Financial Markets

Financial Markets
MSMSR/BBA/605 (F) DSE
Dr. Akshita Sharma

Asst. Prof. (MSMSR)
MATS University, Pandri, Raipur (C.G.)
MSMSR/BBA/605 (F) DSE Financial Markets 1

Text Books
• 1. Financial institutions and Markets :
L.M.Bhole
• 2. Indian Securities market: Hooda.R.P
• 3. Monetary Economics: Suraj Gupta

MODULE I
• An overview of financial markets in India;
Money markets: Indian money markets
structure and compositions: Acceptance
houses, Discount house, and call money
market, recent trends in Indian money market.

An overview of financial markets in India
Financial Markets are an important component of a country’s
financial system. It is the infrastructure that connects lender
and borrowers. In simple terms, individuals who have surplus
money invest in securities and entities which requires capital
issues securities. The investors earn a return on the security
while the entity gets capital for growing or expanding its
business. Let us understand this with the help of an example.
Person A has excess amount and wants to invest it. He can
deposit the amount in bank and earn a fixed interest. However,
if he invests in stocks, he can earn higher returns. The financial
market creates an alternative for the individual who has a
higher risk appetite and wants to earn higher returns. Banks
also use the money we deposit for giving loan to companies
An overview of financial markets in India
. In Financial Market, we directly lend money to companies and get

interest or returns. Financial markets are a mechanism for the
exchange trading of financial products within a policy
framework. They are characterized by a large volume of
transactions and the speed with which financial resources move
from one owner to the other. They perform the important
functions of an efficient payment mechanism, providing
information about companies, enhancing liquidity of financial
claims, transmutation of financial claims to suit the preferences of
both savers and borrowers, diversification and reduction of risk,
and an efficient source for capital generation and investment.
Financial Markets consist of two distinct types of markets –
Money Market and Capital Market.
Money Market
The money market is a market for short-term debt instruments
with maturity below one year. It is a highly liquid market
where securities are bought and sold in large quantities to
reduce transaction cost. Such securities are often risk free. Call
money market, certificates of deposits, commercial paper, repo
and treasury bills are the major instruments of the money
market. Money market constitutes a very important segment of
the financial system as it facilitates the conduct of monetary
policy.
The main investors in money market are financially strong
entities such as banks and mutual funds. Participation of retail
investors is less due to low returns in comparison to other
markets. The money market is regulated by the Reserve Bank
of India. 6
MSMSR/BBA/605 (F) DSE Financial Markets
Capital Market
Capital market is an institutional arrangement for the trading of

medium and long-term securities or equity and debt. The
major purpose of capital markets is to mobilize long-term
savings and finance long-term investments. It also provides
liquidity with a mechanism enabling the investor to sell
financial assets, encourages broader ownership of productive
assets, lowers the cost of transactions and information and
improves the effectiveness of capital allocation by way of a
competitive pricing mechanism. So, it comprises of all long-
term borrowings from banks as well as financial institutions,
borrowings from foreign markets and raising of capital by
issuing several securities such as shares, debentures, bonds,
etc.
Capital Market
The market participants in capital markets is widespread and

includes everyone from Retail Investors to Strong Financial
Entities such as Banks and Mutual Funds. SEBI is the main
regulator when it comes to capital market. Capital markets can
be further classified into primary and secondary markets.
Primary Markets – The primary market is also known as the
new issue market. It consists of mechanisms for procurement
of long-term funds by fresh issues of shares and debentures.
Secondary Market – The secondary market is also called the
stock market. It provides a ready market for long term
securities. The secondary market has two components: over-
the-counter (OTC) market and the exchange traded market.

Types of Capital Markets
Debt Market- Debt market is the financial market where
investors buy and sell debt securities, typically in the form of
bonds. These markets are vital sources of funds, particularly in
a developing economy like India. A fairly well-segmented debt
market has emerged in India comprising the following:
·Private corporate debt market
·Public sector undertaking bond market
·Government securities market
The government securities market accounts for nearly 90 per cent
of the business in the debt market. It constitutes the major
segment of the debt market.

Equity Market- Equity market, often known as the stock market
or share market, is a place where shares of companies or
entities are traded. The market enables sellers and buyers to
deal in equity or shares in the same platform. Equities are
mostly traded on the stock exchanges in India. In the Indian
stock market, equities are available for trading at the National
Stock Exchange (NSE) , the Bombay Stock Exchange (BSE)
and the latest entrant, Metropolitan Stock Exchange of India
(MSE).

Forex Market- The Foreign Exchange Market, also known as the
Forex Market, is a market where people can trade in currencies. It
is one of the most liquid markets. Indian law allows forex trading
only in currency derivatives. RBI and SEBI strictly regulates
trading in foreign currencies in India. Hence, Forex Trading in
India is not as prevalent as the stock market or money market.
Derivatives Market- A derivative instrument is a contract whose
value is derived from the value of another asset, known as the
underlying, which could be a share, a stock market index, an
interest rate, a commodity, or a currency. The derivative market in
India was introduced in the year 2000. Derivatives market can be
classified into – forwards, futures, options and swaps.

Indian money markets structure and
compositions
The Indian monetary market has two broad categories – the
organized sector and the unorganized sector.
• Organized Sector: This sector comprises of the governments,
the RBI, the other commercial banks, rural banks, and even
foreign banks. The RBI organizes and controls this sector.
Other corporations like the LIC, UTI, etc also participate in this
sector but not directly. Other large companies and corporates
also participate in this sector through banks.
• Unorganized Sector: These are the indigenous banks and the
local money lenders and hundis etc. Their activities are not
controlled by the RBI or any other body, so they are the
unorganized sector.

Acceptance Houses
A financial institution that guarantees a bill of exchange, as a
result of which it can be discounted on more favorable
terms.
• An acceptance market is a contractual agreement involving
the use of short-term credit as payment in international
trade.
• It is commonly used between exporters and importers,
allowing the seller to get paid faster.
• An importer signs and sends a bill back to the exporter,
indicating they are willing to pay for goods by a certain date.
• The exporter can sell the bill for a discount.

Discount House
• Discount houses are financial institutions that act as money
lenders, or serve as intermediaries between commerical
lenders and borrowers, trading in various short-term
securities and instruments.
• Mainly located in the U.K., discount houses once provided a
ready secondary market, thus ensuring liquidity in the British
monetary system. The Bank of England often operated
through discount houses to help regulate the money supply,
set interest rates, and extend credit to commercial banks.
• By 2000, British discount houses largely ceased to exist as
separate financial institutions.

Call Money Market
• Call money and call money markets, in general, are characterized
by very short term loans. Call money loans typically range from
one to 14 days. They can include institutional participants such as
in the interbank call money market. Other types of call money
markets also exist. Brokerages may use call money markets to
cover margin accounts. Call money rates are usually influential in
the margin borrowing rates of brokerage accounts since call
money serves as a source of funds to cover margin lending.
• Call money loans typically do not have set repayment schedules
since they are so very short term—coming to maturity within two
weeks. Thus, call money is used for very short term needs and is
repaid quickly.

