FINANCIAL INSTITUTIONS & MARKETS – BMS VI SEM

DR. ANIRUDDH SAHAI

PH.D. (FINANCE)
SYLLABUS - UNIT I

 Indian Financial System and major Institutions:

 Structure of Indian Financial System: An overview of the Indian financial system, major reforms in the last decade: Payment
banks, GST, monetary policy, Insolvency and Bankruptcy code; issues in financial reforms and restructuring; future agenda of
reforms;
 Regulatory Institutions in India:
 RBI,SEBI,IRDA,PFRDA, Corporate Governance and SEBI, Role of central bank and commercial banks, Commercial Banking :
Role of Banks, NPA, Risk Management in Banks, Basel Norms, Products offered by Banks and FIs: Retail banking and
corporate banking products. Universal Banking: need and importance, trends and RBI guidelines, Core banking solution
(CBS); RTGS and internet banking, CAMELS rating system, Basel Norms, MCLR based lending NBFCs and its types;
comparison between Banks and NBFCs.
SYLLABUS (CONTD.) - UNIT II

 Financial Markets in India:

 Introduction to Financial Markets in India: Role and Importance of Financial Markets, Types of Financial Markets: Money
Market; Capital Market; Factors affecting Financial Markets, Linkages Between Economy and Financial Markets, Integration
of Indian Financial Markets with Global Financial Markets, Mutual Fund: types of Mutual Funds and different types of
schemes, concept of NAV, Credit Rating Agencies : Role and mechanism, Merchant Bank: role and types, Venture Capital
Funds concept, stages of investment , exit options; Private Equity. Foreign Exchange Market: Foreign Exchange Market
(Introductory, only Conceptual) Foreign Capital – FDI & FII
SYLLABUS (CONTD.) - UNIT III

 Capital Market in India:

 Introduction to Stock Markets, Regional and Modern Stock Exchanges, International Stock Exchanges, Demutualization of
exchanges, Comparison between NSE and BSE, Primary and Secondary market, Raising of funds in International Markets:
ADRs and GDRs, FCCB and Euro Issues; Indian Stock Indices and their construction, maintenance, adjustment for corporate
actions (rights, bonus and stock split;) on index with numerical, Classification of Securities to be included in the Index, Bulls
and Bears in Stock Markets, Factors influencing the movement of stock markets, indicators of maturity of stock markets,
Major Instruments traded in stock markets: Equity Shares, Debentures, Myths attached to Investing in Stock Markets.
Trading of securities on a stock exchange; Selection of broker, capital and margin requirements of a broker, MTM and VAR
Margins (with numerical), kinds of brokers, opening of an account to trade in securities, DEMAT System, placing an order for
purchase/sale of shares, margin trading and margin adjustment, contract note and settlement of contracts, Algorithmic
trading, Settlement mechanism at BSE & NSE. Corporate Listings: Listing and Delisting of Corporate Stocks Commodity
Markets – Structure, Operations and trends
SYLLABUS (CONTD.) - UNIT IV

 Money Markets & Debt Markets in India:

 Money Market: Meaning, role and participants in money markets, Segments of money markets, Call Money Markets, Repos
and reverse Repo concepts, Treasury Bill Markets, Market for Commercial Paper, Commercial Bills and Certificate of Deposit.
 Debt Market: Introduction and meaning, Primary Market for Corporate Securities in India: Issue of Corporate Securities,
Market for Government/Debt Securities in India, Secondary market for government/debt securities, Over subscription and
devolvement of Government Securities, Government securities issued by State Governments, Municipal Bonds, Corporate
Bonds vs. Government Bonds.
TEXTBOOKS

 Bhole L.M. and Mahakud J., Financial Institutions and Markets: Structure, Growth and Innovations (6th Edition).
McGraw Hill Education, Chennai, India
 Saunders, Anthony & Cornett, Marcia Millon (2007). Financial Markets and Institutions (3rd Ed.). Tata McGraw Hill
 Pathak, Bharati V., Indian Financial System: Markets, Institutions and Services, Pearson education, New Delhi,
Second edition, 2008.
REFERENCES

 Unit 1
 Pathak, B. Indian Financial System (4th ed). Pearson Publication [Chapter 1, 13, 16, 24]
 Goods and Services Tax: http://www.gstcouncil.gov.in/about-gst Insolvency & Bankruptcy Code:
http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
 RBI Guidelines on Payment Banks, Monetary Policy Committee, Universal Banking, CAMELS rating system and MCLR based lending.
 Unit 2
 Khan, M.Y. Financial Services (8th ed). Mc Graw Hill Education [Chapter 7,9,14]
 Pathak, B. Indian Financial System (4th ed). Pearson Publication [Chapter 15,17,19]
 Saunders, A. & Cornett, M.M. on Financial Markets and Institutions (3rd Ed.). Tata McGraw Hill [chapter 8]
 Unit 4
 Pathak, B. Indian Financial System (4th ed). Pearson Publication [Chapter 10]
 Saunders, A. & Cornett, M.M. Financial Markets and Institutions (3rd Ed). Tata McGraw Hill. [chapter 5,6]
REFERENCES (CONTD.)

 Unit 3
 Pathak, B. on Indian Financial System (4th ed.) Pearson Publication [Chapter 6,8]
 Saunders, A. & Cornett, M. M. Financial Markets and Institutions (3rd Ed.). Tata McGraw Hill [chapter 9]
 Bombay Stock Exchange website on Adjustment for Corporate Actions :
https://www.bseindia.com/markets/MarketInfo/DispNoticesNCirculars.aspx?noticeno=20190325-45
 Bombay Stock Exchange website on Compulsory Rolling Settlement:
https://www.bseindia.com/static/markets/equity/EQReports/tra_Settlement.aspx
 National Stock Exchange and Bombay Stock Exchange website. FAQs on margins as applicable for transactions on Cash and Derivatives
segments: https://www.nseindia.com/content/assist/asst_Margins_faq.pdf
 National Stock Exchange website on listing of Securities: https://www.nseindia.com/corporates/content/eligibility_criteria.htm
 NIFM, Department of Economic Affairs on A Study on Algorithmic Trading/High Frequency Trading in the Indian Capital Market
https://dea.gov.in/sites/default/files/NIFM%20Report%20on%20Algo%20trading.pdf [Page 1-13]
 SEBI guidelines. Delisting of securities: https://www.sebi.gov.in/legal/regulations/jun-2009/sebi-delisting-of-equity-shares-regulations-2009-
last-amended-on-november-14-2018-_34625.html
UNIT 1
WHAT IS FINANCIAL SYSTEM? WHAT ARE ITS COMPONENTS?

 An institutional framework existing in a country to enable financial transactions between savers, investors, lenders
& borrowers
 Role: To channelize funds from those who have extra resources (surplus units) to those who require more
resources (deficit units) for productive purposes
 Main components:
 Financial assets/ instruments/ securities
 Financial institutions
 Financial markets
 Financial services
 Regulation is another important aspect of the financial system
FINANCIAL SYSTEM & ECONOMIC DEVELOPMENT

 Economic development of country depends on a well organized financial system

 Financial inputs can be provided for the production of goods & services to improve the standard of living
& well-being of the nation
 Financial system is crucial for capital formation since it converts savings into productive investments
 Banking services as an example: A person deposits his savings in a bank. The same bank uses these deposits to
provide a loan to another person to invest in a new business. Once his business is functional, he sells his
products in exchange for money, and pays salaries to his employees, who further pay taxes to the government
and spend some amount out of the disposable income. The government uses the taxes for other investments
that will benefit the economy – like construction of roads. This also becomes an employment opportunity for
many others, who will again deposit some money with the bank. This is the circular flow of income in
economy that shows the relevance of the financial system for economic development. There is a significant
interdependence between the two.
FIVE COMPONENTS OF FINANCIAL SYSTEM

 Financial assets/ instruments/ securities (loans, deposits, bonds, equities, etc.)

 Financial markets (money market, capital market, forex market, etc.)
 Financial institutions (banks, Asset Management Companies, insurance companies, etc.)
 Financial services (banking service, insurance services, stock broking services etc.)
 Regulation is another aspect of the financial system (RBI, SEBI, IRDA etc.)
1. FINANCIAL ASSETS/ INSTRUMENTS

 Households with surplus funds buy financial assets in order to earn returns. On the other hand, businesses and
government use these funds for expansion & development.
 There are instruments for savers such as deposits, equities, mutual fund units, etc.
 There are instruments for borrowers such as loans, overdrafts, etc.
 Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc.
 Instruments like PPF, NSC, KVP etc. are available to savers who wish to lend money to the government.
2. FINANCIAL SERVICES

 Banking services – issue checkbook, issue ATM card, debit card, or credit card.
 Insurance services – Settlement of claims, collection of monthly or annual premium.
 Stock broking services – Opening up demat & trading accounts, Conversion of physical shares to electronic share
certificates (dematerialization).
3. FINANCIAL MARKETS

 Marketplace where financial instruments are traded.

 Eg. Stocks & stock market, Debenture or bonds in debt markets.
 Two parties : lender & borrower, buyer & seller.
 Direct Finance. Eg. Buyers & sellers directly meet in the stock exchange. Borrowers & lenders directly meet either in
primary or secondary debt markets.
 No need for financial intermediaries.
 Structure:
 Debt Market vs Equity Market
 Primary Market vs Secondary Market
 Exchange vs Over The Counter (OTC)
 Money Market vs Capital Market
4. FINANCIAL INSTITUTIONS

 Bodies that provide customers with financial products & services that cannot be obtained efficiently through
direct transactions in the securities markets.
 Products - deposits, loans, investments & currency exchange.
 Firms that collect funds from lenders & channelize them to borrowers
 Some financial intermediaries (Indirect Finance) – includes commercial banks, brokerage houses, etc. - match
sellers and buyers indirectly through financial asset transformation, primary source of funding for businesses. Eg.
SBI, HDFC, ICICI.
 Indirect finance. Agent that connects buyers & sellers (may be individual or institution);
TYPES OF FINANCIAL INSTITUTIONS

 Categories:
 Central Banks – RBI, Federal Reserve – Manage other banks and set the monetary policy.
 Depository: Retail Banks – Provide products & services to individual users such as loans, savings & deposits etc.
 Depository: Commercial Banks – Work directly with small, medium and large businesses.
 Depository: Credit Union – similar to commercial bank but smaller and help members.
 Non Depository: Investment banks – Work in capital markets and help clients (large corporations & institutional investors) buy & sell
securities. Assist in IPOs, provide advice, sales assistance & underwriting of securities. Eg. Morgan Stanley, Goldman Sachs, Lehman Brothers.
 Non depository: Insurance Companies – protection against future uncertainties, get premium.
 Non depository: Brokerage Firms – help in buying & selling securities, get commission.
 Non depository: Mutual Fund AMC
 Non depository: Credit Card Company
 Non depository: Mortgage Company
FUNCTIONS OF FINANCIAL INTERMEDIARIES

 Lower transaction costs due to economies of scale & liquidity services.

 Reduce risk due to diversification of assets.
 Reduce Asymmetric Information by screening, monitoring & rating of borrowers.
 Management of payments & other services.
 Increase market efficiency.
5. FINANCIAL REGULATORS

 Why regulate financial system?

 Necessity of regulatory framework for the financial system has been universally felt,
 Primarily, to safeguard the interests of a large number of savers/ depositors and
 Secondly, to ensure proper and efficient functioning of the institutions that are part and parcel of the financial system.
 For efficient functioning of the markets, reduce asymmetric information.
 To impart proper knowledge & awareness to investors.

 Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory & Development
Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA)
INDIAN FINANCIAL SYSTEM - WEAKNESSES

 Role of unorganized sector – unregulated and no records

 Failure to mobilize savings – real estate and gold
 Inefficiencies of capital markets – companies are hesitant and depend on financial institutions’ loans
 Dominance of large financial institutions – protective policies of government
 High rates of interest – businesses take less loans
 Ever increasing NPAs – especially in public sector banks
 Performance of cooperative banks – political interference and scams
 Performance of public sector institutions – less efficient than private sector
RESERVE BANK OF INDIA (RBI)
FUNCTIONS OF RBI:

1. Issue of currency notes

 To ensure adequate supply of money
 Issuing new currency and destroying old notes & coins
 Keeping gold & foreign reserves against the currency issued
2. Banker to the government
 To perform banking functions for the central & state governments and also act as their banker
3. Banker to the banks
 To maintain banking accounts for all scheduled banks
 Regulates opening and installation of ATMs
 Regulate opening of branches for banks
FUNCTIONS OF RBI:

4. Monetary regulation & management

 To maintain monetary stability by ensuring adequate credit in the economy
 Formulate monetary policy
5. Banks supervision
 Licensing of banks
 Audit
 Inspection of banks
 Issuing guidelines & directives for the banks
6. Exchange management & control
 Promote development & maintenance of foreign exchange market
 Maintaining exchange rates with currencies like dollar, pound, euro, yen
 Managing Foreign Exchange Management Act, 1999
SECURITIES & EXCHANGE BOARD OF INDIA (SEBI)
INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA)
PENSION FUND REGULATORY DEVELOPMENT AUTHORITY (PFRDA)

 Established in 2003 but non-statutory body

 PFRDA Act came in 2013, became statutory body
 Regulates National Pension System (NPS)
PENSION

 Continuous cash flow/ monthly incomes after retirement

 Deposit money monthly/ annually in a pension scheme during the working age
 Power of Compounding
Commutation of Pension : Accumulated Balance - withdraw whole
amount
NPS does not allow commutation of Pension
FINANCIAL INSTITUTIONS

 A financial institution (FI) is an entity engaged in financial & monetary transactions such as deposits,
loans, investments, and currency exchange. Financial institutions can provide a broad range of business services
within the financial sector including banking, mutual funds, insurance, pension funds, brokerage firms, and
investment dealing. Virtually everyone has an ongoing or at least periodic need for the services of financial
institutions.
 DEPOSITORY INSTITUTION

• Institutions that collect money from people and pay interest. Deposits are the major source of funds
for depository institutions. You can deposit your cash and withdraw it anytime. They also pay
interest on the deposits and give out loans at higher interest rates. Examples are:
• Commercial banks,
• Thrift Institutions (institutions that are owned & used by the same members, more community
focused, offer higher interest on savings and charge lower fees)
❑ Credit unions (a not-for-profit financial institution that is owned and used by its members – eg.
self help groups & cooperative societies in India),
❑ Savings Institutions (banks & loan institutions serving a local community are called savings
institutions; local residents deposit money in the banks and that is offered back in the form of
mortgages, consumer loans, credit cards, and loans for small businesses).
NON-DEPOSITORY INSTITUTION

 Don’t take deposits. You would not get interest. They are intermediaries
between borrowers and savers. They perform financial services & collect
fees for it as their primary means of income. Examples:
 Mutual funds (investment companies),
 Insurance companies,
 Pension funds,
 Finance companies,
 Brokerage houses,
 Mortgage companies.
 COMMERCIAL BANKING

 Definition: A commercial bank is a profit-based financial institution that accepts deposits, grants loans,
and offers other financial services, such as overdraft facilities and electronic transfer of funds.
 In other words, commercial banks are financial institutions that accept demand deposits from the
general public, transfer funds from the bank to another, grant loans at higher interest rates and earn
profit.
 Commercial banks are the most important components of the whole banking system.
NBFC
 Non Banking Financial Company
 What is NBFC? 50-50 test
 When company’s financial assets constitutes more than 50% of total assets
 Income from financial assets constitute more than 50% of gross income
 Its primary business is receiving time deposits (12 months to 60 months) under any
scheme and providing loan facilities.
 NBFC is a company registered under the Companies Act 2013 while commercial banks are
registered under Banking Regulations Act, 1949.
 Department of Non-Banking Supervision (DNBS) of RBI regulates NBFCs within the framework of RBI Act, 1934.
 No demand deposits. No Current a/c or savings a/c.
 Do not have banking licence.
 Do not form part of the payment & settlement system.
 No Cheques, No Demand drafts.
 Deposit Insurance & Credit Guarantee Corporation (DICGC) not available to the depositors of NBFCs.
TYPES OF NBFCS

 On the nature of their activity:

 1. Asset Finance Company
 2. Loan Company
 3. Mortgage Guarantee Company
 4. Investment Company
 5. Core Investment Company
 6. Infrastructure Finance Company
 7. Micro Finance Company
 8. Housing Finance Company
EXAMPLES OF NBFCS

 Power Finance Corporation (PFC) – finance to power sector

 Rural Electrification Company (REC) – finance to power sector
 Shriram Transport Finance – leasing finance, finance for transportation: tractor, truck etc.
 M&M Financials (tractor financier)
 Bajaj Finserv (finances consumer goods, lending, asset management, wealth management, insurance)
 Industrial Development Finance Company (IDFC – finances infrastructure projects)
 Indiabulls Housing Finance- finance for housing
 Dewan Housing Finance (DHFL) - finance for housing
 Muthoot Finance - Gold Loans
 Manappuram Finance – Gold Loans
 Aditya Birla Capital- Asset management
 HDFC AMC
 Birla Sun life AMC
NATURE OF WORK BY NBFC

 Loans & advances

 Investments in shares/ bonds/ debentures
 Leasing
 Hire purchase
 Insurance business
 Asset management
WHY NBFCS ARE OUTPERFORMING BANKS?

 Competitive Interest Rates

 Quick processing of loans
 Less rules & regulations
 Loans available for individuals with poor or no credit ratings (but at higher interest rate)
BUSINESS OF NBFC DOES NOT INCLUDE:

 Agricultural Activities
 Industrial Activities
 Purchase/ sale of goods
 Providing services
 Sale/ purchase/ construction of immovable properties
DEVELOPMENT BANKS
 Financial Institutions with primary objective – economic development, provides financial &
technical support to various sectors.
 Also known as development financial institutions or term lending institutions.
 Long Term Credit for capital intensive developmental activities
 Low rates of Interest to promote long term investments in the economy
 Provide help From the Planning to the Operational level
 Example of Projects - construction of roads, bridges, mining, railways, irrigation, industrial &
infrastructure projects.
 Do not accept deposits from the public (only lending facility)
 Provide finance to financial institutions (refinance facility)
EVOLUTION OF DFIS IN INDIA
 Industrial Finance Corporation of India (1948)
 Industrial Credit & Investment Corporation of India (1955)
 Industrial Development Bank of India (1964)
 EXIM Bank & NABARD (1982)
 NHB (1988)
 Mudra Bank (2015)
 There have been three phases in the evolution of DFIs in India. The first phase began with Independence and
spreads to 1964 when the Industrial Development Bank of India was set up. The second phase stretched from
1964 to the middle of the 1990s when the role of the DFIs grew in importance. In third phase after 1993-94,
the prominence of development banking declined with the decline being particularly severe after 2000-01, as
liberalization resulted in the exit of some firms from development banking.
ROLE OF DFIS IN THE INDIAN ECONOMY

 Promote industrial growth

 Development of Backward Areas
 Generate Employment
 More Exports & Import Substitution
 Modernisation & improvement of technology
 Reduce Regional Imbalance
 DFIs, such as, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI),
National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB) and Small
Industry Development Bank of India (SIDBI), with majority ownership of the RBI were launched to meet the
long-term financing needs of industry and agriculture in India for driving growth in our economy post-
independence.
WORKING OF DFIS

 Require long term sources of finance to lend for long term

 SOURCE – Till 1969, capital markets were not very well developed. Developmental banks were financed by line of
credit from RBI.
 They also issue long dated securities in the capital markets which are subscribed by long term savings institutions
– Pension Funds, Life Insurance Companies, Post office savings schemes.
 Supported by government (tax incentives) or international institutions (World Bank)
DIFFERENCE BETWEEN DEVELOPMENT BANKS & COMMERCIAL BANKS
Development Banks
Long term loans
Do not accept deposits from the public
Provide help From the Planning to the Operational level
Low Interest Rate
Provide refinance facilities to banks
Commercial Banks
Short & Medium Term Loans
Deposits taken from public
Provide Financial Assistance
High Interest Rate
Provide finance to customers
PROBLEMS FOR DFIS

 Rising NPAs
 Politically motivated lending
 Inadequate professionalism
 Narasimham Committee Report after 1991, DFIs were converted to commercial banks
 Led to a steep fall in long term credit from a tenure of 10-15 years to just 5 years.
CURRENT SITUATION

 FM has allocated 20000 cr for infusion in DFI. This will be done by granting 5000 cr at a time. National Bank
for Financing Infrastructure & Development.
 Infrastructure & Housing are priority sectors.
 Objective to improve access to long term finance.
 DFI will have a professional board. Persons of eminence will be part of the board.
 Institution will have certain tax benefits.
 Benefits will be given for a period of 10 years.
 DFI will start with 100% government ownership that will be gradually reduced to 26%
OTHER COUNTRIES

 China – Agricultural Development Bank of China, Export-Import Bank of China, China Development Bank.
 Germany – KfW
 Provide long term loans for infrastructure & industrial development, agriculture & rural development
SECTOR SPECIFIC DFI
INDUSTRY DFI

 IFCI – Industrial Finance Corporation of India (first DFI – established in 1948)

 ICICI – Industrial Credit & Investment Corporation of India Ltd. (established in 1955 by initiative of World Bank &
GOI, established a subsidiary company ICICI Bank Ltd in 1994, In 2002 both were merged ICICI Ltd. & ICICI Bank
Ltd. to make a first universal bank of India, Universal Bank – Financial Institution performing the function of both
commercial Bank & DFI, Only DFI in private sector)
INDUSTRY DFI CONTD.

 IDBI – Industrial Development Bank of India (set up in 1964 as a subsidiary of RBI, granted autonomy in 1976,
established as a Apex institution in the field of Industrial finance, it is responsible for ensuring adequate flow of
credit to various sectors, in 2003 it was converted into a universal bank, set up NSE, NSDL, functions -
coordinate, finance, promote and develop, subsidiaries – SIDBI, IDBI Bank, IDBI Capital Market Services, IDBI
Investment Management)
 SIDBI – Small Industries Development Bank of India (established in 1990 as a subsidiary of IDBI, later granted
autonomy, functions - promotion, financing, development and regulation of MSME sector, coordination between
institutions, provides re-finance facilities)
INDUSTRY DFI CONTD. 2

 Mudra Bank – Micro Unit Development & Refinance Agency [established in 2015 as a subsidiary of SIBDI, micro
means up to 25 lakh in manufacturing, established under Companies Act, 2013 and registered with RBI as a NBFC,
it is regulating & refinancing FI which is lending to non corporate small business segments, they provide refinance
to NBFCs & micro finance institutions, provide refinance under PM Mudra Yojana under three categories: Shishu
(loan up to 50000), Kishore (50000 to 5 lakh),Tarun (5 lakh to 10 lakh)]
 MUDRA is a refinancing institution. It does not lend directly to the micro entrepreneurs. Mudra loans under
PMMY can be availed from nearby branch of a bank, NBFC, MFI etc. Udyamimitra portal can be used to file
application.
FOREIGN TRADE DFI

 EXIM Bank (established in 1982, apex institution in foreign trade investment, provides technical assistance & loans
to exporters, acts as guarantor for foreign transactions, coordinating the working of institutions engaged in
financing imports and exports, promote country’s international trade)
HOUSING DFI

 National Housing Bank (established in 1988 as a subsidiary of RBI, it has regulatory power, it is apex institution in
Housing Finance, PM Awas Yojana for urban areas & Housing for All by 2022 for rural areas, Credit facilitation,
coordinate/regulate, develop housing infra, Housing market expansion)
AGRICULTURE DFI

 NABARD - National Bank for Agriculture and Rural Development [RBI at the insistence of the government,
constituted a Committee to Review the Arrangements for Institutional Credit for Agriculture & Rural
Development (CRAFICARD) in 1979, NABARD was formed in 1982 by transferring the agriculture credit
function of RBI and the refinance functions of the Agriculture Refinance & Development Corporation
(ARDC), NABARD is completely owned by GOI, it is a development bank focusing primarily on rural sector,
apex institution to provide finance for agriculture & rural development, it is responsible for the development
of small industries, cottage industries, and other village or rural projects through participative financial and
non-financial interventions, innovations, technology, and institutional development for securing prosperity,
statutory body NABARD Act, 1981]
 Credit functions
 Development & promotional functions
 Supervisory functions and coordination
 Training workshops
CO-OPERATIVE BANKS
RURAL COOPERATIVE CREDIT INSTITUTION
CO-OPERATIVE BANKS

 Societies engaged in the business of banking.

 The co-operative banks are small-sized units which operate both in urban and non-urban centers. They
finance small borrowers in industrial and trade sectors besides professional and salary classes.
 If they operate in a single state, they need to register under State Cooperative Societies Act. If they operate in
multiple states, they need to register under Multi State Cooperative Societies Act of 2002.
 Section 56 of BR Act 1949, wef. 1965 cooperative banks come under the purview of RBI.
 1st cooperative bank – Anyona Coop Bank
 State Government benefits are passed to the public through these banks (eg. Pension scheme of UP Govt.)
 State Cooperative Bank -> District Cooperative Bank -> Primary Societies.
 BENEFITS & PROBLEMS

 Benefits • Problems
• Regulation Problem (RBI & NABARD)
 Encourages rural savings habit (high interest).
• Management Problem
 Supplements banking sector like NBFC • Political involvement
 Cheap loans • Structural Problem (like flood in Bihar)
• Low finance (no capital market involvement)
 Investment increases
• Sub-prime lending
 Democratic • Owner = Debtor
 Farm Development • Accounting Problem
• Small Capital Required
 Very important for rural sector credit prior to 1969.

Large cooperative banks have to report loans greater than 5 crore to CRILC (Central Repository of Information on Large Credit).

Maximum 15% of tier 1 capital can be given to single borrower.

