INVESTMENT IMP

Module 3 – Sebi
SEBI or Securities and Exchange Board of India is a regulatory body which regulates the Indian stock
exchanges and financial markets.
Stock exchanges, stocks, mutual funds, bonds and almost every other financial product and player in
the Indian financial markets is regulated by SEBI. SEBI is a regulatory body under the Ministry of
Finance division of Government of India. It was established in the year 1988 with an aim to protect
the interest of the investors and also to develop the Indian capital markets to the latest standards by
regulating and enforcing the required rules and regulations.
The Securities and Exchange Board of India (SEBI) was constituted as a non-statutory
regulatory back in 1988. However, it was given autonomy as a statutory body only on 30
January 1993 when the Indian Parliament passed the Securities and Exchange Board of India
(SEBI). The SEBI replaced the Controller of Capital Issues.
The Controller of Capital Issues was in charge of handling the securities market in India until
the time the SEBI was constituted. It was being governed by the Capital Issues (Control) Act,
1947. This was one of the initial acts passed by the independent Indian Parliament.
Following are some of the objectives of the SEBI:

1. Investor Protection: This is one of the most important objectives of setting up SEBI. It
involves protecting the interests of investors by providing guidance and ensuring that the
investment done is safe.

2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange

3. To develop a code of conduct for the financial intermediaries such as underwriters,

brokers, etc.

4. To maintain a balance between statutory regulations and self regulation.

Functions of SEBI
SEBI has the following functions

1. Protective Function

2. Regulatory Function

3. Development Function

The following functions will be discussed in detail

Protective Function: The protective function implies the role that SEBI plays in protecting
the investor interest and also that of other financial participants. The protective function
includes the following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by
the insiders of a company, which includes the directors, employees and promoters. To prevent
such trading SEBI has barred the companies to purchase their own shares from the secondary
market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price
of securities by either increasing or decreasing the market price of the stocks that leads to
unexpected losses for the investors. SEBI maintains strict watch in order to prevent such
malpractices.

c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.

Regulatory Function: Regulatory functions involve establishment of rules and regulations

for the financial intermediaries along with corporates that helps in efficient management of
the market.

The following are some of the regulatory functions.

a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.

b. Regulating the process of taking over of a company.

c. Conducting inquiries and audit of stock exchanges.

d. Regulates the working of stock brokers, merchant brokers.

Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.

1. Training of intermediaries who are a part of the security market.

2. Introduction of trading through electronic means or through the internet by the help of
registered stock brokers.

3. By making the underwriting an optional system in order to reduce cost of issue.

Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilsation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.

It meets the needs of the following groups:

1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.

2. Investors: It provides protection and supply of accurate information that is maintained on a

regular basis.

3. Intermediaries: It provides a competitive market for the intermediaries by arranging for

proper infrastructure.

Advantages of SEBI
1. Short-term likelihood of increased returns
Compared to other investment options like PPF and fixed deposits, investing in the stock
market has the potential to produce higher inflation-beating returns in a shorter amount of
time. By sticking to the fundamentals of the stock market, such as planning the trade and
conducting due diligence, people can significantly increase their chances of securing superior
returns.
2. Purchased stock in the listed company and became a shareholder
Regardless of how few shares you purchase, you gain proportionate power over the
company's stakes the instant you do.
3. Unparalleled liquidity
Stock investing offers a level of liquidity that is practically unmatched compared to other
investment strategies. Of course, investors can quickly determine whether to buy or sell a
security. People can always sell their shares and get access to the cash if they need a quick
flush of liquidity.
4. A regulatory agency that protects the interests of the public
India's Securities and Exchange Board controls and oversees the stock market. The
responsibility of SEBI is to oversee all developments and protect the interests of all parties.
Again, this goes a long way toward protecting their interests in the face of any fraudulent
behaviour or business, for that matter.
Disadvantages of SEBI
1. Volatility risks are rising
Investment in equities entails its risks because of how volatile and dynamic markets are.
Within a single day, share prices frequently experience peaks and troughs. Although the odds
of a major failure are few, it can take years for the market to recover from the worst effects of
a crisis. These swings are frequently unpredictable and can, as a result, put assets at risk.
2. The profit margins can be eroded by the brokerage
An investor must pay the broker a set percentage of the purchase price or sale price of each
share they choose to buy or sell. Profitability could thus be put in danger.

