own scheme.

5. MUTUAL FUNDS AND ITS RELEVANCE IN PRESENT

CONTEXT
What Is a Mutual Fund?

A mutual fund is a type of financial vehicle made up of a pool of money collected from many
investors to invest in securities like stocks, bonds, money market instruments, and other
assets. Mutual funds are operated by professional money managers, who allocate the fund's
assets and attempt to produce capital gains or income for the fund's investors. A mutual
fund's portfolio is structured and maintained to match the investment objectives stated in its
prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios
of equities, bonds, and other securities. Each shareholder, therefore, participates
proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of
securities, and performance is usually tracked as the change in the total market cap of the
fund—derived by the aggregating performance of the underlying investments.

Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds. The value of the mutual fund company depends on the
performance of the securities it decides to buy. So, when you buy a unit or share of a mutual
fund, you are buying the performance of its portfolio or, more precisely, a part of the
portfolio's value. Investing in a share of a mutual fund is different from investing in shares of
stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a
mutual fund represents investments in many different stocks (or other securities) instead of
just one holding.

That's why the price of a mutual fund share is referred to as the net asset value (NAV) per
share, sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value
of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares
are those held by all shareholders, institutional investors, and company officers or insiders.
Mutual fund shares can typically be purchased or redeemed as needed at the fund's current
NAV, which—unlike a stock price—doesn't fluctuate during market hours, but it is settled at
the end of each trading day. Ergo, the price of a mutual fund is also updated when the
NAVPS is settled.

The average mutual fund holds over a hundred different securities, which means mutual fund
shareholders gain important diversification at a low price. Consider an investor who buys
only Google stock before the company has a bad quarter. He stands to lose a great deal of
value because all of his dollars are tied to one company. On the other hand, a different
investor may buy shares of a mutual fund that happens to own some Google stock. When
Google has a bad quarter, she loses significantly less because Google is just a small part of
the fund's portfolio.

How Mutual Funds Work ?

A mutual fund is both an investment and an actual company. This dual nature may seem
strange, but it is no different from how a share of AAPL is a representation of Apple Inc.
When an investor buys Apple stock, he is buying partial ownership of the company and its
assets. Similarly, a mutual fund investor is buying partial ownership of the mutual fund
company and its assets. The difference is that Apple is in the business of making innovative
devices and tablets, while a mutual fund company is in the business of making investments.

Investors typically earn a return from a mutual fund in three ways:

1. Income is earned from dividends on stocks and interest on bonds held in the fund's
portfolio. A fund pays out nearly all of the income it receives over the year to fund
 owners in the form of a distribution. Funds often give investors a choice either to
receive a check for distributions or to reinvest the earnings and get more shares.

2. If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.

3. If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit in the
market.

If a mutual fund is construed as a virtual company, its CEO is the fund manager, sometimes
called its investment adviser. The fund manager is hired by a board of directors and is legally
obligated to work in the best interest of mutual fund shareholders. Most fund managers are
also owners of the fund. There are very few other employees in a mutual fund company. The
investment adviser or fund manager may employ some analysts to help pick investments or
perform market research. A fund accountant is kept on staff to calculate the fund's NAV, the
daily value of the portfolio that determines if share prices go up or down. Mutual funds need
to have a compliance officer or two, and probably an attorney, to keep up with government
regulations.

Most mutual funds are part of a much larger investment company; the biggest have hundreds
of separate mutual funds. Some of these fund companies are names familiar to the general
public, such as Fidelity Investments, The Vanguard Group, T. Rowe Price, and Oppenheimer.

Types of Mutual Funds

Mutual funds are divided into several kinds of categories, representing the kinds of securities
they have targeted for their portfolios and the type of returns they seek. There is a fund for
nearly every type of investor or investment approach. Other common types of mutual funds
include money market funds, sector funds, alternative funds, smart-beta funds, target-date
funds, and even funds of funds, or mutual funds that buy shares of other mutual funds.

Equity Funds

The largest category is that of equity or stock funds. As the name implies, this sort of fund
invests principally in stocks. Within this group are various subcategories. Some equity funds
are named for the size of the companies they invest in: small-, mid-, or large-cap. Others are
named by their investment approach: aggressive growth, income-oriented, value, and others.
Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign
equities. There are so many different types of equity funds because there are many different
types of equities. A great way to understand the universe of equity funds is to use a style box,
an example of which is below.

The idea here is to classify funds based on both the size of the companies invested in
(their market caps) and the growth prospects of the invested stocks. The term value
fund refers to a style of investing that looks for high-quality, low-growth companies that are
out of favor with the market. These companies are characterized by low price-to-earnings
(P/E) ratios, low price-to-book (P/B) ratios, and high dividend yields. Conversely, spectrums
are growth funds, which look to companies that have had (and are expected to have) strong
growth in earnings, sales, and cash flows. These companies typically have high P/E ratios and
do not pay dividends. A compromise between strict value and growth investment is a "blend,"
which simply refers to companies that are neither value nor growth stocks and are classified
as being somewhere in the middle.

The other dimension of the style box has to do with the size of the companies that a mutual
fund invests in. Large-cap companies have high market capitalizations, with values over $10
billion. Market cap is derived by multiplying the share price by the number of shares
outstanding. Large-cap stocks are typically blue chip firms that are often recognizable by
name. Small-cap stocks refer to those stocks with a market cap ranging from $300 million to
$2 billion. These smaller companies tend to be newer, riskier investments. Mid-cap stocks fill
in the gap between small- and large-cap.

A mutual fund may blend its strategy between investment style and company size. For
example, a large-cap value fund would look to large-cap companies that are in strong
financial shape but have recently seen their share prices fall and would be placed in the upper
left quadrant of the style box (large and value). The opposite of this would be a fund that
invests in startup technology companies with excellent growth prospects: small-cap growth.
Such a mutual fund would reside in the bottom right quadrant (small and growth).

Fixed-Income Funds

Another big group is the fixed income category. A fixed-income mutual fund focuses on

investments that pay a set rate of return, such as government bonds, corporate bonds, or other
debt instruments. The idea is that the fund portfolio generates interest income, which it then
passes on to the shareholders.

Sometimes referred to as bond funds, these funds are often actively managed and seek to buy
relatively undervalued bonds in order to sell them at a profit. These mutual funds are likely to
pay higher returns than certificates of deposit and money market investments, but bond funds
aren't without risk. Because there are many different types of bonds, bond funds can vary
dramatically depending on where they invest. For example, a fund specializing in high-yield
junk bonds is much riskier than a fund that invests in government securities. Furthermore,
nearly all bond funds are subject to interest rate risk, which means that if rates go up, the
value of the fund goes down.

Index Funds

Another group, which has become extremely popular in the last few years, falls under the
moniker "index funds." Their investment strategy is based on the belief that it is very hard,
and often expensive, to try to beat the market consistently. So, the index fund manager buys
stocks that correspond with a major market index such as the S&P 500 or the Dow Jones
Industrial Average (DJIA). This strategy requires less research from analysts and advisors, so
there are fewer expenses to eat up returns before they are passed on to shareholders. These
funds are often designed with cost-sensitive investors in mind.

Balanced Funds

Balanced funds invest in a hybrid of asset classes, whether stocks, bonds, money market
instruments, or alternative investments. The objective is to reduce the risk of exposure across
asset classes.This kind of fund is also known as an asset allocation fund. There are two
variations of such funds designed to cater to the investors objectives.

Some funds are defined with a specific allocation strategy that is fixed, so the investor can
have a predictable exposure to various asset classes. Other funds follow a strategy for
dynamic allocation percentages to meet various investor objectives. This may include
responding to market conditions, business cycle changes, or the changing phases of the
investor's own life.

While the objectives are similar to those of a balanced fund, dynamic allocation funds do not
have to hold a specified percentage of any asset class. The portfolio manager is therefore
given freedom to switch the ratio of asset classes as needed to maintain the integrity of the
fund's stated strategy.

Money Market Funds

The money market consists of safe (risk-free), short-term debt instruments, mostly

government Treasury bills. This is a safe place to park your money. You won't get substantial
returns, but you won't have to worry about losing your principal. A typical return is a little
more than the amount you would earn in a regular checking or savings account and a little
less than the average certificate of deposit (CD). While money market funds invest in ultra-
safe assets, during the 2008 financial crisis, some money market funds did experience losses
after the share price of these funds, typically pegged at $1, fell below that level and broke the
buck.

Income Funds

Income funds are named for their purpose: to provide current income on a steady basis. These
funds invest primarily in government and high-quality corporate debt, holding these bonds
until maturity in order to provide interest streams. While fund holdings may appreciate in
value, the primary objective of these funds is to provide steady cash flow to investors. As
such, the audience for these funds consists of conservative investors and retirees. Because
they produce regular income, tax-conscious investors may want to avoid these funds.

International/Global Funds

An international fund (or foreign fund) invests only in assets located outside your home
country. Global funds, meanwhile, can invest anywhere around the world, including within
your home country. It's tough to classify these funds as either riskier or safer than domestic
investments, but they have tended to be more volatile and have unique country and political
risks. On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by
increasing diversification, since the returns in foreign countries may be uncorrelated with
returns at home. Although the world's economies are becoming more interrelated, it is still
likely that another economy somewhere is outperforming the economy of your home country.

Specialty Funds

This classification of mutual funds is more of an all-encompassing category that consists of

funds that have proved to be popular but don't necessarily belong to the more rigid categories
we've described so far. These types of mutual funds forgo broad diversification to concentrate
on a certain segment of the economy or a targeted strategy. Sector funds are targeted strategy
funds aimed at specific sectors of the economy, such as financial, technology, health, and so
on. Sector funds can, therefore, be extremely volatile since the stocks in a given sector tend to
be highly correlated with each other. There is a greater possibility for large gains, but a sector
may also collapse (for example, the financial sector in 2008 and 2009).

Regional funds make it easier to focus on a specific geographic area of the world. This can
mean focusing on a broader region (say Latin America) or an individual country (for
example, only Brazil). An advantage of these funds is that they make it easier to buy stock in
foreign countries, which can otherwise be difficult and expensive. Just like for sector funds,
you have to accept the high risk of loss, which occurs if the region goes into a bad recession.