Maximum 25% of tier 1 capital can be given to single group.
INSURANCE COMPANIES – BUSINESS MODEL?
***Life Insurance Corporation (LIC) of
PAYMENT BANKS

 For financial inclusion

 Evolved from wallets – paytm, mobikwik, oxygen, itz cash
 For making payments
 Cannot accept time deposits, only demand deposits
 Cannot give out loans
 Cannot form a NBFC as subsidiary
 Examples:
 Paytm payments bank
 Airtel payments bank
 NSDL payments bank
GST

 July 2017
 Simplification
 Remove cascading impact of taxes
 Combine multiple taxes – vat (sales tax), service tax, excise, octroi etc.
 0%, 5%, 12%, 18%, 28% - examples of each
MONETARY POLICY

 RBI
 Inflation and interest rates
 CRR, SLR
 Repo and Reverse repo rates
 Bank rate
IBC
ISSUES IN FINANCIAL REFORMS AND RESTRUCTURING

 1991 reforms – Liberalization, privatization, globalization

 GST
 IBC
 Demonetization
 Mudra Yojana
 Jan Dhan Yojana
CORPORATE GOVERNANCE AND SEBI

 All of the company's stakeholders—shareholders, the board of directors, management, employees, investors,
consumers, regulators, and suppliers—have both rights and obligations in ensuring that the companies follow
corporate governance, which reduces economic fraud, scandal, and crime committed by corporations.
 In India, SEBI, which was established in 1992 as a regulator and watchdog, plays a crucial role in holding corporate
entities accountable for following good corporate governance practices.
PILLARS OF EFFECTIVE CORPORATE GOVERNANCE

 Transparency
 Accountability
 Disclosure
 Equity
 Fairness
 the Rule of Law
 Participation
SEBI’S ROLE IN CORPORATE GOVERNANCE

 Since its founding in 1992, the SEBI has undertaken a number of initiatives, formed a number of committees, and
amended Clauses 35B and 49 of the listing agreement in an effort to improve corporate governance.
CLAUSE 35B

 In accordance with the updated clause 35B, the issuer has committed to offer shareholders the option of
voting electronically or by postal vote for any shareholder resolutions that must be approved at general
meetings. All members, the business's auditors, and the directors must receive meeting notices from the
company via registered mail, registered email, or courier, and the notices must also be posted on the company's
official website. The company should disclose in the meeting notice that it offers members the ability to cast
postal ballots and electronic ballots.
CLAUSE 49 AND SUB CLAUSES

 Corporate responsibility: The standards outlined in the proposed modification to Listing Agreement Clause 49 are
in conformity to the corporate governance standards established by the 2013 New Companies Act.
Once more, this clause includes information regarding the adherence to these standards by all listed
companies. Furthermore, additional specified entities that are not corporations but are governed by
other statutes are also subject to the provisions of this proposed modified paragraph (e.g. banks, financial
institutions, insurance companies, etc.). The modified provisions of the corporate governance norms compliances
are contained in 11 subclasses of clause 49.
CLAUSE 49 AND SUB CLAUSES

 Corporate governance principles [clause 49 (i)]

 In this part, SEBI outlines and clarifies the duties of the board, the obligations of corporations to safeguard the interests of
stakeholders, and the rights of shareholders and other stakeholder groups. According to this, disclosures must be made in a
transparent manner and in line with all applicable accounting rules, both financial and non-financial.
CLAUSE 49 AND SUB CLAUSES

 Board of Directors [clause 49 (ii)]

 Board Composition: This sub-clause outlines the ideal composition of the Board of Directors, which must include at least one
woman director and at least 50% non-executive directors. It is stated that if the Chairman is an executive director, half of the board
must be independent. The board must, however, consist of 1/3 independent directors if the chairman is a non-executive director.
 Restrictions on independent directorship: A person is only permitted to serve as an independent director of seven or fewer
listed companies, in accordance with the Revised Clause. A person may not hold the position of independent director for more than
three listed companies if they are also serving as a full-time director of a listed company. According to the 2013 New Companies
Act's provisions, an independent director's term will be for a period of five years. Concerning the compensation and
disclosures for non-executive directors, the proposed amendment to clause 49 of the listing agreement makes significant changes.
 Code of conduct: The BOD shall establish a code of conduct for all Board members and senior management of the Company,
which shall be posted on the Company's official website, in accordance with the proposed revision to this clause.
 Whistle blowing: Under the updated clause 49 of the listing agreement, the whistle blowing policy will be required, which will be a
significant step in preserving the norms of corporate governance. This clause's subclause offers protection to anyone who exposes
wrongdoing, fraud, unlawful activity, and misappropriation within a corporation.
CLAUSE 49 AND SUB CLAUSES

 Audit committee [clause 49 (iii)]

 This modified provision states that the audit committee must have a minimum of three members, with independent
directors making up at least two-thirds of the body. Each member must have a working knowledge of finances, and one
member must be a specialist in accounting or a related field of financial management. This committee must meet at least
four times per year, spaced no more than four months apart from one another. The authority, function, and duties of audit
committee members are defined by this amendment by SEBI.
 Nomination and Remuneration committee [clause 49 (iv)]
 The nomination and compensation committee should have a minimum of three members, half of whom should be
independent directors and all of whom should be non-executive directors. This clause outlines the Committee's
responsibilities, which include developing evaluation criteria for Independent directors, formulating board diversity policies,
identifying potential directors and senior management in accordance with the established standards, and recommending to
the Board remuneration policies for directors and other employees, including key managerial personnel.
CLAUSE 49 AND SUB CLAUSES

 Requirements w.r.t. subsidiary companies [Clause 49 (v)]

 The obligations of listed holding company subsidiaries, both listed and unlisted, are laid out in this sub-clause. Provisions
with regard to unlisted subsidiaries include (a) the requirement that at least one independent director of the holding
company serve on the board of directors of an Indian subsidiary company that is materially unlisted and (b) the
requirement that the audit committee of the listed holding company review the financial statements of the subsidiary
company that is materially unlisted.
 Risk management [Clause 49 (vi)]
 The BODs of the top 100 businesses by market capitalization are required under this clause from SEBI to establish a risk
management committee, decide its role and responsibilities, and assign authority as they see fit. This committee shall be
made up of Board members in accordance with SEBI standards. Senior executives are eligible to join the committee as
members, although the chairman must also be on the board of directors.
CLAUSE 49 AND SUB CLAUSES

 Related party transactions [Clause 49 (vii)]

 The companies are required to present the audit committee with a summary of all information regarding related party
transactions on a regular basis.
 Disclosure Norms [Clause 49 (viii)]
 The proposed amendment to Article 49 of the listing agreement would make disclosure standards stricter than ever before.
The amended clause requires that a quarterly report that includes information on all relevant facts relating to parties'
transactions, a compliance report on corporate governance, and a web link be made available on the company's website.
Reiterating the previous point, the annual report will include information on any changes to the accounting treatment used
in financial statements, the remuneration of directors, and the directors' relationship to the company
CLAUSE 49 AND SUB CLAUSES

 Certification from Chief Executive Officer (CEO) and Chief Finance Officer (CFO) [Clause 49 (ix)]
 This sub clause increases the accountability and responsibility of the Board of Directors, the Chief Executive Officer, and the Chief
Financial Officer. They must attest that they have examined the financial accounts and the cash flow statements. Then, to the best of
their knowledge, they must verify that the Company hasn't engaged in any transactions that violate the Company's code of conduct
or are fraudulent. It will be their responsibility to alert the auditors and the audit committee to any material modifications to
internal control over financial reporting, alterations to accounting principles, or cases of material fraud that they become aware of.
 Compliance Certificate on Corporate Governance [clause 49 (x) and (xi)]
 SEBI mandates that corporations get the Compliance Certificate on Corporate Governance from either the Company's auditor or a
Practicing Company Secretary in accordance with the listing agreement's modified clause 49. A separate component of the annual
report will contain this certificate. In addition to the Annual Report, a Certificate must be presented to the stock exchange.

 Even though SEBI is a young organization, it has done a good job of fulfilling its role as a capital market regulator,
ensuring the protection of various stakeholders, and raising involvement in capital formation. When necessary, SEBI has
taken action to ensure honest trading and investor protection. SEBI is essential for corporate governance compliance.
CENTRAL BANKS

 Manages a country’s monetary policies.

 Helps maintain economic growth & stability
 Acts as a banker to commercial banks
 Acts as a banker to the government
 Issues currency
CENTRAL BANKS

 Features of Central Banks

 Central bank must be able to keep track of the economic growth of the country at all times.
 Central bank should maintain a low inflation rate at all times.
 Central bank should be in contact with the international banking community and it should take part in making policies through
treasury securities auctions as well as bond sales.
 Role of Central Banks in the Economy
 Formulates monetary and banking policies
 Plays an important role in the economic growth & development of the country.
 Regulates the money supply to the economy at all times.
 Tracks economic indicators like exchange rate, gross domestic product (GDP), etc on a regular basis .
 Maintains an optimum level of liquidity so that banks can provide credit facilities to their customers at all times.
COMMERCIAL BANKS

 Role of Commercial Banks in the Economy

 Financial services: Commercial banks provide financial services to the general public including small and medium
industries, agriculture, households, and business.
 Safe custody: Commercial banks are known for depositing and safekeeping of cash and deposit money.
 Mobilization of funds: Commercial Banks convert savings into productive investments.
 Economic growth and development: Credit provided by commercial banks is used by businesses to produce more
goods and services.
FUNCTIONS OF COMMERCIAL BANK

 Primary functions
 Accepts deposit : in the form of saving, current, and fixed deposits.
 Provides loan and advances : Offers loans and advances to the entrepreneurs and business people, and collect interest.
It is the primary source of making profits.
 Secondary functions
 Discounting bills of exchange: A written agreement acknowledging the amount of money to be paid against the goods
purchased at a given point of time.
 Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
 Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.
 Locker facilities: To keep the valuables or documents safely.
 Other financial services are also offered by commercial banks.
NPA

 A non performing asset (NPA) is a loan or advance for which the principal or interest payment remain overdue for a period of 90 days.
 Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
 Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
 Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
 Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted, although there may be some salvage or recovery value.”
 When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its capacity to lend falls, and the possibility of loan
defaults and write-offs rise.
 To address this issue, the government and the Reserve Bank of India have introduced various policies and methods to manage and
reduce the amount of non-performing assets (NPAs) in the banking sector.
 Provisioning means an amount that the banks set aside from their profits or income in a particular quarter for non-performing assets,
such as assets that may turn into losses in the future. It is a method by which banks provide for bad assets and maintain a healthy book
of accounts.
GNPA AND NNPA

 GNPA: GNPA stands for gross non-performing assets. GNPA is an absolute amount. It tells you the total value of
gross non-performing assets for the bank in a particular quarter or financial year, as the case may be.
 NNPA: NNPA stands for net non-performing assets. NNPA subtracts the provisions made by the bank from the
gross NPA. Therefore net NPA gives you the exact value of non-performing assets after the bank has made
specific provisions.
 GNPA ratio is the ratio of the total GNPA of the total advances.
 NNPA ratio uses net NPA to determine the ratio to the total advances.
RISK MANAGEMENT

 The recent string of bank failures and associated financial crises has brought the importance of risk management
in banking into sharp focus. As banks facilitate the creation and management of money, unnecessary risk-taking on
their part can lead to significant financial losses that can slow down or even stall economies—both local and
global.

 What is Risk Management in Banking?

 The Risk Management Process: How It Works in Banking
 Types of Risk Management in Banking
 Best Practices for Banking Risk Management
WHAT IS RISK MANAGEMENT IN BANKING?

 Banking risk management is the process of a bank identifying, evaluating, and taking steps to mitigate the chance of
something bad happening from its operational or investment decisions. This is especially important in banking, as banks
are responsible for creating and managing money for others.
 Typically, risk teams separate fraud and compliance operations, resulting in separate teams for fraud risk management,
responsible for managing risk associated with fraud operations, and compliance risk management, responsible for
managing risk associated with compliance operations.
 The Importance of Risk Management in Banking
 If banks fail, it slows or halts the creation and exchange of money, which has far-reaching impacts on the rest of the economy.
 Some specific reasons for the importance of risk management in the banking sector are that it helps banks to:
 Avoid wasting or needlessly losing the money they need to stay in business
 Avoid disruptions to their operations
 Maintain confidence from investors and customers to continue doing business with them
 Comply with laws and regulations to avoid paying non-compliance fines
THE RISK MANAGEMENT PROCESS: HOW IT WORKS IN BANKING

 Identification: Defining the nature of risks, including where they originate from and why they pose a threat to the bank.
 Assessment and Analysis: Evaluating how likely a risk will pose a threat to the bank, and how grave that threat will likely
be. This helps a bank prioritize which risks deserve the most attention.
 Mitigation: Designing and implementing bank policies and processes that limit the chance that risks will become threats,
and that minimize the damage that threats may cause.
 Monitoring: Gathering data on threat prevention and incident response to determine how well a bank risk management
strategy is working. This also involves researching emerging risk trends to determine if a bank’s risk management
framework needs (or will need) updating.
 Cooperation: Establishing relationships between risks and mitigation strategies across different areas of the bank’s
operations to create a more centralized and coordinated threat response system.
 Reporting: Documenting and reviewing information related to the bank’s risk management efforts to gauge their
effectiveness. This is also used to track how the bank’s overall risk profile changes over time..
TYPES OF RISK MANAGEMENT IN BANKING

 Bank risk management has a number of different threat areas to cover. The challenge isn’t just how many different types
of risk there are though, it’s also about how much control an organization actually has over these factors.

 1. Credit Risk
 Credit risk is one of the most common types of risk for banks. Put simply, it’s the risk of a bank lending money to a customer and
not having it paid back. This can decrease the amount of assets a bank has available to meet its financial obligations. It can also cost
the bank extra money if it deploys methods of trying to recoup the money it’s owed.
 How to Mitigate Credit Risk
 Mitigating credit risk boils down to knowing two things. First is the bank’s overall financial position, in terms of how much in losses it
can take while still being able to operate effectively. Second is knowing a specific customer—understanding their financial history and
situation, as well as their general financial behavior, to evaluate the amount of risk they pose of defaulting on a loan. A bank can then
tailor a customer’s lending agreement to have tighter or looser terms, depending on their level of risk.
TYPES OF RISK MANAGEMENT IN BANKING

 2. Market Risk
 Also known as systematic risk, market risk is the chance that an adverse event outside the banking industry itself will
negatively affect a bank’s investments. This could be from an issue in a single industry—such as the US housing market
collapse in 2008—or from a general national or international economic downturn. Other types of crises, such as political
instability or natural disasters, can also increase market risk.
 How to Mitigate Market Risk
 In some cases, market risk can be mitigated by diversifying a bank’s investment portfolio. However, there are other times
where this strategy won’t work because a crisis will affect multiple interdependent industries. Some other tactics that can
work include investing in staple industries (such as utilities or consumer packaged goods), employing a long-term investing
strategy, or keeping more of a bank’s assets in liquid form.
TYPES OF RISK MANAGEMENT IN BANKING

 3. Operational Risk
 Operational risk refers to risks incurred based on how a bank is run from day to day. For example, if employees are poorly trained,
they may make more errors that cost the bank time and money to correct. Or if the bank has an inadequate IT infrastructure, its
systems may break down, disrupting services to customers.
 A component of operational risk is cybersecurity risk. This is how likely cybercriminals are to successfully attack a bank’s digital
systems. The resulting theft or destruction of digital money or sensitive information can significantly hinder a bank’s ability to operate
effectively. It can also put customers and stakeholders at risk.
 How to Mitigate Operational Risk
 Operational risk can be limited in a few ways. One is to hire the right people and properly train them on both the bank’s processes
and its ethical culture. Another is to secure the bank’s tech stack, including thoroughly vetting third-party service providers, as well as
staying up-to-date with cybersecurity threats and trends.
 Automating processes with technology—such as customer onboarding—can help reduce human error. Implementing feedback and
data collection programs can help address any updates needed as the bank’s risk profile changes over time.
TYPES OF RISK MANAGEMENT IN BANKING

 4. Reputational Risk
 Reputational risk refers to the risk that a bank will lose confidence from its investors and customers, and thus lose funding or business
(respectively). It’s basically a side effect of any other risk a bank encounters, but that doesn’t mean it’s any less threatening. It can be caused
directly by the bank’s business practices or employee conduct, or indirectly by the bank being associated with a person or group that has a
negative reputation.
 For example, reputational risk might result from a client receiving poor customer service from the bank and then telling others about it—
either through word of mouth or on social media. Or a news outlet may publish a story revealing corruption among some of a bank’s
management staff.
 How to Mitigate Reputational Risk
 Minimizing reputational risk starts with defining the bank’s core ethical values. Develop these in concert with stakeholders, and conduct
proper training on them so employees understand how they are expected to conduct themselves. A bank should also research its reputation
in news outlets and on social media, addressing concerns and taking responsibility for mistakes whenever appropriate. Reputation
management software can help with this.
 The bank should also develop a contingency plan in case a reputation-affecting incident occurs. It should focus on quick and transparent
communication, outlining what controls are being used to help minimize the damage, as well as how the bank will determine what it will do
differently in the future to avoid the same mistake happening again. A bank may want to hire a public relations firm, or use specialized
reputation management software, to assist with this and other reputational risk management processes.
TYPES OF RISK MANAGEMENT IN BANKING

 5. Liquidity Risk
 Liquidity risk refers to the chance that a bank will run out of physical money, including if it can’t convert its other assets into cash fast enough. Thus, it becomes unable to meet its
short-term obligations to creditors or customers.
 A recent trend that threatens to elevate banks’ liquidity risk is an increase in the number of bank runs. A bank run happens when rumors that a bank may fail in the near future
cause its customers to panic. They then try to withdraw as much cash as possible from the bank before they potentially lose access to their money.
 Bank runs rapidly decrease the amount of liquid assets a bank has available to meet its short-term debts. So while rumors of the bank failing may not have been completely
accurate, the bank run still causes a spike in the bank’s liquidity risk. This makes it much more likely that the bank actually will fail.
 Especially if they result in bank failures in this way, bank runs can also damage overall consumer confidence in the entire financial system. This can lead to a domino effect of further
bank runs, and potentially more bank failures as a consequence.
 To make matters worse, with the advent of the internet, bank runs are becoming more threatening than ever. Rumors of a bank’s financial troubles can spread very quickly over
online communications, especially social networks. And the ability to make electronic funds transfers means that customers can withdraw money almost instantaneously without
actually setting foot in a bank, making it difficult for the bank to control how fast it’s drained of available cash.
 How to Mitigate Liquidity Risk
 Banks can manage their liquidity risk by more regularly forecasting their cash flow—that is, how fast liquid assets are coming into a bank versus leaving it. Part of this is
understanding the potential risks associated with the different ways a bank is funded, from investing to customers. A bank should also have a contingency funding plan (CFP) in place
to address liquidity shortfalls.
 Banks can also conduct stress tests—creating hypothetical risk scenarios that would cause a loss of liquidity, and estimating how much liquidity would be lost in each instance. This
can allow a bank to create baseline liquidity rates, helping to ensure it has enough working capital in the event of a crisis.
TYPES OF RISK MANAGEMENT IN BANKING

 6. Compliance Risk
 Bank compliance risk involves the risks a bank takes by not fully complying with applicable government laws or industry regulations. These can include punitive fines,
civil lawsuits, criminal charges, and even economic sanctioning.
 Compliance risk includes a component of reputational risk, as well. Banks exposed as being non-compliant often lose the trust of their investors and customers,
which hurts their ability to make money. They can also cause a downturn in overall consumer and investor trust in the entire banking industry or financial system.
 How to Mitigate Compliance Risk
 A bank can manage compliance risk by having employees on staff familiar with applicable laws and regulations—for most organizations, this is an AML compliance
officer. It’s also essential to equip them with the right tools to automate processes where possible, quantify and analyze activity patterns, and keep on top of any
other obligations
 One of these obligations should be to understand the other types of risks that a bank faces, as well as assess how likely they are and how impactful they would be.
This allows a bank to identify areas of residual risk where it may not entirely be meeting compliance requirements, and strengthen controls there.
 Finally, a bank should make compliance part of its overall culture. This means educating employees outside of the compliance and risk management teams on what
laws and regulations the bank has to comply with, and why they can play important roles in ensuring this happens. It can also mean proactively addressing reputational
risk. A bank can do this by summarizing what it’s doing (in a practical sense) to remain compliant, and how that protects the interests of customers and other
stakeholders.
BEST PRACTICES FOR BANKING RISK MANAGEMENT

 In addition to the tips above for managing specific types of banking risks, there are certain things a bank can do to
have an overall more effective risk management program. Here are some examples.
 Establish an institution-wide risk governance framework
 This is another way of saying that it’s important to involve everyone who works at the bank—not just risk and compliance
team employees—in the bank’s risk management operations. Department leaders should brainstorm with their teams, and
then collaborate with executives, to develop an overall risk profile for the bank. This should be shared among all bank
stakeholders so they understand what risks a bank faces and why it’s important to control them.
 The identified risks should then be delegated to the appropriate departments. Team leaders should work to develop risk
management strategies, and ensure that they’re properly understood and implemented, within each department.
Decentralizing risk management like this helps to make it an institution-wide priority while limiting confusion over risk
management roles in banking.
BEST PRACTICES FOR BANKING RISK MANAGEMENT

 Prioritize identity verification & authentication for everyone who interacts with the bank
 People not dealing honestly with a bank can drastically increase the risks it faces. That’s why a bank should make a point of
investing in identity verification and authentication techniques for both customers—whether individuals or businesses—and
its own employees. These are especially important during onboarding (whether gaining new clients or hiring new staff), but
they should be applied regularly afterwards to ensure everyone is acting in their own capacity.
 Know Your Customer (KYC) helps to ensure individuals aren’t impersonating others to cheat the system, or acting
unlawfully to another party’s benefit. Know Your Business (KYB) is essential for knowing who’s really in charge of a business,
and making sure the business itself is legitimate (and not, say, a shell company used simply to hide illicit dealings). And Know
Your Employee (KYE) is important for ensuring all bank employees are acting in the bank’s best interests, as many risks can
be caused by employees misusing privileged information—including sharing it with illegitimate outside parties.
BEST PRACTICES FOR BANKING RISK MANAGEMENT

 Automate tasks related to risk management, like transaction monitoring

 Checking transactions to see if they pose a threat to a bank or its stakeholders is a tedious—if not impractical—process to
do manually. Not only does this cost extra time and money, but it can also actually introduce more risk in the form of
human error. The key is to balance between being able to catch transactions (or patterns of them) that are likely risky, and
filtering out false positives that unnecessarily take up a risk management team’s time.
 Transaction Monitoring solution helps with this in two ways. First, it looks beyond strictly monetary data streams to other
activities that may be deemed suspicious. This allows banks to create more complete and accurate risk profiles for
customers and transactions. Second, it employs machine learning in banking risk management to create “alert scores”. These
are ratings based on a customer’s transaction history, the bank’s case history, and other factors that indicate how likely a
suspicious activity alert will be a true positive. This allows a bank’s risk management team to better prioritize which alerts
actually warrant a manual investigation.
BEST PRACTICES FOR BANKING RISK MANAGEMENT

 Keep up with both individual cases and overall risk reporting

 When incidents happen that present heightened risk to the bank, it’s important to not try and deal with them as a single
group. Compartmentalize them based on the relevant information, and then delegate them to separate teams or team
members. This allows for handling more incidents at once, while still allowing each team to have greater focus on data
analysis and pattern visualization for each incident. This is a strategy known as case management.
 With that said, it’s also helpful to write and file reports regarding incidents on a fairly regular basis.
 This serves two purposes. First, it reduces compliance risk by demonstrating what practical steps the bank is taking to
address risk. Second, when taken together, these reports help paint a picture of a bank’s overall risk management profile—
where it faces the most (and least) risk, and how effective its controls are in mitigating certain types of risk.
BEST PRACTICES FOR BANKING RISK MANAGEMENT

 Continually assess, analyze, and act on risk metrics

 Risk management in the banking sector—or anywhere else, for that matter—isn’t a static process. A bank’s staff or clientele
can grow and change. New technological standards get developed, which can lead to both better security and new avenues
for risk. And new regulatory requirements are put in place to address the evolving landscape of threats to banks
 That’s why the risk management process in the banking sector has to be dynamic. Banks need to assess how well their
current controls are handling risk, and what areas of risk may need further attention. They also need to look at what risks
they may face in the near future, and determine if their systems are capable of adapting to properly manage those risks.
 Above all, though, a bank has to take action—creating and updating risk management plans based on its analysis and
implementing governance structures to ensure all employees are on board and doing their part.
BASEL NORMS

 Basel norms, also known as Basel accords, are the international banking regulations issued by the Basel
Committee. The Basel Committee was established in 1974. This Committee set standards regarding various
banking supervisory matters. The main aim of these standards is to ensure the coordination of banking regulations
worldwide.
 Basel norms are also referred to as banking supervision accords. These are simple standards aimed at increasing
the capital ratios of various banks. Basel norms also provided a benchmark for analytical comparative assessment.
 Why Basel Norms?
 Banks around the world lend to different types of borrowers having different creditworthiness. They lend the deposits of
the public and money raised from the market. This exposes the banks to a variety of risks of default. As a result, banks have
to keep a certain percentage of capital as security in case of risk of non-recovery. The Basel Committee has created various
norms to tackle this risk.
BASEL NORMS TYPES

 The Basel Committee has issued the following sets of regulations.