Module 4- Types of depository receipts - IDR, ADR,

GDR
Depository receipts (DRs) are financial instruments that symbolize shares of a local
company; however, they are listed and traded on a stock exchange outside the
country of its origin/registration. DRs are issued in foreign currency.
To issue a DRs, a precise quantity of underlying equity shares of the company is
lodged with a custodian bank, which authorizes the issue of depository receipts
against these shares. Depository Receipt is a mechanism through which a
domestic company can raise finance from the international equity market. In
this system, the shares of the company domiciled in one country are held by the
depository i.e. Overseas Depository Bank, and issues claim against these shares.
Such claims are known as Depository Receipts that are denominated in the
convertible currency, mostly US$, but these can also be denominated in Euros.
Now, these receipts are listed on the stock exchanges.Each DR symbolizes a
certain number of underlying shares of the issuer company:

The Different Kinds Of DRs:

American Depository Receipts (ADRs)
When DRs are issued only in the U.S. and it has listed on a U.S. stock exchange
such as the New York stock exchange, it is termed American Depository Receipts
(ADRs)
Global Depository Receipts (GDRs)
When DRs are issued in several countries together and listed on a stock exchange
outside the U.S., say on London Stock Exchange, it is termed Global Depository
Receipts (GDRs)
American Depository Receipt (ADR), is a negotiable certificate, issued by a US
bank, denominated in US$ representing securities of a foreign company trading
in the United States stock market. The receipts are a claim against the number
of shares underlying. ADR’s are offered for sale to American investors. By way
of ADR, the US investors can invest in non-US companies. The dividend is paid
to the ADR holders, is in US dollars.
ADR’s are easily transferable, without any stamp duty. The transfer of ADR
automatically transfers the number of shares underlying.
Definition of GDR
GDR or Global Depository Receipt is a negotiable instrument used to tap the
financial markets of various countries with a single instrument. The receipts are
issued by the depository bank, in more than one country representing a fixed
number of shares in a foreign company. The holders of GDR can convert them
into shares by surrendering the receipts to the bank.
Prior approval of Ministry of Finance and FIPB (Foreign Investment Promotion
Board) is taken by the company planning for the issue of GDR.

H2:Indian Depository Receipts (IDRs)

· When DRs are issued in India and listed on an Indian StockExchange with
foreign stocks as underlying shares, it is termed as Indian Depository
 Receipts (IDRs)
· The shares of a company that forms the basis of an ADR/GDR/IDR issue
may be existing shares already issued by the company.
· These shareholders now give their shares at a grant price for conversion
into DRs.such a DR issue is termed as the sponsored issue.
· On the other hand, the company can issue new shares, which form the
underlying for the DR issue.
· The company, whose shares were traded as DRs, gains an open investor
base from the international markets.
· Investors in international markets earn to invest in shares of the company
that they may otherwise have been unqualified because of many
restrictions or administrative issues.
· Investors are able to invest in international stocks through domestic
exchanges with their existing brokers and local currency.
· Holding DRs give investors the right to dividends and capital appreciation
from the underlying shares, but they do not get voting rights.
· Conversely, the issue of voting rights for DR holders is under consideration
by SEBI at present.

The Steps In Issuing DRs Are The Following.

· The company has to observe the stock exchange's listing requirements
where they recommend getting the DRs listed.
· The company appoints a depository bank that holds the stock and issues
DRs against it.
· If it is a sponsored issue, the stocks from existing shareholders are
acquired and delivered to the local custodian of the depository bank.
Besides, the company issues fresh shares against which the DRs are
issued.
· Each DR symbolizes a certain number of underlying shares of the
company.
· DRs may trait two-way replaceable, subject to regulatory provisions of the
countries concerned.
· This means that the shares could be bought in the local market and
converted into DRs to be traded in the foreign market.
· Likewise, DRs can be bought and converted into the underlying shares
which are traded on the domestic stock exchange.
· Indian companies are allowed to raise foreign currency resources in the
form of the issue of ordinary equity shares through depository receipts.
Foreign companies were permitted to raise equity capital from India
through IDRs.
· SEBI has laid down the guiding principles that have to be followed by
companies for IDRs.
· These comprise the limit on the money raised by a company in India, one-
year lock-in on converting IDRs into shares, the availability of IDRs to
only residents.
Venture Capital
Venture capital (VC) is a form of private equity funding that is generally provided to
start-ups and companies at the nascent stage. VC is often offered to firms that show
significant growth potential and revenue creation, thus generating potential high
returns.

How Does Venture Capital Work?

Entities offering VC invest in a company until it attains a significant position and then
exits the same. In an ideal scenario, investors infuse capital in a company for 2 years
and earn returns on it for the next 5 years. Expected returns can be as high as 10x of
the invested capital.

Financial venture capital can be offered by –

• Venture capital firms,

 • Investment banks and other financial institutions,
• High net worth individuals (Angel investors), etc.
• Venture capital firms create venture capital funds – a pool of money collected
from other investors, companies, or funds. These firms also invest from their
own funds to show commitment to their clients.

•• Who are Venture Capitalists?