Recent trends in Indian money market
• The money market involves the purchase and sale of large
volumes of very short-term debt products, such as overnight
reserves or commercial paper.
• An individual may invest in the money market by purchasing a
money market mutual fund, buying a Treasury bill, or opening
a money market account at a bank.
• Money market investments are characterized by safety and
liquidity, with money market fund shares targeted at $1.

Assignment
Q.1. What is Financial Markets?
Q.2. What are types of Financial Markets?
Q.3. Write Short on:-
a. Acceptance house
b. Discount house.

MODULE II
• Capital market: Security market – (a) New
issue market (b) Secondary market; functions
and role of stock exchange, Listing, Pricing of
public issue, Stock exchanges and over the
counter exchanges.

Capital market
• Capital markets refer to the venues where funds are exchanged
between suppliers and those who seek capital for their own use.
• Suppliers in capital markets are typically banks and investors
while those who seek capital are businesses, governments, and
individuals.
• Capital markets are used to sell different financial instruments,
including equities and debt securities.
• These markets are divided into two categories: primary and
secondary markets.
• The best-known capital markets include the stock market and
the bond markets.
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Security market – (a) New issue market
• The primary market is where securities are created. It's in this
market that firms sell (float) new stocks and bonds to the
public for the first time. An initial public offering, or IPO, is
an example of a primary market. These trades provide an
opportunity for investors to buy securities from the bank that
did the initial underwriting for a particular stock. An IPO
occurs when a private company issues stock to the public for
the first time.
• For example, company ABCWXYZ Inc. hires
five underwriting firms to determine the financial details of
its IPO. The underwriters detail that the issue price of the
stock will be $15. Investors can then buy the IPO at this
price directly from the issuing company.
20
• This is the first opportunity that investors have to contribute
capital to a company through the purchase of its stock. A
company's equity capital is comprised of the funds generated
by the sale of stock on the primary market.
• Types of Primary Offering
• A rights offering (issue) permits companies to raise additional
equity through the primary market after already having
securities enter the secondary market. Current investors are
offered prorated rights based on the shares they currently own,
and others can invest anew in newly minted shares.
• Other types of primary market offerings for stocks include
private placement and preferential allotment.
• Private placement allows companies to sell directly to more
significant investors such as hedge funds and banks without
making shares publicly available.
• While preferential allotment offers shares to select investors
(usually hedge funds, banks, and mutual funds) at a special price
not available to the general public. Similarly, businesses and
governments that want to generate debt capital can choose to issue
new short- and long-term bonds on the primary market. New bonds
are issued with coupon rates that correspond to the current interest
rates at the time of issuance, which may be higher or lower than
pre-existing bonds.
• The important thing to understand about the primary market is that
securities are purchased directly from an issuer.
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The Secondary Market
• For buying equities, the secondary market is commonly
referred to as the "stock market." This includes the New York
Stock Exchange (NYSE), Nasdaq, and all major exchanges
around the world. The defining characteristic of the secondary
market is that investors trade among themselves.
• That is, in the secondary market, investors trade previously
issued securities without the issuing companies' involvement.
For example, if you go to buy Amazon (AMZN) stock, you are
dealing only with another investor who owns shares in
Amazon. Amazon is not directly involved with the transaction.
• In the debt markets, while a bond is guaranteed to pay its
owner the full par value at maturity, this date is often many
years down the road. 23
• Instead, bondholders can sell bonds on the secondary market
for a tidy profit if interest rates have decreased since the
issuance of their bond, making it more valuable to other
investors due to its relatively higher coupon rate.
• The secondary market can be further broken down into two
specialized categories:
• Auction Markets- In the auction market, all individuals and
institutions that want to trade securities congregate in one area
and announce the prices at which they are willing to buy and
sell. These are referred to as bid and ask prices. The idea is
that an efficient market should prevail by bringing together all
parties and having them publicly declare their prices.
• Thus, theoretically, the best price of a good need not be sought out because
the convergence of buyers and sellers will cause mutually agreeable prices
to emerge. The best example of an auction market is the New York Stock
Exchange (NYSE).1
• Dealer Markets- In contrast, a dealer market does not require parties to
converge in a central location. Rather, participants in the market are joined
through electronic networks. The dealers hold an inventory of security,
then stand ready to buy or sell with market participants. These dealers earn
profits through the spread between the prices at which they buy and sell
securities.
• An example of a dealer market is the Nasdaq, in which the dealers, who
are known as market makers, provide firm bid and ask prices at which they
are willing to buy and sell a security.2 The theory is that competition
between dealers will provide the best possible price for investors.

• The OTC Market- Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC)
market. The term originally meant a relatively unorganized system where trading did not occur at a
physical place, as we described above, but rather through dealer networks. The term was most likely
derived from the off-Wall Street trading that boomed during the great bull market of the 1920s, in which
shares were sold "over-the-counter" in stock shops. In other words, the stocks were not listed on a stock
exchange, they were "unlisted."
• Over time, however, the meaning of OTC began to change. The Nasdaq was created in 1971 by the
National Association of Securities Dealers (NASD) to bring liquidity to the companies that were trading
through dealer networks.3 At the time, few regulations were placed on shares trading over-the-counter,
something the NASD sought to improve. As the Nasdaq has evolved over time to become a major
exchange, the meaning of over-the-counter has become fuzzier.
• Nowadays, the term "over-the-counter" generally refers to stocks that are not trading on a stock exchange
such as the Nasdaq, NYSE, or American Stock Exchange (AMEX). This means that the stock trades
either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither of these networks is an
exchange; in fact, they describe themselves as providers of pricing information for securities. OTCBB
and pink sheet companies have far fewer regulations to comply with than those that trade shares on a
stock exchange. Most securities that trade this way are penny stocks or are from very small companies.
• For these reasons, while the Nasdaq is still considered a dealer market and, technically, an OTC, today's
Nasdaq is also a stock exchange and, therefore, it is inaccurate to say that it trades in unlisted securities.
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Functions of stock exchange
• Role of an Economic Barometer: Stock exchange serves as an economic
barometer that is indicative of the state of the economy. It records all the
major and minor changes in the share prices. It is rightly said to be the
pulse of the economy, which reflects the state of the economy.
• Valuation of Securities: Stock market helps in the valuation of securities
based on the factors of supply and demand. The securities offered by
companies that are profitable and growth-oriented tend to be valued higher.
Valuation of securities helps creditors, investors and government in
performing their respective functions.
• Transactional Safety: Transactional safety is ensured as the securities that
are traded in the stock exchange are listed, and the listing of securities is
done after verifying the company’s position. All companies listed have to
adhere to the rules and regulations as laid out by the governing body.
• Contributor to Economic Growth: Stock exchange offers a platform for
trading of securities of the various companies.
Functions of stock exchange
• This process of trading involves continuous disinvestment and reinvestment, which offers
opportunities for capital formation and subsequently, growth of the economy.
• Making the public aware of equity investment: Stock exchange helps in providing
information about investing in equity markets and by rolling out new issues to encourage
people to invest in securities.
• Offers scope for speculation: By permitting healthy speculation of the traded securities, the
stock exchange ensures demand and supply of securities and liquidity.
• Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready
platform for the sale and purchase of securities. This gives investors the confidence that the
existing investments can be converted into cash, or in other words, stock exchange offers
liquidity in terms of investment.
• Better Capital Allocation: Profit-making companies will have their shares traded actively,
and so such companies are able to raise fresh capital from the equity market. Stock market
helps in better allocation of capital for the investors so that maximum profit can be earned.
• Encourages investment and savings: Stock market serves as an important source of
investment in various securities which offer greater returns. Investing in the stock market
makes for a better investment option than gold and silver.