 1. Basel I: Basel I was introduced in 1988. This Basel norm focused on credit risk. Credit risk arises when a
borrower fails to repay a loan or meet contractual obligations. This norm defined the capital and structure of risk
weights for banks. The minimum capital requirement was set as 8% of risk-weighted assets. Risk-weighted assets
mean a bank's assets are weighted according to risk.
 2. Basel II: Basel II guidelines were issued in 2004. These norms were refined versions of Basel-I norms. These
norms were based on the following three parameters.
 Banks should retain a minimum capital adequacy requirement of 8% of risk assets.
 Banks were advised to develop and use better risk management techniques.
 Banks must disclose their capital adequacy requirement and risk exposure to the central bank.
BASEL III

 Basel III guidelines were issued in 2010. These norms were introduced in response to the financial crisis of 2008. A need was felt to strengthen the banking
system across the globe. It was also felt that the quantity and quality of capital under Basel II were considered insufficient.
 The following are some regulations followed by banks regarding Basel norms:
 Increasing capital requirements ensures that banks are strong enough to combat losses.
 Improving the quality of bank regulatory capital in the form of Common Equity Tier 1 capital.
 Specifying a minimum leverage ratio requirement to curb excess leverage in the banking system.
 Introducing capital buffers that are maintained in good times and can be used in times of crisis.
 The Basel Committee also introduced an international framework for mitigating excessive liquidity risk through the Liquidity Coverage Ratio.
 Basel 3 guidelines promote a strong banking system by focusing on four important banking parameters.
 Capital - The capital adequacy ratio should be maintained at 12.9%. The minimum tier 1 capital ratio should be 10.5%, and the tier 2 capital ratio should be 2% of risk-weighted
assets. Banks are also required to maintain a capital conservation buffer of 2.5%. Counter-cyclical buffers should also be maintained at 0-2.5%.
 Leverage - The leverage rate should be at least 3%. The leverage ratio is a bank's tier 1 capital to average total consolidated assets.
 Funding And Liquidity - Basel 3 created two liquidity ratios :
 i) Liquidity coverage ratio will require banks to hold a buffer of high-quality liquid assets to deal with the cash outflows. The goal is to ensure banks have enough funds.
 ii) Net stable funds rate requires banks to maintain a stable funding profile for their off-balance sheet assets and activities. The minimum net stable fund rate requirement is 100%.
(The NSFR presents the proportion of long term assets funded by stable funding).
INDIA ON BASEL NORMS

 The deadline for implementing Basel-III norms was March 2019, but it was pushed to March 2020.
 Due to the pandemic, the Reserve Bank of India postponed the implementation of Basel norms for another 6
months.
 This resulted in a lower capital burden on banks regarding provisioning requirements.
 This extension would have an impact on how RBI and Indian banks are perceived by global players.

 Conclusion
 Basel norms are an attempt to harmonise banking regulations around the world. The goal is to strengthen the international
banking system and improve the quality of banking worldwide. These norms focus on the risks to banks and the whole
financial system. This will allow the banks to grab better financial opportunities and improve their profits.
DIFFERENCE BETWEEN RETAIL BANKING AND CORPORATE BANKING

 Banks offer different types of services to their clients depending on their needs. Retail banking and corporate
banking are two such services that banks offer.
 What is Retail banking?
 Retail banking is the type of banking service that is offered to individual customers. Retail banking services include savings
and checking accounts, loans, mortgages, credit cards, and other financial products that cater to individual customers. Retail
banking services are usually offered through bank branches, online banking, and mobile banking.
 What is Corporate Banking?
 Corporate banking, on the other hand, is a type of banking service that is offered to corporate clients, including small and
medium-sized enterprises (SMEs) and large corporations. Corporate banking services include working capital finance, trade
finance, treasury services, cash management, and other financial products that cater to the needs of corporate clients.
Corporate banking services are usually offered through relationship managers and other specialized teams.
DIFFERENCE BETWEEN RETAIL BANKING AND CORPORATE BANKING

 Customers
 Individual customers
 Corporate clients

 Products
 Savings and current accounts, loans, mortgages, credit cards, and other financial products for individual customers
 Working capital finance, trade finance, treasury services, cash management, and other financial products for corporate clients

 Services
 Usually offered through bank branches, online banking, and mobile banking
 Usually offered through relationship managers and other specialized teams
DIFFERENCE BETWEEN RETAIL BANKING AND CORPORATE BANKING

 Deposits
 Retail deposits are usually smaller and more frequent
 Corporate deposits are usually larger and less frequent

 Risk
 Retail banking is generally considered to be less risky
 Corporate banking is generally considered to be riskier

 Revenue
 Retail banking generates revenue through fees and interest charged on loans and deposits
 Corporate banking generates revenue through fees and interest charged on loans and other financial products
PRODUCTS AND SERVICES

 Retail banks offer a diverse range of products and services tailored to meet the financial requirements of
individual customers. These include savings accounts, checking accounts, personal loans, credit cards, mortgages,
auto loans, and various investment options such as certificates of deposit (CDs) and individual retirement
accounts (IRAs). The focus is on providing convenient and accessible banking solutions to the general public.
 Corporate banks, on the other hand, provide a comprehensive suite of financial services specifically designed for
businesses and institutions. These services encompass cash management solutions, working capital lines of credit,
trade finance facilities, foreign exchange services, investment banking advisory, debt and equity financing, and
treasury management. The objective is to support the financial operations and growth of corporate clients.
CONCLUSION:

 Retail banking and corporate banking are two different types of banking services that cater to different types of
customers. Retail banking services are geared towards individual customers, while corporate banking services
cater to corporate clients. The main differences between retail banking and corporate banking are the types of
customers they serve, the products they offer, the services they provide, the size and frequency of deposits, the
level of risk involved, the revenue streams, and the level of competition in the market.
UNIVERSAL BANKING

 Universal banking is a system in which banks provide a wide variety of comprehensive financial services, including
those tailored to retail, commercial, and investment services. Universal banking is common in some European
countries, including Switzerland.
 Under this type of banking a bank will deal with working capital requirement as well as term loans for
development activities. They will be dealing with individual customer as well as big corporate customers. They will
have expanded lines of business activities combining the functions of traditional deposit taking, modern financial
services ,selling long -term saving products, insurance cover, investment banking etc.
HISTORY

 In 1933, during the Great Depression period, The United States’ government passed the Glass-Steagall Act, which put
restrictions to the banking system of the nation. According to the act, the commercial banks were prohibited from
offering universal banking services, which was supposed to be the cause of bank failures. As a result, the universal
banking facilities witnessed a slow growth in the country.
 In 1999, the Gramm-Leach-Biley Act (GLBA) brought about a partial change in the Glass-Steagall Act and allowed
commercial banks to offer investment options to customers. This provision aimed to expand the horizons of the
financial institutions and make it easier for customers to take up financial services from the platform they might want to
finance it from.
 The universal banking activities have been adopted by many nations across the world, given the modernization
opportunity that it offers to the banking sector. Germany and many European regions have permitted banks to feature
such services for customers.
 While there are numerous banks offering universal banking services across the globe. Today, the top 20 largest financial
banks are universal banks, which include the Deutsche Bank, JP Morgan Chase, BNP Paribas, Morgan Stanley, UBS,
Citigroup, Credit Suisse, Barclays, HSBC, Citigroup, Wells Fargo, ING Bank, etc.
ADVANTAGES OF UNIVERSAL BANKING

 Economies of scale : Universal banking results in greater economic efficiency in the form of low cost, higher output and
better products. In India , RBI is in favour of universal banking because it results in economies of scale.
 Profitable Diversions: The banks can utilize their existing skill in single type of financial services in offering other kinds by
diversifying the activities. Therefore, it involves lower cost in performing all types of financial functions by one unit
instead of other institution.
 Resources Utilization: A bank possesses all types of information about the existing customers which can be utilized to
perform other financial activities with the same customer.
 Easy Marketing : A bank with established brand name can easily use its existing branches and staff to sell the other
financial products like insurance policies, mutual fund plans without spending much effort on marketing.
 Under one roof: Universal banking offers all financial products and services under one roof. It save transaction cost and
time. It also increase the speed of work. Hence it is beneficial to bank as well as customer.
 Investors trust: Universal banks hold equity shares of many companies .These companies can easily get investors from
public to invest in their business . This is due to other investor have full confidence and faith in the universal banks.
DISADVANTAGES OF UNIVERSAL BANKING

 No Expertise in Long Term Lending: These are different types of long term loans like project finance and infrastructure finance, having
long gestation projects can not properly handle by the single bank.
 Non-Performing Assets problem: One of the most serious problems faced by universal banks is Non-performing Assets.
 Risk of Failure: The larger the banks, the greater the effects of their failure on the system. The failure of a larger institution could have
serious consequences for the entire banking system. If one universal bank were to collapse, it could lead to a systemic financial crisis.
 Concentration of Monopoly Power in the Hands of Few Banker: Universal banking sometimes creates monopoly power in the hands of
few large bankers. Such a monopoly power in the hands of a few big bankers is a source of danger to the community whose goal is a
socialistic pattern of society.
 Bureaucratic and Inflexible: Universal banks tend to be bureaucratic and inflexible. They tend to work primarily with large established
customers and ignore or discourage smaller and newly established businesses.
 Different Rules and regulations: They offer all financial product and services under one roof. However ,all these products and services
have to follow different rules and regulation of RBI, SEBI, IRDA. This create many problems because same bank has to follow different
rules and regulation for different products.
 Conflict of interest : Combining commercial and investment banking can result in conflict of interest .some banks may give more
importance to one types of banking and less importance to another one. Eg. Underwriting-advisory, Loans-underwriting & advisory
CORE BANKING SOLUTION

 Core banking solution is an effective banking service that benefits customers in manifold ways. Robust
transactions, improved document management, customer retention, and proper safety and compliance process are
among the primary boons of core banking solutions.
 Core Banking Solution or CBS is required to streamline the banking process and cater to the dynamically
fluctuating market.
WHAT IS CORE BANKING?

 Core banking is a centralised system that allows customers or business bodies to carry on business operations
regardless of the bank’s branch.
 The main objective of core banking solutions is to offer tailor-made offerings to customers at their convenience. These
solutions differ in nature and are dependent a lot on the customer base. CBS refers to the networking of different bank
branches that enables customers to opt for varied banking facilities from different corners of the world. The entire
banking application is based on a centralised server and can be used via the internet.
 Different functions of core banking encompass transactions, payments, loans and more. Internet banking, ATMs
(Automated Teller Machines), Phone banking, Fund transfer remotely and instantly (IMPS, NEFT, RTGS and more),
interest computation on loans and deposits etc., are some of the core banking solutions types.
 While customers or business bodies reap the benefits of carrying out transactions freely, financial institutions via core
banking solutions benefit from lesser time and can save upon resources that are used for repetitive business activities.
LUCRATIVE FEATURES OF CORE BANKING SOLUTIONS

 Transaction management
 Customer relationship management activities
 Accounts, loans and disbursal management
 Customer onboarding
 Deposits and withdrawal management etc.
ADVANTAGES FOR CUSTOMERS

 Internet banking, mobile banking etc. are among the multiple channels that prove effective for faster payment processing.
 CBS (Core Banking Solution) benefits those who are living in rural areas. For instance, farmers can easily get e-payments
towards subsidies directly in their accounts.
 Customers can get expedited service for routine transactions which includes withdrawals, passbooks, demand drafts,
cash deposits etc.
 The provision of a 24X7 banking service is another notable advantage of core banking solutions. Moreover, the
provisions can be opted at any time and anywhere.
 Every bank branch uses applications from the data centre or central servers, hence deposits done in one branch get
displayed instantly. Customers or any business owners can withdraw funds from any branch across the world.
 Core banking solutions curb the need for filling out multiple entries, thereby reducing errors and ensuring accuracy.
 It facilitates a hassle-free merging of self-service operations and back-office data.
ADVANTAGES FOR BUSINESSES

 Core banking solutions facilitate standardisation and transparency within business bodies and branches of banks. Since all the branches are connected to a central server, transactions can
be viewed anytime. Instant projection of the transactions helps businesses to deal with inaccurate transactions or fraud.
 Core banking solution emerged to be a saviour helping businesses cater to the increasing needs of customers. It ensures better customer retention via prompt customer service.
 This banking mode has led to the minimization of errors, thereby facilitating accurate transactions.
 It helps to bring down and manage operational costs involving lesser manpower for process execution.
 With the emergence of different core banking solution types, submission of reports to regulatory boards and the government has become convenient.
 Core banking solutions help in efficient documents and record management. CBS incorporates a centralized database that helps in the faster collection of data.
 It has become convenient for businesses to process cash, compute interest, open accounts, incorporate policy changes etc.
 In addition, businesses can offer services and products to customers at nominal rates. For instance, automating different parts of financial transactions has curbed the need for multiple
staff, helping to save on wages and related costs.
 Custom-crafted banking software enables full integration of the banking system.
 Another advantage of core banking is that it adds security levels to the banking system.
 Core banking solutions facilitate informed decision-making ability. For instance, as the overall banking procedure has become streamlined, business bodies can now decide whether to use
the funds for business expansion or for lending out to customers.
REAL TIME GROSS SETTLEMENT SYSTEM (RTGS) & NATIONAL
ELECTRONIC FUND TRANSFER SYSTEM (NEFT)

 Bank offers Real Time Gross Settlement System (RTGS) & National Electronic Fund Transfer system (NEFT) which enables an efficient, secure, economical and reliable system of transfer
of funds from bank to bank as well as from remittance account in a particular bank to the beneficiary account in another bank across the country.
 1. RTGS: An electronic payment system in which payment instructions between banks are processed and settled individually and continuously, on a real time basis, throughout the day.
Available for transaction value of Rs.2.00 lacs and above.
 2. NEFT : Another electronic payment system in which payment instructions between banks are processed and settled on deferred net settlement (DNS) basis at fixed times during the
day. There is no minimum or maximum stipulated transaction value for using this facility.
 Note :RTGS and NEFT systems work on all days (24X7) across the states.
 Information Required for transfer of Funds
 Amount to be remitted
 Account no. to be debited
 Name of the beneficiary bank
 Name of the beneficiary customer
 Account no. of the beneficiary customer
 Sender to receiver information, if any
 IFSC code of the receiving branch.(IFSC Code is printed on cheque leaves.)
HOW DOES REAL-TIME GROSS SETTLEMENT (RTGS) WORK?

 Initiation: A sender requests their bank to transfer a specific amount to a recipient's account in another bank via RTGS. The sender's
bank verifies the sender's account balance and the availability of funds.
 Communication: The sender's bank communicates with the recipient's bank through a secure network. The two banks exchange the
transaction details, including the sender's account, the recipient's account, and the amount to be transferred.
 Verification: The recipient's bank verifies the transaction details and ensures that the recipient's account is valid and can receive the funds.
 Settlement: Once both banks have confirmed the transaction details and the availability of funds, the sender's bank debits the sender's
account, and the recipient's bank credits the recipient's account. This process is done simultaneously, ensuring that the transaction settles
in real time.
 Confirmation: Both the sender and recipient receive confirmation of the completed transaction, which typically includes a transaction
reference number.

 RTGS systems are widely used for high-value and time-sensitive transactions, such as interbank transfers, large business payments, and
securities settlement. It reduces settlement risk and allows for secure and efficient fund transfers.
RTGS BENEFITS

 Every RTGS transaction is processed individually.

 Funds are transferred to the beneficiary bank account instantly.
 RTGS online fund transfer facility is available 24x7, even on weekends and bank holidays.
 RTGS was designed for high-value transactions and has a minimum transfer limit of ₹2 Lakhs.
 Fund transfers via RTGS can be initiated online or offline by visiting a bank branch.
 RTGS fund transfers only require a few details such as the beneficiary’s name, bank account number, branch and
IFSC.
 RTGS online fund transfers are reliable, safe and encrypted for maximum security.
 RTGS significantly reduces the risk associated with high-value transactions between financial institutions.
WHAT IS THE CAMELS RATING SYSTEM?

 The CAMELS Rating System was developed in the United States as a supervisory rating system to assess a bank’s
overall condition. CAMELS is an acronym that represents the six factors that are considered for the rating. Unlike
other regulatory ratios or ratings, the CAMELS rating is not released to the public. It is only used by top
management to understand and regulate possible risks.
 Supervisory authorities use scores on a scale of 1 to 5 to rate each bank. The strength of the CAMEL lies in its
ability to identify financial institutions that will survive and those that will fail. The concept was initially adopted in
1979 by the Federal Financial Institutions Examination Council (FFIEC) under the name Uniform Financial
Institutions Rating System (UFIRS). CAMELS was later modified to add a sixth component – sensitivity – to the
acronym.
THE COMPONENTS OF CAMELS ARE:

 (C)apital adequacy
 (A)ssets
 (M)anagement capability
 (E)arnings
 (L)iquidity
 (S)ensitivity
CAMELS

 Capital Adequacy
 Capital adequacy assesses an institution’s compliance with regulations on the minimum capital reserve amount. Regulators
establish the rating by assessing the financial institution’s capital position currently and over several years.
 Future capital position is predicted based on the institution’s plans for the future, such as whether they are planning to give
out dividends or acquire another company. The CAMELS examiner would also look at trend analysis, the composition of
capital, and liquidity of the capital.
 Assets
 This category assesses the quality of a bank’s assets. Asset quality is important, as the value of assets can decrease rapidly if
they are high risk. For example, loans are a type of asset that can become impaired if money is lent to a high-risk individual.
 The examiner looks at the bank’s investment policies and loan practices, along with credit risks such as interest rate risk
and liquidity risk. The quality and trends of major assets are considered. If a financial institution has a trend of major assets
losing value due to credit risk, then they would receive a lower rating.
CAMELS

 Management Capability
 Management capability measures the ability of an institution’s management team to identify and then react to financial stress. The
category depends on the quality of a bank’s business strategy, financial performance, and internal controls. In the business strategy
and financial performance area, the CAMELS examiner looks at the institution’s plans for the next few years. It includes the capital
accumulation rate, growth rate, and identification of the major risks.
 For internal controls, the exam tests the institution’s ability to track and identify potential risks. Areas within internal controls
include information systems, audit programs, and recordkeeping. Information systems ensure the integrity of computer systems to
protect customer’s personal information. Audit programs check if the company’s policies are being followed. Lastly, record keeping
should follow sound accounting principles and include documentation for ease of audits.
 Earnings
 Earnings help to evaluate an institution’s long term viability. A bank needs an appropriate return to be able to grow its operations
and maintain its competitiveness. The examiner specifically looks at the stability of earnings, return on assets (ROA), net interest
margin (NIM), and future earning prospects under harsh economic conditions. While assessing earnings, the core earnings are the
most important. The core earnings are the long term and stable earnings of an institution that is affected by the expense of one-time
items.
CAMELS

 Liquidity
 For banks, liquidity is especially important, as the lack of liquid capital can lead to a bank run. This category of CAMELS
examines the interest rate risk and liquidity risk. Interest rates affect the earnings from a bank’s capital markets business
segment. If the exposure to interest rate risk is large, then the institution’s investment and loan portfolio value will be
volatile. Liquidity risk is defined as the risk of not being able to meet present or future cash flow needs without affecting
day-to-day operations.
 Sensitivity
 Sensitivity is the last category and measures an institution’s sensitivity to market risks. For example, assessment can be
made on energy sector lending, medical lending, and agricultural lending. Sensitivity reflects the degree to which earnings are
affected by interest rates, exchange rates, and commodity prices, all of which can be expressed by Beta.
HOW DOES THE CAMELS RATING SYSTEM WORK?

 For each category, a score is given from one to five. One is the best score and indicates strong performance and risk management
practices within the institution. On the other hand, five is the poorest rating. It indicates a high probability of bank failure and the need
for immediate action to ratify the situation. If an institution’s current financial condition falls between 1 and 5, it is called a composite
rating.

 A scale of 1 implies that a bank exhibits a robust performance, is sound, and complies with risk management practices.
 A scale of 2 means that an institution is financially sound with moderate weaknesses present.
 A scale of 3 suggests that the institution shows a supervisory concern in several dimensions.
 A scale of 4 indicates that an institution has unsound practices, thus is unsafe due to serious financial problems.
 A rating of 5 shows that an institution is fundamentally unsound with inadequate risk management practices.

 A higher number rating will impede a bank’s ability to expand through investment, mergers, or adding more branches. Also, the institution
with a poor rating will be required to pay more in insurance premiums.
MCLR

 Reserve Bank of India (RBI) sets a fixed internal reference rate for banks. This interest rate is, then, used by banks
and lending institutions that come under RBI to define the minimum interest rate applicable to different loan
types.
 This rate is updated by RBI every once in a while when there is a drastic change in the country’s economic
activities. Banks are usually not allowed to lend money at a rate below this reference rate called the MCLR.
WHAT IS MCLR?

 Marginal Cost of Funds based Lending Rate (MCLR) is the minimum lending rate below which a bank is not
permitted to lend. MCLR replaced the earlier base rate system to determine the lending rates for commercial
banks.
 RBI implemented MCLR on 1 April 2016 to determine rates of interests for loans. It is an internal reference rate
for banks to determine the interest they can levy on loans. For this, they take into account the additional or
incremental cost of arranging an additional rupee for a prospective buyer.
THE OUTCOME OF MCLR IMPLEMENTATION

 After the implementation of MCLR, the interest rates are determined as per the relative risk factor of individual
customers. Previously, when RBI reduced the repo rate, banks took a long time to reflect it in the lending rates
for the borrowers.
 Under the MCLR regime, banks must adjust their interest rates as soon as the repo rate changes. The
implementation aims at improving the openness in the structure followed by the banks to calculate the interest
rate on advances.
 It also ensures the prospect of bank credits at the interest that is true to the consumers as well as the banks.
HOW TO CALCULATE MCLR?

 MCLR is calculated based on the loan tenor, i.e., the amount of time a borrower has to repay the loan. This tenor-
linked benchmark is internal in nature. The bank determines the actual lending rates by adding the elements
spread to this tool.
 The banks, then, publish their MCLR after careful inspection. The same process applies for loans of different
maturities – monthly or as per a pre-announced cycle.
THE FOUR MAIN ELEMENTS OF MCLR

 Tenor premium
 The cost of lending varies from the period of the loan. The higher the duration of the loan, the higher will be the risk. In
order to cover the risk, the bank will shift the load to the borrowers by charging an amount in the form of a premium. This
premium is known as the Tenure Premium.
 The al cost of funds
 The al cost of funds is the average rate at which the deposits with similar maturities were raised during a specific period
before the review date. This cost will reflect in the bank’s books by their outstanding balance.
 The al cost of funds has several components like the Return on Net Worth and the Marginal Cost of Borrowings. Marginal
Cost of Borrowings takes up 92% while the Return on Net Worth accounts for 8%. This 8% is equivalent to the risk of
weighted assets as denoted by the Tier I capital for banks.
THE FOUR MAIN ELEMENTS OF MCLR

 Operating Cost
 Operational expenses include the cost of raising funds, barring the costs recovered separately through service charges. It is,
therefore, connected to providing the loan product as such.
 Negative carry on account of CRR
 Negative carry on the CRR (Cash Reserve Ratio) takes place when the return on the CRR balance is zero. Negative carry
arises when the actual return is less than the cost of the funds.
 This will impact the mandatory Statutory Liquidity Ratio Balance (SLR) – reserve every commercial bank must maintain. It is
accounted negatively as the bank cannot utilise the funds to earn any income nor gain interests.
HOW IS MCLR DIFFERENT FROM BASE RATE?

 MCLR is set by the banks on the basis of the structure and methodology followed. To summarise, borrowers can
benefit from this change. MCLR is an improved version of the base rate.
 It is a risk-based approach to determine the final lending rate for borrowers. It considers unique factors like the al
cost of funds instead of the overall cost of funds.
 The al cost takes into account the repo rate, which did not form part of the base rate. When calculating the
MCLR, banks are required to incorporate all kinds of interest rates that they incur in mobilizing the funds.
 Earlier, the loan tenure was not taken into account when determining the base rate. In the case of MCLR, the
banks are now required to include a tenor premium. This will allow banks to charge a higher rate of interest for
loans with long-term horizons.
WHAT ARE THE DEADLINES TO DISCLOSE MONTHLY MCLR?

 Banks have the liberty to make available all loan categories under fixed or floating interest rates. Additionally,
banks need to follow specific deadlines to disclose the MCLR or the internal benchmark. They could be one
month, overnight MCLR, three months, one year or any other maturity as the bank deems fit.
 The lending rate cannot be below the MCLR for any loan maturities. However, there are other loans that are not
linked to MCLR. These include loans against customers’ deposit, loans to the bank’s employees, special loan
schemes by the Government of India (Jan Dhan Yojana), fixed-rate loans with tenures above three years.
UNIT 2
FINANCIAL MARKETS

 Any place where the exchange and trading of financial assets, including stocks, bonds, commodities, forex, etc., takes place. It provides a
platform where those in need of funds can easily find those who are looking for returns on their investments.
 Like regular markets are places where buying & selling of goods occur, financial markets serve the same purpose for financial instruments.
 Provide an avenue for individuals and institutions to participate in the trading of securities. This includes stocks, bonds, commodities,
money market instruments, forex, derivatives, etc. Every country has at least one financial market for each of these financial instruments,
though they may be different in size.
 The stock market is an example of financial markets where participants trade stocks. Similarly, investors can buy or sell bonds on the
bond market. There is also a money market, where individuals & institutions deal in securities with short-term maturities & high liquidity.
 Play an essential role in the smooth functioning of a country’s economy. Having efficient financial markets enables anyone in need of
capital to conveniently access it. Informational transparency is crucial in ensuring that market prices reflect the intrinsic value of assets.
 India’s financial markets feature different types of monetary institutions and many new market participants. Banks have the majority of
the monetary value of the country’s financial system. All Indian markets are regulated by the Reserve Bank of India (RBI), the country’s
central bank and the Securities and Exchange Board of India (SEBI), the capital market regulator.
MAIN FUNCTIONS OF FINANCIAL MARKET

 It provides facilities for interaction between the investors and the borrowers.
 It provides pricing information resulting from the interaction between buyers and sellers in the market when they
trade the financial assets.
 It provides security to dealings in financial assets.
 It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
 It ensures low cost of transactions and information.
HOW ARE FINANCIAL MARKETS STRUCTURED IN INDIA?