• Venture capitalists are those people who invest in early-stage companies having
promising futures. A venture capitalist can be a sole investor or a group of
investors who come together through investment firms.

Features of Venture Capital

Some of the features of venture capital are –

• Not for large-scale industries – VC is particularly offered to small and medium-

sized businesses.
• Invests in high risk/high return businesses – Companies that are eligible for VC
are usually those that offer high return but also present a high risk.
• Offered to commercialise ideas – Those opting for VC usually seek investment to
commercialise their idea of a product or a service.
• Disinvestment to increase capital – Venture capital firms or other investors may
disinvest in a company after it shows promising turnover. The disinvestment
may be undertaken to infuse more capital, not to generate profits.
• Long-term investment – VC is a long-term investment, where the returns can be
realised after 5 to 10 years.

Stages of VC:
The pre-seed stage
Before accessing VC capital, there is the pre-seed or bootstrapping stage. This is the
time you spend getting your operations off the ground, and when you begin to build
your product or service prototype to assess the viability of your idea. At this point it is
unlikely that VCs will provide funding in exchange for equity, so you need to depend
on your personal resources and contacts to launch your startup.
During the pre-seed stage, many entrepreneurs seek out guidance from founders who
have had similar experiences. With this advice you can begin developing a winning
business model and a plan for creating a viable company. This is also the time to
hammer out any partnership agreements, copyrights or other legal issues that are
central to your success. Later on, these issues could become insurmountable, and no
investor will provide funds to a startup with open legal questions.
The most common investors at this stage are:
▪ Startup founder
▪ Friends and family
▪ Early-stage funds (Micro VCs)

Frequent pre-seed stage funds are:

▪ Seedcamp
▪ K9 Ventures
▪ First Round

1. The seed stage

Your company now has a degree of experience and can demonstrate potential to
develop into a vibrant company. You now need a pitch deck to demonstrate to VCs
that your idea is a viable investment opportunity. Most of the modest sums you raise
in the seed stage are for specific activities like:
 ▪ Market research
▪ Business plan development
▪ Setting up a management team
▪ Product development
The goal is to secure enough funding now to prove to future investors you have the
capacity to grow and scale.
Often seed-stage VCs will participate in pitching additional investment rounds at the
same time to help you convey credibility. Someone from the venture capital firm
likely will take a seat on the board to monitor operations and ensure activity is done
according to plan.
Because VCs are assuming so much risk at this stage, this is possibly the most
expensive funding you can take in terms of equity you’ll need to give up to secure the
investment.
The most common investors at this stage are:
▪ Startup owner
▪ Friends and family
▪ Angel investors
▪ Early venture capital

Frequent seed stage funds are:

▪ Techstars
▪ 500 Startups
▪ Y Combinator
▪ AngelPad
▪ Speedinvest

2. The Series A stage

Series A typically is the first round of venture capital financing. At this stage, your
company has usually completed its business plan and has a pitch deck emphasizing
product-market fit. You are honing the product and establishing a customer base,
ramping up marketing and advertising, and you can demonstrate consistent revenue
flow.
You now need to:
▪ Fine tune your product or service
▪ Expand your workforce
▪ Conduct additional research needed to support your launch
▪ Raise the funds needed to execute your plan and attract additional investors
In the Series A round, you need to have a plan that will generate long-term profits.
Despite how many enthusiastic users you may have, you need to demonstrate how
you’ll monetize your product for the long run.
Most Series A funding comes from angel investors and traditional venture capital
firms. But family offices and corporate VC funds in your sector are available sources
for funding. These investors are interested in startups with a solid business strategy
and leaders with the chops to execute it – to reduce the risk of a failed investment on
their part.
The most common investors at this stage are:
▪ Accelerators
▪ Super angel investors
▪ Venture capitalists
▪ Corporate venture capital funds
▪ Family offices
Frequent Series A investors include:
▪ IDG Capital
▪ New Enterprise Associates
▪ Plug and Play
▪ SOSV

3. The Series B stage

Your company is now ready to scale. This stage of venture capital supports actual
product manufacturing, marketing and sales operations. To expand, you’ll likely need
a much larger capital investment than earlier ones. Series B funding differs from
Series A. Whereas Series A investors will measure your potential, for Series B they
want to see actual performance and evidence of a commercially viable product or
service to support future fundraising. Performance metrics give investors confidence
that you and your team can achieve success at a larger scale.
VCs, corporate VCs and family offices providing Series B funding specialize in
financing well-established startups. They’re providing the funds you need to expand
markets and form operational teams like marketing, sales and customer service. Series
B funding enables you to:
▪ Grow your operations
▪ Meet customer demands
▪ Expand to new markets
▪ Compete more successfully
The most common investors at this stage are:
▪ Venture capitalists
▪ Corporate venture capital funds
▪ Family offices
▪ Late stage venture capitalists
Frequent Series B investors include:
▪ Khosla Ventures
▪ GV
▪ NEA