Socially responsible funds (or ethical funds) invest only in companies that meet the criteria of
certain guidelines or beliefs. For example, some socially responsible funds do not invest in
"sin" industries such as tobacco, alcoholic beverages, weapons, or nuclear power. The idea is
to get competitive performance while still maintaining a healthy conscience. Other such
funds invest primarily in green technology, such as solar and wind power or recycling.

Exchange Traded Funds (ETFs)

A twist on the mutual fund is the exchange traded fund (ETF). These ever more popular
investment vehicles pool investments and employ strategies consistent with mutual funds, but
they are structured as investment trusts that are traded on stock exchanges and have the added
benefits of the features of stocks. For example, ETFs can be bought and sold at any point
throughout the trading day. ETFs can also be sold short or purchased on margin. ETFs also
typically carry lower fees than the equivalent mutual fund. Many ETFs also benefit from
active options markets, where investors can hedge or leverage their positions. ETFs also
enjoy tax advantages from mutual funds. Compared to mutual funds, ETFs tend to be more
cost effective and more liquid. The popularity of ETFs speaks to their versatility and
convenience.

Classes of Mutual Fund Shares

Mutual fund shares come in several classes. Their differences reflect the number and size of
fees associated with them.
Currently, most individual investors purchase mutual funds with A shares through a broker.
This purchase includes a front-end load of up to 5% or more, plus management fees and
ongoing fees for distributions, also known as 12b-1 fees. To top it off, loads on A shares vary
quite a bit, which can create a conflict of interest. Financial advisors selling these products
may encourage clients to buy higher-load offerings to bring in bigger commissions for
themselves. With front-end funds, the investor pays these expenses as they buy into the fund.

To remedy these problems and meet fiduciary-rule standards, investment companies have
started designating new share classes, including "level load" C shares, which generally don't
have a front-end load but carry a 1% 12b-1 annual distribution fee.

Funds that charge management and other fees when an investor sell their holdings are
classified as Class B shares.

A New Class of Fund Shares

The newest share class, developed in 2016, consists of clean shares. Clean shares do not have
front-end sales loads or annual 12b-1 fees for fund services. American Funds, Janus, and
MFS are all fund companies currently offering clean shares.

By standardizing fees and loads, the new classes enhance transparency for mutual fund
investors and, of course, save them money. For example, an investor who rolls $10,000 into
an individual retirement account (IRA) with a clean-share fund could earn nearly $1,800
more over a 30-year period as compared to an average A-share fund, according to an April
2017 Morningstar report co-written by Aron Szapiro, Morningstar director of policy research,
and Paul Ellenbogen, head of global regulatory solutions.

Advantages of Mutual Funds

There are a variety of reasons that mutual funds have been the retail investor's vehicle of
choice for decades. The overwhelming majority of money in employer-sponsored retirement
plans goes into mutual funds. Multiple mergers have equated to mutual funds over time.

Diversification

Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is
one of the advantages of investing in mutual funds. Experts advocate diversification as a way
of enhancing a portfolio's returns, while reducing its risk. Buying individual company stocks
and offsetting them with industrial sector stocks, for example, offers some diversification.
However, a truly diversified portfolio has securities with different capitalizations and
industries and bonds with varying maturities and issuers. Buying a mutual fund can achieve
diversification cheaper and faster than by buying individual securities. Large mutual funds
typically own hundreds of different stocks in many different industries. It wouldn't be
practical for an investor to build this kind of a portfolio with a small amount of money.

Easy Access
Trading on the major stock exchanges, mutual funds can be bought and sold with relative
ease, making them highly liquid investments. Also, when it comes to certain types of assets,
like foreign equities or exotic commodities, mutual funds are often the most feasible way—in
fact, sometimes the only way—for individual investors to participate.

Economies of Scale

Mutual funds also provide economies of scale. Buying one spares the investor of the
numerous commission charges needed to create a diversified portfolio. Buying only one
security at a time leads to large transaction fees, which will eat up a good chunk of the
investment. Also, the $100 to $200 an individual investor might be able to afford is usually
not enough to buy a round lot of the stock, but it will purchase many mutual fund shares. The
smaller denominations of mutual funds allow investors to take advantage of dollar cost
averaging.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction
costs are lower than what an individual would pay for securities transactions. Moreover, a
mutual fund, since it pools money from many smaller investors, can invest in certain assets or
take larger positions than a smaller investor could. For example, the fund may have access to
IPO placements or certain structured products only available to institutional investors.

Professional Management

A primary advantage of mutual funds is not having to pick stocks and manage investments.
Instead, a professional investment manager takes care of all of this using careful research and
skillful trading. Investors purchase funds because they often do not have the time or the
expertise to manage their own portfolios, or they don't have access to the same kind of
information that a professional fund has. A mutual fund is a relatively inexpensive way for a
small investor to get a full-time manager to make and monitor investments. Most private,
non-institutional money managers deal only with high-net-worth individuals—people with at
least six figures to invest. However, mutual funds, as noted above, require much lower
investment minimums. So, these funds provide a low-cost way for individual investors to
experience and hopefully benefit from professional money management.

Variety and Freedom of Choice

Investors have the freedom to research and select from managers with a variety of styles and
management goals. For instance, a fund manager may focus on value investing, growth
investing, developed markets, emerging markets, income, or macroeconomic investing,
among many other styles. One manager may also oversee funds that employ several different
styles. This variety allows investors to gain exposure to not only stocks and bonds but
also commodities, foreign assets, and real estate through specialized mutual funds. Some
mutual funds are even structured to profit from a falling market (known as bear funds).
Mutual funds provide opportunities for foreign and domestic investment that may not
otherwise be directly accessible to ordinary investors.

Transparency
Mutual funds are subject to industry regulation that ensures accountability and fairness to
investors.

Disadvantages of Mutual Funds

Liquidity, diversification, and professional management all make mutual funds attractive
options for younger, novice, and other individual investors who don't want to actively
manage their money. However, no asset is perfect, and mutual funds have drawbacks too.

Fluctuating Returns

Like many other investments without a guaranteed return, there is always the possibility that
the value of your mutual fund will depreciate. Equity mutual funds experience price
fluctuations, along with the stocks that make up the fund. The Federal Deposit Insurance
Corporation (FDIC) does not back up mutual fund investments, and there is no guarantee of
performance with any fund. Of course, almost every investment carries risk. It is especially
important for investors in money market funds to know that, unlike their bank counterparts,
these will not be insured by the FDIC.

Cash Drag

Mutual funds pool money from thousands of investors, so every day people are putting
money into the fund as well as withdrawing it. To maintain the capacity to accommodate
withdrawals, funds typically have to keep a large portion of their portfolios in cash. Having
ample cash is excellent for liquidity, but money that is sitting around as cash and not working
for you is not very advantageous. Mutual funds require a significant amount of their
portfolios to be held in cash in order to satisfy share redemptions each day. To
maintain liquidity and the capacity to accommodate withdrawals, funds typically have to
keep a larger portion of their portfolio as cash than a typical investor might. Because cash
earns no return, it is often referred to as a "cash drag."

High Costs

Mutual funds provide investors with professional management, but it comes at a cost—those
expense ratios mentioned earlier. These fees reduce the fund's overall payout, and they're
assessed to mutual fund investors regardless of the performance of the fund. As you can
imagine, in years when the fund doesn't make money, these fees only magnify losses.
Creating, distributing, and running a mutual fund is an expensive undertaking. Everything
from the portfolio manager's salary to the investors' quarterly statements cost money. Those
expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to
pay attention to the fees can have negative long-term consequences. Actively managed funds
incur transaction costs that accumulate over each year. Remember, every dollar spent on fees
is a dollar that is not invested to grow over time.

"Diworsification" and Dilution

"Diworsification"—a play on words—is an investment or portfolio strategy that implies too
much complexity can lead to worse results. Many mutual fund investors tend to
overcomplicate matters. That is, they acquire too many funds that are highly related and, as a
result, don't get the risk-reducing benefits of diversification. These investors may have made
their portfolio more exposed. At the other extreme, just because you own mutual funds
doesn't mean you are automatically diversified. For example, a fund that invests only in a
particular industry sector or region is still relatively risky.

In other words, it's possible to have poor returns due to too much diversification. Because
mutual funds can have small holdings in many different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result
of a successful fund growing too big. When new money pours into funds that have had strong
track records, the manager often has trouble finding suitable investments for all the new
capital to be put to good use.

One thing that can lead to diworsification is the fact that a fund's purpose or makeup isn't
always clear. Fund advertisements can guide investors down the wrong path. The Securities
and Exchange Commission (SEC) requires that funds have at least 80% of assets in the
particular type of investment implied in their names. How the remaining assets are invested is
up to the fund manager.3 However, the different categories that qualify for the required 80%
of the assets may be vague and wide-ranging. A fund can, therefore, manipulate prospective
investors via its title. A fund that focuses narrowly on Congolese stocks, for example, could
be sold with a far-ranging title like "International High-Tech Fund."

Active Fund Management

Many investors debate whether or not the professionals are any better than you or I at picking
stocks. Management is by no means infallible, and even if the fund loses money, the manager
still gets paid. Actively managed funds incur higher fees, but increasingly passive index
funds have gained popularity. These funds track an index such as the S&P 500 and are much
less costly to hold. Actively managed funds over several time periods have failed to
outperform their benchmark indices, especially after accounting for taxes and fees.

Lack of Liquidity

A mutual fund allows you to request that your shares be converted into cash at any time,
however, unlike stock that trades throughout the day, many mutual fund redemptions take
place only at the end of each trading day.

Taxes

When a fund manager sells a security, a capital-gains tax is triggered. Investors who are
concerned about the impact of taxes need to keep those concerns in mind when investing in
mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-
tax sensitive mutual funds in a tax-deferred account, such as a 401(k) or IRA.

Evaluating Funds
Researching and comparing funds can be difficult. Unlike stocks, mutual funds do not offer
investors the opportunity to juxtapose the price to earnings (P/E) ratio, sales growth, earnings
per share (EPS), or other important data. A mutual fund's net asset value can offer some basis
for comparison, but given the diversity of portfolios, comparing the proverbial apples to
apples can be difficult, even among funds with similar names or stated objectives. Only index
funds tracking the same markets tend to be genuinely comparable.