 Financial markets are divided into two segments: money markets and capital markets. While money markets deal
with short-term liquid securities, capital markets usually deal with medium-term and long-term securities.
MONEY MARKET AND CAPITAL MARKET

 Money market
 Deal with highly liquid and low-risk instruments. participants trade money market instruments such as Treasury Bills (T-Bills), certificates of
deposits, commercial papers, overnight securities, etc. These securities have maturities of one year or less.
 These assets are characterized by high liquidity, short-term maturity periods, low risks of loss or volatility and low-interest rates. They are
mostly used by companies and large institutional investors like government bodies and financial institutions for wholesale traders.
 Although the returns from these assets are limited, they offer a high degree of safety due to their liquidity & short tenures. Money markets
also offer a large variety of instruments to choose from. For market participants who require funds, this market is a reliable source of cash.
 Capital market
 Venues where entities that require capital can access it from suppliers who have excess funds. It includes stock markets, bond markets,
currency markets and forex markets. The stock market and the bond market are the two most popular capital markets.
 Suppliers include financial institutions & investors who have extra capital to invest. Entities looking for capital include companies, government
bodies & individual borrowers. It provides a platform where buyers & sellers can come to terms & exchange securities.
 The capital market can be divided into two categories- The primary market and the secondary market.
DISTINCTION BETWEEN MONEY MARKET & CAPITAL MARKET

 Firstly, while money market is related to short-term funds, the capital market related to long term funds.
 Secondly, while money market deals in securities like treasury bills, commercial paper, trade bills, deposit
certificates, etc., the capital market deals in shares, debentures, bonds and government securities.
 Thirdly, while the participants in money market are Reserve Bank of India, commercial banks, non-banking financial
companies, etc., the participants in capital market are stockbrokers, underwriters, mutual funds, financial
institutions, and individual investors.
 Fourthly, while the money market is regulated by Reserve Bank of India, the capital market is regulated by
Securities Exchange Board of India (SEBI).
PRIMARY MARKET AND SECONDARY MARKET

 Primary market
 Also known as New Issue Market, this is where a company issue securities for the first time. Companies use this
marketplace to raise capital to help them fund their business endeavors. They issue securities in the primary market in the
form of shares, bonds and IPOs (Initial Public Offerings).
 Secondary market
 Shares that have already been issued in the primary markets are traded in the secondary markets. Unlike primary markets,
where securities move from companies to investors, in the second market, securities are traded among investors. Also, the
value of securities tends to change as per their demand and supply. Stocks, Futures, Options, bonds, etc., are some of the
financial instruments traded in the secondary markets.
DISTINCTION BETWEEN PRIMARY MARKET & SECONDARY MARKET

 The main points of distinction between the primary market and secondary market are as follows:
 1. Function : While the main function of primary market is to raise long-term funds through fresh issue of securities, the
main function of secondary market is to provide continuous and ready market for the existing long-term securities.
 2. Participants: While the major players in the primary market are FIs, MFs, underwriters & individual investors, the major
players in secondary market are all of these and the stockbrokers who are members of the stock exchange.
 3. Listing Requirement: While only those securities can be dealt within the secondary market, which have been approved for
the purpose (listed), there is no such requirement in case of primary market.
 4. Determination of prices: In case of primary market, the prices are determined by the management with due compliance
with SEBI requirement for new issue of securities. But in case of secondary market, the price of the securities is determined
by forces of demand and supply of the market and keeps on fluctuating.
WHAT FACTORS IMPACT THE FINANCIAL MARKET?

 Some driving forces impact market movement; by understanding these factors, we can financially plan in life.
Factors such as supply and demand, international transactions and more are aspects of the financial market. Even
events and trends significantly contribute to the changes in the financial sector.
1. SUPPLY AND DEMAND

• Everyone holds a different view about the economy at the Micro & Macro level, and such perception, behavioral
actions & estimates affect how they act today. In other words, financial markets are indirectly correlated to the
consumption of goods & services within the economy and the speculations and expectations regarding the
growth or downfall of the products or services. The future possibility of demand and supply is dependent on
current acts. The present financial interactions determine the current and future trends.
2. SPECULATION & INVESTOR SENTIMENT

• Speculations and Investor sentiment affect the financial market in numerous ways. Some of the determining
factors are:
1. Change in the level of trust placed in the industry
2. Industry sentiment indicators gauging industrial venture's growth of physical products & services
3. Popular notions or desirable outcomes of investors regarding businesses
4. Analysis of all possible indicators as well as other forms of fundamental and technical analysis
5. Any bias or expectation of future price rates and trend direction
3. INTERNATIONAL TRANSACTIONS

• Currency exchange rates between countries also affect the financial market. A higher currency exchange rate
gives the investor as well as the seller an advantage in deriving more value in the financial market. The flow of
funds between countries affects the strength of a country's economy and its currency which happens mostly via
imports and exports. Countries that predominantly export physical goods or services are continually bringing
money into their countries, thereby more money getting reinvested in the financial market. This type of positive
economic activity stimulates the economy comprehensively.
4. CURRENT EVENTS:

 The current events in the country, as well as outside, has an impact on the financial market sentiments. As all
stakeholders are connected at a Macro Level to the local & global markets, current societal affairs have an effect on the
Financial Markets. Some of the regular events with recurrence include: -
 Technological changes in the country at a larger or smaller level.
 Inflation or Deflation leads to increased or decreased prices of physical goods or services.
 Economic indicators such as the Consumer Confidence Index or Index of Industrial Production gives an insight into probable effects
or outcomes in the near future.
 Natural calamities or extreme weather events lead to surplus or shortage, change in behavior, or perception of common people
engaging in transactions.
 More conflict and non-resolution doubts arising among stakeholders in the financial market can lead to a decline in investments.
 Wars or another conflict can lead to temporary or permanent stoppage of financial trading in the region or regions around the
War/conflict.
 5. GOVERNMENT:

 Most of the State governments in the world have control over the financial markets through fiscal and monetary
policies. Increasing and decreasing domestic currency interest rates can effectively slow down or speed up growth
within the country. Government, by the medium of Central bank, issues interest rates applicable to all financial
bodies within the monetary system. Interest rates play a vital role in the valuation of any stock or bond. If
Government spending on various economic sectors increases or decreases, it can effectively ease unemployment,
stabilize prices, or vice-versa. The fiscal & monetary policies have a profound effect on the real disposable income
of the public too. By raising or lowering taxes, altering interest rates, and influencing the amount of currency
available in the open market, the government can change how much investment flows in and out of the country.
LINKAGES BETWEEN ECONOMY AND FINANCIAL MARKET

 Financial markets play an important role in any well developed economy. Smoothly working financial market do
contribute to the health and efficiency of an economy. There is a strong positive relationship between financial markets
and economy of the nation. Economic development creates demands for particular types of financial engagements. The
financial market responds automatically to these demands. Financial market is a part of financial system of any economy.
There is a way as to how optimal financial system should look like. The optimal financial system in combination with a
well-developed legal system should integrate both direct, market & indirect, bank-based finance. Direct market based
finance has an effect on economic growth in the following ways:
 Funneling savings to firm
 Improving the allocation of capital
 Affecting the saving rate
 Risk sharing
 Household borrowing
 Interest rate effects
LINKAGES BETWEEN ECONOMY AND FINANCIAL MARKET

 A well-developed financial market with financial institutions would promote savings. It also encourages these
savings to flow into financial assets as against physical assets. The flow of liquidity into physical assets such as gold,
silver or real estate would nourish inflation. If the same capital flow is in financial assets it is not only
non-inflationary but would aid growth in the economy.
 The financial system is also particularly important in reallocating capital. Thus it provides the base for the
continuous reorganization of the economy which is needed to support growth. In countries with a highly
developed financial market, we observe that a greater share of investment is allocated to relatively fast
growing sectors. The reason is there are new financial assets which come up in financial markets.
 The third way financial development can affect growth is by shifting the saving rates. The financial development
may also reduce saving, and thereby growth. As capital markets develop, households gain better insurance against
granted shocks and better diversification of rate-of-return risk. Credit becomes more readily and cheaply
available. It also narrows the distance between the interest rate paid by firms and that received by households.
LINKAGES BETWEEN ECONOMY AND FINANCIAL MARKET

 Financial markets enable people to share both endowment risks (such as health hazards) and rate-of-return
risk (such as that due to the volatility of stock returns). People counter the first type of risk via insurance
markets. Rate-of-return risk can be reduced by diversifying portfolios through securities markets.
 Capital markets also transfer funds from households that save to those that do not save, in the form of consumer
credit and mortgage loans. If the loan supply falls short of demand then it affects some households which are
liquidity-constrained. The reason is their consumption is limited by current resources, rather than by permanent income.
Thus mandatory liquidity constraints increase the saving rate. For some industries at certain times of their development,
market-based financing is advantageous. As we all know financing through stock markets is ideal for industries.
 As such market brings continuous technological advances and there is little harmony on how firms should be
managed. The contribution of financial markets in this area is a necessity. It maintains the competitiveness of an
economy today. Factors such as strongly increased international competition, rapid technological progress are
responsible. The increased role of innovation for growth performance is also important.
INTEGRATION OF INDIAN FINANCIAL MARKETS WITH GLOBAL
MARKETS

 Globalization, deregulation and advances in information technology

 Financial integration of emerging market economies
 Cross-border mobility of private capital inflows due to investors pursuing portfolio diversification and better
returns.
 Growing belief of nations on the savings of other nations & a shift in the preference of companies from debt to
equity finance
 Benefits like development of markets and institutions & effective price discovery leading to higher savings, more
investment and economic progress
 Risks also - contagion and associated disruption of economic activities. Eg.Asian crisis in late 1990s and 2008
global crisis
INTEGRATION OF INDIAN FINANCIAL MARKETS WITH GLOBAL
MARKETS

 Indian financial market – internationalization began in the early 1990s.

 BSE emerged as the largest stock exchange in the world in terms of number of companies listed.
 Many companies decided to list on stock exchanges of other nations especially United States & United Kingdom.
 India - a fourth of total portfolio capital inflows to the emerging market economies (EMEs) group.
 FIIs participation in India’s stock market is increasing each day.
 Singapore & Hong Kong markets have significant influence. Japanese market has weak influence on the Indian
market. The two global markets, United States & United Kingdom, have a major impact on the Indian market.
 Co-integrated stock markets would contribute to financial stability, since they cannot deviate too far from the
long-run equilibrium path. From the standpoint of their portfolio diversification objective, investors cannot benefit
from arbitrage activities in the long run.
MUTUAL FUNDS

 Collective/ Pooled Investment made by professional managers on behalf of small investors.

 Benefits - Diversification, Professional Management, Liquidity, Low Cost, Convenience, Lower risk,
Transparency, Choice of Schemes,Tax Benefits
 Fees & Commissions – Expense Ratios
 Structure of MF in India – Sponsors (of the AMC), Asset Management Company (manages funds), Board
of Trustees (Protect Investors), Custodians (Safe Custody, Trade Settlement, Transfer Agents), Regulator
(SEBI), Unit Holder (Investor)
 Example – SBI Mutual Funds: Sponsor – SBI; Trustee – SBI Mutual Fund Trustee Company Pvt. Ltd.; Asset
Management Company – SBI Funds Management Pvt. Ltd. (A Joint Venture between SBI & AMUNDI);
Custodians – Bank of Nova Scotia/ HDFC Bank/ SBI-SG Global Securities Pvt. Ltd.
TYPES OF MUTUAL FUNDS

 By structure (open ended, closed ended)

 By Nature (Equity, Debt, Balanced/Hybrid)
 Equity Funds (Large Cap, Mid Cap, Small Cap, Sectoral, ELSS)
 Debt Funds (Short term, Long Term)
 Hybrid Funds (Equity oriented, debt oriented)

 By Investment Objective (Growth Oriented, Dividend/ Income Plan)

 Specialized Funds - Offshore,Arbitrage, Contra, Money Market, Gilt etc.
 By Management Style (Active, Passive/ Index)
 By Load (Front, back, no Load)
TYPES OF MUTUAL FUNDS
NAV

 NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by its NAV per unit.
 NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a
given date. For example, if the market value of securities of a mutual fund scheme is ₹200 lakh and the mutual fund has
issued 10 lakh units of ₹ 10 each to the investors, then the NAV per unit of the fund is ₹ 20 (i.e., ₹200 lakh/10 lakh).
 Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis.
 NAVs of mutual fund schemes are published on respective mutual funds’ websites as well as AMFI’s website daily.
 Unlike stocks, where the price is driven by the stock market and changes from minute-to-minute, NAVs of mutual fund
schemes are declared at the end of each trading day after markets are closed, in accordance with SEBI Mutual Fund
Regulations. Further, Units of mutual fund schemes under all scheme (except Liquid & Overnight funds) are allotted only
at prospective NAV, i.e., the NAV that would be declared at the end of the day, based on the closing market value of the
securities held in the respective schemes.
 A mutual fund may accept applications even after the cut-off time, but you will get the NAV of the next business day.
Further, the cut-off time rules apply for redemptions too.
WHAT IS CREDIT RATING

 Credit rating is an evaluation of the creditworthiness and loan repayment capability of an entity that has or want
to borrow money. It is basically an opinion of registered Credit Rating Agencies (CRAs) regarding the ability and
willingness of an entity to pay back the debt on time. Needless to mention that good credit rating depicts a good
repayment history, along with responsible credit behavior of an enterprise, company or organization. Credit rating
of an entity influences the lender’s decision of approving and denying loan applications.
TYPES OF CREDIT RATINGS

 Credit Rating is measured broadly under two main categories that is Investment Grade and Speculative Grade.
However, the risk associated with a corporate entity is scaled as per the credit ratings defined by each CRAs in
India. The credit ratings are majorly graded from the highest (AAA) to (D) lowest that shall vary as per the agency
and company’s profile.
 a) Investment Grade: Investment grade credit ratings signifies that the company has made perfect investment
decisions and are in a good position to repay their debts on time. Corporate entities falling under this category
can avail loan easily that too at low interest rates.
 b) Speculative Grade: Companies falling under this category have made risky business investments and shall not be
able to repay the loan on time. Therefore, these corporate entities do get loans but at higher interest rates.
ENTITIES THAT CHECK CREDIT RATINGS

 Entities that check credit ratings of companies and enterprises include the following:

 Lenders (Banks/NBFCs and other financial institutions)

 Investment Banks
 Debt Issuers
 Retail and Institutional Investors
 Other business entities
IMPORTANCE OF CREDIT RATING

 For Lenders
 Better Investment Decision: No bank or money lending companies would like to give money to a risky customer. With
credit rating, they get an idea about the creditworthiness of a company (that is borrowing the money) and the risk factor
attached with them. By evaluating this, they can make a better investment decision.
 Safety Assured: High credit rating means an assurance about the safety of money and that it will be paid back with interest
on time.
 For Borrowers
 Easy Loan Approval: With a high credit rating, you will be seen as a low/no risk customer. Therefore, banks will approve your
loan application easily.
 Competitive Rate of Interest:You must be aware of the fact that every bank offers loans in a particular range of interest
rates. One of the major factors that determine the rate of interest on the loan you take is your credit history. Higher the
credit rating, lower the rate of interest.
HOW DO CREDIT RATING AGENCIES WORK IN INDIA

 Every credit rating agency has its own algorithm to evaluate the credit rating through major factors, such as timely
repayment of supplies and dues, cash flow, working capital, net worth, etc.
 Every month, these credit rating agencies collect credit information from partner banks and other financial
institutions
 Once the request for credit rating has been made, these agencies dig out the information and prepare a report
based on such factors
 Based on that credit report, they grade every individual or company and give them a credit rating
 This rating is used by banks, financial institutions and investors to make a decision of investing money, buying
bonds or giving loan or credit card
 The better the rating is, more are the chances of getting loan at lower interest rates
TOP 7 CREDIT RATING AGENCIES IN INDIA

 Credit Rating Information Services of India Ltd. (CRISIL)

 Investment Information and Credit Rating Agency of India (ICRA) Ltd.
 Credit Analysis and Research (CARE) Ltd.
 India Ratings and Research Pvt. Ltd.
 Brickwork Ratings India Private Ltd.
 INFOMERICS Valuation and Rating Private Ltd.
 Acuité Ratings & Research Ltd.
TOP 7 CREDIT RATING AGENCIES IN INDIA

 Credit Rating Information Services of India Ltd. (CRISIL) - Incorporated in 1987, CRISIL Ratings Limited (A subsidiary of
CRISIL Limited, an S&P Global company) is a full-service credit rating agency that serves investors, lenders, issuers, and
market intermediaries and regulators by covering banks, NBFCs, PSUs, manufacturing companies, financial institutions,
state governments, urban local bodies, etc. It evaluates the creditworthiness of commercial entities based on their
strengths, market reputation and market share. The agency helps investors make informed investment decisions by
providing credit ratings for companies, organisations and banks. CRISIL generates and provides various ratings services,
such as Independent Credit Evaluation, Corporate and financial Sector ratings, Fund Ratings, Recovery Risk Ratings,
Expected Loss (EL) Ratings, etc. The rating generated by the agency ranges from AAA to D, wherein AAA is the highest
or creditworthy and D being the lowest or even defaulted.
 Investment Information and Credit Rating Agency of India (ICRA) Ltd. - ICRA Limited (formerly Investment Information
and Credit Rating Agency of India Limited) is an independent and professional investment Information and Credit Rating
Agency. Formed in 1991, ICRA offers guidance and information to institutional and individual investors and creditors. It
rates rupee-dominated debt instruments issued by commercial banks, NBFCs, PSUs, manufacturing companies and
municipalities. The agency uses a transparent rating system to assign comprehensive credit ratings to corporates. It
specialises in assigning corporate governance rating, mutual funds rating, structured finance rating, performance rating,
etc.
TOP 7 CREDIT RATING AGENCIES IN INDIA

 Credit Analysis and Research (CARE) Ltd. - Established in 1993, Credit Analysis and Research Limited (CARE) is
an experienced credit rating agency that covers various market sectors, including infrastructure, manufacturing,
and financial sector, including banks and non-financial services. The agency provides ratings to companies related
to developing bank debt and capital market instruments that include CPs, corporate bonds and debentures, and
structured credit. Its credit ratings can be used by investors to make informed decisions on the basis of credit risk
and risk-return expectations. CareEdge Ratings’ (CARE Ratings Ltd.) manages and operates its wholly owned
subsidiaries, such as CARE Advisory, Research & Training Ltd. and CARE Risk Solutions Pvt Ltd.
 India Ratings and Research Pvt. Ltd. - India Ratings and Research (Ind-Ra), a wholly owned subsidiary of the Fitch
Group is one of the leading credit rating agencies recognized by SEBI and accredited by RBI. Ind-Ra offers credit
rating services to banks, insurance companies, corporate issuers, finance and leasing companies, urban local bodies
and managed funds, structured finance and project finance companies. With its Head office is Mumbai, the agency
operates from its seven branch offices across India, including Delhi, Chennai, Kolkata, Ahmedabad, Bengaluru,
Hyderabad and Pune.
TOP 7 CREDIT RATING AGENCIES IN INDIA

 Brickwork Ratings India Pvt. Ltd. - Brickwork Ratings (BWR) is a SEBI registered and RBI accredited Credit Rating Agency that offers
rating services on Bank Loans, Fixed Deposits, Non-convertible debentures (NCD), Commercial Paper, Securitised paper, Security
receipts, etc. The agency offers credit ratings for banks, financial institutions, large corporate customers, and state and local governments.
BWR offers a wide range of rating services and products related to Capital Market Instruments and Bank Loans for the Corporate,
Financial, Infrastructure and Insurance Sectors, PSUs, State Government, Municipal and Urban Local Bodies, etc.
 INFOMERICS Valuation and Rating Pvt. Ltd. - INFOMERICS Valuation and Rating Private Limited is a SEBI registered and RBI accredited
Credit Rating Agency that provides deep analysis and evaluation of creditworthiness and ratings of Banks, NBFCs, Large Corporates and
Small and Medium Scale Units (SMUs). INFOMERICS offer credit rating services money market & capital market instruments and
borrowing programmes. The agency also rates Mutual Funds and Alternative Investment Fund schemes. Its grading services include
Corporate Governance rating, and Grading of Construction entities, Engineering & Management institutions, Initial Public Offerings
(IPOs), etc.
 Acuité Ratings & Research Limited - Acuité Ratings & Research Limited (Formerly known as SMERA Ratings Limited) is a SEBI registered
and RBI accredited credit rating agency that offers ratings to companies serving structured finance, corporate and financial sectors. Its
earlier range of products and services portfolio included Bank Loan Ratings, SME Ratings, Bond Ratings, CP Ratings, etc. However,
currently the agency’s primary services include Bond & Bank Loan Ratings, Economic Analysis and Financial Research services. Largely,
Acuité offers services to largely small-sized private corporates, and public sector organizations like Nuclear Power Corporation, and
renowned companies in the financial sector. The agency offers credit rating services to companies serving various sectors, such as
banking, telecom, IT & ITes, steel, aviation, oil and gas, retail, etc.
INTRODUCTION TO MERCHANT BANKING

 Merchant banking is a professional service provided by the merchant banks to their customers considering their
financial needs, for adequate consideration in the form of fee. Merchant banks are banks that conduct
fundraising, financial advising and loan services to large corporations.
 These banks are experts in international trade, which makes them experts in dealing with large corporations
and industries. Merchant banking provides funds to the multinational businesses and large business entities in the
country which helps to boost the country’s economic strength.
 Merchant banks do not provide services to the general public; their services are limited to business entities
and large business corporations.
 Merchant banker is a person who provides assistance for the subscription of securities. The merchant banker
plays an important role and carries a lot of responsibilities like, private placement of securities, managing
public issue of securities, stock broking, international financial advisory services, etc.
FUNCTIONS OF MERCHANT BANKING

 The functions of merchant banking in India are governed by Securities and Exchange Board of India (SEBI) regulations, 1992.

 Portfolio Management: Merchant banking provides investment advice to the investors to make the investment decisions. The
merchant bank provides portfolio managing assistance to the investors by trading securities on their behalf.
 Raising funds for clients: Merchant banks assist clients in raising funds from the domestic and international market by issuing
securities.
 Promotional activities: The merchant bank also helps in the promotion of the business institute in its initial stages. It helps the
organisation to work on their business idea and to get the approval from the government.
 Loan Syndication: This is the service provided by merchant banks to its clients for raising credit from banks and financial institutions.
 Leasing Services: Merchant banks also provide leasing services to their customers.
 Merchant banking provides a lot of support and opportunities for new businesses. This in turn also has a positive effect on the country’s
economic growth.
BENEFITS OF MERCHANT BANKING

 Risk Management: Merchant banks can provide risk management services such as hedging, derivatives, and insurance
solutions to protect clients from market fluctuations.
 Expertise: Merchant banks have extensive knowledge of financial markets and industries, providing clients with strategic
advice and guidance.
 Networking: Merchant banks have vast networks of contacts, including investors, corporations, and financial
institutions, which can help clients identify opportunities and connect with potential partners.
 International Presence: Merchant banks often have a global presence, which can help clients expand their business
internationally and access foreign markets.
 Customized Solutions: Merchant banks provide tailored solutions to meet the specific needs of clients, rather than
offering off-the-shelf products and services.
 Long-term Relationships: Merchant banks typically work closely with clients over the long term, building strong
relationships and providing ongoing support and advice.
HOW DOES MERCHANT BANKING WORK?

 Merchant banks typically work with large, established companies that need help with mergers and acquisitions, IPOs, and other
complex financial transactions.
 The services provided by merchant banks may include underwriting, corporate finance, securities trading, and advisory
services.
 Merchant banks may also offer services like investment management, asset management, and wealth management to high-
net-worth individuals and families.
 Merchant banks typically charge higher fees for their services compared to traditional banks due to the specialized nature of
their work.
 Merchant banks may also take equity stakes in the companies they work with, which can provide additional revenue streams
and potentially lucrative investments.
 Merchant banks may be standalone institutions or part of larger financial institutions like investment banks or
commercial banks.
 The merchant banking industry has evolved significantly over time, with new regulations and market dynamics shaping the way that
merchant banks operate and provide services to their clients.
FEATURES OF MERCHANT BANKING

 Merchant banking is a specialized form of banking that focuses on providing customized financial services and
advice to corporations, governments, and high net-worth individuals.
 Merchant bankers act as intermediaries between their clients and financial markets, helping clients to
raise capital, manage risks, and invest wisely.
 Merchant banking services include underwriting, syndication, mergers and acquisitions, portfolio
management, corporate restructuring, and project financing.
 Merchant bankers are skilled in analyzing financial data, assessing market trends, and identifying
investment opportunities for their clients.
 Merchant banking requires a high level of expertise and experience in financial markets, as well as strong
relationships with other financial institutions, regulators, and key stakeholders.
EXAMPLES OF MERCHANT BANKING

 Overall, merchant banking is a broad field that encompasses a range of financial services, including underwriting, M&A, private equity, venture capital,
structured finance, wealth management, corporate finance, international trade finance, real estate finance, and advisory services.

 Here are some examples of merchant banking :

 Underwriting: Merchant banks may provide underwriting services for initial public offerings (IPOs) and other securities issuances. This involves taking on the
risk of buying securities from the issuer and then selling them to investors at a profit.
 Mergers and Acquisitions (M&A): Merchant banks may also act as intermediaries in M&A transactions, advising both buyers and sellers on deal structure,
valuation, and other aspects of the transaction.
 Private Equity: Merchant banks may invest in private companies through private equity funds. This involves buying a stake in the company and working with
management to improve operations, with the goal of eventually selling the stake at a profit.
 Venture Capital: Similar to private equity, merchant banks may also invest in early-stage startups through venture capital funds. This involves taking on more
risk in exchange for potentially higher returns.
 Wealth Management: Some merchant banks offer wealth management services to high-net-worth individuals and families. This may include investment
management, tax planning, estate planning, and other services.
 Corporate Finance: Merchant banks may provide a range of corporate finance services, such as debt and equity financing, restructuring, and risk management.
WHAT IS VENTURE CAPITAL?