4. The expansion stage (Series C and beyond)

When you reach the Series C funding stage, you’re on a growth path. You’ve achieved
success and incremental funding will help you build new products, reach new markets
and even acquire other startups. It typically requires 2-3 years to reach this phase on a
quick trajectory, and you’re producing exponential growth and consistent
profitability.
To receive Series C and subsequent funding, you must be well-established with a
strong customer base. You also need:
▪ Stable revenue stream
▪ History of growth
▪ Desire to expand globally
Investors are eager to participate at Series C and beyond because your proven success
means they shoulder less risk. Hedge funds, investment banks, private equity firms
and others beyond traditional VC firms are more eager to invest at this stage.
The most common investors at this stage are:
▪ Late-stage venture capitalists
▪ Private equity firms
▪ Hedge funds
▪ Banks
▪ Corporate venture capital funds
▪ Family offices
Frequent Series C investors include:
▪ Accel
▪ Sequoia Capital
▪ Founders Fund
▪ Lightspeed Venture Partners

5. The mezzanine stage

The final stage of venture capital marks your transition to a liquidity event, either an
exit via going public or M&A. You’ve reached maturity and now need financing to
support major events.
Entering the mezzanine stage — it’s often also called the bridge stage or pre-public
stage — means you are a full-fledged, viable business. Many of the investors who
have helped you reach this level of success will now likely choose to sell their shares
and earn a significant return on their investment.
With the original investors leaving, that opens the door for late-stage investors to
come in hoping to gain from an IPO or sale.

Going public — the IPO

An IPO or initial public offering is the natural progression of funding beyond
VCs. It’s the process of taking your private company public by offering corporate
shares on the open market. This can be a very effective way for a growing startup with
proven potential or a long-established company to generate funds and reward earlier
investors, including the founder and team.

To go public, you need to:

▪ Form an external public offering team of underwriters, lawyers, certified public
accountants and SEC experts
▪ Compile all your financial performance information and project future
operations
▪ Have your financial statements audited by a third party who’ll also generate an
opinion about the value of your public offering
▪ File your prospectus with the SEC and determine a specific date for going public
Going public benefits include:
▪ An effective way to raise significant capital
▪ Secondary offerings will enable you to generate additional funds, typically used
to pay off original investors and early leadership team
▪ Public stock can be more attractive as a part of executive compensation and as an
employee benefit
▪ Mergers are easier because you can use public shares to acquire another
company
All that said, you don’t have to go public. For example, one option is with a special
purpose acquisition company (SPAC). They have been around for decades, but in our
current market conditions they are a way to raise capital faster and with fewer hurdles
than a conventional IPO. You can remain private and continue to accept VC money to
scale. SPACs may also offer you more price certainty and provide a clearer idea of
who investors will be. This can help you weigh the value of short-term investors
looking for a quick return — through a conventional IPO — compared to investors
with a longer-term goal of helping you grow over time.

Advantages and Disadvantages of VC

Advantages –

• Help gain business expertise

One of the primary advantages of venture capital is that it helps new entrepreneurs
gather business expertise. Those supplying VC have significant experience to help the
owners in decision making, especially human resource and financial management.

• Business owners do not have to repay

Entrepreneurs or business owners are not obligated to repay the invested sum. Even if
the company fails, it will not be liable for repayment.

• Helps in making valuable connections

Owing to their expertise and network, VC providers can help build connections for the
business owners. This can be of immense help in terms of marketing and promotion.

• Helps to raise additional capital

VC investors seek to infuse more capital into a company for increasing its valuation.
To do that, they can bring in other investors at later stages. In some cases, the
additional rounds of funding in the future are reserved by the investing entity itself.
 • Aids in upgrading technology
VC can supply the necessary funding for small businesses to upgrade or integrate new
technology, which can assist them to remain competitive.

Disadvantages –

• Reduction of ownership stake

The primary disadvantage of VC is that entrepreneurs give up an ownership stake in
their business. Many a time, it may so happen that a company requires additional
funding that is higher than the initial estimates. In such situations, the owners may end
up losing their majority stake in the company, and with that, the power to make
decisions.

• Give rise to a conflict of interest

Investors not only hold a controlling stake in a start-up but also a chair among the
board members. As a result, conflict of interest may arise between the owners and
investors, which can hinder decision making.

• Receiving approval can be time-consuming

VC investors will have to conduct due diligence and assess the feasibility of a start-up
before going ahead with the investment. This process can be time-consuming as it
requires excessive market analysis and financial forecasting, which can delay the
funding.