Indian Mutual Fund Industry: Current Scenario

The Indian Mutual Fund Industry is one of the fastest growing sectors in the Indian capital
and financial markets. The mutual fund industry in India has seen dramatic improvements in
quantity as well as quality of products and services offering in recent years. Mutual funds as
an investment vehicle have gained immense popularity in the current scenario, which is
clearly reflected in the robust growth levels of Assets under Management.

The Indian Mutual fund industry has witnessed considerable growth since its inception in
1963. The assets under management (AUM) have surged to Rs 825240 crores as on 31st Mar,
2014 from just Rs 25 crores in March, 1965. The impressive growth in the Indian Mutual
Fund Industry in recent years can largely be attributed to various factors such as rising
household savings, comprehensive regulatory framework, favourable tax policies, and
introduction of several new products, investor education campaign and role of distributors. In
the last few years, household’s income levels have grown significantly, leading to
commensurate increase in household’s savings. The considerable rise in household’s
financial savings, point towards the huge market potential of the Mutual fund industry in
India.

Besides, SEBI has introduced various regulatory measures in order to protect the interest of
small investors that augurs well for the long term growth of the industry. The tax benefits
allowed on mutual fund schemes (for example investment made in Equity Linked Saving
Scheme (ELSS) is qualified for tax deductions under section 80C of the Income Tax Act)
also have helped mutual funds to evolve as the preferred form of investment among the
salaried income earners. Besides, the Indian Mutual fund industry that started with traditional
products like equity fund, debt fund and balanced fund has significantly expanded its product
portfolio.

Today, the industry has introduced an array of products such as liquid/money market funds,
sector-specific funds, index funds, gilt funds, capital protection oriented schemes, special
category funds, insurance linked funds, exchange traded funds, etc. It also has introduced
Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or gold related
instruments. Further, the industry has launched special schemes to invest in foreign securities.
The wide variety of schemes offered by the Indian Mutual fund industry provides multiple
options of investment to common man.

Recent Development Measures

The Indian mutual fund industry is undergoing a transformation, adapting to the various
development measures that are coming about. Following development measures have been
undertaken in the industry which impacted the industry as a whole. All measures have been
taken keeping interest of the investors in mind.

Abolishment of Initial Issue Expenses and Entry Load from Mutual Funds: In recent
years, the industry regulator, Securities and Exchange Board of India has focused more on
investor protection, introducing a number of regulations to empower retail investors in
Mutual Funds. SEBI began by prohibiting the charging of initial issue expenses, which were
permitted for closed-ended schemes, and mandating that such MF schemes shall recover sales
and distribution expenses through entry load only. These steps aimed at creating more
transparency in fees paid by investors and helping make informed investment decisions.
Subsequently, w.e.f. August 1, 2009, SEBI banned the entry load that was deducted from the
invested amount, and instead sallowed customers the right to negotiate and decide
commissions directly with distributors based on investor’s assessment of various factors and
related services to be rendered. The objective was to bring about more transparency in
commissions and encourage long-term investment. Though the intent of the amendment was
to benefit the investor, it has hit the margins of the Asset Management Companies (AMCs).
Further, higher distributor commission on Unit Linked Insurance Products (issued by
Insurance companies) is giving tough competition to the business of mutual funds.

Valuation of Debt Securities by Mutual Funds: With a view to ensure that the value of
debt securities reflects the current market scenario in calculation of net asset value, SEBI has
brought down the discretionary mark up and mark down to the level as per SEBI regulations.

Systematic Investment Plans to be exempted from PAN: SEBI has advised that the
investment in micro schemes such as Systematic Investment Plans of Mutual Funds up to Rs.
50000/- per year per investor shall be exempted from the requirement of PAN.

Introduction of Direct plans: If an investor wants to invest some money into mutual funds
he can either invest through a certified distributor of the mutual fund or he can go directly to
the customer service centre of the particular AMC and invest directly into any of their
scheme. AMC take the money from the investor and invest according to the objective of the
scheme. AMC deduct the recurring expenses from the fund (within the prescribed limits by
SEBI) and give the returns to the investors. If an investment is made through any distributor,
the brokerage or incentive of that investment is paid to that distributor and if the investment is
made directly by the investor in that case no brokerage is paid to anyone. But in both the
cases AMCs deduct similar recurring expenses from the investments of investor. So if an
investor has not any taken any kind of financial advice or services from any distributor he
still had to bear the same recurring expenses. As SEBI is taking many steps in favour of
investors, it has instructed AMCs to introduce DIRECT plans of all their schemes from
January 01, 2013. After this if an investor is not taking any kind of financial advice or
services form any distributor and taking his own decision while investing, he can invest in
these direct plans of the same schemes.
AMCs have been instructed by the SEBI to limit the recurring expenses in these DIRECT
plans as they do not have to pay any kind of brokerage or incentive to any of the distributor in
these plans. So previously wherein a direct investor have to bear the same expenses now he
can invest in these direct plans and take the benefit of the saving in expenses as he is taking
his own investment decisions.

Documentation: In December 2009, SEBI had made it mandatory for all AMCs to maintain
a copy of full investor documentation including Know Your Customer i.e. KYC details. Such
documentation was earlier maintained by the respective MF distributors who have now been
asked to give a copy of the same to the fund houses.

Disclosure of Investor Complaints in the Annual Report: In order to improve the

transparency in the ‘grievance redressal mechanism’, SEBI has recently issued a Circular that
requires MFs to include details of investor complaints in their Annual Report as part of the
Report of the Trustees, beginning with the annual report for the year 2009-10. MFs provide
abridged booklets of the Annual Reports to all the unit holders.

Fund of Fund Schemes: In the past, AMCs had been entering into revenue sharing
arrangements with offshore funds in respect of investments made on behalf of Fund of Fund
schemes. Recently, SEBI has issued directions stating that since these arrangements create
conflict of interest, AMCs shall be prohibited from entering into any revenue sharing
arrangement with the underlying funds in any manner and they have been prohibited from
receiving any revenue by whatever means/ head from the underlying fund. Further, SEBI is
also in discussions to raise the AMC fees from the present cap of 0.75% of the net assets in
the case of FoF schemes.

6. VENTURE CAPITAL
1. CONCEPT
Narrowly speaking, venture capital refers to the risk capital supplied to growing companies
and it takes the form of share capital in the business firms. Both money provided as start-up
capital and as development capital for small but growing firms are included in this definition.
In developing countries like India, venture capital concept has been understood in this sense.
In our country venture capital comprises only seed capital, finance for high technology and
funds to turn research and development into commercial production. In broader sense,
venture capital refers to the commitment of capital and knowledge for the formation and
setting up of companies particularly to those specialising in new ideas or new technologies.
Thus, it is not merely an injection of funds into a new firm but also a simultaneous input of
skills needed to set the firm up, design its marketing strategy, organise and manage it. In
western countries like the USA and UK, venture capital perspective scans a much wider
horizon along the above sense. In these countries, venture capital not only consists of supply
of funds for financing technology but also supply of capital and skills for fostering the growth
and development of enterprises. Much of this capital is put behind established technology or
is used to help the evolution of new management teams. It is this broad role which has
enabled venture capital industry in the West to become a vibrant force in the industrial
development. It will, therefore, be more meaningful to accept broader sense of venture
capital.

Importance of Venture Capital

Venture Capital institutions lets entrepreneurs convert their knowledge into viable projects
with the assistance of such Venture Capital institutions.

 It helps new products with modern technology become commercially feasible.

 It promotes export oriented units to earn more foreign exchange.

 It not only provide the financial institution but also assist in management, technical
and others.

 It strengthens the capital market which not only improves the borrowing concern but
also creates a situation whereby they can raise their own capital through capital
market.

 It promotes modern technology through the process where financial institutions

encourage business ventures with new technology.

 Many sick companies get a turn around after getting proper nursing from such
Venture Capital institutions.

Features of Venture Capital

High-risk investment: It is highly risky and the chances of failure are much higher as it
provides long-term startup capital to high risk-high reward ventures.

High Tech projects: Generally, venture capital investments are made in high tech projects or
areas using new technologies as they have higher returns.

Participation in Management: Venture Capitalists act complementary to the entrepreneurs,

for better or worse, in making decisions for the direction of the company.

Length of Investment: The investors eventually seek to exit in three to seven years. The
process takes several years for having significant returns and also need the talent of venture
capitalist and entrepreneurs to reach completion.

Illiquid Investment: It is an investment that is not subject to repayment on demand or a

repayment schedule.

Characteristics of Venture Capital:

Venture capital as a source of financing is distinct from other sources of financing because of
its unique characteristics, as set out below:
  Venture capital is essentially financing of new ventures through equity participation.
However, such investment may also take the form of long-term loan, purchase of
options or convertible securities. The main objective underlying investment in
equities is to earn capital gains there on subsequently when the enterprise becomes
profitable.
 Venture capital makes long-term investment in highly potential ventures of technical
savvy entrepreneurs whose returns may be available after a long period, say 5-10
years.
 Venture capital does not confine to supply of equity capital but also supply of skills
for fostering the growth and development of enterprises. Venture capitalists ensure
active participation in the management which is the entrepreneur’s business and
provide their marketing, technology, planning and management expertise to the firm.
 Venture capital financing involves high risk return spectrum. Some of the ventures
may yield very high returns to more than Compensates for heavy losses on others
which may also have earning prospects.
 In nut shell, a venture capital institution is a financial intermediary between investors
looking for high potential returns and entrepreneurs who need institutional capital as
they are yet not ready/able to go to the public.

Functions of Venture Capital:

Venture capital is growingly becoming popular in different parts of the world because of the
crucial role it plays in fostering industrial development by exploiting vast and untapped
potentialities and overcoming threats. Venture capital plays this role with the help of the
following major functions:

Venture capital provides finance as well as skills to new enterprises and new ventures of
existing ones based on high technology innovations. It provides seed capital to finance
innovations even in the pre-start stage.

In the development stage that follows the conceptual stage, venture capitalist develops a
business plan (in partnership with the entrepreneur) which will detail the market opportunity,
the product, the development and financial needs.

In this crucial stage, the venture capitalist has to assess the intrinsic merits of the
technological innovation, ensure that the innovation is directed at a clearly defined market
opportunity and satisfies himself that the management team at the helm of affairs is
competent enough to achieve the targets of the business plan.