 It is the money provided by an outside investor to finance a new, growing, or troubled business. The venture
capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits
and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan.
 Venture Capital is the most suitable option for funding a costly capital source for companies and most for
businesses having large up-front capital requirements which have no other cheap alternatives.
FEATURES OF VENTURE CAPITAL

 Equity Participation: Venture financing is actual or potential equity participation through direct purchase of
shares, options or convertible securities. The objective is to make capital gains by selling-off the investment,
once the enterprise becomes profitable.
 Long-term Investment: Venture financing is a long term, illiquid investment; it is not repayable on demand. It
requires long-term investment attitude that necessitates the venture capital firms to wait for a long period,
say 5-10 years, to make large profits.
 Participation in management: Venture financing involves participation of the venture capitalist in the
management of the entrepreneur’s business. This hands-on management Approach helps him to protect and
enhance his investment by actively supporting the entrepreneur. More than finance, other important inputs
such as technology, planning and management skills are provided to new firm.
ADVANTAGES & DISADVANTAGES – VC

 Advantages of Venture Capital

 They bring wealth and expertise to the company
 Large sum of equity finance can be provided
 The business does not stand the obligation to repay the money
 In addition to capital, it provides valuable information, resources, technical assistance to make a business successful
 Disadvantages of Venture Capital
 As the investors become part owners, the autonomy and control of the founder is lost
 It is a lengthy and complex process
 It is an uncertain form of financing
 Benefit from such financing can be realized in long run only
METHODS OF VC

 Equity
 Participating Debentures (different interest rates for different periods)
 Conditional Loan
 Royalty
STAGES OF VC FINANCING
STAGES OF VC FINANCING (CONTD.)
 Early Stage Financing:
 It has three sub-divisions: seed financing, start up financing and first stage financing.
 Seed financing is defined as a small amount that an entrepreneur receives for proving & fructifying a new idea.
 Start up financing is given to companies for the purpose of finishing the development of products/ services & marketing.
 First Stage financing: Companies that have spent all their starting capital and need finance for beginning business/ manufacturing activities
at the full-scale are the major beneficiaries of the First Stage Financing.
 Expansion Financing:
 It may be categorized into second-stage, third stage, & fourth stage financing.
 Second-Round: Operational capital given for early stage companies which are selling products, but not generating profits.
 Third-Round:Also known as Mezzanine financing, this is the money for expanding a newly profitable company.
 Fourth-Round: Also called bridge financing, 4th round is provided as a short-term interest only financing option for the "going public“ or
IPO process.
 Acquisition or Buyout Financing:
 It is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to
acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain
control over another company using a large amount of debt.
EXIT STRATEGY

 The focus is often on identifying the next big thing, the next unicorn that will bring in massive returns for investors. But while finding the
right companies to invest in is certainly important, it's equally crucial for investors to have a solid exit strategy in place.

 What is an Exit Strategy and Why is it Important?

 An exit strategy is a plan for how investors will eventually sell their stake in a company and realize their returns.
 Manage Risk and Align Interests with Exit Strategies

 Manage risk - First and foremost, they help investors to manage risk. Investing in startups is inherently risky, as many of these companies
will fail to achieve the kind of growth and success that investors are hoping for. By having a clear plan for how they will eventually exit an
investment, investors can mitigate some of this risk and ensure that they have a way out if things don't go as planned.
 Alignment of Interests - Another key benefit of exit strategies is that they help to align the interests of investors and entrepreneurs.
When investors and entrepreneurs are on the same page about how and when investors will exit a company, it can help to build trust
and collaboration between the two parties. This, in turn, can help to drive better outcomes for both sides.
COMMON EXIT STRATEGIES FOR VENTURE INVESTING

 Initial Public Offering (IPO): An IPO is when a company sells shares of its stock to the public for the first time. This
is typically the most lucrative exit strategy for investors, as it can lead to significant returns if the company's stock
performs well. However, IPOs are also unpredictable and can be difficult to time correctly - especially in volatile
investment climates, like the one we are in today.
 Acquisition: An acquisition is when another company buys out a startup. This can be a good exit strategy for investors
who are looking for a quicker return on their investment, as acquisitions can often happen relatively quickly. However,
acquisitions can also tend to result in lower returns for investors than IPOs.
 Secondary Market: A secondary market is a marketplace where investors can buy and sell shares in private
companies. This can be a good option for investors who want to exit a company before it goes public or gets acquired.
However, secondary markets can be illiquid and it can be difficult to find a buyer for your shares.
 Buyback: A buyback is when a company repurchases shares of its own stock from investors. This can be a good option
for investors who are looking for a quick and easy way to exit a company. However, buybacks tend to result in lower
returns for investors than IPOs or acquisitions.
FACTORS TO CONSIDER WHEN CHOOSING AN EXIT STRATEGY

 the stage of the company,

 the industry the company operates in, and
 the goals of the investors.
 the timing. It can have a significant impact on the returns that investors receive. If investors exit too early, they
may miss out on significant upside potential. On the other hand, if they wait too long to exit, they may be stuck
with an illiquid investment that is difficult to sell.
WHAT IS PRIVATE EQUITY?

 Private equity describes investment partnerships that buy and manage companies before selling them. Private
equity firms operate these investment funds on behalf of institutional and accredited investors.
 Private equity funds may acquire private companies or public ones in their entirety, or invest in such
buyouts as part of a consortium. They typically do not hold stakes in companies that remain listed on a stock
exchange.
 Private equity is often grouped with venture capital and hedge funds as an alternative investment. Investors in this asset
class are usually required to commit significant capital for years, which is why access to such investments is limited to
institutions and individuals with high net worth.
 In contrast with venture capital, most private equity firms & funds invest in mature companies rather than
startups. They manage their portfolio companies to increase their worth or to extract value before exiting the
investment years later.
 Private equity firms raise client capital to launch private equity funds, and operate them as general partners,
managing fund investments in exchange for fees and a share of profits above a preset minimum known as
the hurdle rate.
PRIVATE EQUITY SPECIALTIES

 Some private equity firms and funds specialize in a particular category of private-equity deals. While venture
capital is often listed as a subset of private equity, its distinct function and skillset set it apart, and have given rise
to dedicated venture capital firms that dominate their sector. Other private equity specialties include:
 Distressed investing, specializing in struggling companies with critical financing needs
 Growth equity, funding expanding companies beyond their startup phase
 Sector specialists, with some private equity firms focusing solely on technology or energy deals, for example
 Secondary buyouts, involving the sale of a company owned by one private-equity firm to another such firm
 Carve-outs involving the purchase of corporate subsidiaries or units.
FOREIGN EXCHANGE MARKET

 What is Foreign Exchange Market?

 The Foreign Exchange Market is a global decentralized marketplace where currencies are bought and sold. It is the largest
and most liquid financial market in the world, with trading volumes exceeding $6 trillion per day. The forex market
facilitates international trade and investment and also speculation by enabling businesses to convert one currency
into another.
 The forex market operates 24 hours a day, 5 days a week, with trading taking place in major financial centers around the
world. The market is driven by various factors, including economic data, geopolitical events, and central bank
policies. The exchange rate, which is the value of one currency relative to another, is determined by supply and demand
forces in the market.
WHAT ARE THE DIFFERENT TYPES OF FOREIGN EXCHANGE
MARKETS?

 There are three main types of foreign exchange markets:

 1. Spot Forex Market

 The spot forex market is where currencies are traded for immediate delivery. This means that the exchange of currencies takes place at the current
market price, which is determined by supply and demand forces. The spot forex market is the most liquid and actively traded market in the world, with
trading taking place 24 hours a day across major financial centers.

 2. Forward Forex Market

 The forward forex market is where contracts are used to buy or sell currencies at a future date at a predetermined exchange rate. This allows
participants to lock in a future exchange rate, providing protection against currency fluctuations. The forward forex market is used for hedging
purposes and is not as actively traded as the spot market.

 3. Futures Forex Market

 The futures forex market is a centralized exchange where standardized contracts are traded for the future delivery of a specified currency at
a predetermined price. Futures contracts are used for hedging and speculative purposes and are traded on regulated exchanges. The futures forex
market is less liquid than the spot market and requires participants to post margin.
ADVANTAGES OF FOREIGN EXCHANGE MARKETS

 High liquidity: The forex market is the largest and most liquid market in the world, making it easy to buy and sell
currencies quickly.
 Accessibility: The forex market is open 24 hours a day, 5 days a week, and can be accessed by anyone with an internet
connection.
 Diverse trading options: Traders can choose from a wide range of currency pairs and trading strategies, providing
ample opportunities for profit.
 Low transaction costs: The cost of trading in the forex market is relatively low compared to other financial markets.
 Leverage: Forex trading allows traders to use leverage to increase their trading position, potentially amplifying profits.
 Global market: The forex market is a global market, making it a valuable tool for international businesses to manage
their currency risk.
 Transparency: The forex market is highly transparent, with real-time price data available to all market participants.
DISADVANTAGES OF FOREIGN EXCHANGE MARKETS

 Volatility: The forex market is highly volatile and can experience sudden and significant price movements, which can lead to large losses
for traders.
 Risk of leverage: While leverage can increase potential profits, it can also magnify losses and lead to significant financial risk.
 High competition: The forex market is highly competitive, and traders must compete with other market participants, including large
financial institutions.
 Limited regulation: The forex market is not as regulated as other financial markets, which can lead to fraudulent activities and scams.
 Complex market: The forex market can be complex, and traders must have a good understanding of the market and its various factors
that affect currency values.
 Economic and political events: The forex market is highly influenced by economic and political events, which can cause significant
volatility and unpredictability.
 High barriers to entry: Trading in the forex market requires a significant amount of knowledge, experience, and capital, making it
difficult for inexperienced traders to participate.
FEATURES OF THE FOREIGN EXCHANGE MARKET

 It is a decentralized market that operates 24 hours a day, 5 days a week, across multiple time zones.
 It is the largest and most liquid market in the world, with high trading volumes and low transaction costs.
 The market is influenced by a variety of factors, including economic indicators, geopolitical events, and central
bank policies.
 The market provides opportunities for traders to speculate on the movement of currency values through a range
of trading strategies.
 The market is accessible to a wide range of participants, including individuals, financial institutions, and
governments.
WHO ARE THE PARTICIPANTS IN A FOREIGN EXCHANGE MARKET?

 Commercial banks: Banks are the most active participants in the forex market, trading on behalf of their clients and for
their own accounts.
 Central banks: Central banks participate in the market to manage their country's monetary policy and stabilize currency
values.
 Hedge funds and investment firms: These institutions trade in the forex market to generate returns for their clients.
 Corporations: Multinational corporations use the forex market to manage their currency risk, particularly when
conducting international trade.
 Retail traders: Individual traders can participate in the forex market through online brokers, seeking to profit from
currency price movements.
 Governments: Governments participate in the forex market to manage their currency values and maintain their
country's economic stability.
WHAT FACTORS INFLUENCE THE FOREIGN EXCHANGE MARKET?

 Economic indicators: Economic indicators such as inflation, GDP, and employment data can influence currency
values, as they affect a country's economic outlook.
 Central bank policies: The monetary policies of central banks, including interest rates and quantitative easing
measures, can influence currency values.
 Geopolitical events: Political events such as elections, wars, and trade agreements can cause significant currency
volatility.
 Market sentiment: Market sentiment, including investor confidence and risk appetite, can influence currency
values.
 Natural disasters: Natural disasters can disrupt economic activity and cause currency values to fluctuate.
 Speculation: Speculative trading activity can also influence currency values, as traders buy or sell currencies based
on their expectations of future price movements.
WHAT IS THE REAL EFFECTIVE EXCHANGE RATE (REER)?

 The Real Effective Exchange Rate (REER) is a measure of a country's currency value relative to a basket of other
currencies, adjusted for inflation. It takes into account the relative prices of goods and services between countries
and provides a more comprehensive view of a country's currency value than the nominal exchange rate.
 The REER is calculated by adjusting the nominal exchange rate using the country's inflation rate and the inflation
rates of its trading partners. A high REER indicates that a country's currency is overvalued, while a low REER
indicates that it is undervalued.
HOW DOES THE FOREIGN EXCHANGE MARKET AFFECT THE
ECONOMY?

 International trade: Changes in currency values can affect a country's balance of trade, as exports become more
expensive when a country's currency appreciates.
 Capital flows: The forex market facilitates capital flows between countries, allowing businesses and investors to
invest in foreign markets.
 Monetary policy: The forex market can influence a country's monetary policy, as central banks may adjust interest
rates or intervene in the market to maintain currency stability.
 Economic growth: A stable currency and exchange rate can support economic growth, while currency volatility
can harm business and consumer confidence, potentially leading to economic slowdowns.
WHAT CAUSES EXCHANGE RATES TO FALL?

 Decreased demand: If demand for a country's currency decreases relative to other currencies, its exchange rate
may fall.
 Economic factors: Economic indicators such as deflation or slowing economic growth can lead to a fall in a
country's exchange rate.
 Political instability: Political instability, such as political protests or leadership changes, can cause a country's
exchange rate to fall.
 Central bank policies: If a country's central bank reduces interest rates or engages in quantitative easing, its
currency may weaken.
 Trade imbalances: Persistent trade deficits can cause a country's currency to depreciate as demand for its
currency weakens.
HISTORY OF FOREX

 Foreign exchange trading has a long history, with evidence of currency trading dating back to ancient civilizations.
However, modern forex trading as we know it today began in the 1970s when the Bretton Woods system of fixed
exchange rates collapsed, leading to the adoption of floating exchange rates. The emergence of electronic trading
platforms and the internet in the 1990s transformed the forex market, making it more accessible and providing
greater opportunities for individual traders. Today, the forex market is the largest financial market in the world,
with trillions of dollars traded daily.
UNIT 3
WHAT ARE REGIONAL STOCK EXCHANGES

 Regional Stock Exchanges (“RSE”) are stock exchanges operating in a specific geographical location. They provide
a platform to trade securities and other capital instruments for a limited area. However, the definition also differs
in different jurisdictions. In the United States of America, the RSEs are stock exchanges not located in the
country’s financial centre, i.e. New York.
 In the year 1957, there were 8 Regional Stock Exchange (“RSE”) registered under Securities Contracts
(Regulations ) Act, 1956 and by the 1980s, 13 stock exchanges were further added, thus making it a total of 21.
However, currently, there is only one RSE recognized and registered with SEBI, Calcutta stock exchange. What
was the reason for such an extreme downfall?
HISTORY OF REGIONAL STOCK EXCHANGES

 In the United Kingdom, the London Stock Exchange was established in the 1609s which was the key stock
exchange for almost a century and a half. There was a rise in RSEs subsequently due to the “funding gap” for the
smaller firms located outside London. In the year 1799, a stock exchange came up in Dublin and 1836, two more
stock exchanges were established in Liverpool and Manchester after the first Railway promotion boom.
Subsequent to the second rail promotion boom new stock exchanges like Glasgow, Edinburgh, Aberdeen and 12
other English towns were set up. The reason for the emergence of these stock exchanges was the
industrialization north of England and Scotland and many new investors arose who were located in towns and
cities. Railways and joint-stock banks were also located in these provisional towns.
HISTORY OF REGIONAL STOCK EXCHANGES

 The emergence of RSEs in America can be traced to the 1790s by the founding of the Philadelphia Stock
Exchange. In 1934 when the Securities Exchange Commission was established and 24 exchanges were registered
with it. These included major RSEs operating in America namely the Boston Stock Exchange, Philadelphia Stock
Exchange, Chicago Stock Exchange and Pacific Stock Exchange. Each of these RSEs had a specialized market on its
own, Pacific Stock exchange focused on derivatives trading whereas Philadelphia stock exchange dealt with
currency transactions.
HISTORY OF REGIONAL STOCK EXCHANGES

 In India, originally stock exchanges were regional stock exchanges only, since physical trading was practiced by an
open outcry model. The investors preferred to operate in the companies conducting operations in their vicinity
and even the companies were listed in the stock exchanges where they operated. The business of RSEs was
materially increased after the Ministry of Finance issued a circular mandating the listing of a company on a stock
exchange located in the state where their registered office is established. This step was taken in the year 1985
when there was little to no online trading thus the RSEs were the best alternative to meet the investment needs
of the local investors.
BENEFITS OF REGIONAL STOCK EXCHANGES

 The smaller companies which are not large enough or do not have operations at a national level voluntarily opt to
get registered on RSE instead of national stock exchanges. The decentralized system of stock exchanges in a
country favors the smaller firms by providing larger access to the equity capital.
 Another reason for RSE’s popularity was the less stringent requirements for listing in these exchanges, companies
who are not eligible to get listed on national stock exchanges get listed in RSEs to enable trading of their
securities.
 It also adds to the overall liquidity of the financial market, it also increases the efficiency by providing an
alternative platform to trade.
THE DECLINE OF REGIONAL LISTING

 Slowly but steadily, the popular phenomena of regional listing declined throughout the globe. The traders started
preferring to trade on national stock exchanges as on the same platform they could access securities listing across
the nation, sometimes even international securities. Even the companies started opting to get listed on national
stock exchanges to have larger visibility. The development of technology played a vital role in the decline of the
popularity of regional listing and trading. In India, the share of RSE’s was 45.6% of the total all Indian market
turnover in 1995-96 which continuously declined ever since to 8.4% in 2001-02.
CAUSES FOR THE DECLINE OF RSE

 Online trading on national stock exchanges

 The primary reason for the decline of RSEs has been the growth of stock exchanges operating on national levels. These
integrated stock exchanges enable the investors to have access to the issuers and investment options countrywide and not
only throughout the country but also the investment options at an international level.
OTHER REASONS FOR DECLINE OF RSE

 Abolition of Badla trading

 Another reason for such a decline was the abolition of the Badla system. This system played an imperative role in the business of
regional exchanges like Ahmedabad Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange and Ludhiana Stock Exchange
because badla trading was mostly done via RSEs.
 Badla trading system refers to a system which was a combination of cash & future settlements enabling investors to have long
settlement periods. Under this system, the investors buy shares without taking delivery and the transaction is carried forward to the
next settlement date by paying interest on the outstanding amount. This interest and the operational charges of the exchanges is
called Badla.
 The brokers bridge the gap between the margin and the full value of the shares by utilising the lending mechanism of the exchange,
however, certain eligibility criteria were to be met before such facility could be extended. Thus for the investors who didn’t meet
such criteria, individuals also lent, this was known as Vyaj Badla.
 Badla financing is profitable for the investor as he lends money to buy overnight shares which gives an estimated return of 4 to 5 %
& similar to ‘buy’ they also have a ‘sell’ contract for the next day. It had three benefits- quasi-hedging, stock lending & financing
mechanism.
 The Securities Exchange Board of India first banned badla in 1992 but was revived in 1995 and finally it was banned in the year 2001.
OTHER REASONS FOR DECLINE OF RSE

 Uniform trade and settlement cycles

 Uniform trading cycles were introduced by SEBI in 2001 for all the stock exchanges in the country. As these uniform trade
cycles further reduced the trading opportunities on the RSEs by reducing the arbitrage transactions.
 The same circular also provided for the adoption of rolling settlement instead of the account period settlement with
different settlement cycles on a T+5 from 2001, T+3 from 2002, and T+2 from 2003. Rolling settlement refers to the feature
of stock exchanges ensuring the settlement of the trading transactions within the specified period, here T means the trading
day and T+n means the trade has to be settled within n days from the day of the transaction. The account period settlement
used to be much longer thus incentivizing the traders to trade on RSEs.
OTHER REASONS FOR DECLINE OF RSE

 Ceasing mandatory registration

 During 2001-02, there was no trading in 7 out of 21 RSEs due to the nationwide trading service available on NSE and BSE
covering approximately 400 cities. The absence of trading and the mandatory registration on RSEs increased the operational
costs of the companies thus SEBI issued its (Delisting of Securities) Guidelines, 2003 and Ministry of Finance issued its
circular ceasing the requirement to be mandatorily registered with the RSE in the area of the company’s registered office
instead they could be registered with either of the two national stock exchanges. Thus the last source of income for the
RSEs, the annual listing fees also stopped.
OTHER REASONS FOR DECLINE OF RSE

 Failed attempts of revival

 There were several attempts of the revival of RSEs & other smaller stock exchanges. One such attempt was the integration
of 14 RSEs, with the aim to convert all small isolated markets into one integrated large market with much higher liquidity
and automated trading.
 Initially, the daily turnover increased but it soon reduced as the participating RSEs did not shut down their regional
operations & the bigger investor still preferred the national stock exchanges.
 Another step to revive smaller stock exchanges was taken by SEBI by permitting stock exchanges to float its subsidiaries to
acquire membership rights of other exchanges to provide the members access to a wider market by improving the trade
volume. The attempt was not a complete failure but it is still unable to generate an appreciable volume of trading.
RSES REGISTERED WITH SEBI

 Currently, 9 stock exchanges are operating in India, out of which only one is an RSE. However, until recently, a
total of 23 exchanges were registered in India out of which only 2 were operating at a national level and rest 21
were of regional level. SEBI issued stringent criteria of minimum net worth 100 crore and minimum annual trading
1000 crores in the form of Securities Contracts (Stock Exchanges and Clearing Corporations) Regulations, 2012,
to be listed and as a result, 20 regional stock exchanges opted to exit the business.
 SEBI issued a circular with an exit policy for all the regional stock exchanges which voluntarily wanted to exit the
market and not allow regional stock exchanges with little business to be listed. The committee headed by G.
Anantharaman recommended that regional stock exchanges should be allowed to be self listed or to bring a
strategic partnership with national stock exchanges. Calcutta Stock Exchange tied up with BSE and Madras Stock
Exchange with NSE.
 The said phenomena were said to be inevitable due to increased reach of countrywide stock exchanges due to
online trading and other technological aids, thus their operations’ commercial relevance has subsided.
RSES CURRENTLY REGISTERED WITH THE SEC

 Regional exchanges currently registered with the SEC include the following:
 BOX Options Exchange LLC
 Cboe BYX Exchange, Inc.
 Cboe BZX Exchange, Inc.
 Cboe C2 Exchange, Inc.
 Cboe EDGA Exchange, Inc.
 Cboe EDGX Exchange, Inc.
 Cboe Exchange, Inc.
 Chicago Stock Exchange, Inc.
 The Investors Exchange LLC
 Miami International Securities Exchange
 MIAX PEARL, LLC
 Most of the RSEs were absorbed in other national stock exchanges like NASDAQ acquired the Philadelphia Stock Exchange and Boston exchange.
And New York Stock Exchange acquired Pacific Stock Exchange.
REGIONAL STOCK EXCHANGES OVERSEAS

 Similarly, other RSEs are present in other countries as well. The United Kingdom had several RSEs but all of them
were absorbed by the London Stock Exchange in 1973. However, there still exists one major RSE functioning in
several Caribbean nations named Eastern Caribbean Securities Exchange. The exchange was established in 2001
with the aim to finance the regional investors.
CONCLUSION

 The RSEs decline not only affected the regional brokers, companies but also the investors, particularly
shareholders who realised due to the delisting of several regional companies there was no existing market for
their holdings. The RSEs as a concept was still viable for increasing the liquidity of the market and enabling small
firms to raise capital but their practicality and commercial viability in the era of online national trading systems
diminished.
INTERNATIONAL STOCK EXCHANGES

 There are twenty one stock exchanges in the world that have a market capitalization of over US$1 trillion each.
They are sometimes referred to as the "$1 Trillion Club". These exchanges accounted for 87% of global market
capitalization in 2016.Some exchanges do include companies from outside the country where the exchange is
located.
 Monthly
Market
trade
cap
# Stock exchange Region Market place volume
(USD tn) (USD bn)
1 New York Stock Exchange United States New York City 27.69 1,452
2 Nasdaq United States New York City 24.56 1,262
3 Shanghai Stock Exchange China Shanghai 8.15 536
Amsterdam
Brussels
Dublin
4 Euronext Europe Lisbon 7.33 174
Milan
Oslo
Paris
Japan Exchange Group
5 Japan Tokyo 6.54
(Tokyo Stock Exchange)
6 Shenzhen Stock Exchange China Shenzhen 6.22
7 National Stock Exchange India Mumbai 4.5 481
8 Bombay Stock Exchange India Mumbai 4.5
9 Hong Kong Stock Exchange Hong Kong Hong Kong 3.98 182
10 Toronto Stock Exchange Canada Toronto 3.26 97
11 London Stock Exchange United Kingdom London 3.18 219
12 Saudi Stock Exchange (Tadawul) Saudi Arabia Riyadh 2.71
13 German Stock Exchange (Deutsche Börse AG) Germany Frankfurt 2.37 140
14 SIX Swiss Exchange Switzerland Zürich 1.95 77
Nasdaq Nordic and Baltic Exchanges Europe
Copenhagen Stock Exchange Denmark Copenhagen
Stockholm Stock Exchange Sweden Stockholm
Helsinki Stock Exchange Finland Helsinki
15 1.94 72
Tallinn Stock Exchange Estonia Tallinn
Riga Stock Exchange Latvia Riga
Vilnius Stock Exchange Lithuania Vilnius
Iceland Stock Exchange Iceland Reykjavik
Seoul
16 Korea Exchange South Korea 1.83 277
Busan
17 Taiwan Stock Exchange Taiwan Taipei 1.59 75
18 Australian Securities Exchange Australia Sydney 1.55
19 Johannesburg Stock Exchange South Africa Johannesburg 1.36 29
20 Tehran Stock Exchange Iran Tehran 1.29
DEMUTUALIZATION OF STOCK EXCHANGES

 Demutualization is a process by which a private, member-owned company, legally changes its structure, in order
to become a public-traded company owned by shareholders. In other words, it describes the transition of an
entity from a mutual association of members operating on a not-for-profit basis to a limited liability or-profit
company accountable to shareholders.
 The first set of securities exchanges started out as member-owned mutual organizations (a private company
created to provide specific services/benefit to its members) with The Amsterdam Stock Exchange widely
considered the oldest “modern” securities market in the world (1602). Since then, a large number have taken the
demutualization route thus separating ownership from right of access to trading with the first to do so being the
Stockholm Stock Exchange in 1993. Many others have followed suit including the Australian Securities Exchange
(1998), NASDAQ (2002), Bursa Malaysia (2004), New York Stock Exchange (2005), Sao Paulo Stock Exchange
(2007) London Stock Exchange (2000) Toronto Stock Exchange (2000).
DEMUTUALIZATION OF STOCK EXCHANGES