• Availing VC can be challenging

Approaching a venture capital firm or investor can be challenging for those who have
no network.

In 2019, the total value of venture capital deployed throughout India was worth $10
billion. This is an increase of 55% compared to the previous year and is currently the
highest.

VC was introduced in the country back in 1988, after economic liberalisation. IFC,
ICICI, and IDBI were the few organisations that established venture capital funds and
targeted large corporations. The formalisation of the Indian VC market started only
after 1993.

MUTUAL FUNDS

A mutual fund is a financial vehicle that pools assets from shareholders 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
The value of the mutual fund depends on the performance of the securities in
which it invests. When buying a unit or share of a mutual fund, an investor is
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 their
holders any voting rights. A share of a mutual fund represents investments in
many different stocks or other securities.
Advantages of Mutual Funds
There are many reasons why investors choose to invest in mutual funds with
such frequency. Let's break down the details of a few.
Advanced Portfolio Management
When you buy a mutual fund, you pay a management fee as part of your
expense ratio, which is used to hire a professional portfolio manager who buys
and sells stocks, bonds, etc.1 This is a relatively small price to pay for getting
professional help in the management of an investment portfolio.
Dividend Reinvestment
As dividends and other interest income sources are declared for the fund, they
can be used to purchase additional shares in the mutual fund, therefore
helping your investment grow.
Risk Reduction (Safety)
Reduced portfolio risk is achieved through the use of diversification, as most
mutual funds will invest in anywhere from 50 to 200 different securities—
depending on the focus. Numerous stock index mutual funds own 1,000 or
more individual stock positions.
Convenience and Fair Pricing
Mutual funds are easy to buy and easy to understand. They typically have low
minimum investments and they are traded only once per day at the closing net
asset value (NAV).1 This eliminates price fluctuation throughout the day and
various arbitrage opportunities that day traders practice.
Disadvantages of Mutual Funds
However, there are also disadvantages to being an investor in mutual funds.
Here's a more detailed look at some of those concerns.
High Expense Ratios and Sales Charges
If you're not paying attention to mutual fund expense ratios and sales charges,
they can get out of hand. Be very cautious when investing in funds with
expense ratios higher than 1.50%, as they are considered to be on the higher
cost end. Be wary of 12b-1 advertising fees and sales charges in general.
There are several good fund companies out there that have no sales charges.
Fees reduce overall investment returns.1
Management Abuses
Churning, turnover, and window dressing may happen if your manager is
abusing their authority. This includes unnecessary trading, excessive
replacement, and selling the losers prior to quarter-end to fix the books.
Tax Inefficiency
Like it or not, investors do not have a choice when it comes to capital
gains payouts in mutual funds. Due to the turnover, redemptions, gains, and
losses in security holdings throughout the year, investors typically receive
distributions from the fund that are an uncontrollable tax event.1
Poor Trade Execution
If you place your mutual fund trade anytime before the cut-off time for same-
day NAV, you'll receive the same closing price NAV for your buy or sell on the
mutual fund.2 For investors looking for faster execution times, maybe because
of short investment horizons, day trading, or timing the market, mutual funds
provide a weak execution strategy.
Types of Mutual Funds:
The different types of mutual funds available can be classified broadly based on structure, asset
class, and investment goals. Going a step further, funds can also be categorized based on risk.

1. Structure of Mutual Funds

Based on the ease of investment, mutual funds can be:

• Open-ended funds:
These funds do not limit when or how many units can be purchased. Investors can enter or exit
throughout the year at the current net asset value. Open-ended funds are ideal for investors seeking
liquidity.

• Close-ended funds:
Close-ended funds have a pre-decided unit capital amount and also allow purchase only during a
specified period. Here, redemption is bound by the maturity date. However, to facilitate liquidity,
schemes trade on stock exchanges.

• Interval funds:
A cross between open-ended and close-ended funds, interval mutual funds permit transactions at
specific periods. Investors can choose to purchase or redeem their units when the trading window
opens up.

2. Mutual Fund Asset Class

Depending on the assets they invest in, mutual funds are categorized under:

• Equity funds:
Equity funds invest money in company shares, and their returns depend on how the stock market
performs. Though these funds can give high returns, they are also considered risky. They can be
categorized further based on their features, like Large-Cap Funds, Mid-Cap Funds, Small-Cap Funds,
Focused Funds, or ELSS, among others. Invest in equity funds if you have a long-term horizon and a
high-risk appetite.

• Debt funds:
Debt funds invest money into fixed-income securities such as corporate bonds, government
securities, and treasury bills. Debt funds can offer stability and a regular income with relatively
minimum risk. These schemes can be split further into categories based on duration, like low-duration
funds, liquid funds, overnight funds, credit risk funds, gilt funds, among others.