Therefore, venture capitalist helps the firm to move to the exploitation stage, i.e., launching
of the innovation. While launching the innovation the venture capitalist will seek to establish
a time frame for achieving the predetermined development marketing, sales and profit targets.

In each investment, as the venture capitalist assumes absolute risk, his role is not restricted to
that of a mere supplier of funds but that of an active partner with total investment in the
assisted project. Thus, the venture capitalist is expected to perform not only the role of a
financier but also a skilled faceted intermediary supplying a broad spectrum of specialist
services- technical, commercial, managerial, financial and entrepreneurial.

Venture capitalist fills the gap in the owner’s funds in relation to the quantum of equity
required to support the successful launching of a new business or the optimum scale of
operations of an existing business. It acts as a trigger in launching new business and as a
catalyst in stimulating existing firms to achieve optimum performance.

Venture capitalists role extends even as far as to see that the firm has proper and adequate
commercial banking and receivable financing. Venture capitalist assists the entrepreneurs in
locating, interviewing and employing outstanding corporate achievers to professionalize the
firm.

Advantages of Venture Capital

Expansion of Company: Venture capital provides large funding that a company needs to
expand its business. It has the ability for company expansion that would not be possible
through bank loans or other methods.

Expertise joining the company: Venture capitalists provide valuable expertise, advice and
industry connections. These experts have deep knowledge of specific market standards and
they can help you avoid your business from many downsides that are usually associated with
startups.

Better Management: It’s not always that being an entrepreneur one is also a good business
manager. However, since Venture Capitalists hold a percentage of equity in the business.
They will have the power to say in the management of the business. So if one is not good at
managing the business, this is a significant benefit.

No Obligation to repay: In addition, there is an obligation to repay to investors as it would

be in case of banks loans. Rather, investors take the investment risk on their own shoulders
because they believe in the company’s future success.

Value Added Services: Venture Capitalists provide HR Consultants, who are specialist in
hiring the best staff for your business. This helps in avoiding to hire the wrong person. It also
offers a number of other such services such as mentoring, alliances and also facilitates the
exit.

Disadvantages of Venture Capital

Complex Process: It is a lengthy and complex process which needs a detailed business plan
and financial projections. Until and unless the Venture Capitalists are properly satisfied with
the business plan, whether or not it will succeed in the future, they won’t invest. So securing
a deal with a Venture Capitalist can be a long and complex process.
Loss of control: Venture Capital firms add one of their team members to your management
team, while this is usually done for ensuring the success of the business, it can also create
internal problems.

Loss over decisions: Another big problem faced in Venture Capital funding is that you will
have to give up many key decisions on how the company will process or operate. This is
because Venture Capitalist are required to be informed about all the key decision relating to
business plans, and they usually can override such decision if they are unsatisfied with the
decision.

No Confidentiality: Generally Venture Capitalist treat information confidentially. But they

refuse to sign non- disclosure agreement due to the legal ramification of doing so. This puts
the ideas at risk, especially when they are new. Further, your investor will expect regular
information and consultation to check how things are progressing. For example, accounts and
minutes of board meetings.

Quick Liquidity: Most Venture Capitalists seek to realize their investment in the company in
three to five years. If your business plan expects a longer timetable before providing liquidity,
then Venture Capital funding may not be a suitable option for you.

2. Regulatory Framework
The venture capital funds and venture capital companies in India were regulated by the
Guidelines issued by the Controller of Capital Issues, Government of India, in 1988. In 1995,
Securities and Exchange Board of India Act was amended which empowered SEBI to register
and regulate the Venture Capital Funds in India. Subsequently, in December, 1996 SEBI
issued its regulations in this regard. These regulation replaced the Government Guidelines
issued earlier. The SEBI guidelines, as amended in 2000, are as follows:

1) Definitions

A Venture Capital Fund has been defined to mean a fund established in the form of a trust or
a company including a body corporate and registered with SEBI which –

i) has a dedicated pool of capital, raised in the specified manner, and

ii) ii) invests in venture capital undertakings in accordance with these regulations.

A Venture Capital Fund may be set up either as a trust or as a company. The purpose of
raising funds should be to invest in Venture Capital Undertakings in the specified manner.

A Venture Capital Undertaking means a domestic company –

i) whose shares are not listed on a recognised stock exchange in India, and
ii) ii) which is engaged in the business for providing services, production or
manufacture of articles or things and does not include such activities or sectors
which have been included in the negative list by the Board.
The negative list of activities includes real estate, non-banking financial services, gold
financing, activities not permitted under Government’s Industrial Policy and any other
activity specified by the Board.

2) Registration of Venture Capital Funds

A venture capital fund may be set up either by a company or by a trust. SEBI is empowered
to grant a certification of registration to the fund on an application made to it. The applicant
company or trust must fulfil the following conditions:

i. The memorandum of association of the company must specify, as its main objective,
the carrying of the activity of a venture capital fund.
ii. It is prohibited by its memorandum of association and Articles of Association from
making an invitation to the public to subscribe to its securities.
iii. Its director, or principal officer or employee is not involved in any litigation
connected with the securities market.
iv. Its director, principal officer or employee has not been at any time convicted of an
offence involving moral turpitude or any economic offence.
v. The applicant is a fit and proper person.

In case an application has been made by a Trust, the instrument of Trust must be in Venture
Capital the form of a Deed and the same must have been duly registered under the Indian
Registration Act, 1908. It must also comply with the above-mentioned conditions (ii) to (v).
On receipt of the Certificate of Registration, it shall be binding on the venture capital fund to
abide by the provisions of SEBI Act and these Regulations. Venture Capital Fund shall not
carry on any other activity than that of a Venture Capital Fund.

3) Resources for Venture Capital Fund

A Venture Capital Fund may raise moneys from any investor – India, foreign or non Resident
Indian – by way of issue of units, povided the minimum amount accepted from an investor is
Rs. 5 lakh. This restriction does not apply to the employees, principal officer or directors of
the venture capital fund, or non-Resident Indians or persons or institutions of Indian Origin. It
is essential that the venture capital fund shall not issue any document or advertisement
inviting offers from the public for subscription to its securities/units.

Moreover, each scheme launched or fund set up by a venture capital fund shall have firm
commitment from the investors to contribute at least Rs. 5 crore before the start of its
operations.

4) Investment Restrictions

While making investments, the venture capital fund shall be subject to the following
conditions:

a. A Venture Capital Fund shall disclose the investment strategy at the time of
application for registration.
 b. A Venture Capital Fund shall not invest more than 25% of its corpus in one venture
capital undertaking.
c. It shall not invest in the associated companies.
d. It shall make investment in the venture capital undertakings as follows:
i) at least 75% of the investible funds shall be invested in unlisted equity shares or
equity-linked instruments (i.e., instruments convertible into equity shares or share
warrants, preference shares, debentures compulsorily convertible into equity),
ii) not more than 25% of the investible funds may be invested by way of a)
subscription to initial public offer of a venture capital undertaking whose shares
are proposed to be listed, subject to a lock in period of one year. b) debt or debt
instruments of a venture capital undertaking in which the venture capital fund has
already made investment by way of equity.
5) Prohibition on Listing

The securities or units issued by a venture capital fund shall not be entitled to be listed on any
recognised stock exchange till the expiry of 3 years from the date of issuance of such
securities or units.

6) Private Placement of Securities/Units

A venture capital fund may receive moneys for investment in the venture capital undertakings
only through private placement of its securities/units. For this purpose the venture capital
fund/company shall issue a placement memorandum which shall contain details of the terms
subject to which moneys are proposed to be raised. Alternatively, it shall enter into
contribution or subscription agreement with the investors, which shall specify the terms and
conditions for raising money. The venture capital fund shall also file with SEBI a copy of the
above memorandum/ agreement together with a report on money actually collected from the
investors.

7) Winding up of Venture Capital Fund Scheme

A Scheme of a Venture Capital Fund set up as a Trust shall be wound up, in any of the
following circumstances, namely:

i) when the period of the scheme, if any is over or

ii) if the trustees are of the opinion that the winding up shall be in the interest of the
investors, or
iii) 75% of the investors in the scheme pass a resolution for the winding up, or
iv) SEBI so directs in the interest of investors. A Venture Capital Company shall be
wound up in accordance with the provisions of the Companies Act.
8) Powers of the Securities and Exchange Board of India

SEBI has the following powers:

 a) to appoint inspecting/investigating officers to undertake inspection/investigation of
the books of accounts, records and documents of Venture Capital Fund.
b) to suspend the certificate granted to a Venture Capital Fund if it contravenes any
provisions of the SEBI Act or these guidelines or fails or defaults in submitting any
information as required by SEBI or submits false/misleading information, etc.
c) to cancel the certificate in the following cases:
i) Venture capital fund is guilty of fraud or has been convicted of an
offence involving moral turpitude.
ii) Venture capital fund has been guilty of repeated defaults
mentioned in (b) above.
iii) Venture capital fund contravenes any of the provisions of the Act
or the Regulations.

SEBI FOREIGN VENTURE CAPITAL INVESTORS REGULATIONS, 2000

Investments in Venture Capital Funds or Venture Capital Undertakings in India can also be
made by foreign venture capital investors, incorporated outside India. To regulate such
investors, SEBI issued the above mentioned Regulations in the year 2000. The salient
features of these regulations are as follows:

Registration

A foreign venture capital investor (FVCI) must be registered with SEBI after fulfilling the
following eligibility conditions and on payment of application fee of US $1000:

1. Its track record, professional competence, financial soundness, experience, reputation

of fairness and integrity.
2. RBI has granted approval of investing in India
3. It is an investment company, trust, partnership, pension or mutual or endowment fund,
charitable institution or any other entity incorporated outside India.
4. It is an asset/investment management company, investment manager or any other
investment vehicle incorporated outside India.
5. It is authorised to invest in Venture Capital Fund or to carry on activity as Venture
Capital Venture Capital Fund.
6. It is regulated by an appropriate foreign regulatory authority or is an income tax
payer. Otherwise, it submits a certificate from its bankers about its promoters’ track
record.
7. It is a fit and proper person. SEBI will grant the Certificate of Registration on receipt
of the registration fee of US $10,000 on the following conditions:
a. it would appoint a domestic custodian for the custody of securities.
b. to enter into an agreement with any bank to act as its banker for operating a
special non-resident rupee/foreign currency account.