Role of stock exchange
1. Mobilization of Savings? Capital Markets are one of the most sought-after
platforms for institutional investors as well as individuals. To ensure
investor’s protection, all the trading transactions in the capital markets are
regulated with proper regulations and rules. This also helps in
consolidating the confidence of small savers and individual investors. In
this way, stock exchanges help in attracting savings from large number of
investors in the capital markets.
2. Promoting Capital Formation - The mobilization of funds from the savers
by the capital markets is channelized to various industries which are
involved in production and manufacturing of various goods and services
which is beneficial for the economy. This enhances the capital formation
and development of the national assets. This channelization of savings into
appropriate avenues of investment is one of the primary roles of the stock
exchanges.

3. Liquidity of Investment- As an investor, it is very important to consider
the liquidity of your investment. This liquidity is provided by the stock
exchanges. Investors can liquidate their securities and other capital market
assets anytime during the trade hours and days. Therefore, stock exchanges
help in ensuring liquidity of investment. The online trading carried out on
the stock exchanges after dematerialization of securities has transformed
the trading experience. It helps investors in buying, selling and transferring
their investment seamlessly.
4. Investment Safety- One of the most important role of stock exchange in
ensuring investment safety to the investors. After the dematerialization act,
trading on stock exchanges has been completely online. The Securities and
Exchange Board of India (SEBI) keeps an eye on the functioning of
exchanges and keeps on identifying new loopholes in the system. Several
measures are enforced at times to overcome the same and ensure
investment safety. The authorities at exchanges try their best to curb
speculative practices and minimize the risk for investors to safeguard their
confidence. MSMSR/BBA/605 (F) DSE Financial Markets
30
5. Wide Marketability to Securities- In the earlier days, trading on stock exchanges was done
using physical security certificates. The trading was limited to the office of the stock
exchange and all dealings were carried out over there only. Investors from distant parts of the
country remain in the dark about the price movements on exchanges. After the establishment
of online trading system, investors can keep an eye on the price movements and make the
most out of all the price movements in the capital markets. The modern stock exchanges
backed by information technology have provided wide marketability to the securities.
6. Funds for Development Purpose- As we have already discussed, stock exchanges help in
mobilization and channelizing of funds from savers to various industries. Many times, these
industries are the one which are involved in government development projects including infra
companies, railways, telecommunications etc. Stock exchanges help in constant evaluation of
government securities.
7. Barometer of National Economy- The stock exchanges are considered to be the barometer of
a nation’s economy. The economy of a country is economically symbolized by the most
significant stock exchange of that particular country. These stock exchanges help in
representing the progress and situation of a nation’s economy at national and international
levels. For instance, Bombay Stock Exchange or BSE is often considered by overseas
investors to have an idea about the economic condition of our country.
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Listing
• In corporate finance, a listing refers to the
company's shares being on the list (or board) of stock that are
officially traded on a stock exchange. Some stock exchanges
allow shares of a foreign company to be listed and may
allow dual listing, subject to conditions.
• Normally the issuing company is the one that applies for a
listing but in some countries an exchange can list a company,
for instance because its stock is already being traded via
informal channels.
• Stocks whose market value and/or turnover fall below critical
levels may be delisted by the exchange. Delisting often arises
from a merger or takeover, or the company going private.
Pricing of public issue
• The public offering price (POP) is the price an underwriter sets for
new issues of stock sold to the public during an initial public offering
(IPO).
• Underwriters look at a variety of factors when setting the public
offering price, such as the profitability of the company, the strength
of its financial statements, growth trends, and investor confidence.
• Underwriters need to set a POP that is low enough to attract the
attention of investors, yet high enough to ensure the company raises
a satisfactory amount of money through the new stock issue.
• Some qualitative factors—such as the public's perception of a
company or the desire to invest in the next hot tech company—can
sometimes push the share price beyond the public offering price,
particularly during the early days of an IPO.

• Understanding a Public Offering Price (POP)
• Investors and analysts sometimes use the POP price as
a benchmark against which a stock's current price can be compared. If a
company's share price rises significantly above its initial public offering
price, the company is considered to be performing well. However, if the
share price later dips below its initial public offering price, this is
considered a sign that investors have lost confidence in the company's
ability to create value.
• A public offering price does not necessarily reflect what the shares are
worth. Investors can get overly excited about a hot new company and
push prices higher than the stock should be. By using the balance
sheet information contained in the prospectus, prospective investors can
calculate an accurate share value to help determine whether the market
has correctly priced an IPO.

• The Underwriting Process
• It's the underwriting company's job to evaluate the company interested
in an IPO to determine an optimal public offering price.
The underwriter must take many variables into consideration during this
process. First, the public offering price must accurately reflect the
current and potential near-term worth of the underlying company. The
underwriter will need to undertake a thorough review of the
company's financial statements, which includes the balance sheet,
income statement, and cash flow statement.
• Additionally, the underwriter will need to set a POP that is high enough
to ensure the company raises a satisfactory amount of money through
the equity issue. Lastly, the POP must be low enough to attract the
attention of investors and motivate them to buy shares of the new
offering.
• How to Research Public Offering Prices
• The main way to research an IPO price is to contact the underwriting
bank for the offering and get a copy of the prospectus. Find the financial
data contained in the prospectus. Locate the balance sheet and find the
stockholder’s equity section. Look for the amount under the “paid-in
capital” heading, which is the money the company has received from the
sale of IPO stock.
• As an example, let’s say the balance sheet reports $500,000 as the
amount of paid-in capital. Locate the number of shares the company has
sold in the stockholders' equity section. Divide the paid-in capital by the
number of shares sold to get the value of one share of stock. For
example, if the company has sold 25,000 IPO stock shares for $500,000,
you would divide the $500,000 paid-in capital amount by the 25,000
shares to arrive at a $20-per-share book value.
Stock exchanges and over the counter
exchanges
BASIS FOR
OTC (OVER THE COUNTER) EXCHANGE
COMPARISON
Meaning Over the Counter or OTC is a Exchange is an organized and regulated
decentralized dealer market market, wherein trading of stocks takes
wherein brokers and dealers place between buyers and sellers in a
transact directly via computer safe, transparent and systematic manner.
networks and phone.
Market maker Dealer Exchange itself
Used by Small companies Well established companies
Physical Location No Yes
Trading hours 24×7 Exchange hours
Stocks Unlisted Stocks Listed Stocks
Transparency Low Comparatively high
Contracts Customized Standardized
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Assignment
Q.1. Write a comparison between money and
capital market?
Q.2. Differentiate between Primary & secondary
Market.
Q.3. Differentiate between OTC & stock
exchange.
38
MODULE III
• Securities contract and regulation act: Main
provisions; Investor’s protection: Grievances
handling and their removal.
39
Securities contracts (Regulations)
Act 1956
Introduction: The Securities Contracts (Regulation) Act, 1956 “Act” was
enacted in order to prevent undesirable transactions in securities and to
regulate the working of stock exchanges in the country. The provision
of the Act came into force with effect from 20th February, 1957 vide
Notification No. SRO 528 dated 16th February, 1957.
Definitions:
Stock exchange [Section 2(j)]
any body of individuals, whether incorporated or not, constituted before
corporatization and demutualization under sections 4A and 4B, or
a body corporate incorporated under the Companies Act, 1956 whether
under a scheme of corporatization and demutualization or otherwise,
for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities

Securities contracts (Regulations) Act
1956
Recognized Stock Exchange [Section 2(f)] means a stock exchange which is for the
time being recognized by the Central Government under Section 4 of the Act.
Corporatization [Section 2(aa)] means the succession of a recognized stock
exchange, being a body of individuals or a society registered under the Societies
Registration Act, 1860 (21 of 1860), by another stock exchange, being a company
incorporated for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities carried on by such individuals or society.
Demutualization [Section 2(ab)] means the segregation of ownership and
management from the trading rights of the members of a recognized stock
exchange in accordance with a scheme approved by the Securities and Exchange
Board of India (SEBI).
The main parts of the Act are as follows and the powers of Central Government with
regard to this Act are exercisable by SEBI:
(A) Recognized Stock Exchanges (B) Penalties

1956
Corporatization and demutualization of stock exchanges (Section 4A)
On and from the appointed date, all recognized stock exchanges (if not
corporatized and demutualised before the appointed date) shall be corporatized
and demutualised in accordance with the provisions contained in section 4B.
Procedure for corporatization and demutualization (Section 4B)
4B(1): All recognized stock exchanges referred to in section 4A shall, within such
time as may be specified by the SEBI, submit a scheme for corporatization and
demutualization for its approval
4B(2): On receipt of the scheme, the SEBI after making such enquiry as may be
necessary and if it is satisfied that it may approve the scheme with or without
modification.
Note: “appointed date” means the date which the SEBI may, by notification in the
Official Gazette, appoint and different appointed dates may be appointed for
different recognized stock exchanges.

1956
modification.

1956
modification.

1956
Power of Central Government to call for periodical returns or direct inquiries to be
made (Section 6) Every recognized stock exchange shall furnish to SEBI periodical
returns relating to its affairs as may be prescribed. Every recognized stock exchange
and every member thereof shall preserve such books of accounts and other documents
for period of not exceeding five years.
Annual reports to be furnished to Central Government by stock exchanges (Section7)
Every recognized stock exchange shall furnish the Central Government a copy of the
annual report.
Power of recognized stock exchanges to make bye-laws (Section 9)
9(1) Any recognized stock exchange may, subject to the previous approval of the SEBI,
make bye-laws for the regulation and control of contracts.
Power of SEBI to make or amend bye-laws of recognized stock exchanges (Section
10) 10(1) The SEBI may either on a request from the governing body of a recognized
stock exchange or on its own motion make bye-laws for all or any of the matters
specified in section 9 or amend any bye-laws made by such stock exchange under that
section.

1956
Power to suspend business of recognized stock exchanges (Section 12)
The Central Government is empowered to suspend the business of
recognized stock exchange on an emergency situation by giving
notification in the Official Gazette stating the reasons therein, for a
period of not exceeding seven days and subject to such conditions as
may be specified in the notification. However, in the interest of the trade
or the public the said period can be extended from time to
time, provided that no such period of suspension can be extended,
unless the governing body of the recognized stock exchange has been
given an opportunity of being heard in the matter.
Conditions for listing (Section 21)
Where securities are listed on the application of any person in any
recognized stock exchange, such person shall comply with the
conditions of the listing agreement with that stock exchange.
1956
Delisting of securities (Section 21A)
21A(1): A recognized stock exchange may delist the securities, after
recording the reasons therefore, on any of the ground or grounds as
may be prescribed under this Act, provided that the securities of a
company shall not be delisted unless the company concerned has
been given a reasonable opportunity of being heard.
21A(2): A listed company or an aggrieved investor may file an appeal
before the Securities Appellate Tribunal (SAT) against the decision
of the recognized stock exchange within fifteen days from the date
of the decision of the recognized stock exchange, provided that SAT
may, if it is satisfied that the company was prevented by sufficient
cause from filing the appeal within the said period, allow it to be
filed within a further period not exceeding one month.

1956
Section 22 - Right of appeal against refusal of stock exchanges to list
securities of public companies
Where a recognized stock exchange refuses to list the securities of any public
company or collective investment scheme, the company or scheme may
appeal to the Central Government against such refusal, omission or failure,
as the case may be:
within fifteen days from the date on which the reasons for such refusal are
furnished to it, or
where the stock exchange has omitted or failed to dispose of, within the time
specified in sub-section (1) of section 73 of the Companies Act, 1956 (1 of
1956) (hereafter in this section referred to as the “specified time”), the
application for permission for the shares or debentures to be dealt with on
the stock exchange, within fifteen days from the date of expiry of the
specified time or within such further period, not exceeding one month, as
the Central Government may, on sufficient cause being shown, allow.

1956
Section 22A - Right of appeal to Securities Appellate Tribunal against refusal of stock
exchange to list securities of public companies
Where a recognized stock exchange refuses to list the securities of any public company or
collective investment scheme, the company or scheme may appeal to the SAT against such
refusal, omission or failure, as the case may be:
within fifteen days from the date on which the reasons for such refusal are furnished to
it, or
where the stock exchange has omitted or failed to dispose of, within the time specified
in sub-section (1A) of section 73 of the Companies Act, 1956 (1 of 1956), (hereafter
in this section referred to as the “specified time”), the application for permission for
the shares or debentures to be dealt with on the stock exchange, within fifteen days
from the date of expiry of the specified time or within such further period, not
exceeding one month, as the Securities Appellate Tribunal may, on sufficient cause
being shown, allow.
Section 22D – Limitation- The provisions of the Limitation Act, 1963 (36 of 1963)
shall, as far as may be, apply to an appeal made to a Securities Appellate Tribunal.

Investors protection
• “Investors protection is a wide term, it encompasses of all the
measures designed to protect investors from malpractices of brokers,
companies managers to issue, merchant bankers, registrar to issues
etc. The main complaints are against brokers of stock exchanges, against
listed companies and mutual funds.
• Investor protection is one of the crucial elements of a growing securities
market. It focuses on making sure that investors are fully informed about
their purchases, transactions and the corporate affairs and updates. Various
procedures, guidelines, rules and regulation have been issued in the
legislations to protect the investor’s right and repose their confidence.
• ROLE OF SEBI IN INVESTOR PROTECTION
• Investors are the pillar of the financial and securities market. They
determine the level of activity in the market. They put the money in funds,
stocks, etc. to help grow the market and thus, the economy.
50
• It is thus very important to protect the interests of the investors.
investor protection involves various measures established to protect
the interests of investors from malpractices. Securities and Exchange
Board of India (SEBI) is responsible for regulations of the Mutual
Funds and safeguard the interests of the investors. Investor protection
measures by SEBI are in place to safeguard the investors from the
malpractices in shares, the stock market, Mutual Fund, etc. The two
broad objectives of SEBI are given below:
• i. Conducive environment: SEBI aims at creating a proper and
conducive environment for raising money from capital market
through the rules, regulation, trade practices and guidelines. SEBI
regulates stock exchanges and other intermediaries in securities
market such as brokers, sub-brokers, merchant bankers, venture funds,
mutual funds, FIIMSMSR/BBA/605
etc. (F) DSE Financial Markets 51
• ii. Investor protection and Education: SEBI aims at
protecting investors from fraudulent practices and
educating investors so as to make them aware of their
rights as well as duties. Measures taken by SEBI for
Investor Protection has given out various methods
and measures to ensure the investor protection from
time to time.
• It has published various directives, driven many
investor awareness programmes, set up investor
protection Fund (IPF) to compensate the investors.