• Hybrid funds:
Hybrid funds invest in both debt and equity instruments so as to balance out debt and equity. The
ratio of investment can be fixed or varied, depending on the fund house. The broad types of hybrid
funds are balanced or aggressive funds. There are multi asset allocation funds which invest in at least
3 asset classes.

• Solution-oriented funds:
These mutual fund schemes are for specific goals like building funds for children’s education or
marriage, or for your own retirement. They come with a lock-in period of at least five years.

• Other funds:
Index funds invest based on certain stock indices and fund of funds are categorized under this head.

3. Mutual Funds based on Investment Goals

You can also choose a fund based on your financial objective:

• Growth funds:
Funds that invest primarily in high-performing stocks with the aim of capital appreciation are
considered growth funds. These funds can be an attractive option for investors seeking high returns
over a long period.

• Tax-saving Funds (ELSS):

Equity-linked saving schemes are mutual funds that invest mostly in company securities. However,
they qualify for tax deductions under Section 80C of the Income Tax Act. They have a minimum
investment horizon of three years.

• Liquidity-based funds:
Some funds can be categorized based on how liquid the investments are. Ultra-short-term and liquid
funds, are ideal for short-term goals, while schemes like retirement funds have longer lock-in periods.

• Capital protection funds:

These funds invest partially in fixed income instruments and the rest into equities. This could ensure
capital protection, i.e., minimal loss, if any. However, returns are taxable.

• Fixed-maturity funds (FMF):

These funds route money into debt market instruments, which have either the same or a similar
maturity period as the fund itself. For instance, a three-year FMF will invest in securities with a
maturity of three years or lower.

• Pension Funds:
Pension funds invest with the idea of providing regular returns after a long period of investment. They
are usually hybrid funds that give low but have potential to provide steady returns in future.

4. Risk appetite
Investors may also choose to invest in mutual funds depending on their individual risk appetite. Very-
low-risk and low-risk funds are usually short-term investments (liquid or ultra-liquid funds) that attempt
to hedge market risk. However, the returns they generate are also low.

Medium-risk funds, like hybrid funds, invest a portion in debt instruments to balance risk while high-
risk funds have large equity exposure. Usually, the higher the risk, more the possibility of high returns.

Every mutual fund must disclose its risk exposure via a risk-o-meter that investors can check to
decide if it lines up with their risk capacity.

Unit Trust
A unit trust is an unincorporated mutual fund structure that allows funds to
hold assets and provide profits that go straight to individual unit owners
instead of reinvesting them back into the fund. Mutual funds are investments
that are made up of pooled money from investors, which hold various
securities, such as bonds and equities. However, a unit trust differs from a
mutual fund in that a unit trust is established under a trust deed, and the
investor is effectively the beneficiary of the trust.
The underlying value of the assets in a unit trust portfolio is directly stated by
the number of units issued multiplied by the price per unit. It is also necessary
to subtract transaction fees, management fees, and any other associated
costs. Determining management goals and limitations depends on the goals
and objectives of the investment of the unit trust.
In unit trust investments, fund managers run the trust for gains and
profit. Trustees are assigned to ensure that the fund manager runs the trust
following the fund’s investment goals and objectives. A trustee is a person or
organization that's charged with managing assets on behalf of a third party.
Trustees are often fiduciaries, meaning the interests of the beneficiaries of the
trust must come first and as part of that responsibility, a trustee's job to
safeguard the assets of the trust.
Owners of unit trusts are called unit-holders, and they hold the rights to the
trust’s assets. Between the fund manager and other
important stakeholders are registrars, who simply act as middlemen or liaison
for both parties.
Functions:
Functions of UTI
• Mobilize the saving of the relatively small investors.
• Channelize these small savings into productive investments.
• Distribute the large scale economies among small income
groups.
• Encourage savings of lower and middle-class people.
• Sell nits to investors in different parts of the country.
• Convert the small savings into industrial finance.
• To give investors an opportunity to share the benefits and
fruits of industrialization in the country.
• Provide liquidity to units.
• Accept discount, purchase or sell bills of exchange, warehouse
receipt, documents of title to goods etc.,
• To grant loans and advances to investors.
• To provide merchant banking and investment advisory service
to investors.
• Provide leasing and hire purchase business.
 • To extend portfolio management service to persons residing in
other countries.
• To buy or sell or deal in foreign currency.
• Formulate a unit scheme or insurance plan in association with
GIC.
• Invest in any security floated by the RBI or foreign bank.

Advantages
1. You do not have to be an expert on investing
You do not need any expertise to invest in a unit trust. The trust organisation and/or
manager invests the trust’s funds in shares, bonds and other securities. The
organisation and/or manager is an investor specialist, who has the know-how for
investing smartly. All you need to do is provide the money.