Investment Criteria
FVCls must disclose their investment strategy to SEBI. They are permitted to invest their
total funds committed in one venture capital funds, but for investing in venture capital
undertakings they have to follow the norms as prescribed by SEBI domestic VCFs.

Powers of SEBI

SEBI has the following powers as regards FVCls:

i) Power to conduct inspection/investigation in respect of conduct and affairs of

FVCls.
ii) Power to issue directions in the interest of the capital market and investors.
iii) Power to suspend or cancel registration.
iv) Power to call for any information.

TAX EXEMPTIONS

Clause 23F was inserted in Section 10 of the Income Tax Act in the year 1995 to exempt
income by way of dividends or long term capital gains of a venture capital fund/company,
derived from investments in equity shares of venture capital undertakings, subject to
fulfilment of certain conditions. Since the financial year 2000-01 under clause 23FB the
entire income of venture capital funds has been granted exemption from taxation as these
incomes merely pass through the dividends to investors. Hence, from the assessment year
2001-02 any income of venture capital fund/company has been exempted. Such exemption’
continues even after the shares of venture capital undertaking are listed on a recognised stock
exchange. Income distributed by the venture capital funds will be taxed in the hands of the
investors at rates applicable to them. Services sector has also been included under the venture
capital functions.

INDIAN SCENARIO

The oldest form of venture capital in India goes back more than 150 years when many of the
managing agency houses (British businesses) acted as capitalists, providing both finance and
management skills to risky projects. After the abolition of the managing agency system, the
public sector term lending institutions met a part of venture capital requirements through seed
capital and risk capital for hi-tech industries, which were not able to meet funding
requirements through promoter contributions. However, all these institutions supported only
proven and sound technology businesses, while technology development remained confined
to government labs and academic institutions. Many hi-tech industries, thus, found it
impossible to obtain financial assistance from banks and other financial institutions due to
unproven technology, a conservative funding attitude and rigid security parameters. The
growth of the venture capital industry in India has followed a sequence of phases22:

• Pre-1985: The idea of venture capital financing was adopted at the instance of the central
government and government–sponsored institutions. The need for venture capital financing
was highlighted in 1972 by the Committee on Development of small and medium
entrepreneurs (Bhatt Committee). It drew attention to the problems of new entrepreneurs and
technologists in setting up industries. In 1975, venture capital financing was introduced in
India with the inauguration of the Risk Capital Foundation (RCF) sponsored by Industrial
Finance Corporation of India (IFCI), to supplement promoters’ equity with a view to
encourage technologists and professionals to promote new industries. In 1976, the seed
capital scheme was introduced by the Industrial Development Bank of India (IDBI). In 1984,
Industrial Credit and Investment Corporation of India (ICICI) decided to allocate funds for
providing assistance in the form of venture capital to economic activities involving both risk
and high profit potential. To popularize venture capital financing, the government announced
the creation of a Venture Capital Fund (VCF) to provide equity capital for pilot projects
attempting commercial applications of indigenous technology and for adapting previously
imported technology for wider domestic applications.

• 1986-1995: In 1986, ICICI launched a venture capital scheme to encourage new technocrats
in the private sector in the emerging fields of high-risk technology. In August 1986, ICICI
undertook the administration of the Programme for Advancement of Commercial Technology
(PACT). This was akin to venture capital financing for specific needs of the corporate sector
industrial units. IDBI started offering its venture capital fund scheme in March 1987. The
origin of modern venture capital in India can be traced to the setting up of a Technology
Development Fund (TDF) in the year 1987-88, through the levy of a cess on all technology
import payments. In 1990, Gujarat Venture Finance Limited (GVFL) began operations with
investments from the World Bank, the U.K. Commonwealth Development Fund, the Gujarat
Industrial Investment Corporation, Industrial Development Bank of India, various banks,
state corporations, and private firms. It was sufficiently successful and in 1995, launched its
second fund. Then, in 1997, it raised a third fund to target the information technology sector.
From the 1990 fund to the 1995 fund, there were fewer food and agriculture-related firms and
a greater emphasis on information technology. The 1997 fund invested exclusively in
information technology. This first stage had difficulties as management needed to develop
experience and there were handicaps such as regulations regarding which sectors were
eligible for investment, a deficient legal system, successive scandals in the capital markets,
economic recession, and general difficulties in operating in the Indian regulatory
environment.

• 1995–1999: The success of Indian entrepreneurs in Silicon Valley that began in the 1980s
became far more visible in the 1990s. This attracted the attention of venture capitalists both
from India and abroad. The amount of capital under management in India increased after
1995. Particularly important were venture capital funds raised from abroad during this period.
Very often, Non Resident Indians (NRIs) were important LPs in these funds. The
formalization of the Indian venture capital community began in 1993 with the establishment
of the Indian Venture Capital Association (IVCA). In 1999, ~80 % of the total venture capital
investments were derived from overseas firms. These foreign firms registered in Mauritius as
a strategy to avoid the onerous regulations and taxes imposed by the Indian government. In
1999, IVCA had 21 VC firms registered, and 8 of these were in the public sector.

• Nascency Phase (2000-2010): This phase is characterized by an activation of capital and

setting up of funds to leverage the start-up environment. VC funds started testing Indian
waters with liberalization showing some early results and Indian firms becoming more
successful in Silicon Valley

• Scale-up Phase (2011-2014): This phase is defined by aggressive VC competition due to

growth in the number of start-ups looking for funding. VCs in India focused on effecting a
larger number of deals and building an initial portfolio. The LP view on India macro-
economic fundamentals was strong

• Evolving Phase (2016 onwards): This phase is defined by VCs focusing on effecting select
deals. As early VC entrants like Sequoia, SAIF and Accel evolved, they started focusing on
larger deals and this trend is reflected in the broader market as well.

VENTURE CAPITAL AND COVID-19

Even in the face of global economic uncertainty, 2019 was the second-most active year
globally for venture capital (VC) investments in dollar value. It was a milestone year for the
Indian VC industry, too, with $10 billion in capital deployed, the highest ever and about 55%
higher than 2018. Additionally, India witnessed a 30% increase in deal volume over 2018 as
well as larger average deal sizes across all stages. Despite substantial capital deployment, dry
powder availability for VC investing in India was at an all-time high of $7 billion at the end
of 2019, indicating likely continued investment activity in 2020.

The Indian VC industry passed through three distinct phases over the past decade:

 Between 2011 and 2015, the industry experienced rapid activity growth (albeit off a
small base) to support an evolving start-up environment. During this phase, multiple
VCs entered and became active participants in India’s economy for the first time.

 This initial, almost euphoric, phase was then followed by moderation between 2015
and 2017. The lack of clarity regarding exits made investors more cautious, and that
shifted the focus to fewer and higher-quality investments.

 Over the past two years, however, the VC industry in India has been in a renewed
growth phase, buoyed by marquee exits for investors, such as Flipkart, MakeMyTrip
and Oyo; strong start-up activity in new sectors, such as fintech and software as a
service (SaaS); and market depth in e-commerce.

About 80% of VC investments in 2019 were concentrated in four sectors: consumer tech,
software/SaaS, fintech, and business-to-business commerce and tech. Consumer tech
continues to be the largest sector, accounting for approximately 35% of total investments,
with several scale deals exceeding $150 million. Within consumer tech, verticalized e-
commerce companies continued to be the largest subsegment, but in addition, there were
increased investments in healthcare tech, food tech and education tech. Both SaaS and fintech
attracted significant investor interest and activity throughout 2019, with several early-stage
and increasingly late-stage deals.
The start-up ecosystem in India remains robust and is rapidly growing. Between 2012 and
2019, the number of start-ups in India increased by 17% each year, while funded start-ups’
compound annual growth rate increased faster at 19% during the same period. Currently, of
almost 80,000 start-ups in India, only about 8% are funded, indicating room for investments.
India’s unicorn tribe also continues to grow, with several firms in e-commerce, SaaS and
fintech leading the way.

While India-focused VC funds raised approximately $2.1 billion in 2019, which was slightly
lower than 2018, the fund-raising outlook for 2020 is largely positive among both limited
partners and general partners. The dip from 2018 to 2019 was the result of marquee funds
that had already raised large sums and hence did not go to the market in 2019. Several new
funds also invested in India during 2019. Notable among them are Tanglin, founded by
former Tiger Global executives; A91 Partners, founded by former Sequoia partners; Arali
Ventures, an early-stage-focused fund; Samsung Ventures, launched by Samsung Corporate
Venture Capital; and ITI, an early-stage VC fund by Investment Trust of India.

Meanwhile, the Indian government introduced several regulatory programs to boost the
Indian start-up ecosystem. Flagship programs such as StartupIndia, Digital India and the
Alternative Investment Policy Advisory Committee continue to improve the economic
landscape for start-ups and investors. India’s ranking on the World Bank’s “ease of doing
business” index also increased significantly from 130 in 2016 to 63 in 2019, improving
investor confidence in the regulatory ecosystem.

India’s start-up and VC ecosystems continue to thrive as investors take a long-term view
based on the country’s growth potential. They see the current slowdown as more cyclical than
structural. We go into 2020 with record-high levels of dry powder, counterbalanced with
caution and an underlying optimism in the long-term potential for the ecosystem.

Way Forward- Venture Capital in India

It is being increasingly observed that irrespective of funding stage, Consumer Internet &
Ecommerce have emerged as the most preferred industry segment across start-ups. Other
popular industries Fintech, Logistics and Foodtech. What is encouraging is that in recent
years, the Indian startup ecosystem has really put up a splendid performance and come into
its own- driven by factors, like, substantial funding, consolidation activities, evolving
technology and a mushrooming domestic market. The prognosis speaks about this fact, i.e.
from 3,100 startups in 2014 to 11,500 by 2020.