Investor Protection measures by SEBI
iii. Issue of regulation and guidelines : Build the capacity of investors through
education and awareness to enable an investor to take informed investment
decisions. SEBI endeavors to ensure that the investor learns investing, that
is, he obtains and uses information required for investing, evaluates
various investment options to suit his specific goals, ascertains his rights
and obligations in a particular investment, deals through registered
intermediaries, takes necessary precautions, seeks help in case of any
grievance, etc. SEBI has been organizing investor education and awareness
workshops directly, and through investor associations and market
participants, and been encouraging market participants to organize similar
programmes. It maintains an updated, comprehensive web site for
education of investors. It publishes various kinds of cautions through
media. It responds to the queries of investors through telephone, e-mails,
letters, and in person for those who visit SEBI office.

iv. Investor education: Make available every detail relevant for investment in public
domain. SEBI has adopted disclosure based regulatory regime. Under this
framework, issuers and intermediaries disclose relevant details about themselves,
the products, the market and the regulations so that the investor can take informed
investment decisions based on such disclosures. SEBI has prescribed and monitors
various initial and continuous disclosures.
v. Safe transactions: Ensure that the market has systems and practices which make
transactions safe. SEBI has taken various measures such as screen based trading
system, dematerialization of securities, T+2 rolling settlement, and framed various
regulations to regulate intermediaries, issue and trading of securities, corporate
restructuring, etc. to protect the interests of investors in securities. It also ensures
that only the fit and proper persons are allowed to operate in the market, every
participant has incentive to comply with the prescribed standards, and the miscreant
are awarded exemplary punishment.

vi. Grievance redressal system: Facilitate redressal of

investor grievances. SEBI has a comprehensive
mechanism to facilitate redressal of investor grievances
against intermediaries and listed companies. It follows up
with the companies and intermediaries who do not
redress investors' grievances, by sending reminders to
them and having meetings with them It takes appropriate
enforcement actions as provided under the law (including
launch of adjudication, prosecution proceedings,
directions) where progress in redressal of investor
grievances is not satisfactory.
It has set up a comprehensive arbitration mechanism in stock

exchanges and depositories for resolution disputes of the
investors. The stock exchanges have investor protection
funds to compensate investors when a broker is declared a
defaulter. Depository indemnifies investors for loss due to
negligence of depository or depository participant.
vii. Other measures: SEBI conducts inspection, inquiries and
audits of stock exchanges, intermediaries and self-
regulating organisations and takes suitable remedial
measures whenever necessary. Further it penalizes those
who undertake fraudulent and unfair trade practices

Grievances handling and their removal.
• In India investment risks are very high due to dishonest
practices, frauds and unethical investment culture. Investors
experience a sense of helplessness and insecurity, they have
hardly any confidence in financial markets. Investors are
cheated by companies, by lead managers, by brokers and by
everybody, who is capable of cheating them. The Government,
the Company Law Board and the SEBI, in recent years have
made efforts to protect the investors. “Investors protection is a
wide term, it encompasses all the measures designed to protect
investors from malpractices of brokers, companies managers
to issue, merchant bankers, registrar to issues etc.

• The main complaints are against brokers of stock exchanges,
against listed companies and mutual funds.
USUAL GRIEVANCES OF INVESTORS
•  Against Companies.
•  Against Brokers.
•  Against depositories.
USUAL GRIEVANCES AGAINST COMPANIES 1. Delay in
registering transfer of securities. Registration of transfers
should be done by the companies within 30 days of receipt of
share transfer instrument but usually it takes many months

2. Non-payment or delay in payment of dividend. Dividends
should be distributed within 30 days from the date of
declaration but by manipulation of procedures dividends may
not be received for months.
METHODS OF REDRESSAL OF INVESTORS GRIEVANCES
1. Non-repayment or delayed repayment of public deposits.
Thousands of depositors are involved in litigation to get back
their deposits from companies.
2. Non-receipt of rights issue offer. The letter of offer of rights
shares should be sent to all eligible shareholders by registered
post and this fact should be prominently advertised in at least
two all India newspapers. Shareholders quite often are not
informed of rights issue. 59
3. Non-receipt of duplicate share certificate. A company is bound
to issue duplicate share certificates if the shares are lost or
misplaced by the shareholder, after receiving a request along
with the requisite fee and on completion of formalities.
4. Transmission of shares. After the death of a shareholder the
ownership of shares passes to his legal heirs which is called
transmission of shares. The company is bound to transfer the
shares in the name of legal heir of the deceased.
5. Non-receipt of notice of meeting. Every shareholder whose
name appears in the register of members is entitled to receive
21 days advance notice of meeting of shareholders. Non-
dispatch of notice of meeting to shareholder is common but
serious lapse. 60
USUAL GRIEVANCES AGAINST
BROKERS
1. Delay or default in payment of securities sold. A broker has
to make payment to client who has sold securities through
him within in 48 hours of payout of funds by clearing house
of stock exchange or the Clearing Corporation. but brokers,
as a rule, retain the sale proceed as long as they can.
2. Delay or default in delivery of purchased security to the
client. A broker has to deliver the purchased securities to his
client within 48 hours of payout of securities by the stock
exchange. It never happens so, in practice.
3. Non-Issue of contract note. Brokers have to issue a contract
note in in prescribed form to all their clients within 24 hours
of the transaction but they avoid doing so to earn secret
profits. 61
USUAL GRIEVANCES AGAINST
BROKERS
4. Charging excess brokerage from clients.