 Demutualization refers to the conversion of an existing non-profit organization into a profits-oriented company.
In other words, an association that is mutually owned by members converts itself into an organization that is
owned by shareholders. The company can take different shapes and forms, that is, it could be either a listed or
unlisted company which may be closely held or publicly held.
 Demutualization of stock exchanges involves the segregation of members’ right into distinct segments, viz.
ownership rights and trading rights. It changes the relationship between members and the stock exchange.
Members while retaining their trading rights acquire ownership rights in the stock exchange, which have a market
value, and they also acquire the benefits of limited liability. The shareholders in a corporatized stock exchange may
be a diverse group, as members may decide to retain their shares or to sell them. Demutualization however, does
not insulate them from competition. A stock exchange whose management does not effectively work to maintain
its position in the market may soon become a take-over target.
DEMUTUALIZATION OF STOCK EXCHANGES

 This term is not restricted only to corporatization of stock exchanges. Any organization that is a non-profit body
(which is not the same as loss-making), and is not distributing its profits to owner-members but retains the same
to develop infrastructure of the organization, can demutualize.
 Thus recapitulating once again Demutualization refers to the transition process of an exchange from a “mutually-
owned” association to a company “owned by shareholders”. In other words, transforming the legal structure of an
exchange from a mutual form to a business corporation form is referred to as demutualization. The above, in
effect means that after demutualization, the ownership, the management and the trading rights at the exchange
are segregated from one another.
DEMUTUALIZATION OF STOCK EXCHANGES

 A demutualized exchange is way different from a mutual exchange; the three functions of ownership, management
and trading are intervened into a single Group in a mutual exchange. The broker members of the exchange over
here are both the owners and the traders on the exchange and they further manage the exchange as well. A
demutualized exchange has all these three functions clearly segregated.
 SEBI had formed a Group on Corporatization and Demutualization of Stock Exchanges under the Chairmanship
of Justice M H Kania, former Chief Justice of India, for advising SEBI on corporatization and demutualization of
exchanges and to recommend the steps that need to be taken to implement the same. The Group submitted its
Report to SEBI on August 28, 2002. SEBI has taken up with Central Government to amend the SC(R) A to affect
Corporatization and Demutualization.
ADVANTAGES OF DEMUTUALIZATION:

 Rationalized Governance: The corporate model will enable management to take actions that are in the best
interest of customers and the exchange itself. There would be transparency.
 Investors Participations: A demutualized exchange affords both institutional investors and retail investors the
opportunity to become shareholders. Institutional investors require much greater liquidity for block trading.
 Competition from Alternate Trading System’s (ATS) and Electronic Communication Networks: ATS and Electronic
Communication Networks provide cheap and efficient access to quoted stocks unlike traditional stocks
exchanges. To cope with competition, exchange required funds. While members owned have limitations in raising
funds.
ADVANTAGES OF DEMUTUALIZATION:

 Globalization: Historically brokers and exchanges were locally focused. Exchanges did not face meaningful
competition from exchanges in distant places. Through alliances, exchanges seek to attract more investors by
harmonizing distinct trading environment and by offering greater product variety.
 Resources for capital investment: One of the drivers of stock exchange demutualization is screen trading, which
has which has replaced floor trading on most exchanges. Once customers have direct access to screens,
exchanges memberships no longer have as much economic value and clearing firms rather than traders become a
dominant force in exchange activities.
INTERNATIONAL CAPITAL MARKET

 International Capital Market exists with the aim of enhancing efficiencies in economies and generating economies
of scale. It is the most consumed source of financing. Organizations in current times, including global corporations,
are dependent on a large amount of funds in rupees in addition to foreign currency. Under this source of
international financing, there are several financial avenues available which are as follows:
EURO ISSUES

 Euro issue is a name given to sources of finance or capital available to raise money outside the home country in
foreign currency.
 Types of euro issue: The most frequently used bases of funds that fall under Euro issues are
• American Depository Receipts (ADR),
• Global Depository Receipts (GDR),
• Foreign Currency Convertible Bonds (FCCB)
1. GLOBAL DEPOSITORY RECEIPTS (GDRS)

 Earlier in a country, generally finances were raised domestically, but now it can be raised from foreign as well. This can happen by issuing securities and shares
in foreign countries. To make this process convenient, there exist a financial instrument called GDR. The shares are first issued in the currency of the
domestic country.These shares are forwarded to a depository bank, and this depository bank is then responsible for issuing depository
receipts in exchange of these shares.
 The denomination for these depository receipts or GDR is US Dollars. When it comes to India, GDR is considered to be a financial instrument issued to
raise foreign exchange, i.e., in foreign denominations than in Rupees.
 It is a negotiable instrument that can be traded like any other instrument freely. Just like any other security, GDR can exchange hands very easily.
 GDRs are listed on the foreign stock exchange.
 The righteous entity is authorised to claim any dividend and bonus receivable on account of GDRs but does not hold any right to vote.
 It provides the facility of converting depository receipts anytime into the shares it stands for. The investor can not only easily transfer GDR into
equity shares, but can also sell shares these shares mentioned in the GDR through the depository or so-called local custodian. Once issued GDR, the facility
for converting them into shares gets activated after 45 days, i.e., 45 days from the date of issue.
 The main motive of issuing GDR is to attract investors globally. Issuing GDR provides a low-cost mechanism where investors can take easily part in.
Apart from their local capital market, foreign investors get a chance to participate in or access the capital markets globally.
 Corporations like ICICI, Wipro, Reliance & Infosys in India raise foreign exchange through GDRs.
 A few of the international banks like Citigroup, and JPMorgan issue GDR in place of shares.
2. AMERICAN DEPOSITORY RECEIPTS (ADRS)

 The American Depository Receipts are quite similar to the Global Depository Receipts.
 The process of issuing shares in local currency and then sending the shares to the depository bank to convert them into
depository receipts remains as it is.
 The prime difference between both of the depository lies in the fact that ADRs can only be issued in the USA.
 The sale and purchase of ADRs can only happen in the capital market of America. These depository receipts are listed only
on the stock exchange of the USA and nowhere else.
 American Depository Receipts like GDRs are negotiable certificates issued by a U.S. depository bank.
 With the issuance of ADRs, US investors get an opportunity to invest in overseas companies, which would otherwise be not
available to them. So this widens the horizons of investing opportunities.
 Before any investor could invest in companies globally, they are required to access financial information. So, US banks are required to
provide correct knowledge of the financial health of the company.
 Unlike Global depository receipts, American depository receipts can’t be offered for sale-purchase to any random foreign
country rather can only be issued to residents of the United States of America.
 ADRs are just like any other ordinary stock for the Americans who are dealing out there in the capital market of the USA.
3. INDIAN DEPOSITORY RECEIPTS (IDRS)

 As the name implies, Indian Depository Receipts are exclusively available in the Indian markets.
 Just like for GDRs, here also the shares are forwarded to the depository banks to get depository receipts in exchange for
those respective shares. But it is slightly different from the GDRs because the depository here is of Indian origin. The depository
receipts are denominated in Indian rupees. Hence it allows any foreign investors to raise funds from India’s capital market in the form of
IDRs as a replacement for shares/securities.
 An Indian Depository Receipt is a negotiable financial instrument.
 IDRs are nothing, but an Indian version of Global Depository Receipts.
 The depository in India is none other than the Securities and Exchange Board of India, which is the watchdog of all the
securities listed on the stock board.
 IDRs are available to Indian investors too, as in they can also access IDRs, just like any normal security of the Indian capital market.
Residents of India are invited to the bidding process the same way they are called for the issuance of Indian shares.
 The company need not necessarily follow the listing and regulatory requirements of every country where it is willing to sell shares.
 Investing in IDRs is a successful alternative to buying stock on a foreign exchange.
 Standard Chartered Bank was the first foreign corporation to issue any kind of IDR.
4. FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBS)

 Foreign Currency Convertible Bonds are a combination of debt and equity instruments.
 Just like any other convertible securities, these bonds are also convertible meaning thereby that on a nearby future date after a passage of a
stipulated time these bonds can be changed to any depository receipt or some equity shares.
 The bearer of the bond can exchange their FCCBs with some equity shares for whom the price is already decided or for any
exchange rate.
 The bearer can also opt for holding back their FCCBs with them.
 FCCBs are always bought and sold in foreign financial markets.
 The fixed rate of interest over foreign currency convertible bonds is generally lesser as compared to any other debt instruments,
which are non-convertible in nature.
 At the time of maturity, the whole complete face value of the bond is redeemed. And usually, the time period for redemption of Foreign Currency
Convertible Bonds is around 5 years.
 Its functioning is quite similar to the Indian convertible financial avenues.
 Issuance of Foreign Currency Convertible Bonds dilutes the ownership, and earnings per share decrease for other shareholders.
 Here, holders cannot control the conversion rate.
CONCLUSIONS

 Overall, it can be said that there are various external sources of funding through which money can be raised, but
it is important to choose the best financial alternative among all. But, as we all know, no avenue is perfect, they all
have some limitations so sometimes it is required to form a portfolio of all the funds, i.e., a mix of two or more
than two avenues. Certain factors, like purpose and duration of business, risk-taking capacity, benefits of the tax,
the financial strength of the investor and many more, help firms to decide what will be the best from all the
available options.
WHAT ARE STOCK MARKET INDICES?

 A stock market index abbreviated as a stock index is an indicator that shows all the major changes in India's stock
market.
 The same stocks are selected from amongst the securities already grouped and listed on the stock exchange to
develop an index. However, the selection criteria are based upon the type of industry, the company's size, and its
market capitalization.
 This indicator is used to minimize the mess up and indicate the proper position of the market. Changes in the
price of underlying assets impact the overall value of the index.
 If the price goes upwards, the stock index will rise, and if they go downwards, the index will fall.
TYPES OF STOCK MARKET INDICES

 Benchmark Indices
 Nifty 50 – a collection of top 50 best-performing stocks and BSE Sensex – a collection of top 30 best-performing stocks
are indictors of the National Stock Exchange and Bombay Stock Exchange, respectively.
 This collection of stocks are known as benchmark indices respectively because they use the best practices to regulate the
companies they pick.
 Hence they are known as the best point of reference for the working of markets in general.
TYPES OF STOCK MARKET INDICES

 Sectoral Indices
 Both BSE and NSE have some good indicators that measure companies falling under one specific sector.
 Indices like S&P BSE Healthcare and NSE Pharma are considered good indicators of their respective changes in the
pharmaceutical sector.
 Another prominent example could be S&P BSE PSU, and Nifty PSU Bank Indices are indicators of all the listed public sector
banks.
 However, both the exchanges don't have to have corresponding indices for all the sectors.
TYPES OF STOCK MARKET INDICES

 Market-Cap Based Indices

 Few indices choose companies based on their market capitalization. Market capitalization means the market value of any
public traded company in the stock exchange.
 Indices like S&P BSE and NSE small cap 50 are a collection of companies that have a lower market capitalization in
accordance with the rules set by the Security Exchange Board of India (SEBI).
TYPES OF STOCK MARKET INDICES

 Other Indices
 Several other indices like S&P BSE 500, NSE 100, S&P BSE 100, among others, are slightly larger indices and come with a
more significant number of stocks listed on them.
TYPES OF INDICES

 Different indices based on size

 SENSEX Constituted of 30 scrips
 BSE-100 Constituted of 100 scrips
 BSE-500 Constituted of 500 scrips
 Nifty Constituted of 50 scrips
 Nikkie Index Constituted of 225 scrips
 S & P 500 Constituted of 500 scrips
 NASDAQ Composite Constituted of around 4700 scrips
TYPES OF INDICES

 Different indices based on Nature

 SENSEX Broad-based index representing all major industries from the listed universe
 BSE IT Sector Index Index representing the IT sector stocks
 BSE TECk Index Index representing the TMT sector stocks
 BSE Healthcare Index Index representing the Healthcare sector stocks
 FTSE-TMT Index Index based on telecom, media and technology sector stocks
 Nasdaq-100 Index Technology Index
HOW ARE STOCK MARKET INDICES CREATED?

 A stock market index is created by adding similar stocks based on their market capitalization, company size or
industry. Later on, the index is computed based on the selection of stocks.
 However, each stock will come with a different price and price change in one stock would not be equal to the
price change in another stock. Hence, the index value cannot be decided based on the simple sum of the prices of
all the stocks.
 Due to this, assigning weights to stocks comes into the picture. Each stock in the index is assigned a specific
weightage based on its price lying in the market or because of its market capitalization. The weight defines the
impact that changes in the stock price has on the index value. The two most commonly used stock market indices
are:
CALCULATION METHODOLOGY

 Market value-weighted Method - Each stock is given a weighting proportional to its market capitalization
 The market value-weighted method, where a company worth 200 crores is given twice the weight of a company worth 100
crores, is the most popular way of creating an index. The Standard & Poor’s 500 Index and SENSEX are the main examples.
By giving larger companies higher weighting, this method reflects the fact that large companies have larger revenues and
profits and that any change will have a larger effect on economic activity than change in smaller companies. Nasdaq
Composite Index, London FTSE, and MSCI Indexes are also constructed using the market value methodology.
CALCULATION METHODOLOGY

 Price Weighted Method - Each stock is given a weighting proportional to its market price
 A price-weighted index overweights the performance of companies with higher listed stock prices. Early in this century, high
prices were synonymous with larger companies and higher market caps. Things are different today but the old method is
still used for computing the index. The DJIA and Japanese Nikkei 225 are price-weighted.
CALCULATION METHODOLOGY

 Equal Weighted Method - Each stock is equally weighted in the index

 An equally-weighted index makes no distinction between large and small companies, both of which are given equal
weighting. The good performance of large-cap stocks is negated one-for-one by poor performance of smaller-cap stocks in
this index. Since there are many more small companies than large ones, this strategy greatly over-emphasizes the
importance of small company activity.
CALCULATION METHODOLOGY

 Modified Market Capitalisation Weighted Index - Market capitalisation is considered partially on a predefined basis
. For example the weightage of any one stock may be capped (at say 10%) or may be considered only to the
extent of free-float.
 Under modified market capitalisation weighted method, only a portion of the market capitalization of a company is
considered for the purpose of calculation of index. A popular way is to consider the floating stock or non-promoter holding
for this purpose. Since the non-promoter-held equity is actually available for trading in the market (unlocked equity), it is
also called the free-float equity. World over, major index providers are gradually moving towards modified market
capitalisation weighted index method. For e.g. Nasdaq-100 and BSE TECk index are modified market capitalisation weighted
index.
INDEX CONSTRUCTION, MAINTENANCE AND REVISION.

 Specialized agencies perform index construction, maintenance and revision.

 For instance, all NSE indices are managed by a separate company called "India Index Services and Products Ltd.(IISL)".
 It is a joint venture between Standard and Poor's(S&P), National Stock Exchange(NSE) and CRISIL Ltd.(Now a part of S&P)
 Index construction includes choosing the index stocks and deciding the index calculation methodology.
 Index maintenance includes adjusting the index for corporate actions like bonus issue, rights issue, stock split, consolidation,
mergers etc.
 Index revision includes recomposition of the index such as replacing some existing stocks by the new ones as the trading
paradigm/interest of market participants has changed.
INDEX CONSTRUCTION

 Index construction:
 A good index strives to find the right balance between diversification and liquidity.
 A well diversified index spans the market and reflects the behavior of the overall market/economy.
 While diversification reduces risk, beyond a certain point it may not make a substantial difference. For ex, going from 10 to
20 stocks gives a sharp reduction in risk. Going from 50 to 100 stocks gives very little reduction in risk. Going beyond 100
stocks gives almost zero reduction in risk.
 Certain pre-determined qualitative and quantitative parameters, laid down by Index construction managers, determine
which stocks will form the index. When the stock satisfies this eligibility criteria, it is entitled for inclusion in the index.An
Index committee generally takes the final decision of inclusion or removal of a security from the index.
INDEX MAINTENANCE AND REVISION

 This is performed with the help of various mathematical formulae. In order to keep the index comparable across
time, the index needs to take into account all corporate actions. Hence, the index requires maintenance.
 Index revision ensures that the most vibrant lot of securities is captured by the index and continues to correctly
reflect the market.
 One of the important aspects of maintaining continuity with the past is to update the base year average. The base
year value adjustment ensures that additional issue of capital and other corporate announcements like bonus etc.
do not destroy the value of the index. The beauty of maintenance lies in the fact that adjustments for corporate
actions in the Index should not per se affect the index values.
INDEX MAINTENANCE AND REVISION

 Maintenance of Nifty indices includes carrying out adjustments for corporate actions like stock splits, stock
dividends, share changes and scheme of arrangements. Some corporate actions, such as bonus, stock splits and
reverse stock splits require simple changes in the equity shares outstanding and the stock prices of the companies
in the index. Other corporate actions such as change in equity, rights issue of shares, special dividend, results into
change in the market value of an index overall and require a divisor adjustment to prevent the value of the index
from changing. This helps in keeping the value of the index accurate and ensures that the movement of the index
does not get impacted due to corporate actions of the companies in it. Appropriate adjustments are made after
the close of trading and after the calculation of the closing value of the index. Corporate actions such as bonus,
splits, dividends, rights offerings, and share changes are applied on the ex-date.
INDEX DIVISOR

 An Index Divisor is a number by which the total value of an index is divided to arrive at the initial market index.
The Index Divisor does not change frequently, and it also helps in arriving at the intended easy value of the
market index. The Index Divisor is significant as the total value of the index will be a large number.
 For example, if the total value of the constituents of the index is 986. To set a market index at an easy number like
100, the total value of the index can be divided by a divisor of 9.86. This divisor remains constant over time,
except in the case of significant material changes. Stock market changes are reflected in the value of the market
index.
 If the total value of the index changes, the divisor will be used with a new number. Therefore, the new value of the
market index will arrive. Index Divisor is used to secure the index from significant alterations due to special
dividends, stock splits, spin-offs, etc.
BULL MARKET VS BEAR MARKET

 A bear market is defined by a prolonged drop in investment prices — generally, a bear market happens when a
broad market index falls by 20% or more from its most recent high. The reverse of a bear market is a bull market,
characterized by gains of 20% or more.
 Bear markets tend to be shorter than bull markets — 363 days on average — versus 1,742 days for bull markets.
They also tend to be less statistically severe, with average losses of 33% compared with bull market average gains
of 159%, according to data compiled by Invesco.
Aspect Bear Market Bull Market

Market Sentiment Pessimistic and negative Optimistic and positive

Investor Behavior Sell & exit Buy & Hold
Investment Styles Defensive Stocks,Value Investing Growth Stocks, Aggressive Trading
Risk Appetite Low High
Economic Indicators Unemployment may rise, GDP Unemployment may fall, GDP
growth may slow down, and growth may accelerate, and
corporate profits may decline. corporate profits may increase.

Asset Performance Most asset classes (stocks, bonds, Most asset classes experience
commodities) decline in value. significant price appreciation.

Volatility Higher market volatility, with Lower market volatility, with

frequent large swings. relatively smoother trends.
Market Psychology Fear and caution dominate. Confidence and enthusiasm prevail.

Strategy Short-selling and defensive Buying and holding investments for

investments are common strategies. long term are common strategies.

Market Impact on Job Cuts and Layoffs Increased Hiring

Employment
I. INVESTING IN A BULL MARKET

 Emphasize Growth-Oriented Investments: In a bull market, economic conditions are generally favorable, and
investor sentiment is optimistic. Investors often focus on growth-oriented assets, such as growth stocks, IT
companies, and small-cap stocks. These assets have the potential to outperform the broader market during
periods of economic expansion.
 Sector Rotation: As economic conditions improve, different sectors of the economy may experience varying
levels of growth. A strategy called sector rotation involves shifting investments between sectors to capitalize on
the industries that are expected to perform well during the current economic phase. For example, during a bull
market, sectors like technology, consumer discretionary, and industrials might perform better than defensive
sectors like utilities or FMCG.
I. INVESTING IN A BULL MARKET

 Buy the Dip: In a bull market, short-term market pullbacks or corrections may occur due to profit-taking or
temporary negative news. Investors often view these dips as buying opportunities. The “buy the dip” strategy
involves purchasing bear and bull stocks or assets when their prices have declined, with the expectation that they
will rebound as the overall market trend remains positive.
 Technical Analysis: Bull markets tend to exhibit clear upward trends on price charts. Technical analysis involves
studying historical price patterns and trends to identify potential entry and exit points. Investors can use technical
indicators to make more informed decisions about when to buy or sell assets.
 Long-Term Investment Approach: In a bull market, market sentiment is generally positive, and there is an
optimistic outlook for the future. Investors with a long-term investment horizon may choose to stay invested and
take advantage of the potential for further market gains.
II. INVESTING IN A BEAR MARKET

 Preserve Capital: In a bear market, the primary goal is to preserve capital and protect against significant losses.
Investors tend to shift their focus to safer assets, such as bonds, gold, or defensive stocks. These assets often
demonstrate more stability during times of market downturns.
 Dividend Stocks: Dividend-paying stocks can provide a source of income during a bear market. Companies that
have a history of paying dividends may continue to do so, even in challenging economic conditions. Dividends can
help offset some of the negative effects of declining asset prices.
 Hedging Strategies: Investors may employ hedging strategies to protect their portfolios from severe market
declines. Hedging involves using financial instruments, such as options or inverse exchange-traded funds (ETFs), to
offset potential losses in the portfolio.
II. INVESTING IN A BEAR MARKET

 Rupee-Cost Averaging: In a bear market, asset prices may be more volatile and unpredictable. Rupee-cost
averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. This
strategy can help reduce the impact of market fluctuations and lower the average cost of investments.
 Fundamental Analysis: During a bear market, stock prices may be undervalued compared to the intrinsic value
of the companies. Fundamental analysis involves evaluating a company’s financial health, earnings potential, and
growth prospects to identify investment opportunities that may have been overlooked by the market.
 Short Selling: For experienced investors willing to take on higher risk, short selling can be an option in a bear
market. Short selling involves borrowing and selling an asset with the expectation that its price will decline. If the
asset’s price falls, the investor can buy it back at a lower price, making a profit on the trade.
FACTORS AFFECTING THE STOCK MARKET

 Economic Indicators:
 Economic indicators like Gross Domestic Product (GDP), inflation rate, and unemployment rate reflect the overall health of the economy. When
GDP growth is strong and unemployment is low, consumer spending and business activities tend to increase, positively impacting company profits
and stock prices. Conversely, high inflation or rising unemployment can lead to reduced consumer spending and economic uncertainty, causing
stock prices to decline. So, favorable economic data is significant to increase investor confidence in the company’s stocks.

 Inflation & Interest Rates:

 As prices of goods and services rise, consumers may reduce spending, potentially leading to lower company profits and stock prices. Central banks
may respond to high inflation by raising interest rates, increasing borrowing costs for businesses and affecting their profitability. Further, increasing
costs of products dampens consumer spending, affecting corporate profits and stock performance. On the other hand lower interest rates can
stimulate borrowing and spending, leading to higher company earnings and potentially higher stock prices.
 There are more challenges caused by inflation. When investors are uncertain about the future value of money, it results in conservative investment
behavior, influencing stock market trends. Moreover, inflation's effect on the valuation of future company cash flows can also lead to changes in
stock valuations. Different sectors can also be impacted, with commodities and real estate potentially benefiting, while technology may suffer.
FACTORS AFFECTING THE STOCK MARKET

 Corporate Earnings:
 Company performance, as reflected in quarterly earnings reports, directly impacts stock prices. Strong earnings growth indicates a
healthy business environment, attracting investors and potentially driving stock prices higher. Conversely, disappointing earnings can lead
to decreased investor confidence and a drop in stock prices. However, these are not the thumb rules. Investors pick the stocks' basis
sentiment around its future growth.
 For example, Reliance Industries Limited (RIL) is one of the largest conglomerates in India with interests in various sectors, including
petrochemicals, refining, telecommunications, and retail. When RIL reports strong quarterly earnings, it indicates robust profits from its
diverse businesses. This tends to increase investor confidence, often leading to a rise in its stock price.

 Exchange Rates:
 The currency fluctuations can affect revenues, profits, competitive positioning and overall financial performance of multinational
companies, especially for the companies that rely heavily on international markets. Investors closely monitor these fluctuations and assess
their potential impact on a company's earnings and stock price. Companies with well-defined currency risk management strategies and a
diversified global presence may be better equipped to navigate the challenges posed by currency volatility.
FACTORS AFFECTING THE STOCK MARKET

 Global Events:
 Geopolitical events such as trade tensions, conflicts, or economic crises can create uncertainty in financial markets. Investors may
become cautious or risk-averse, leading to stock market volatility. Positive global developments, on the other hand, can boost investor
confidence and lead to market gains.
 For instance in 2022, events like energy-price-led inflation, rising interest rates and political uncertainty caused by the war, led to high
volatility in equity-markets across the globe.

 Government Policies:
 Government decisions on taxation, regulations, and fiscal policies can significantly affect businesses. Favorable policies can stimulate
economic growth and boost stock prices, while unfavorable policies can create uncertainty and negatively impact investor sentiment.
 For example, the RBI's monetary policy decisions, such as changes in cash reserve ratios and open market operations, influence liquidity
in the banking system, which in turn affects stock market liquidity and performance.
 Further changes in the corporate taxes can directly impact the industry. So, policy makers generally analyze the impact of increasing taxes
on the business profits and investor sentiments prior implementation.
FACTORS AFFECTING THE STOCK MARKET

 Foreign Institutional Investment (FII) Flows:

 Foreign investors' buying and selling of Indian stocks can have a substantial impact on stock prices as it impacts market
liquidity. Increased foreign investments can lead to higher demand for stocks, pushing prices up. Conversely, significant
outflows can create selling pressure and result in price declines.