The Indian Government’s Economic Survey Report of 2015 further highlights the emergence
of substantial number of start-ups in India and has ranked India as the 4 th biggest start-up
hub in the globe. In terms of investment, over USD 1 billion has been invested in the last 3
years in the start-up space alone. These investments are not restricted to the poster boys of the
Indian start-up ecosystem (Flipkart, Snapdeal and PayTM) but are widespread with global
conglomerates investing into diverse start-ups in India. As such, India continues to hold high
promise for the emergence of a start-up ecosystem.
On the contrary, the World Bank’s ‘Doing Business Report 2015’ report ranks India at 158th
on the yardsticks concerning the ease of commencing a business. Accordingly, whilst there is
adequate promise for India to develop as a start-up hub, the Indian start-up system is still
quite nascent, underdeveloped and functions within the locale of multiple regulators, tax
ambiguity and the realities of establishing / operating businesses in India.

A well-known instance would be the recent proposal to regulate Indian e-commerce entities
by nine different governmental ministries. Before we draw the curtains down, it will be of
immense academic and research value to discuss some noteworthy developments in the space
of venture capital by perusing the approaches of KB Chandrasekhar committee. The SEBI
Committee on venture capital was formed in July 1999 to identify the impediments and
suggest suitable measures to provide fillip to the growth of venture capital activity in India.
Also taking into account the need for a global perspective, it was decided to associate Indian
Entrepreneurs from Silicon Valley in the committee headed by KB Chandrasekhar. These
guidelines were further amended in April 2000 with the objective of stoking up the growth of
VC activities in India. The recommendations were as followsa) Multiplicity of regulations –
need for harmonization and nodal Regulator. b) Double taxation for Venture Capital Funds
need to be avoided c) Mobilization of Global and Domestic resources d) Flexibility in
Investment and Exit of Venture Capitalists e) Flexibility in the matter of investment ceiling
and sectoral restrictions f) Relaxation in IPO norms g) Issue of Shares with Differential Right
with regard to voting and dividend. h) Global integration and opportunities – Incentive for
employees; Incentive for shareholders and Global investment opportunity for Domestic
Venture Capital Funds (DVCF). i) Development in Infrastructure and R&D j) Self-
Regulatory Organization (SRO) It was envisioned that implementation of KB Chandrasekhar
Committee will usher in a renaissance in the sphere of venture capital in India. No doubt
noteworthy developments were observed but to a great extent, in the form of Reserve Bank of
India giving nod to the applications from foreign venture capital investors (FVCI). But at the
same it brought great astonishment for the venture capitalists, since the approval letters issued
by FVCIs issued to venture capital firms provided for a new clause that substantially curtailed
the investment horizons to ten investible sectors. These were- infrastructure, biotechnology,
information technology, nanotechnology, research in new chemical entities in the
pharmaceuticals sector, dairy and poultry industry, among others. Now the sectors prescribed
were similar to those provided under section 10 (23FB) of the Income Tax Act, 1961, for
availing tax pass-through treatment for domestic VC funds.

The objective of introducing the FVCI regime was to create a congenial investment milieu in
India in comparison with Foreign Direct Investment (FDI) as envisaged by the KB
Chandrasekhar Committee Report of January 2000. The report emphasized the importance of
sectoral flexibility for FVCIs and noted sectoral restrictions for investment by VC funds are
not consistent with the start-up ventures that are built on innovation and technology and can
emerge in any business. As discussed, contrary to the recommendations of the report of the
committee, the regulators did not shown much interest in providing stimulus to the venture
capital investments in several sectors, including manufacturing, media, outsourcing, among
others, many of which are still in a growth phase, have dearth of capital, and have high
employment generation capabilities.

Thus, it can be said that the impact of KB Chandrasekhar’s Committee recommendations

were partially adhered. However, looking at the current scenario of venture capital financing
it can be opined that the scenario is changing, especially, looking at the stupendous growth in
venture capital financing for start-ups, i.e. start-ups working on a marketplace model
basically ecommerce enticed the highest amount of funding given its capital intensive nature
of business at, $442 mn in first quarter of 2016. Further, in terms of number of Accel Partners
(5), Blume Ventures (5) and Saif Partners(5) were major VC funds, while, Ratan Tata (9)
took the position of most active angel investor, Mohandas Pai(9) and Traxn Labs invested in
over 7 startups. So there is a light at the end of the tunnel and the India is all set to wheedle
venture capital investments.

7. GOVERNMENT SECURITIES
Government securities are investment products issued by the both central and state
government of India in the form of bonds, treasury bills, or notes.
They are generally issued for the purpose of refunding maturity securities for advance
refunding of securities that have not yet matured and raising fresh cash resources.
However, they carry minimal risk and are called risk-free gilt-edged instruments. So let’s
look at the different types of government securities in India:

What are the Different Types of Government Securities in India?

There are several types of government securities offered by the Reserve Bank of India. Let’s
look at the given below:

 Treasury Bills

Treasury bills, also called T-bills, are short term government securities with a maturity period
of less than one year issued by the central government of India.
Treasury bills are short term instruments and issued three different types:
1) 91 days
2) 182 days
3) 364 days
Several financial instruments pay interest to you on your investment; treasury bills do not pay
interest because they are also called zero-coupon securities.
These securities do not pay any interest; instead, they are issued at a discount rate and
redeemed at face value on the date of the maturity.
For example a 91 day T-bill with a face value of Rs. 200 may be issued at Rs.196, with a
discount of RS. 4 and redeemed at face value of Rs. 200.
However, RBI performs weekly auctions to issue treasury bills.

 Cash Management Bills (CMBs)

Cash management bills are new securities introduced in the Indian financial market. The
government of India and the Reserve Bank of India introduced this security in the year 2010.
Cash management bills are similar to treasury bills because they are short term securities
issued when required.
However, one primary difference between both of these is its maturity period. CMBs are
issued for less than 91 days of a maturity period which makes these securities an ultra-short
investment option.
Generally, the government of India use these securities to fulfil temporary cash flow
requirements.

 Dated Government Securities

Dated Government securities are a unique type of securities because they either have fixed or
a floating rate of interest also called the coupon rate.
They are issued at face value at the time of issuance and remains constant till redemption.
Unlike treasury and cash management bills, government securities are recognized as long-
term market instruments because they provide a wide range of tenure starting from 5 years up
to 40 years.
The investors investing in dated government securities are called primary dealers. There are
nine different types of dated government securities issued by the Government of India given
below:
1) Capital Indexed Bonds
2) Special Securities
3) 75% Savings (Taxable) Bonds, 2018
4) Bonds with Call/Put Options
5) Floating Rate Bonds
6) Fixed Rate Bonds
7) Special Securities
8) Inflation Indexed Bonds
9) STRIPS

 State Development Loans

State development loans are dated government securities issued by the State government to
meet their budget requirements.
The issue is auctioned once every two weeks with the help of the Negotiated Dealing System.
SDL support the same repayment method and features a variety of investment tenures. But
when it comes to rates, SDL is a little higher compared to dated government securities.
The major difference between dated government securities and state development loans is
that G-Securities are issued by the central government while SDL is issued by the state
government of India.

 Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) are available based on five, 10 or 30 year term
periods. These securities deliver interest payments to all users every six months.
TIPS are similar to conventional treasury bonds, but it comes with one major difference. The
same principle is issued during the entire term of the bond in a standard treasury bond.
However, the par value of TIPS will increase gradually to match up with the Consumer Price
Index (CPI) to keep the bond’s principle on track with inflation.
If inflation increases during the year, there will be an increase in the security value during
that year. It means you will have a bond that maintains its value throughout life instead of a
bond that’s worthless after maturity.

 Zero-Coupon Bonds

Zero-coupon bonds are generally issued at a discount to face value and redeemed at par.
These bonds were issued on January 19th 1994.
The securities do not carry any coupon or interest rate as the tenure is fixed for the security.
In the end, the security is redeemed at face value on its maturity date.

 Capital Indexed Bonds

In these securities, the interest comes in a fixed percentage over the wholesale price index,
which offers investors an effective hedge against inflation.
The capital indexed bonds were floated on a tap basis on December 29th 1997.

 Floating Rate Bonds

Floating rate bonds does not come with a fixed coupon rate. They were first issued in
September 1995 as floating rate bonds are issued by the government.

Government Securities Market

The Government securities market is the principal segment of the Indian debt market. Its
importance lies in facilitating market borrowings by the Government, enabling the pricing of
other debt instruments of varying risk perceptions, and bringing about an effective and
reliable transmission channel for the use of indirect instruments of monetary policy. In fact,
the interest rates on Government securities act as a benchmark for pricing securities in the
rest of the financial markets. Thus, the information that is disseminated with respect to the
Government securities market is critical and watched on a real time basis by the rest of the
market participants.

The Government securities consist of both the Central and State Government securities. RBI
acts as the debt manager for the Centre and the States. As a debt manager, RBI is not only the
issuer but also procedurally maintains a record of ownership and the transactions that take
place in Government securities. RBI is also the regulator of the market for Government
securities.

Current Status of government securities market.

Data for the Government securities market are mainly generated, compiled and disseminated
by RBI. RBI also publishes all relevant data pertaining to the Government securities market
on a daily, weekly, monthly and annual basis.
The intended fresh borrowing programme of the Government is made public through the
Union Budget. The fresh borrowings are operationalised by RBI in consultation with the
Government. RBI releases data on market borrowings of the Central and State Governments,
secondary market transactions, its open market operations and Repurchase Agreement (repo)
transactions both through press releases and through its website on a daily basis. Data relating
to auction results are released through press releases and the RBI website on the date of the
auction itself. In addition, data relating to secondary market transactions, open market
operations, yield on Government securities, market borrowings of the Central and State
Governments, ownership of Central and State Government securities, maturity pattern of
Government of India Rupee loans, repo auctions by RBI, and interest rates on Central and
State Government dated securities are published in various publications of RBI such as
Weekly Statistical Supplement, Monthly Bulletin, Annual Report and the Handbook of
Statistics on Indian Economy. The data on guarantees by the Central and State Governments
are also collected individually from these Governments either through the budget or directly
from the Ministry of Finance of the respective Governments and published annually by RBI.

The RBI has embarked upon the technological upgradation of the debt market. The
operations of the Public Debt Office (PDO) are being automated to provide connectivity
between different PDOs, and to facilitate on-line screen-based execution for trade and
settlement in Government securities transactions. The computerisation of PDO (expected to
be operationalised within a year), will facilitate screen-based negotiated dealings in
Government securities, tendering of screen-based applications in auctions, full-fledged audit
trail, debt servicing, information dissemination, price list for open market operations, central
information system for access by monitoring and regulatory authorities, etc. The RBI is also
separately putting in place a real time gross settlement system (RTGS), which is scheduled to
be made operational within the same time frame. An offshoot of this would be that
information would be available to all market participants on a real-time basis.