5. Non-passing of corporate benefits. A broker is duty bound
to pass all the corporate benefits like rights shares, bonus
shares, dividends etc. to the client he is dealing with but,
many a times brokers play tricks in this regard.
6. Overcharging. The broker should charge or pay only that
amount for of sale or purchase of securities at He should
not overcharge for purchases or pay less for the sales. In
practice, most brokers play tricks about it.
62
Assignment
Q.1. Discuss Securities contract and regulation
act.
Q.2. Write Short notes on:-
a. Investor’s protection.
b. Grievances handling and their removal.
63
MODULE IV
Functionaries of stock exchange; brokers, sub
brokers, market makers, jobbers, portfolio
consultants, institutional investors and NRIs.
64
Functionaries of stock exchange
• Determining the security prices
• Maintaining Liquidity
• Indicating the Economic State
• Facilitating investments
• Raising capital
• Building a healthy economy
• Providing rights to investors
• Attracting foreign investments
65
Brokers
A broker is a person or company who works as a go-between for just a client and a stock market.
Personal traders and investors utilize the assistance of exchange members since stock markets
cannot accept orders from persons or organizations that are members of the exchange.
Brokers will provide service and are paid in a variety of methods, including commissions,
fees, and payments from the exchange itself. The companies constantly examine all the top
brokers on a regular basis and keep a list of the finest brokerage firms and trading systems to
assist investors in determining which broker is right for them.
• A broker is a person or company who works as a go-between for just a client and a stock
market.
• When a company works as an intermediary for such a client and charges the customer a fee
for its services, it is referred to as a broker.
• Although brokerage firms work on behalf of their clients, they rarely offer investing advice.
• Execution is provided by comprehensive brokers as well as tailored investment planning and
solutions.
• Brokers must join with Financial Industry Regulatory Authority (FINRA), whereas
investment advisers must register with the Securities and Exchange Commission (SEC)
(RIAs). 66
Regulation of Brokers
Brokers must join with the Financial Industry Regulatory Authority (FINRA), a self-regulatory
organization for broker-dealers. Brokers have been placed in a position of action based on the
"suitability rule," which states that suggesting a specific item or investment must be based on reasonable
grounds.
The second component of the rule, often known as "know your customer," or KYC, outlines the
procedures a broker must take to recognize their customer and his savings goals, allowing them to
demonstrate reasonable reasons for the advice.
The broker shall make a reasonable attempt to acquire information about the customer's financial
situation, tax situation, investment goals, and other relevant facts before making a recommendation.
This code of care differs significantly from that which applies to financial advisors who are registered as
registered investment advisors with the Securities and Exchange Commission (SEC) (RIAs). The
Investment Advisers Operate of 1940 imposed a strict fiduciary standard on RIAs, requiring them to
always work for the benefit of their investors while fully disclosing their fees.
In the United States, real estate brokers are licensed by each county, not by the national govt. Every state
has its own set of regulations governing the types of interactions that really can exist between customers
and brokers, as well as the responsibilities of brokers toward clients and the general public.
67
Sub Brokers
A sub-broker is a person that functions similar to a broker but works as
the middle man between two parties; the customer and the main
broker. While a stock broker is a middle man between an investor
and the stock exchange, a sub-broker is the middle man between the
stockbroker and the investor.
The job of a sub-broker is to mediate between the broker and client and
assist the client in various activities such as financial transactions
and paperwork. Since the sub-broker works for a stock broker, in
most cases, their job includes bringing clients to the brokerage firm.
Additionally, the sub-broker assists clients with investing and
dealing with securities. In return for the services rendered by the
sub-brokers to the brokers, they receive a certain commission from
the transaction done by the clients.
68
What is Sub-broker: Difference Between Sub Broker and Stock Broker
Trading Member: Stock brokers are listed as trading members on the stock
exchange, while sub-brokers are not listed as licensed trading members. This
does not mean that sub-brokers do not have any certification from the stock
exchange. To fulfil the definition of what is sub-broker under SEBI’s
guidelines, they are required to have a Certification of Registration from SEBI
to conduct their business as a sub-broker.
Brokerage Fee: Another key difference between a stock broker and a sub-broker
under the segment of what is sub-broker is that while stock brokers are paid in
brokerage fees, sub-brokers are paid in commission. As per law, only brokers
who are registered as trading members of the stock exchange are allowed to
charge brokerage fees. As sub-brokers are not listed as trading members, they
can not charge a brokerage. In other words, the stock brokers make a brokerage
fee on every transaction their client makes. Of the brokerage fee, the sub-broker
gets a percentage of the brokerage fee, which is called commission.
69
Market Makers
The term market maker refers to a firm or
individual who actively quotes two-sided
markets in a particular security by
providing bids and offers (known as asks) along
with the market size of each. Market makers
provide liquidity and depth to markets and
profit from the difference in the bid-ask spread.
They may also make trades for their own
accounts, which are known as principal trades.
70
Market Makers
• A market maker is an individual participant or member firm of
an exchange that buys and sells securities for its own account.
• Market makers provide the market with liquidity and depth
while profiting from the difference in the bid-ask spread.
• Brokerage houses are the most common types of market
makers, providing purchase and sale solutions for investors.
• Market makers are compensated for the risk of holding assets
because a security's value may decline between its purchase and
sale to another buyer.
• While brokers compete against one another, specialists post
bids and asks and ensure they are reported accurately.
71
Jobbers
A jobber, also known as a stock jobber, was a term used for a market
maker on the London Stock Exchange.
Jobbers held shares on their own accounts and help boost market
liquidity by matching investors' buy and sell orders through their
brokers.
The term jobber was used prior to October 1986, but little is known of
their actual activities as they kept few records.
Jobbers left few records of their affairs and neither journalists nor other
observers retained much in the way of detailed accountings of their
work.
The jobber system evolved into a recognizably modern form during the
course of the 19th century, as the range of securities types broadened.
72
When Did Jobbers Disappear?
Stock jobbers officially disappeared from British
stock exchanges in October 1986, coinciding
with a sudden deregulation of financial markets
in the U.K. put into effect by then-Prime Minister
Margaret Thatcher. This deregulation meant that
stock jobbers were no longer needed to facilitate
stock trades; while at the same time, efforts to
introduce electronic, screen-based trading were
enacted that further led to their obsolescence
73
Portfolio Consultants
Portfolio consultancy firm provides services in relation
to building portfolio of various stock as per need of
investor generally they choose best stock available
for investment & then pooled them for investor.
Duties include consulting and advising clients to
develop investment objectives aimed to increase
investment performance, creating reports on
investment activity and performance, communicate
effectively with clients regarding investment
accounts, market conditions and economic trends
74
Institutional Investors
An institutional investor is a company or organization that invests money on behalf of
other people. Mutual funds, pensions, and insurance companies are examples.
Institutional investors often buy and sell substantial blocks of stocks, bonds, or other
securities and, for that reason, are considered to be the whales on Wall Street. The
group is also viewed as more sophisticated than the average retail investor and, in
some instances, they are subject to less restrictive regulations.
KEY TAKEAWAYS
An institutional investor is a company or organization that invests money on behalf of
clients or members.
Hedge funds, mutual funds, and endowments are examples of institutional investors.
Institutional investors are considered savvier than the average investor and are often
subject to less regulatory oversight.
The buying and selling of large positions by institutional investors can create supply and
demand imbalances that result in sudden price moves in stocks, bonds, or other
assets.
Institutional investors are the big fish on Wall Street.
75
Understanding Institutional Investors
An institutional investor buys, sells, and manages stocks, bonds, and other investment
securities on behalf of its clients, customers, members, or shareholders. Broadly speaking,
there are six types of institutional investors: endowment funds, commercial banks, mutual
funds, hedge funds, pension funds, and insurance companies. Institutional investors face
fewer protective regulations compared to average investors because it is assumed the
institutional crowd is more knowledgeable and better able to protect themselves.
Institutional investors have the resources and specialized knowledge for extensively
researching a variety of investment opportunities not open to retail investors. Because
institutions are moving the biggest positions and are the largest force behind supply and
demand in securities markets, they perform a high percentage of transactions on major
exchanges and greatly influence the prices of securities. In fact, institutional investors
today make up more than 90% of all stock trading activity. Since institutional investors
can move markets, retail investors often research institutional investors’ regulatory filings
with the Securities and Exchange Commission (SEC) to determine which securities the
retail investors should buy personally. In other words, some investors attempt to mimic
the buying of the institutional crowd by taking the same positions as the so-called "smart
money."
76
NRIs
Non Resident Indian (NRIs) can purchase/sell shares/convertible
debentures of Indian companies on Stock Exchanges under
Portfolio Investment Scheme. For this purpose, the NRI/PIO
has to apply to a designated branch of a bank, which deals in
Portfolio Investment.
Yes, NRI/PIO can invest in other securities namely
• Dated Government securities (other than bearer securities) or
treasury bills.
• Units of domestic mutual funds.
• Bonds issued by a public sector undertaking (PSU) in India.
• Shares in Public Sector Enterprises being disinvested by the
Government of India.
77
How can NRIs invest in shares in India?
As per Reserve Bank of India (RBI) guidelines,