 Investor Sentiment:
 Investor sentiment, driven by emotions, plays a crucial role in market movements. Positive sentiment can lead to higher
demand for stocks, causing prices to rise. Negative sentiment can trigger panic selling, driving prices down. Factors like
news headlines, social media, and overall economic outlook can influence market sentiment.
 For instance, news about excellent performance of specific industries and sectors can influence the overall market.
Positive developments in a particular sector can drive up stocks within that industry, affecting market indices.
FACTORS AFFECTING THE STOCK MARKET

 Industry Trends:
 Stock market trends are also dependent on performance and trends within specific industries or sectors. Factors such
as supply and demand dynamics, changing consumer preferences, and regulatory shifts can impact the profitability and
prospects of companies within those sectors.

 Market Liquidity:
 The ease with which assets can be bought or sold without causing significant price changes is referred to as market
liquidity. Lower liquidity can result in higher price volatility and wider bid-ask spreads, potentially affecting stock prices.

 Technological Advancements:
 Technological innovations can disrupt industries and create new investment opportunities. Companies that leverage
emerging technologies may experience rapid growth and attract investor interest, leading to stock price appreciation.
MYTHS OF INVESTING IN STOCK MARKETS

 1. The Reality of Investment Risk

 Investing is risky, so is driving a car, swimming, riding a bike, walking on the pavement. We learn to do these things with the
guidance and help of our parents and trainers pretty early in our lives. But often we ignore the importance to educate
about handling, investing and saving money which is a very essential skill for life.
 Investment is indeed risky, only if you ignore to learn about investments and still try your luck. If you do not understand
your risk appetite and risk involved in the process, investment can thoroughly be dangerous for you. Like you would arrange
a coach to learn to swim, similarly you must educate yourself to understand investment properly. Risk often comes form
not being aware of what you’re doing.
 Educating yourself will eliminate risk away from your investment decisions. So, investing in stock market isn’t risky if you
know how to do it in the right way.
MYTHS OF INVESTING IN STOCK MARKETS

 2. Investing in stocks is gambling

 Stock market investing differs from speculating in the stock market. Gambling may imitate investing in stocks, but these two
behaviors are fundamentally different. Benjamin Graham, the father of value investing, rightly said that a market is a voting
machine (gambling) in the short term, but a weighing machine in the long run. And investing is an endeavor in the long run.
 Shares are seen by investors as merely a trading instrument, they certainly forget that the stock reflects the company's
ownership.
 In a corporation, a share of common stock represents part ownership. It entitles the holder to an asset claim as well as a
percentage of the company's produced profit. In addition, gambling is a zero-sum game. Gambling merely takes money and
gives it to a winner from a loser. Investing and generating wealth should not be confused with the zero-sum game of
gambling. Investment cannot be compared with gambling.
MYTHS OF INVESTING IN STOCK MARKETS

 3. I’m not rich, Stock market is not for me.

 To invest in the stock market, you do not have to be a millionaire. The stock market is basically the only place where you
can start investing with a small initial capital.You need at least few lakhs of rupees to buy a piece of property, even in a low-
priced area, if compared to real estate.
 You don't have to be a millionaire to build wealth on the stock market, all you need is to start early and keep investing
regularly and let your money accumulate over a prolonged period of time.
MYTHS OF INVESTING IN STOCK MARKETS

 4. The Younger you are, the more risk you can take
 Young investors tend to think about taking high risk in order to make surplus and extraordinary profit. Although the
youngsters have greater number of years than an aged investor to cover up, one should not fall for highly risky investments
to book high profits.
 Warren Buffett’s 2 Investment rules:
 Rule No.1: Never lose money
 Rule No.2: Never forget about Rule No.1.
MYTHS OF INVESTING IN STOCK MARKETS

 5. Investing is straightforward. Buy low, sell high.

 This is one of the most common investment myths among non-investors. They think investment is simple and
straightforward. You just have to buy when the price is low and sell it when it reaches at a higher price. What they don’t
understand is, it takes a lifetime for investors to understand which share is closing on the higher side and to what extent a
share could fall. Even if you find a stock with low price, its challenging to find an exit point.
MYTHS OF INVESTING IN STOCK MARKETS

 6. High Risk = High Rewards

 High-risk investments are not going to promise high returns. On the contrary, you can only invest in a high risky stock if it
ensures high return. Such stock is hard to find.You can earn high profits with moderate or low risk bearing stocks. Buy
quality companies, run by quality management, at a favorable price with ample of safety margin. So, you are not taking a high
risk by purchasing good companies at a cheap price.
MYTHS OF INVESTING IN STOCK MARKETS

 7. FII’s are investing in this stock, even I should buy this stock.
 FII’s may buy stocks for different purpose. They might buy to diversify their portfolio or they must be buying in one account
and selling it in the other. Arbitrage positions are created very often by FIIs, i.e., long on equity and short on futures. Buying
stocks without looking at the essence of the transaction would take you nowhere.You should do your own research work,
identify your goal to invest and understand your risk appetite before investing.
MARGIN REQUIREMENT

 Margin in the stock market in India is the minimum fund or security an investor must pay to the broker before
executing a trade. Margin requirements are set by the SEBI and enforced by the stock exchanges in India. Recently,
SEBI has released a circular introducing a few significant changes in the margin requirements in the Indian Stock
Market. This article discusses the new margin requirements in trading.
 Why margin is required?
 Upfront payment of margin is required to mitigate the risk of failure to pay for the shares (or F&O contract) you bought or
failure to deliver the shares which are sold through the exchange.
 SEBI frequently changes rules margin collection and reporting to fill the loopholes in existing policies and to further
enhance the security of funds for investors, brokers and exchanges.
 SEBI has also defined strict reporting requirements for stockbrokers to make sure that the client's funds or holdings are
not misused by the broker. This includes using the client's surplus fund in the trading account for another client, or by the
brokerage firm itself.
TYPES OF MARGINS IN STOCK MARKET

 VaR Margin
 The Value at Risk (VaR) is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day
losses while for illiquid stocks, it covers three-day losses to allow the Exchange to liquidate the position over three days.
 ELM Margin
 Extreme Loss Margin (ELM) is a second line of defence to cover extended losses that go beyond 99% risk which is covered under the VaR margin.
 Span Margin
 Standard Portfolio Analysis of Risk (SPAN) margin is the initial margin paid by the traders to cover 99% value at risk over a one day time horizon. The SPAN margin is for the F&O
segment. It varies by the trading instrument and updated daily by the exchange.
 It is also known as the Initial Margin. Read more about it at BSE and NSE.
 Mark-to-Market (MTM)-
 MTM is calculated at the end of the day by comparing transaction price with the closing price of the shares. For example, you purchased 100 shares of a company at Rs.100/- on
January 1, 2008. If the closing price of the shares on that day is Rs.80/-, then you are facing a notional loss of Rs.2,000/. This loss is called MTM loss is payable by the next day of the
trade.
 Exposure Margin
 The exposure margin is used for F&O contracts of securities as well as indexes in addition to the Span Margin. The exposure margin gives the 2nd line of defence to the risks in
derivatives trading.
OPTIONS MARGIN

 In addition to these margins, in options contracts, the following additional margins are levied-
 Premium Margin- This margin is paid by the buyers of the Options contracts. It is calculated as the value of the options
premium multiplied by the number of Options contracts purchased. For example, if you buy 100 call options on ABC Ltd at
Rs. 20/-, then the premium margin is 100 X 20= Rs. 2,000.
 Assignment Margin- This margin is collected on assignment from the sellers of the Options contracts. It is charged on the
net exercise settlement value payable by the traders who are selling the Options.
MARGIN REQUIREMENTS FOR EQUITY DERIVATIVES (F&O)

 SEBI has rules for collecting and reporting margins in the derivative segments (Equity, Currency & Commodity).
 All brokerage firms receive a file from the exchange at the end of the day detailing the margins required for
positions taken by their clients (SPAN + Exposure).
 The brokerages are then required to upload back details of margins available in the client's account. If the
available margin is lesser than the exchange stipulated margin, a penalty is levied on the shortfall.
MARGIN REQUIREMENTS FOR EQUITY DELIVERY

 For buy delivery trades, the customer has to keep the minimum VaR+ELM margin in his trading account. Similar to F&O,
the equity delivery margin is also specified by the exchanges daily. The margin varies by stock to stock i.e. on 18th Dec
2019, Axis bank has a delivery margin requirement of 12.5% and Yes Bank has 58.12%.
 Most online stock brokers (discount brokers) like Zerodha and Prostocks anyway insist on the entire delivery purchase
value to be funded in advance. Thus the delivery margin requirement doesn't make any difference for them.
 As of Jan 01, 2019, collecting and reporting margins in the equity (cash) segment becomes exactly like the derivative
(F&O) segment. Instead of SPAN + Exposure, the VaR+ELM margin is required to either buy or sell stocks.
 This significantly reduces the overall risk and the reporting mechanism ensures that one client's funds can't be used by
another client of the brokerage firm itself.
 On the sell side, if the broker has PoA on demat, no margin will be required. In case PoA is not given to the broker, the
customer has to pay the margin similar to buy transaction before selling stocks. This is to ensure that in case the
customer doesn't deliver, there is margin available to make good of any potential auction settlement loss to the buyer.
MARGIN REQUIREMENTS FOR EQUITY INTRADAY

 Similar to Equity Delivery, Equity Intraday trading requires the VaR+ELM margin specified by the exchanges. This is
the minimum amount (not including margin funding) a trader has to pay for intraday trading.
 The brokerage firm may offer higher leverage (i.e. 8x) once the requirement of minimum margin is met. The
broker has to use its own funds to offer higher leverage. They cannot use other client's surplus funds for this
purpose.
TYPES OF BROKERS IN STOCK MARKET

 In the intricate world of the stock market, share market brokers play a pivotal role as intermediaries, connecting investors with the vast
realm of financial instruments. Understanding the different types of brokers in stock market is essential for investors looking to navigate
the market effectively. Let's explore the kinds of brokers in stock exchange and the unique services they offer.

 Full-Service Brokers
 Full-service brokers are the comprehensive solution providers in the stock market arena. These brokers offer a wide range of services,
including investment advice, research reports, and personalized financial planning. Investors opting for full-service brokers benefit from a
hands-on approach, gaining access to expert guidance for strategic decision-making. However, these services often come with higher fees
and commissions.

 Discount Brokers
 On the opposite end of the spectrum, discount brokers cater to cost-conscious investors. These brokers provide a no-frills, execution-
only service, allowing clients to trade at lower costs. While discount brokers may lack the personalized advice of full-service
counterparts, they appeal to self-directed investors who prefer a more hands-on approach to their portfolios.
TYPES OF BROKERS IN STOCK MARKET

 Online Brokers
 The rise of the internet has given birth to online brokers, revolutionizing the way investors engage with the stock
market. Online brokers provide a digital platform for clients to execute trades, access market information, and
manage their portfolios. With user-friendly interfaces and real-time data, online brokers empower investors to
take control of their investments with convenience and efficiency.

 Robo-Advisors
 In the era of artificial intelligence, robo-advisors have emerged as a novel category of brokers. These automated
platforms utilize algorithms to analyze market trends, assess risk tolerance, and construct diversified portfolios.
Robo-advisors are particularly appealing to tech-savvy investors seeking a low-cost, hands-off investment solution.
TYPES OF BROKERS IN STOCK MARKET

 Institutional Brokers
 Institutional brokers cater to large institutions, such as mutual funds, pension funds, and hedge funds. These
brokers facilitate large-scale transactions in the financial markets, providing access to liquidity and specialized
services tailored to the unique needs of institutional investors. The scale of transactions often leads to negotiated
commissions.

 Specialty Brokers
 Specialty brokers focus on specific asset classes or markets. Whether it's commodities, foreign exchange, or
options trading, these brokers possess specialized knowledge and expertise in their chosen niche. Investors
seeking exposure to a particular market segment often turn to specialty brokers for tailored services.
TYPES OF BROKERS IN STOCK MARKET

 Direct Market Access (DMA) Brokers

 Direct Market Access (DMA) brokers offer a direct link to financial exchanges, allowing clients to execute trades with minimal latency. Typically,
these brokers cater to institutional clients and high-frequency traders who require swift execution and access to the order book. DMA brokers
provide a direct pipeline to the heart of the market.

 Prime Brokers
 Prime brokers serve hedge funds and other large investors, providing a suite of services, including securities lending, custodial services, and trade
execution. Prime brokers act as a one-stop-shop for institutional clients, streamlining their interactions with the financial markets.

 Navigating the stock market involves choosing a broker that aligns with your investment goals, preferences, and level of expertise. The diversity of
brokers in stock exchange ensures that there's a suitable option for every investor, from those seeking comprehensive guidance to others who
prefer a more self-directed approach.
 In the ever-evolving landscape of the stock market, the key is to align your choice of broker with your investment strategy. Whether you opt for
the personalized services of a full-service broker, the cost efficiency of a discount broker, or the automated approach of a robo-advisor,
understanding the types of broker in stock market empowers you to make informed decisions in your financial journey.
HOW TO SELECT THE RIGHT STOCKBROKER?

 Step 1: Determine Your Investment Goals

 Before selecting a stockbroker, it is important to determine your investment goals. Consider factors such as your risk tolerance,
investment horizon, and financial goals. Once you have a clear idea of what you want to achieve, you can find a stockbroker that
aligns with your investment goals.
 Step 2: Conduct Research
 Conduct research to find potential brokers that match your investment goals.You can start by reading online reviews, checking the
broker’s regulatory status, and comparing the fees and commissions charged by different brokers.
 Step 3: Compare and Contrast Brokers
 Once you have identified potential share market brokers, compare and contrast them based on your investment goals. Consider
factors such as the trading platform, customer service, investment options, research and analysis tools, and account minimums.
 Step 4: Open an Account and Start Investing
 Once you have identified the right broker, open an account and start investing. Be sure to read and understand the terms and
conditions of the account, including the fees and commissions charged. It is also important to monitor your investments regularly
and adjust your portfolio as needed.
OPENING A TRADING ACCOUNT

 In the first step, choose a brokerage firm to open a trading account after conducting a thorough research. Take the various charges levied
by brokerages, the interface of the trading platform and the value-added services into account before finalising a brokerage.
 After selecting a broker, enquire about the trading account opening procedure. The brokerage will require you to fill up an account
opening form and a Know Your Customer (KYC) form. A representative from the brokerage firm will assist you with the process. Most
brokerages offer a Demat-cum-trading account as a Demat account is mandatory to store the securities.
 You will also have to submit identity proof, residence proof and in some cases proof of income. A photocopy of the Aadhar card or
passport, besides several other documents, can be used as proof of residence and a copy of an Aadhar card or PAN card can be used as
identity proof. The PAN card is compulsory to open a trading account.
 Post submission of the documents, the brokerage will conduct a manual KYC verification. A representative may visit your house to verify
the documents or an online verification will be conducted. If you do not want to manually verify the documents, you can opt for the e-
KYC process. For the e-KYC process, your PAN card should be linked to the Aadhar card and your bank account. The mobile number
submitted in the account opening form should be the same as the Aadhar card for the e-KYC process.
 It generally takes 3-4 days to activate the trading account after the completion of the verification process.
WHAT IS DEMAT ACCOUNT?

 A Demat Account is a bit like a bank account for your share certificates and other securities that are held in an
electronic format. Demat Account is short for dematerialisation account and makes the process of holding investments
like shares, bonds, government securities, Mutual Funds, Insurance and ETFs easier, doing away the hassles of physical
handling and maintenance of paper shares and related documents.
 To understand Demat Account meaning, let’s use an example. Let’s say you want to purchase the shares of Company X.
When you buy those shares, they will have to be transferred in your name. In earlier times, you got physical shares
certificates from the exchange with your name on it. This, as you can imagine, involved tonnes of paperwork. Each time a
share was bought and sold, a certificate had to be created. To do away with this paperwork, India introduced the Demat
Account system in 1996 for trades on NSE.
 Today, there’s no paperwork involved, and physical certificates are no longer issued. So when you buy shares of Company
X, all you get is an entry in electronic form, in your Demat Account. So this is what is a Demat Account.
 Today if you want to trade/invest in the stock market (NSE & BSE) or other securities, having a Demat Account is a
must. Your Demat Account number is compulsory for electronic settlements of the trades and transactions you do.
HOW TO GET DEMAT ACCOUNT

 Now that you know what is Demat Account let’s see how you can go about getting one. When you open a Demat
Account, you are opening one with a central depository like the National Securities Depository Ltd (NSDL) or the
Central Depository Services Ltd (CDSL). These depositories appoint agents called Depository Participants (DP), who
act as intermediaries between themselves and investors.Your bank, like for instance HDFC Bank, is a DP, with which you
can open a Demat Account. Stockbrokers and financial institutions too are DPs, and you can open a Demat Account
with them also.
 Just like a bank account holds money, a Demat Account holds your investments in an electronic form, which is easily
accessible with a laptop or a smart device and Internet. All you need to have is the unique login ID and password to
access it. However, unlike a bank account, your Demat Account need not have a ‘minimum balance’ of any sort.
 You can check the websites of any of the depositories to get a list of DPs with whom you can open Demat Account
with. The choice of a DP should ideally depend on its annual charges.
 Note that you have more than one Demat Account, but not with the same DP. So one PAN card can be linked to
multiple Demat and Trading Accounts. Also, make sure to check the eligibility criteria and documents required to for a
Demat Account so you can choose accordingly.
BENEFITS OF A DEMAT ACCOUNT

 No paper certificates:
 Prior to the existence of Demat Accounts, share used to exist as physical paper certificates. Once you purchased shares, you had to store several paper certificates
for the same. Such copies were vulnerable to loss and damage, and also come attached with lengthy transfer processes. Demat Account turned all of it electronic,
saving you much hassle.
 Ease of Storage:
 With a Demat Account you can store as many shares as you need to. This way, you can trade in volumes and keep track of the shares in your account.You can also
rely on your Demat Account to execute quick transfer of shares.
 Variety of Instruments:
 Apart from stock market shares, you can also use your Demat Account to hold multiple assets including mutual funds, Exchange Traded Funds (ETFs), government
securities, etc. Thus, with a Demat Account, you can approach your investment plans more holistically and easily build a diverse portfolio.
 Easy Access:
 Accessing your Demat Account is super easy.You can do so with the help of a smartphone or laptop and manage your investments from anywhere, at any time. A
Demat Account truly makes investing for a financially secure future more easy and accessible than it has ever been before.
 Nomination:
 A Demat Account also comes with a nomination facility. The process of nomination is to be followed as has been prescribed by the depository. In case the investor
passes away, the appointed nominee receives the shareholding in the account. This feature enables you to make plans for future eventualities and avoid legal disputes.
MARKET ORDERS

 A market order is the most basic type of trade. It is an order to buy or sell immediately at the current price.
Typically, if you are going to buy a stock, then you will pay a price at or near the posted ask. If you are going to sell
a stock, you will receive a price at or near the posted bid.
 One important thing to remember is that the last traded price is not necessarily the price at which the market
order will be executed. In fast-moving and volatile markets, the price at which you actually execute (or fill) the
trade can deviate from the last traded price. The price will remain the same only when the bid/ask price is exactly
at the last traded price.
 Market orders are popular among individual investors who want to buy or sell a stock without delay. The
advantage of using market orders is that you are guaranteed to get the trade filled; in fact, it will be executed as
soon as possible. Although the investor doesn't know the exact price at which the stock will be bought or sold,
market orders on stocks that trade over tens of thousands of shares per day will likely be executed close to the
bid/ask prices.
LIMIT ORDERS

 A limit order, sometimes referred to as a pending order, allows investors to buy and sell securities at a certain price in the future. This type of order is used
to execute a trade if the price reaches the pre-defined level; the order will not be filled if the price does not reach this level. In effect, a limit order sets the
maximum or minimum price at which you are willing to buy or sell.
 For example, if you wanted to buy a stock at $10, you could enter a limit order for this amount. This means that you would not pay one cent over $10 for
that particular stock. However, it is still possible that you could buy it for less than the $10 per share specified in the order.

 There are four types of limit orders:

 Buy Limit: an order to purchase a security at or below a specified price. Limit orders must be placed on the correct side of the market to ensure they will
accomplish the task of improving the price. For a buy limit order, this means placing the order at or below the current market bid.
 Sell Limit: an order to sell a security at or above a specified price. To ensure an improved price, the order must be placed at or above the current market ask.
 Buy Stop: an order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been
reached (known as the stop level). Buy stop are orders placed above the market and sell stop orders placed below the market (the opposite of buy and sell
limit orders, respectively). Once a stop level has been reached, the order will be immediately converted into a market or limit order.
 Sell Stop: an order to sell a security at a price below the current market ask. Like the buy stop, a stop order to sell becomes active only after a specified price
level has been reached.
ADDITIONAL STOCK ORDER TYPES

 Stop-Loss Order
 A stop-loss order is also referred to as a stopped market, on-stop buy, or on-stop sell, this is one of the most useful orders. This order is
different because, unlike the limit and market orders, which are active as soon as they are entered, this order remains dormant until a
certain price is passed, at which time it is activated as a market order.
 For instance, if a stop-loss sell order were placed on the XYZ shares at $45 per share, the order would be inactive until the price
reached or dropped below $45. The order would then be transformed into a market order, and the shares would be sold at the best
available price.You should consider using this type of order if you don't have time to watch the market continually but need protection
from a large downside move. A good time to use a stop order is before you leave on vacation.

 Stop-Limit Order
 These are similar to stop-loss orders, but as their name states, there is a limit on the price at which they will execute. There are two
prices specified in a stop-limit order: the stop price, which will convert the order to a sell order, and the limit price. Instead of the order
becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price or better. This can mitigate
a potential problem with stop-loss orders, which can be triggered during a flash crash when prices plummet but subsequently recover.
ADDITIONAL STOCK ORDER TYPES

 All or None (AON)

 This type of order is especially important for those who buy penny stocks. An all-or-none order ensures that you get
either the entire quantity of stock you requested or none at all.
 This is typically problematic when a stock is very illiquid or a limit is placed on the order. For example, if you put in an
order to buy 2,000 shares of XYZ but only 1,000 are being sold, an all-or-none restriction means your order will not be
filled until there are at least 2,000 shares available at your preferred price. If you don't place an all-or-none restriction,
your 2,000 share order would be partially filled for 1,000 shares.

 Immediate or Cancel (IOC)

 An IOC order mandates that whatever amount of an order that can be executed in the market (or at a limit) in a very
short time span, often just a few seconds or less, be filled and then the rest of the order canceled. If no shares are
traded in that "immediate" interval, then the order is canceled completely.
ADDITIONAL STOCK ORDER TYPES

 Fill or Kill (FOK)

 This type of order combines an AON order with an IOC specification; in other words, it mandates that the entire order size be traded
and in a very short time period, often a few seconds or less. If neither condition is met, the order is canceled.

 Good 'Til Canceled (GTC)

 This is a time restriction that you can place on different orders. A good-til-canceled order will remain active until you decide to cancel it.
 Brokerages will typically limit the maximum time you can keep an order open (or active) to 90 days.

 Day
 If you don't specify a time frame of expiry through the GTC instruction, then the order will typically be set as a day order.This means
that after the end of the trading day, the order will expire. If it isn't transacted (filled) then you will have to re-enter it the following
trading day.
MARGIN TRADING

 Margin trading is a facility under which you buy stocks that you can’t afford.You are allowed to buy stocks by
paying a al amount of the actual value. This is paid either in cash or in shares as security. Margin trading can be
considered leveraging positions in the market either with cash or security by investors.Your broker funds your
trading transactions. These can be settled later when you square off your position.
 SEBI Regulations
 Earlier, trading was allowed only with cash and providing shares as collateral was not allowed. The Securities and Exchange
Board of India (SEBI) recently relaxed this criterion by allowing investors to create positions under the trading by furnishing
shares as security.
 Eligibility for Margin Trading
 You need to have a account with the broker to avail the margin trading facility (MTF).You are supposed to pay a certain
sum (minimum) at the time of opening the MTF account.You are required to maintain a minimum balance at all times. If you
fail to maintain the minimum balance, then your trade gets squared-off. The squaring-off position is compulsory at the end
of each trade session.
FEATURES OF MARGIN TRADING

 Margin trading allows investors to leverage positions in securities that are not from the segment of derivatives.
 Only authorized brokers can offer trade accounts as per SEBI regulations.
 Securities that are traded are pre-defined by SEBI and respective stock exchanges.
 Investors can create positions using cash or collateral through shares.
 Investors wishing to utilize the trading facility should create an MTF account with their respective brokers by
accepting the terms and conditions that states they are aware of the benefits and risks involved.
BENEFITS OF MARGIN TRADING

 Margin trading is apt for those investors looking at encashing on the price fluctuations over a short-term but do
not enough cash in hand.
 Securities in the portfolio or demat account can be utilized as a security/collateral.
 MTF improves the rate of return on the capital invested.
 MTF enhance investors’ purchasing power.
 The market watchdog SEBI and stock exchanges continuously monitor the margin trade facility.
RISKS INVOLVED IN MARGIN TRADING

 Magnified Losses: If it can help investors magnify profits, it can also magnify losses. In fact, you can end up losing
more than what you invested. Investors think that borrowing from brokers is simpler and dealing with them is
easier than banks. But, little do they know that borrowing from brokers is as binding as they are with banks.
 Minimum Balance:You are supposed to maintain a minimum balance in your trade account at all times. If your
balance falls below the minimum balance, then your broker would ask you to maintain sufficient balance. If you are
unable to maintain the minimum balance, then you would be forced to sell some or all the assets to maintain the
minimum balance.
 Liquidation: Brokers have the right to initiate actions against the investors if they fail to keep up to the trade
agreement. If you fail to meet a call, then the broker can liquidate your assets to recover the sum.
MARGIN TRADING IN MUTUAL FUNDS

 Mutual fund units cannot be bought through margin trading because of their trade mechanism. Mutual fund units
are not sold like stocks. Investors buy and redeem mutual fund units through mutual fund houses. Fund prices are
determined only when the market closes after each working day. It is because of this restriction that it is not
possible to trade mutual funds using margin.
GOOD MARGIN TRADE PRACTICES

 Invest Wisely: If you are planning to invest through margin trading, then you have to be extremely cautious. Margin
trading can magnify both losses and profits. If things go well, then it’s fine. If things go against you, then you would
be in a real spot of bother.You should invest through trading only if you have sufficient cash to withstand a
momentary move against your position and meet the call.
 Borrowing Lesser than the Allowed Limit: You should refrain from borrowing the full allowed limit. Give a try with
a smaller amount upfront and see how it goes. If you are confident in making good profits, then you can continue
to be trade.
 Borrow for Short Durations: Margin is like a loan, and you are liable to pay interest on it. It’s advisable to settle
the trade at the earliest so that you don’t accumulate higher interest on it.
 Margin trading increases investors’ purchasing power. However, it can lead to magnified losses if things don’t go in
your way. You have to be extremely careful when trading.
MARGIN TYPES

 VAR (Value At Risk) Margin

 VAR margin is a statistical calculation that considers the worst possible loss scenario for a stock for a certain period, based
on historical volatility of the scrip.VAR margin is collected upfront to cover the largest possible loss that can hit the stock
during market volatility.