The RBI manages the Public Debt and issues new loans on behalf of the Central and State
Governments under the powers derived from Sections 17, 20, 21, and 21A of the Reserve
Bank of India Act, 1934. The Government securities and their management by RBI are
governed by the Public Debt Act, 1944, the procedures prescribed for which are outdated and
some of the provisions of which have ceased to be of relevance in the present context. A new
legislation titled, the ‘Government Securities Act’ proposes to repeal and replace the Public
Debt Act. The new Act, which seeks to recognise the electronic mode of transfer of title of
Government securities, will facilitate pledging of securities without actual transfer and will
recognise depositories other than RBI for paperless transfer. The new Act will also give
flexibility to allow Government securities to be held in depositories while at the same time,
specifically excluding Government securities from the purview of Depositories Act, 1996.
Further, the RBI has been recently delegated the responsibility, by amending the Securities
Contracts (Regulation) Act, 1956, to regulate any contracts in Government securities, and in
securities derived from these securities and in relation to ready forward contracts in bonds,
debentures, debenture stock, securitised and other debt securities.

Deficiencies
First, while the data on market borrowings by the Central Government are disseminated
regularly on weekly basis through the Weekly Statistical Supplement, data on State
Government securities are not available on a regular basis during the year. Secondly, the data
on secondary market transactions, yield and turnover in Government securities are at present
accounted through the Subsidiary General Ledger (SGL), covering about 98 per cent of the
total transactions. However, detailed data on ownership pattern of Central and State
Government securities are not available. Earlier, detailed data were available on the
ownership pattern based on ad hoc surveys conducted by the RBI since 1958. The last such
survey was conducted by RBI for the period ended March 1990, and the results were
published in the RBI Bulletin, December 1994. Presently, data on the ownership pattern are
disseminated annually in terms of broad categories consisting of scheduled commercial
banks, LIC, Provident Funds, Central and State Governments. Thirdly, data on the maturity
profile of State Government loans are not released, though such data for the Central
Government loans are released annually. The maturity pattern of the Government of India
Rupee loans outstanding over the years, classified into various periods, is released annually.
However, no such data are available for the State Governments. Fourthly, scrip-wise details
for the Central and State Government loans are also not made available now. However, in the
case of Central and some State Governments, scrip-wise details are available in their
respective annual budgets. Finally, although not technically part of the Government securities
market, the most important data gap pertains to the absence of detailed information in relation
to instruments backed by guarantees of Central and State Governments.

Recommendations

It is observed that the data disseminated by RBI on the Government securities market
compares well with international standards. Significant improvements have been undertaken
in the recent past. Technological improvements underway provide further avenues for
improving the system. However, the Commission recommends that to further improve the
transparency in the operations of the Government securities markets, the following data
should be compiled and disseminated:

 Data on ownership pattern of Central and State Government securities are released on
an annual basis for a broad category of investors. However, no data on ownership
pattern are disseminated on a monthly and quarterly basis. Therefore, monthly and
quarterly data with wider coverage should be made available.
 The maturity profile of outstanding State Government loans are not released, though
such data, for the Central Government are released annually. Therefore, the
outstanding market loans of the Central and State Governments separately, scrip-wise,
as well as aggregate year-wise, should be released regularly on an annual basis.
 There are areas where dissemination of market borrowings of State Governments is
not at par with that for the Central Government. This gap needs to be bridged. First,
data on Central Government market borrowings, budgeted and actuals and gross and
net, are released regularly on a weekly, quarterly and annual basis. However, such
data are not available for State Governments. Hence, details of market borrowing
programmes of State Governments, allocations and actuals, auction and pre-
 announced coupons should be released regularly, preferably on a quarterly basis.
Secondly, data on maturity pattern of the Government of India Rupee loans
outstanding at the end of the year classified into different periods with a 5-yearly
interval are released on an annual basis. Data on maturity pattern, on a similar basis,
should be extended to include State Government loans. Further, residual maturity by
original coupon rates should also be published.
 The Government-guaranteed bonds are not treated as part of Government securities
but as an integral part of the corporate debt. However, in view of the sovereign
guarantee extended and the large magnitudes of such securities in the debt market,
they deserve to be separately identified as a category, and data collected and
disseminated. RBI should take up with the Central and State Governments and the
regulator for other securities to mount an information system for this purpose.

8. CREDIT RATING AGENCY

Credit Rating is a symbolic indication of the current opinion regarding the relative capability
of a corporate entity to service its debt obligations in time with reference to the instrument
being rated. It enables the investor to differentiate between debt instruments on the basis of
their underlying credit quality. To facilitate simple and easy understanding, credit rating is
expressed in alphabetical or alphanumerical symbols.

A rating is specific to a debt instrument and is intended to grade different such instruments in
terms of credit risk and ability of the company to service the debt obligations as per terms of
contract namely - principal as well as interest. A rating is neither a general purpose evaluation
of a corporate entity, nor an over all assessment of the credit risk likely to be involved in all
the debts contracted or to be contracted by such entity. Though credit rating is considered
more relevant for gradation of debt securities, it can be applied for other purposes also.

The various purposes for which credit rating is applied are:

Long-term/Medium-term debt obligations such as debentures, bonds, preference shares or

project finance debts are considered long-term and debts ranging from 1 to 3 years like fixed
deposits are considered medium-term;

Short-term debt obligations - the period involved is one year or less and cover money
market instruments such as commercial paper, credit notes, cash certificates etc.;

Equity Grading and Assessment, structured obligations, municipal bonds, mutual fund
schemes, plantation schemes, real estate projects, infrastructure related debts, ADR, GDR
issues, bank securities etc.

Credit rating does not bound the investor to decide whether to hold or sell an instrument as it
does not take into consideration factors such as market prices, personal risk preferences and
other consideration which may influence an investment decision. It does not create any
fiduciary relationship between the rating agency and the user of the rating. A credit rating
agency does not perform an audit but relies on information provided by the issuer and
collected by the analysts from different sources hence it does not guarantee the completeness
or accuracy of the information on which the rating is based.

In determining a rating, both qualitative and quantitative analysis are employed. The
judgement is qualitative in nature and the role of the quantitative analysis is to help make the
best possible overall qualitative judgement or opinion. The reliability of the rating depends on
the validity of the criteria and the quality of analysis.

The quality of credit rating mainly depends upon and quality of the rating agency, rating
elements also. The agency should have good reputation, personal competence, independence,
qualified and experienced staff.

Uses of Credit Rating

Credit rating is useful to investors, issuers, intermediaries and regulators.

For Investors: The main purpose of credit rating is to communicate to the investors the
relative ranking of the default loss probability for a given fixed income investment, in
comparison with other rated instruments. In a way it is essentially an information service. In
the absence of professional credit rating, the investor has to largely depend on his familiarity
with the names of promoters or collaborators of a company issuing debt instruments. This is
not a reliable method. Credit rating by skilled, competent and credible professionals
eliminates or at least minimizes the role of name recognition and replaces it with a well
researched and properly analysed opinions. This method provides a low cost supplement to
investors. Large investors use information provided by rating agencies such as upgrades and
downgrades and alter their portfolio mix by operating in the secondary market. Investors also
use the industry reports, corporate reports, seminars and open access provided by the credit
rating agencies.

For Issuers: The market places immense faith in opinion of credit rating agencies, hence the
issuers also depend on their critical analysis. This enables the issuers of highly rated
instruments to access the market even during adverse market conditions. Credit rating
provides a basis for determining the additional return (over and above a risk free return)
which investors must get in order to be compensated for the additional risk that they bear.
The difference in price leads to significant cost savings in the case of highly rated
instruments.

For Intermediaries: Rating is useful to Intermediaries such as merchant bankers for

planning, pricing, underwriting and placement of the issues. Intermediaries like brokers and
dealers in securities use rating as an input for monitoring risk exposures. Merchant bankers
also use credit rating for pre-packaging issues by way of asset securitisation/structured
obligations.

For Regulators: Regulatory authorities in different countries such as US, Australia and
Japan have specified rules that restrict entry to the market of new issues rated below a
particular grade, that stipulate different margin requirements for mortgage of rated and
unrated instruments, that prohibit institutional investors for purchasing or holding instruments
rated below a particular level and so on.

Important Issues in Credit Rating

Investments and Speculative Grades: Securities rated below ‗BBB‘ (S & P), ‗Baa‘
(Moody‘s) are called non-investment grade or speculative grade or junk bonds. Rating
agencies do not recommend or indicate the rating levels of instruments up to which one
should or should not invest.

Surveillance: The rating published by credit rating agencies is subjected to a continuous

surveillance during the life of the instrument or so long as any amount is outstanding against
the specific instrument. The frequency of surveillance may range between quarterly or yearly.
A formal and extensive written review is taken at least once in an year but where some
specific concern arises about the industry or the issuing entity, the review is taken up
immediately. Where justified the rating agency may change the rating by up gradation or
down gradation depending on the likely impact of changing circumstances on the debt
servicing capability of the issuer. In other cases, the rating is retained at the same level.

Credit Watch: When a major deviation from the expected trends of the issuers business
occurs, or when an event has taken place, it creates an impact on the debt servicing capability
of the issuer and warrants a rating change, the rating agency may put such ratings under
credit watch till the exact impact of such unanticipated development is analysed and decision
is taken regarding the rating change. The credit watch listing may also specify positive or
negative outlooks. It should be noted that being under credit watch does not necessarily mean
that there would be a rating change.

Ownership as a rating consideration: Ownership by a strong concern may enhance the

credit rating of an entity, unless there exists a strong barrier separating the activities of the
parent and the subsidiary. The important issues involved in deciding the relationship are - the
mutual dependence on each other, legal relationship, to what extent one entity has the desire
and ability to influence the business of the other, and how important is the operation of the
subsidiary to the owner.