2. Diversification
Diversification is a fancy way of saying that your money will be spread out across
multiple investments. This protects you from shock losses and increases your
chance for making profits. Sure, you may not hit-the-jackpot with one investment, but
diversifying almost guarantees gradual growth.

3. Limited Liability
Similarly to being a shareholder in a company, as a unit trust holder, you are not
liable for any trust mismanagement. You may lose money if the trust is mismanaged,
but that is all. All responsibility falls with the trust manager. The manager is in a
position of trust and has various duties to fulfil. He/she will be held personally
responsible for not acting in the unit holder’s best interests. This protects your
money from greedy and fraudulent behaviour.

Disadvantages
1. Fees
Not only will you pay for trust units, but you must also pay fees for running the trust.
These fees include:

• Trustee – the person or company running trust needs

compensation;
• Redemption Fee–You pay a percentage of your

investment when selling or claiming units;

• Initial Sales Charge– You pay a percentage of

investment when buying units.

2. Tax
If trust assets are sold at a loss that loss usually stays within the trust. You cannot
offset asset losses against other streams of taxable income. However, the trust may
be set up, so that the unitholders can take the asset losses.

MODULE 5 - NCLT:
National Company Law Tribunal is the outcome of the Eradi Committee. NCLT
was intended to be introduced in the Indian legal system in 2002 under the
framework of Companies Act, 1956 however, due to the litigation with respect
to the constitutional validity of NCLT which went for over 10 years, therefore, it
was notified under the Companies Act, 2013.
It is a quasi-judicial authority incorporated for dealing with corporate disputes
that are of civil nature arising under the Companies Act. However, a difference
could be witnessed in the powers and functions of NCLT under the previous
Companies Act and the 2013 Act. The constitutional validity of the NCLT and
specified allied provisions contained in the Act were re-challenged. Supreme
Court had preserved the constitutional validity of the NCLT, however, specific
provisions were rendered as a violation of the constitutional principles.

NCLT works on the lines of a normal Court of law in the country and is obliged
to fairly and without any biases determine the facts of each case and decide
with matters in accordance with principles of natural justice and in the
continuance of such decisions, offer conclusions from decisions in the form of
orders. The orders so formed by NCLT could assist in resolving a situation,
rectifying a wrong done by any corporate or levying penalties and costs and
might alter the rights, obligations, duties or privileges of the concerned parties.
The Tribunal isn’t required to adhere to the severe rules with respect to
appreciation of any evidence or procedural law.

Major Functions of NCLT

Registration of Companies
The new Companies Act, 2013 has enabled questioning the legitimacy of
companies because of specific procedural errors during incorporation and
registration. NCLT has been empowered in taking several steps, from
cancelling the registration of a company to dissolving any company. The
Tribunal could even render the liability or charge of members to unlimited.
With this approach, NCLT can de-register any company in specific situations
when the registration certificate has been obtained by wrongful manner or
illegal means under section 7(7) of the Companies Act, 2013.

Transfer of shares
NCLT is also empowered to hear grievances of rejection of companies in
transferring shares and securities and under section 58- 59 of the Act which
were at the outset were under the purview of the Company Law Board. Going
back to Companies Act, 1956 the solution available for rejection of
transmission or transfer were limited only to the shares and debentures of a
company but as of now the prospect has been raised under the Companies
Act, 2013 and the now covers all the securities which are issued by any
company.

Deposits
The Chapter V of the Act deals with deposits and was notified several times in
2014 and Company Law Board was the prime authority for taking up the
cases under said chapter. Now, such powers under the chapter V of the Act
have been vested with NCLT. The provisions with respect to the deposits
under the Companies Act, 2013 were notified prior to the inception of the
NCLT. Unhappy depositors now have a remedy of class actions suits for
seeking remedy for the omissions and acts on part of the company that
impacts their rights as depositors.
Power to investigate
As per the provision of the Companies Act, 2013 investigation about the
affairs of the company could be ordered with the help of an application of 100
members whereas previously the application of 200 members was needed for
the same. Moreover, if a person who isn’t related to a company and is able to
persuade NCLT about the presence of conditions for ordering an investigation
then NCLT has the power for ordering an investigation. An investigation which
is ordered by the NCLT could be conducted within India or anywhere in the
world. The provisions are drafted for offering and seeking help from the courts
and investigation agencies and of foreign countries.

Freezing assets of a company

The NCLT isn’t just empowered to freezing the assets of a company for using
them at a later stage when such company comes under investigation or
scrutiny, such investigation could also be ordered on the request of others in
specific conditions.