NRI who wishes to invest in shares in India
through a stock exchange need to approach the
designated branch of any authorized dealer
(bank) authorized by reserve bank to administer
the PIS (Portfolio Investment Scheme) to open
a NRE (Non Resident External) /NRO (Non
Resident Ordinary) account under the scheme
for routing Investments.
78
ASSIGNMENT
Q.1. Write Short notes on:-
a). Jobbers,
b). Portfolio Consultants
Q.2. How can an NRIs invest in India?
79
MODULE V
• Financial services: Merchant banking-
functions and roles, SEBI guidelines; credit
rating – concepts, functions, and types.
80
Financial services
Financial services are the economic
services provided by the finance industry, which
encompasses a broad range of businesses that
manage money, including credit
unions, banks, credit card companies, insurance
companies, accountancy companies, consumer-
finance companies, stock brokerages, investment
funds, individual asset managers, and
some government-sponsored enterprises.
81
10 Types of Financial Services:
• Banking
• Professional Advisory
• Wealth Management
• Mutual Funds
• Insurance
• Stock Market
• Treasury/Debt Instruments
• Tax/Audit Consulting
• Capital Restructuring
• Portfolio Management
• These financial services are explained below:
82
1. Banking- The banking industry is the backbone of India’s financial services
industry. The country has several public sector (27), private sector (21), foreign
(49), regional rural (56) and urban/rural cooperative (95,000+) banks. The financial
services offered in this segment include: Individual Banking (checking accounts,
savings accounts, debit/credit cards, etc.). Business Banking (merchant services,
checking accounts and savings accounts for businesses, treasury services, etc.)
Loans (business loans, personal loans, home loans, automobile loans, working-
capital loans, etc.). The banking sector is regulated by the Reserve Bank of India
(RBI), which monitors and maintains the segment’s liquidity, capitalization, and
financial health.
2. Professional Advisory - India has a strong presence of professional financial
advisory service providers, which offer individuals and businesses a wide portfolio
of services, including investment due diligence, M&A advisory, valuation, real-
estate consulting, risk consulting, taxation consulting. These offerings are made by
a range of providers, including individual domestic consultants to large multi-
national organizations.
83
3. Wealth Management - Financial services offered within this segment
include managing and investing customers’ wealth across various
financial instruments- including debt, equity, mutual funds, insurance
products, derivatives, structured products, commodities, and real estate,
based on the clients’ financial goals, risk profile and time horizons.
4. Mutual Funds- Mutual fund service providers offer
professional investment services across funds that are composed of
different asset classes, primarily debt and equity-linked assets. The buy-
in for mutual fund solutions is generally lower compared to the stock
market and debt products. These products are very popular in India as
they generally have lower risks, tax benefits, stable returns and properties
of diversification. The mutual funds segment has witnessed double-digit
growth in assets under management over the last five years, owing to its
popularity as a low-risk wealth multiplier.
84
5. Insurance - Financial services offerings in this segment are primarily offered across
two categories:
General Insurance (automotive, home, medical, fire, travel, etc.)
Life Insurance (term-life, money-back, unit-linked, pension plans, etc.)
Insurance solutions enable individuals and organizations to safeguard against
unforeseen circumstances and accidents. Payouts for these products vary across the
nature of the product, time horizons, customer risk assessment, premiums, and
several other key qualitative and quantitative aspects. In India, there is a strong
presence of insurance providers across life insurance (24) and general insurance
(39) categories. The insurance market is regulated by the Insurance Regulatory and
Development Authority of India (IRDAI).
6. Stock Market- The stock market segment includes investment solutions for
customers in Indian stock markets (National Stock Exchange and Bombay Stock
Exchange), across various equity-linked products. The returns for customers are
based on capital appreciation – growth in the value of the equity solution and/or
dividends – and payouts made by companies to its investors.
85
7. Treasury/Debt Instruments - Services offered in this segment include investments into
government and private organization bonds (debt). The issuer of the bonds (borrower)
offers fixed payments (interest) and principal repayment to the investor at the end of
the investment period. The types of instruments in this segment include listed bonds,
non-convertible debentures, capital-gain bonds, GoI savings bonds, tax-free bonds, etc.
8. Tax/Audit Consulting- This segment includes a large portfolio of financial services
within the tax and auditing domain. This services domain can be segmented based on
individual and business clients. They include:
Tax – Individual (determining tax liability, filing tax-returns, tax-savings advisory, etc.)
Tax – Business (determining tax liability, transfer pricing analysis and structuring, GST
registrations, tax compliance advisory, etc.). In the auditing segment, service providers
offer solutions including statutory audits, internal audits, service tax audits, tax audits,
process/transaction audits, risk audits, stock audits, etc. These services are essential to
ensure the smooth operation of business entities from a qualitative and quantitative
perspective, as well as to mitigate risk. You can read more about taxation in India.
86
9. Capital Restructuring- These services are offered primarily to
organizations and involve the restructuring of capital structure (debt and
equity) to bolster profitability or respond to crises such as bankruptcy,
volatile markets, liquidity crunch or hostile takeovers. The types of
financial solutions in this segment typically include structured
transactions, lender negotiations, accelerated M&A and capital raising.
10. Portfolio Management- This segment includes a highly specialized and
customized range of solutions that enables clients to reach their financial
goals through portfolio managers who analyze and
optimize investments for clients across a wide range of assets (debt,
equity, insurance, real estate, etc.). These services are broadly targeted at
HNIs and are discretionary (investment only at the discretion of fund
manager with no client intervention) and non-discretionary (decisions
made with client intervention).
87
Merchant banking- functions and roles
Merchant banks help in processing loan applications for short and long-
term credit from financial institutions. They provide these services by
estimating total costs involved, developing a financial plan for the entire
project, as well as adopting a loan application for commercial lenders.
• These banks serve huge corporations and high net-worth individuals
instead of the general public;
• They are innovative and have a loose organizational structure;
• Despite high liquidity measures, their profit distribution is low;
• Since they have many decision-makers, the decision-making process is
prompt;
• They offer services at domestic and international levels;
• These banks possess strong databases and high-density information;
• They make money in the form of fees and commissions.
88
Merchant Bank Functions
The banks extend a variety of services and charge a fee. The services differ from those offered by
regular banks.
• Project Counseling: Merchant bankers assist their clients at every stage of the project—idea
generation, report creation, budgeting, and financing. This is especially the case with new
entrepreneurs.
• Leasing Services: The banks extend leasing facilities—clients lease assets and equipment to
generate rental income.
• Issue Management: High net-worth individuals employ merchant banks to issue equity
shares, preference shares, and debentures to the general public.
• Underwriting: The banks also facilitate equity underwriting. They assess the price and risk
involved in particular security and initiate public issue and distribution of stocks.
• Fund Raising: Through various facilities like underwriting and securities issuance, bankers
help the private companies generate capital from international and domestic markets.
• Portfolio Management: On behalf of clients, these bankers invest in different kinds
of financial instruments.
• Loan Syndication: They finance term loans to back projects that need funding.
• Promotional Activities: Merchant banks are financial intermediaries that promote new
enterprises. 89
SEBI guidelines
90
91
Credit Rating – Concepts, Functions, and
Types
Many a times, it has happened that investors in debentures or fixed
deposits were shown rosy pictures of companies and offered very high
rates of interests by bogus companies and in the end the investor
neither got his money back nor the promised interest. Actually, it is
very difficult for an individual investor to gather details about
creditworthiness of a company, neither he has the time nor the skills
to undertake risk evaluation. Every investor wants to ensure safety of
his investment. Credit rating agencies investigate the financial
position of the company issuing various kinds of instruments and
assess risks involved in investing money in them. In the system of
credit rating, the credit rating agency rate the risks involved in
investment in instruments of a particular company, they may rank it
from very safe to very risky. At present credit rating is done only for
debt-instruments and rarely for preference or equity shares. 92
DEFINITION
Credit rating system can be defined as an act of assigning values