Rating agency keeps the information provided by the issuer confidential and completes the
rating within 2 to 4 weeks. Once the rating is assigned, it is communicated to the issuer, who
is given an opportunity to make one request for a review, only in case fresh facts or
clarifications become relevant. After these are considered, the final rating is assigned. In
India, the issuer has the option of not accepting the assigned rate in which case the rating is
not disclosed by the rating agency. However, if the rating is accepted, it comes under the
surveillance process of the concerned agency.

Some of the Top Credit Rating Agencies in India are:

1. Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in
1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL
ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired
8.9% stake in CARE credit rating agency in 2017. It launched India's first index to
benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-
income market, in the rupee as well as dollar version in 2018. The company’s portfolio
includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL
coalition index and so on.

2. ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The
company was formerly known as Investment Information and Credit Rating Agency of India
Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and
several Indian financial and banking service organisations. The ICRA Group currently has
four subsidiaries - Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA
Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is
ICRA’s largest shareholder. ICRA’s product portfolio includes rating for - corporate debt,
financial rating, structured finance, infrastructure, insurance, mutual funds, project and public
finance, SME, market linked debentures and so on.

3. Credit Analysis and Research limited (CARE)

Launched in 1993, CARE offers credit rating services to areas such as corporate governance,
debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and
infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of
bank loan ratings, long-term and short-term debt instruments. The company also offers
ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies
(RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades
various courses of educational institutions. CARE Ratings has also ventured into valuation
services and offers valuation of equity, debt instruments, and market linked debentures.

Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’
by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC
Ratings has commenced operations and completed sovereign ratings of countries, including
India.

4. Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings
for bank loans, SMEs, corporate governance rating, municipal corporation, capital market
instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate
investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork
Ratings is recognised as external credit assessment agency (ECAI) by Reserve Bank of India
(RBI) to carry out credit ratings in India.

5. India Rating and Research Pvt. Ltd.

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for
insurance companies, banks, corporate issuers, project finance, financial institutions, finance
and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the
company is recognised by the Reserve Bank of India and National Housing Bank.

6. Small and Medium Enterprises Rating Agency of India (SMERA)

Established in 2005, SMERA is a joint initiative of SIDBI, Dun & Bradstreet India and
leading banks in India. SMERA has joined hands with prominent institutions such as IIT
Madras, The Bangladesh Rating Agency Limited, CAFRAL, CoinTribe, and SIES. Apart
from its shareholder banks, SMERA has also entered into MoUs with over 30 Banks,
Financial Institutions and Trade Associations of the country.

9. CONCEPT OF SHARE MARKET

A share market is where shares are either issued or traded in.

A stock market is similar to a share market. The key difference is that a stock market helps
you trade financial instruments like bonds, mutual funds, derivatives as well as shares of
companies. A share market only allows trading of shares. Click here to start your journey on
derivatives market.

The key factor is the stock exchange – the basic platform that provides the facilities used to
trade company stocks and other securities. A stock may be bought or sold only if it is listed
on an exchange. Thus, it is the meeting place of the stock buyers and sellers. India's premier
stock exchanges are the Bombay Stock Exchange and the National Stock Exchange.

TYPES OF SHARE MARKET

THERE ARE TWO KINDS OF SHARE MARKETS – PRIMARY AND SECOND

MARKETS.

Primary Market:

This where a company gets registered to issue a certain amount of shares and raise money.
This is also called getting listed in a stock exchange.

A company enters primary markets to raise capital. If the company is selling shares for the
first time, it is called an Read more factors to consider before investing in an IPO.

Secondary Market:

Once new securities have been sold in the primary market, these shares are traded in the
secondary market. This is to offer a chance for investors to exit an investment and sell the
shares. Secondary market transactions are referred to trades where one investor buys shares
from another investor at the prevailing market price or at whatever price the two parties agree
upon.
Normally, investors conduct such transactions using an intermediary such as a broker, who
facilitates the process. Different brokers offer different plans. 

Why is Share Market important?

Share market plays a vital role in aiding the companies to raise capital for expansion and
growth. Through IPOs, companies issue shares to the public and in turn receive funds that are
used for various purposes. The company gets listed on the stock exchange after IPO and this
provides an opportunity to even a common man to invest in the company. The visibility of
the company increases as well.

You can be a trader or investor in the share market. Traders hold stocks for a short period of
time whereas investors hold stocks for a longer duration. As per your financial needs, you can
choose the investment product.

The investors in the company can use this investment to fulfill their life goals. It’s one of the
major platforms for investment as it provides liquidity. For instance, you can buy or sell share
anytime based on the need. That is, financial assets can be converted to cash anytime. It
offers ample opportunities for wealth creation.

You know well that you can earn money by investing in shares. The following are the ways
through which your money grows.

1. Dividends

2. Capital Growth

3. Buyback

Dividends:

1. These are the profits the company earns and it is distributed as cash among the
shareholders.

2. It is distributed according to the number of shares you own.

Capital Growth:

Investment in equities/ shares leads to capital appreciation. The longer is the duration of
investment, the higher the returns. Investment in stocks is associated with risks as well. Your
risk appetite is based on your age, dependants and need. If you are young and don’t have any
dependants, you can invest more in equities to get more yield. But if you have dependants
and commitments, you can allocate more portion of money to bonds and less to equity.

Buyback:

The company buys back its share from the investors by paying a higher value than the market
value. It buys back shares when it has a huge cash pile or to consolidate its ownership.

HOW TO INVEST IN SHARE MARKET

First, you need to open a trading account and a demat account to invest in share market. This
trading and demat account will be linked to your savings account to facilitate smooth transfer
of money and shares. Note that demat and trading account are different, read more
about difference between demat and trading account.

We offer various trading tools to buy and sell shares that caters to our diversified set of
traders and investors :

Online trading: Want to take charge of your stock investing decisions? Our robust online
trading system will help invest in share market online with sheer ease and convenience. To
buy shares online, log in to your trading account using your User ID, Password and Security
Key/Access code.

KEAT PRO X: A jet speed online trading software to Invest in share market online in real
time

Kotak Stock Trader: Just tap and buy stocks on the go using our mobile trading app on your
smartphone.

Dealer assisted trading: Looking for some guidance to buy a stock? This is an assisted
trading service which will help you make an informed investment decision.

Call and Trade: Don’t have access to your laptop or computer. You can call us And invest in
the share market over the phone.

Fastlane: A light and fast Java based trading platform that makes share trading easy even on
slow and age old computers

Xtralite: An extra light and a superfast trading website that’s works best even if you have a
slow internet connection.

WHAT ARE THE FINANCIAL INSTRUMENTS TRADED IN A STOCK MARKET?

Below are the main four key financial instruments that are traded in Stock market:
1.Bonds
2.Shares
3.Derivatives
4. Mutual Fund

We cannot discuss stock market basics without addressing the key financial instruments that
are traded on it. There are four categories of financial instruments traded on the stock
exchange. They are shares, bonds, derivatives, and mutual funds. They are as follows:

1. Shares

A share is a unit denoting equity ownership in a corporation that exists as a financial asset
providing equitable distribution for any profits earned. Hence, when you buy shares, you buy
a stake in the company whose shares you have bought. This means that if the company
becomes profitable over time, shareholders are rewarded with dividends. Traders often
choose to sell shares at a price higher than which they purchased them.

2. Bonds

A company requires money so they can undertake projects. They pay their investors
dividends from the revenue earned on their projects. One way of raising the capital for
operations and other company procedures is via bonds. When a company chooses to borrow
money from a bank, they take a loan which they repay through periodic interest payments.
On a similar note, when a company opts to borrow funds from a variety of investors, this is
known as a bond, which is also paid off through timely interest payments. Take the following
example as an explanation of how bonds work.

Imagine that your goal is to start a project that will begin to earn money in two years’ time.
To undertake this project, you will require some initial amount to get you started. Suppose
you acquire the required funds in the form of a loan from a friend and write down the receipt
of the loan stating that you owe them ₹1 lakh which you will repay in five years with an
interest rate of 5% per annum. Suppose that your friend now holds this receipt. It means that
they have just purchased a bond by lending out money to your company. Since you have
promised to pay the principal amount at a 5% interest, you do so and finally extinguish your
principal repayment by the time the fifth year comes to a close.

3. Mutual Funds

One key financial instrument part of share market basics is mutual funds investing. Mutual
funds are investments that allow you to indirectly invest in the share market. You can find
mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name
a few. Mutual funds work by pooling money from all the investors that fund them. This
aggregate amount is then invested in financial instruments. Mutual funds are handled
professionally by a fund manager.

Each mutual fund scheme issues units that are of a certain value similar to a share. When you
invest in such funds, you become a unit-holder in that mutual fund scheme. When
instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder
receives that revenue reflected as the net asset value of the fund or in the form of dividend
payouts.

4. Derivatives

The market value of shares listed on a stock market continues to fluctuate. It is difficult to fix
the value of a share at one particular price. This is where derivatives enter the picture.
Derivatives are instruments that allow you to trade at a price that has been fixed by you
today. To put it simply, you enter into an agreement where you choose to either sell or buy a
share or any other instrument at a certain fixed price.
WHAT DOES THE SEBI DO?

Investing in the share market is risky. Hence, they need to be regulated to protect investors.
The Security and Exchange Board of India (SEBI) is mandated to oversee the secondary and
primary markets in India since 1988 when the Government of India established it as the
regulatory body of stock markets. Within a short period of time, SEBI became an
autonomous body through the SEBI Act of 1992.

In India the stock market regulator is called The Securities and Exchange board of India often
referred to as SEBI. The objective of SEBI is to promote the development of stock
exchanges, protect the interest of retail investors, regulate the activities of market participants
and financial intermediaries. In general SEBI ensures…

1.The stock exchanges (BSE and NSE) conducts its business fairly

2.Stock brokers and sub brokers conduct their business fairly

3.Participants don’t get involved in unfair practices

4.Corporate’s don’t use the markets to unduly benefit themselves (Example – Satyam
Computers)

5.Small retail investors interest are protected

6. Large investors with huge cash pile should not manipulate the markets

7.Overall development of markets

SEBI has the responsibility of both development and regulation of the market. It regularly
comes out with comprehensive regulatory measures aimed at ensuring that end investors
benefit from safe and transparent dealings in securities.

Its basic objectives are:

 Protecting the interests of investors in stocks

 Promoting the development of the stock market
 Regulating the stock market