 Mark to Market Margin

 MTM Margin considers the difference in a stock’s closing price and transaction price to cover the difference for all open
positions at the end of the day. It covers the risk of change in price of stock due to market volatility. MTM in the cash
market covers risk in trades with margin facility. When a trader buys stocks with funds on credit, broker needs to adjust the
margin as per overall value of trade at close and a shortfall needs to be fulfilled as per MTM value.
VAR MARGIN

 All securities are classified into three groups for the purpose of VaR margin:
 For the securities listed in Group I, scrip wise daily volatility calculated using the exponentially weighted moving average
methodology is applied to daily returns. The scrip wise daily VaR is 6 times the volatility so calculated subject to a minimum
of 9%.
 For the securities listed in Group II, scrip wise daily VaR is 6 times the volatility so calculated subject to a minimum of
21.5%.
 For the securities listed in Group III the VaR margin is 50% if traded at least once per week on any stock exchange; 75%
otherwise.
 In case of ETFs that track broad based market indices and do not include ETFs which track sectoral indices, the
VaR margin rate is 6 times the volatility so calculated subject to a minimum of 6%.
CONTRACT NOTES
 Contract notes are among the most relevant legal documents available to investors in the stock market. It keeps track of
all the transactions at one place along with profit and loss info. The availability and legality of critical information related
to a transaction make it essential for an investor/trader to properly understand the market.
 The contract note is the legal record of any trade made by a stockbroker on a stock exchange. It confirms the trade
conducted on a specific day, on the client's behalf, performed on a stock exchange (BSE / NSE).You receive this
document from your broker stating the details of shares that were bought or sold through him. The document may also
be available in electronic format with a digital signature.
 Contents: Contract note outlines primary contract information along with the date, period, size; quantity exchanged, etc.
This also provides a reference number that can be used to cross-check transaction information with the stock
exchanges. A good contract note should have the following details in a standardized format.
 SEBI registration number of the trading member/sub-broker
 Trade information, such as order number, transaction size, transaction price, trade time, traded amount, brokerage paid, settlement
reference number, and other service charges' information.
 Authorized member's signature or digital signature for the electronic format
 Arbitration by-laws and rules
IMPORTANCE OF CONTRACT NOTE

 As the number of investors in the stock market is rising, chances of fraud and conflicts are also growing day after day.
SEBI has taken several measures to safeguard common investor interests. One of the very first moves in that direction is
the digital contract note showing the price, brokerage, service tax, and STT in the prescribed format.
 Just by looking at this document, an investor can be confident that the order he put through his broker was executed.
This paper is a condition for filing a lawsuit or arbitration action against your broker.You should always rely on your
broker's prompt delivery of contract notes.
 The fundamental usage of a contract note is:
 Calculation of total brokerage charged
 Calculation of capital gains
 Legal Proof in the case of dispute with the broker
 Calculation of data for filing the income tax return
 Cross-examining genuineness of the transactions
WHAT IS PHYSICAL SETTLEMENT?

 Until 2018, all futures and options contracts were settled in cash. In this settlement, the buyer or seller had to
settle their position in cash without actually taking the delivery of the underlying security on the expiry of the
contract. However, as per the SEBI circular dated April 11, 2018, physical settlement is compulsory if a trader
holds stock futures & options contracts that are eligible for physical delivery upon expiry.
 A physical settlement means on the expiry of futures & options contract, actual physical delivery of stocks or
commodities should be made in your Demat account instead of cash settlement. For instance, if you had sold XX
company’s futures and have not rolled over or closed your position till the expiry date, then you will have to
mandatorily give physical delivery of shares. On the other hand, if you had bought the future and not changed
your position till expiry, then you will have to take the physical delivery of shares in your Demat account by
paying the full value of the contract.
 This physical delivery settlement process is carried out for all the stock derivatives (futures and options).
However, index options such as NIFTY, FINNIFTY, and BANK NIFTY are settled on a cash basis only.
PHYSICAL SETTLEMENT OF FUTURES AND OPTIONS

 1. Futures
 All stock futures positions that are open at the end of the expiry day will have to be compulsorily physically settled.
 – Long futures position will result in buying (receiving) the shares
 – Short futures position will result in selling (delivering) of the shares

 2. Options
 In-the-money (ITM) Options
 Long Call Bought a call option Buy stock by paying the full value
 Short Call Sold a call option Sell stock by delivering the agreed quantity of shares at an agreed price
 Long Put Bought a put option Sell stock by delivering the agreed quantity of shares at an agreed price
 Short Put Sold a put option Buy stock by paying the full value
 Note: For Options Contracts, monthly expiry is considered to carry out the physical delivery settlement process.
COMPUTATION OF VALUE OF THE PHYSICAL DELIVERY SETTLEMENT

 1. For Futures Contracts

 The final settlement price of the contract will be the delivery settlement value. For example, consider you hold a long futures position of
1 lot of 200 shares of XYZ company till the expiry at ₹ 2000 each (as on the contract date). Then the settlement value will be ₹ 4,00,000
(2000 * 200) . In this case, to physically settle the shares you need to buy the stock by paying the total settlement value i.e. ₹ 4,00,000.

 2. For Options Contracts

 It will be calculated as below:
 Strike prices of the options contracts * Quantity
 Example:You hold a short call options position of 1 lot of 250 shares of XYZ company till the expiry at ₹ 1800 each (This price is as on
the date you entered into the contract and is known as the strike price). Then the settlement price will be ₹ 4,50,000 (1800*250). In this
case, if the underlying price of XYZ company is ₹ 2000 then your contract is in In-the-money Position. Now, to physically settle the
shares you need to have 250 shares in your Demat account against which you will receive ₹ 4,50,000 (1800*250) by the exchange.
WHAT WILL HAPPEN IN CASE OF FAILURE TO DELIVER THE
SECURITIES/INSUFFICIENT FUNDS IN A PHYSICAL SETTLEMENT?

 In case of short delivery under the physical settlement – The shares will undergo an auction and a penalty will be
imposed
 In case of insufficient funds – A margin shortfall penalty will be levied and can trigger a risk-based square off
 In case of failure to fulfill margin requirements – A margin shortfall penalty will be charged
PHYSICAL SETTLEMENT

 The physical delivery settlement had a significant impact on the derivatives market and helped in reducing the
volatility in the market.
 Also, it has made maintenance of Demat accounts mandatory for the traders.
 It is advisable to square off/ rollover positions before expiry to reduce a load of higher margins, penalties,
maintaining sufficient balance, and price risk.
TRADE SETTLEMENT

 The trading and settlement process in a secondary market begins with the selection of a broker or sub-broker and ends
with settlement of shares. For secondary-market trading, you need first to open a dematerialized (DEMAT) account with
a broking house or bank. Once your account is active, you can buy or sell securities. Once your order is executed, and
you get a contract note, that’s when your trade is settled.
 What is trade settlement?
 Trade settlement is a two-way process which comes in the final stage of the transaction. Once the buyer receives the securities and
the seller gets the payment for the same, the trade is said to be settled. While the official deal happens on the transaction date, the
settlement date is when the final ownership is transferred. The transaction date never changes and is represented with the letter ‘T’.
The final settlement does not necessarily occur on the same day. The settlement day is generally T+1.
 Earlier, when securities were held in physical format, it took five days to settle a trade after the actual transaction. Investors made
payment in cheques after receiving the securities which came in the form of certificates and were delivered by post. The delay caused
differences in prices, posed risks and incurred a high cost. To control transaction delay, market regulators decided to set a date within
which the transaction had to be completed. Due to paperwork, earlier the settlement date used to be T+5, which was reduced to
T+2 post computerization. It currently stands at T+1.
TRADE SETTLEMENT

 Types of settlements in the stock market:

 1. Spot settlement – This is when the settlement is done immediately following the rolling settlement principle of T+1.
 2. Forward settlement – This happens when you agree to settle the trade at a future date which could be T+5 or T+7.
 What is rolling settlement?
 A rolling settlement is one in which the settlement is made in the successive days of the trade. In a rolling settlement,
trades are settled in T+1 day, which means deals are settled by the next working day. This excludes Saturday and Sunday,
bank holidays and exchange holidays. So, if a trade is conducted on a Wednesday, it will be settled by Thursday. Similarly, if
you buy a stock on Friday, the broker immediately deducts the total cost of investment from your account the same day, but
you receive the shares on Monday. The settlement day is also the day you become the shareholder of record.
 The settlement day is essential for those investors who are looking to earn dividends. If the buyer wishes to receive a
dividend from the company, then he must settle the trade before the record date for a profit.
ROLLING SETTLEMENT RULES IN BSE:

 1. In the Bombay Stock Exchange (BSE), securities in the equity segment are all settled in T+1 days.
 2. Government securities and fixed income securities for retail investors are also settled in T+1 days.
 3. Pay-in and pay-out of monies and securities need to be completed on the same day.
 4. The delivery of securities and payment by the client has to be done within one working day after the BSE
completes the pay-out of the funds and securities.
 What is pay-in and pay-out:
 Pay-in is the day when the buyer sends the funds to the stock exchange, and the seller sends the securities. Pay-out is the day when the
stock exchange delivers the funds to the seller, and the shares purchased to the buyer.

 What is a bad delivery?

 A bad delivery is when shares transfer is not completed because of the lack of compliance with the norms of the exchange.
WHAT IS ALGORITHMIC TRADING?

 Algorithmic trading strategies involve making trading decisions based on pre-set rules that are programmed into a
computer. A trader or investor writes code that executes trades on behalf of the trader or investor when certain
conditions are met.
 Disadvantage of Algorithmic Trading
 1. Miss out on trades
 A trading algorithm may miss out on trades because the latter doesn’t exhibit any of the signs the algorithm’s been programmed to look
for. It can be mitigated to a certain extent by simply increasing the number of indicators the algorithm should look for, but such a list can
never be complete.
ADVANTAGES OF ALGORITHMIC TRADING
 1. Minimize market impact
 An investor wanting to buy one million shares in Apple might buy the shares in batches of 1,000 shares. The investor might buy 1,000
shares every five minutes for an hour and then evaluate the impact of the trade on the market price of Apple stocks. If the price
remains unchanged, the investor will continue with his purchase. Such a strategy allows the investor to buy Apple shares without
increasing the price. However, the strategy comes with two main drawbacks:
 If the investor needs to pay a fixed fee for every transaction he makes, the strategy might incur significant transaction costs.
 The strategy takes a significant amount of time to complete. In this case, if the investor buys 1,000 shares every five minutes, it would take him just
over 83 hours (more than three days) to complete the trade.
 A trading algorithm can solve the problem by buying shares and instantly checking if the purchase has had any impact on the market
price. It can significantly reduce both the number of transactions needed to complete the trade and also the time taken to complete
the trade.
 2. Ensures rules-based decision-making
 Traders and investors often get swayed by sentiment and emotion and disregard their trading strategies. For example, in the lead-up
to the 2008 Global Financial Crisis, financial markets showed signs that a crisis was on the horizon. However, a lot of investors
ignored the signs because they were caught up in the “bull market frenzy” of the mid-2000s and didn’t think that a crisis was
possible. Algorithms solve the problem by ensuring that all trades adhere to a predetermined set of rules.
LISTING AND DELISTING
DELISTING

 What is it?
 Delisted shares refer to the shares of a listed company that have been removed from the stock exchange permanently for buying and selling
purposes.
 That means delisted shares will no longer be traded on the stock exchanges – National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE). The process of delisting securities for any company is governed by the market regulator, Securities, and Exchange Board of
India (SEBI).
 Delisting of shares can be voluntary or involuntary, depending on the reason for delisting.
 A listed company’s shares get delisted from exchange for various reasons. These include insufficient market capitalization, a company filing
bankruptcy, and failure to comply with exchange regulatory requirements.
 What Happens to the Shareholders?
 What happens when a stock is delisted must be an intriguing question for all the shareholders.
 If a company is delisted, you are still a shareholder, to the extent of a number of shares held. And yet, you cannot sell those shares on any
exchange.
 However, you can sell it on the over-the-counter market. This means you can look for a buyer outside the stock exchange.
 In a financial sense, each type of delisting of shares – voluntary and involuntary delisting – will impact the investor who owns these shares.
VOLUNTARY DELISTING
 Listed companies voluntarily opt for permanent removal of securities from the stock exchange where the company decides to go private.
 Mostly, mergers with another company, amalgamation, or non-performance are a few reasons for voluntarily delisting. If you own a stock of the
company that has opted for voluntary delisting, the company is required to give you two options as per the delisting guidelines laid out by SEBI:
 1. Offload Your Shares in Reverse Book Building
 Promoter or acquirer will buy back the shares through a reverse book building process. Promoters are required to make a public announcement of buyback by
sending out a letter of offer to eligible shareholders and a bidding form.
 An eligible shareholder can exit by tendering your shares. Final price is decided based on the price at which the maximum number of shares has been offered.
 When the shares tendered by the shareholders reach the specified limits, delisting is considered successful.
 The company shall remain listed in case the limit specified is not met.
 2. Hold Till You Find a Buyer
 If you haven’t sold your shares in reverse book building process or during the exit window period, you can still hold them till you find the buyer on the OTC market.
 The delisted share can be hard to sell as there will be no buyers. However, when you wish to sell in the over-the-counter market, all you need is patience. It can take
a long time to find the buyer who is willing to buy at the desired price.
 When a company voluntarily opts for delisting with some expansion reasons, it usually offers its investor a buyback at a premium price, which can result in a
significant gain.
 However, it’s important to note that it’s just a temporary opportunity for investors to gain. Once the buyback window closes, the price of the stock is likely to drop.
INVOLUNTARY DELISTING

 Involuntary delisting refers to the forced removal of listed company shares from the stock exchange for various reasons
including non-compliance with the listing guidelines, late filing of reports, and low share price.
 In this case, promoters are required to buy back the shares at the value determined by an independent evaluator.
Though delisting does not affect your ownership, shares may not hold any value post-delisting.
 Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell
it to the company when it announces buyback.
 Can a Delisted Stock Come Back?
 Well, yes. A delisted stock can be relisted only if SEBI permits it. The market regulator lays out different guidelines for relisting such
shares.
• Relisting of voluntarily delisted stocks: Such shares will have to wait five years from their delisting date to get relisted again.
• Compulsory delisting: If a company has been delisted compulsorily, they will have to wait for 10 years before they can be listed again
on the exchanges.
COMMODITY MARKET

 A commodity market is a type of marketplace that lets an individual indulge in buying, selling, and trading raw
materials or even primary products.
 Ordinarily, it is a marketplace for investors that permits trading in commodities such as crude oil, precious metals,
natural gas, spices, etc.
 A commodity market facilitates an exchange of physical goods among residents in a country. Individuals aiming to
diversify their portfolio can undertake investments in both perishable and non-perishable products, thereby
not only mitigating the risk factor but also providing a hedge against inflation rates in an economy.
TYPES OF COMMODITIES

 Hard Commodities
 Gold, platinum, copper, silver, etc.
 Crude oil, Natural gas, gasoline, etc.
 Soft Commodities -
 Soybeans, wheat, rice, coffee, corn, salt, etc.
 Live cattle, pork, feeder cattle, etc.
 Some examples of commodities in the market that were most commonly traded in major commodity exchanges in India
included crude oil and silver. While crude oil acts as one of the most important energy sources required for virtually
every industry, silver is one of the most precious metals other than gold, with a steady demand.
 As crude oil is not domestically available in abundance, almost 82% of it is imported from OPEC and Middle Eastern
countries. Similarly, silver is traded in extensive quantities from countries such as Mexico, Peru, etc.
HOW COMMODITY MARKETS WORK

 A commodity market works similarly to any other market. It can be a physical/virtual space where an individual
can purchase, sell and trade multiple commodities at current/future dates.
 There’s a possibility to do commodity trading using futures contracts as well.
 How to Trade in Commodity Market?
 Commodity trading is managed by four major commodity exchanges in India-
 Multi Commodity Exchange (MCX)
 Indian Commodity Exchange (ICEX)
 National Commodity and Derivatives Exchange (NCDEX)
 National Multi Commodity Exchange (NMCE)
 All activities of such nationwide exchanges come under the regulation of the Commodity Derivatives Market Regulation
(CDMRD) of the Securities and Exchange Board of India, which merged with the Forward Market Commission in 2015.
COMMODITY MARKETS

 Commodity markets facilitate an exchange of both physical goods and derivative contracts
 Physical exchange is undertaken by institutional investors and commodity brokers aiming to realize gains through
the resale of the products in the retail sector of the country. Conversely, a derivative contract does not require a
physical store of the goods procured, as individuals can trade commodities online through digitized contracts,
making the transaction hassle-free and convenient.
 Investors can practice investing in commodity markets through a futures or options contract. While a futures
contract dictates individuals to sign a deed stipulating delivery of a product at a later date with respect to a fixed
price, an options contract acts as an agreement but not a liability of the same.
COMMODITY MARKETS – FUTURES AND OPTIONS

 Futures Contracts
 Future derivative trading is most common in the commodity market, wherein sellers sign a futures agreement with
brokers/buyers to purchase a stipulated quantity of products at a given price. While a downtrend in market prices can help
sellers realize margin profits, a rising price can help buyers or brokers profit from the transactions. If such trade is
supervised by commodity exchange, it is known as a future derivative contract. Any settlement between two parties
without any overseeing exchange is known as over-the-counter exchange trading. Both exchange-traded and derivative
futures contracts are undertaken by two primary classes of investors – producers aiming to reduce fluctuations in final
good price and speculators aiming to profit from the volatility of a futures contract.
 Options Contracts
 As of 2017 SEBI regulations, options trading can be practiced while investing in top commodities wherein traders enjoy a
right but not an obligation to purchase/ sell a commodity derivative at a fixed price. Partaking in commodity investment
through such agreements helps individuals profit from any market fluctuations, as no obligation regarding the purchase or
sale of products is imposed on either of the parties, depending upon the type of options contract.
RELATIONSHIP OF COMMODITY MARKET & STOCK/BOND MARKET

 One of the features of a commodity market is that its performance demonstrates an inverse relation with
both stock and bond markets, as the bond and stock prices fall when the average price level of goods rises in
the economy.
 During times of rising aggregate price level or inflation, the prices of commodities traded on
respective exchange rises significantly. As extreme inflation has a negative impact on consumers, the
government often tries to tackle the situation by increasing the domestic lending rates through a repo rate
hike. As the cost of borrowing rises, investors often reduce their speculative demand for stock market
investments, making the prices of the capital sector plummet. The bond market is also affected as a result of such
a hike in the lending rates levied by scheduled commercial banks, as interests on respective savings tools rise.
Consequently, fixed coupon bonds indicate a relatively less profitable investment venture, thereby creating a
surplus amount of bonds with reduced demand, causing bond prices to fall.
 While bond and stock prices move in the opposite direction as compared to commodity prices, investments in
commodities, especially in precious metals and energy sources, tend to generate significant returns for investors.
TRADERS IN A COMMODITY MARKET

 Hedgers
 Such investors aim to reduce exposure to market volatility by entering into a futures contract with traders. Any change in
the price level does not affect the rate at which respective commodities are traded in the market.
 Most hedgers trade physical goods in the commodities market, as they require the stipulated goods or production or resale
purposes.
 Speculators
 Investors aiming to generate substantial profits from trade in the commodity market are termed speculators. A prediction
regarding the direction of movement of market prices is assumed by such individuals before signing a futures contract, and
depending upon the accuracy of the market forecast, positive or negative returns can be realized, subject to spot prices.
 Speculators don’t desire physical possession of the goods traded and hence, opt for a cash settlement to reduce the hassles
of physical trading.
FACTORS AFFECTING COMMODITY PRICES IN AN ECONOMY

 Market Demand and Supply

 Market demand and consequent supply of goods traded on a commodity exchange heavily influence the market price. A
rising demand (for any reason) can cause prices to rise in the short run, as supply cannot be increased immediately to
compensate for the higher demand in the market.
 Generally, such a rise in demand can be attributed to a pessimistic performance outlook towards the stock market, thereby
causing investors to shift towards relatively safer investment avenues.
 Global Scenario
 Global indicators play a crucial role in determining the prices of commodities available internally in a country.
 For example, any turmoil in the Middle Eastern countries can affect the prices at which crude oil is exported, thereby
affecting the prices at which it is traded domestically. A significant example can be cited in this respect when a supply shock
was experienced by all major countries in the world triggered by Iraq-Kuwait tensions in the 1990s.
FACTORS AFFECTING COMMODITY PRICES IN AN ECONOMY

 External Factors
 Any condition affecting the total production of stipulated goods traded in an exchange can cause price changes accordingly.
 For example, a rise in the cost of production can drive up the prices at which a product is sold in the market, consequently
affecting the equilibrium rate.
 Also, the performance of the stock and bond market has an effect on the prices of commodities, as a negative viewpoint
regarding their performances tends to divert investors towards commodity market securities. Individuals often trade in commodity
derivatives to compensate for stock market risks or to safeguard their portfolios from stock market downturns.

 Market Outlook
 Any unforeseen fluctuations in the stock market can cause investors to shift towards commodity trade, as the chances of
severe fluctuations in prices of certain commodities, such as precious metals, are low.
 Hence, commodity market investments are secure in nature and act as a hedge against inflation for risk-averse
individuals.
FACTORS AFFECTING COMMODITY PRICES IN AN ECONOMY

 Speculative Demand
 Demand for derivatives can arise from speculative investors, who aim to realize profits through market price fluctuations.
Speculators often make predictions regarding the direction of movement of prices and aim to close the contract before the
expiration date to realize capital gains on total gains.
 Individuals unwilling to take physical delivery of goods can opt for cash settlement contracts, whereby upon completion of
tenure of the futures contract, the difference between the price in spot trading and the price stated in the futures contract
has to be paid.
 Depending upon the market assumptions, individuals can assume either a short or a long position in a futures contract.
Investors expecting the price to drop in the future can undertake a short position (sell the security at a fixed price on a
stipulated date) to realize profits through a fall in the market price. On the other hand, if individuals expect the price of a
commodity futures contract to rise in the future, they can opt to go long (buy the security at a fixed price on a stipulated
date) so as to sell the same at higher prices in the future.
 Nonetheless, a futures contract tends to merge with the spot price at which a commodity is trading at a future date, as
prices adjust automatically at the expected level.
IMPORTANCE OF INVESTING IN THE COMMODITIES MARKET

 Diversification
 Commodities markets demonstrate an inverse performance when compared to stock and bond market returns, as during a rise in
the market prices of goods, stock and bond market returns falter.
 Investing a stipulated percentage of the investment corpus into the commodities market can help individuals reap a high return on
investment (ROI) even during a stock market downturn, helping them compensate for lower or negative profits generated by the
capital sector.

 Inflation Hedge
 The prices of top commodities, such as gold, tend to rise over time at a faster rate when compared to rising inflation rates in a
country, allowing investors to enjoy a rise in the real value of their corpus investment.
 Also, as the demand for certain goods tends to rise or remain stable over time (such as gold, crude oil, etc.), the price graph of the
same reflects a linear growth in the long run, wiping off any unsystematic fluctuations.
 Such technical analysis tools prove these commodities to be a profitable tools for individuals having a long-term investment outlook.
IMPORTANCE OF INVESTING IN THE COMMODITIES MARKET

 Margin Trading
 Commodity brokers offer a lower margin for trading relative to stock and bond market dealings. Essentially, it permits trading on
borrowed funds (subject to SEBI regulations), allowing both hedgers and speculators to profit from the transaction.
 While commodity traders partaking in physical delivery can benefit from bulk orders with a promise of repayment at a later date,
speculators earn higher returns through such investments.

 Substantial Returns
 While certain goods are known for their stability, many commodities are subject to immense volatility as per the economic and
capital market conditions.
 A prime example of volatile goods is crude oil, whose price varies due to fluctuations in supply, arising from mining problems, or due
to socio-economic conditions.
 Speculators invest in commodities to profit from such price volatility and can attain a long or short position as per their market
prediction, respectively.
LIMITATIONS OF TRADING IN THE COMMODITY MARKET

 High Risk
 The commodity market is volatile, as any fluctuations in the productive capacity, demand, or changing social circumstances
readily affect the prices. Due to such high volatility, predicting the movement of commodity prices might be challenging,
causing investors to lose substantial returns due to unforeseen market events.
 Hence, individuals need to be well-equipped with both the internal workings of an economy as well as external factors such
as international trade before choosing to trade in commodities. Additionally, the demand and supply patterns should be kept
in mind to mitigate the risk further.
 Limited Returns
 While stock and bond markets have periodic payouts such as dividend yields, coupon payments, etc., commodity investment
can only generate capital gains.