Converting a public limited company into a

private limited company
Sections 13-18 of the Companies Act, 2013 read with rules control the
conversion of a Public limited company into the Private limited company, such
conversion needs an erstwhile confirmation from the NCLT. NCLT has the
power under section 459 of the Act, for imposing specific conditions or
restrictions and might subject granting approvals to such conditions.

NCLT and NCALT: Distinction between them!

There are a few difference between NCLT and NCLAT. Here they are:

1. Provisions of Companies Act, 2013:

NCLT was constituted pursuant to Section 408 of Companies Act, 2013 whereas NCLAT was
constituted as per Section 410 of Companies Act, 2013.
• Benches:
NCLT has 16 Benches across India where NCLAT has only 2 benches in India, one principal bench at
New Delhi and other in Chennai.
• Jurisdiction:
NCLT has Original Jurisdiction whereas NCLAT has Appellate Jurisdiction.
• Cases handled:
NCLT does not deal in cases involving Competition Law or appeals from the National Financial
Reporting Authority (“NFRA”). NCLAT is designated as appellate forum for orders passed by NFRA
and Competition Commission of India as per powers granted to it under Companies Act, 2013.
NCLAT has replaced the Competition Appellate Tribunal.
The above briefly explains the formation, functions, jurisdiction and working of the NCLT and
NCLAT. These two quasi-judicial bodies have been doing their bit to get speedy redressal for
corporate disputes which would otherwise have had not been possible before. It would be great to see
if such separate regulatory bodies are able to deliver quick response to corporates which will foster
investors’ confidence and create an ecosystem where justice will be delivered adequately and, in a
time, bound manner.
Structure:
SCRA-
The Securities Contracts (Regulation) Act,1956, that is, the SCRA, 1956 is one of
the very important pieces of legislation which governs the affairs related to the
stock market in India. The Stock market is the platform of security trading or
transactions. For the economic development of the nation, the role played by the
Stock market is indispensable. The Stock market helps in the mobilization of the
funds from the small savings of the investors and channelizes such resources
into different developmental needs of various sectors of the economy.
This definition of securities is utilised for all purposes of the Securities and Exchange Board
of India (SEBI) Act, and several rules and regulations set out as per the SEBI Act. The
Companies Act defines securities to carry the same meaning as defined under the SCRA, and
it includes hybrids as well.
Hybrids are securities that have the characteristics of more than one security, including
derivates. A major example of hybrids can be convertible debentures. These have the
characteristics of both stocks and debentures.
The SCRA includes shares, stocks, bonds, scrips, debentures, debenture stocks, or any other
marketable security of a listed company.
owers granted by the SCRA
Powers granted to the Central Government by the SCRA:

1. Granting recognition to stock exchanges

2. Withdrawing recognition given to stock exchanges
3. Power to call for periodical returns and conducting
direct inquiries
4. Power to require the furnishing of annual reports of
recognised stock exchanges
5. Power to make rules and to direct rules to be made
6. Power to supersede governing body of a recognised
stock exchange
7. Power to suspend the business of recognised stock
exchanges
8. Power to notify contract as illegal in certain
circumstances in notified areas
9. Power to prohibit contracts in certain cases
10. Power to license dealers in securities in certain areas
11. Power to grant immunity
12. Power to delegate its powers to the Securities and
Exchange Board of India and the Reserve Bank of
India
13. Power to make rules
14. Power to vary or set aside the decision of refusal to
list securities made by the recognised stock exchange
on appeal
15. Power to grant or refuse listing of securities in appeal
Powers granted to the Securities and Exchange Board of India (SEBI) by the SCRA:

1. Power to approve the transfer of duties and functions

 of a clearing house to a clearing corporation
2. Power to approve the making of bye-laws by
recognised stock exchanges for the regulation and
control of contracts
3. Power to make or amend bye-laws of recognised stock
exchanges
4. Power to issue directions to stock exchanges, clearing
corporations, agencies, persons or classes of persons
associated with the securities market
5. Power to issue directions to companies whose
securities are listed or proposed to be listed in a
recognised stock exchange
6. Power to approve the establishment of additional
trading floor in recognised stock exchanges
7. Power to appoint adjudicating officers
8. Power to make regulations
Powers granted to the Securities Appellate Tribunal by the SCRA:

1. Power to summon and enforce the attendance of any

person and examine him on oath
2. Power to require the discovery and production of
documents
3. Power to receive evidence on affidavits
4. Power to issue commissions for the examination of
witnesses or documents
5. Power to review its decisions
6. Power to dismiss application for default or deciding it
ex- parte
7. Power to set aside any order of dismissal of any
application for default or any order passed by it ex-
parte
8. Power to vary or set aside decision of refusal to list
securities made by the recognised stock exchange on
appeal
9. Power to grant or refuse listing of securities in appeal
10. Power to exercise any other prescribed matter