to credit instruments by assessing the solvency i.e., the ability
of the borrower to repay debt, and expressing them through
pre- determined symbols. creditworthiness credit
CHARACTERISTICS OF CREDIT RATING
1. Assessment of issuer's capacity to repay. It assesses issuer's
capacity to meet its financial obligations i.e., its capacity to
pay interest and repay the principal amount borrowed.
2. Based on data. A credit rating agency assesses financial
strength of the borrower on the financial data.
93
WHAT CREDIT RATING IS NOT
Not for company as a whole. Credit rating is done for a particular

instrument i.e., for a particular class of debentures and not for
the company as a whole, it is quite possible that two
instruments issued by the same company may carry different
rating. Does not create a fiduciary relationship. Credit rating
does not create a fiduciary relationship (relationship of trust)
between the credit rating agency and the investor. Not
attestation of truthfulness of information provided by rated
company. Rating does not imply that the credit rating agency
attests the truthfulness of information provided by the rated
company. Rating not forever. Credit rating is not a one-time
evaluation of risk. which remains valid for the entire life of a
security. It can change from time to time.
94
FACTORS CONSIDERED IN CREDIT
RATING
Issuers ability to service its debt. For this credit rating agencies
calculate Issuer company's past and future cash flows. Assess
how much money the company will have to pay as interest on
borrowed funds and how much will be its earnings. How
much are the outstanding debts? Company's short term
solvency through calculation of current ratio. Value of assets
pledged as collateral security by the company. availability
and quality of raw material used, favorable location, cost
advantage. Track record of promoters, directors and expertise
of the staff. Market position of the company. What is the
market share of various products of the company, whether it
will be stable, does the company possess competitive
advantage due to distribution net- work, customer base
research and development facilities etc. 95
BENEFITS OF CREDIT RATING
Credit rating offers many advantages which can be classified into
A. Benefits to investors.
B. Benefits to the rated company.
C. Benefits to intermediaries.
D. Benefits to the business world.
96
BENEFITS TO INVESTORS
1. Assessment of risk. The investor through credit rating can assess risk involved in an investment.
A small individual investor does not have the skills, time and resources to undertake detailed
risk evaluation himself. Credit rating agencies who have expert knowledge, skills and
manpower to study these matters can do this job for him. Moreover, the ratings which are
expressed in symbols like AAA, BB etc. can be understood easily by investors.
2. Information at low cost. Credit ratings are published in financial newspapers and are available
from rating agencies at nominal fees. This way the investors get credit information about
borrowers at no or little cost.
3. Advantage of continuous monitoring. Credit rating agencies do not normally undertake rating of
securities only once. They continuously monitor them and upgrade and downgrade the ratings
depending upon changed circumstances.
4. Provides the investors a choice of Investment. Credit ratings agencies helps the investors to
gather information about creditworthiness of different companies. So, investors have a choice
to invest in one company or the other.
5. Ratings by credit rating agencies is dependable. A rating agency has no vested interest in a
security to be rated and has no business links with the management of the issuer company.
Hence ratings by them are unbiased and credible
97
BENEFITS TO THE RATED
COMPANY
1. Ease in borrowings. If a company gets high credit rating for its securities, it can raise funds with more
ease in the capital market.
2. Borrowing at cheaper rates. A favourably rated company enjoys the confidence of investors and
therefore, could borrow at lower rate of interest.
3. Facilitates growth. Encouraged by favourable rating, promoters are motivated to go in for plans of
expansion, diversification and growth. Moreover, highly rated companies find it easy to raise funds
from public through issue of ownership or credit securities in future. They find it easy to borrow from
banks.
4. Recognition of lesser known companies. Favourable credit rating of instruments of lesser known or
unknown companies provides them credibility and recognition in the eyes of the investing public.
5. Adds to the goodwill of the rated company. If a company is rated high by rating agencies it will
automatically increase its goodwill in the market.
6. Imposes financial discipline on borrowers. Borrowing companies know that they will get high credit
rating only when they manage their finances in a disciplined manner i.e., they maintain good operating
efficiency, appropriate liquidity, good quality assets etc. This develops a sense of financial discipline
among companies who want to borrow
7. Greater information disclosure. To get credit rating from an accredited agency, companies have to
disclose a lot of information about their operations to them. It encourages greater information
disclosures, better accounting standards and improved financial information which in turn help in the
protection of the investors
98
BENEFITS TO INTERMEDIARIES
Merchant bankers' and brokers' job made easy.

In the absence of credit rating, merchant
bankers or brokers have to convince the
investors about financial position of the
borrowing company. If a borrowing
company's credit rating is done by a reputed
credit agency, the task of merchant bankers
and brokers becomes much easy.
99
BENEFITS TO THE BUSINESS
WORLD
1. Increase in investor population. If investors get good guidance about investing the
money in debt instruments through credit ratings, more and more people are
encouraged to invest their savings incorporate debts.
2. 2. Guidance to foreign investors. Foreign collaborators or foreign financial
institutions will invest in those companies only whose credit rating is high. Credit
rating will enable them to instantly identify the position of the company
100
CREDIT RATING AGENCIES IN
INDIA
There are 6 credit rating agencies which are registered with SEBI.
These are CRISIL, ICRA, CARE, Fitch India, Brickwork Ratings, and SMERA.
1. Credit Rating and Information Services of India Limited (CRISIL)
 It is India’s first credit rating agency which was incorporated and promoted by the
erstwhile ICICI Ltd, along with UTI and other financial institutions in 1987.
After 1 year, i.e. in 1988 it commenced its operations It has its head office in
Mumbai. It is India’s foremost provider of ratings, data and research, analytics
and solutions, with a strong track record of growth and innovation.  It delivers
independent opinions and efficient solutions. CRISIL’s businesses operate from
8 countries including USA, Argentina, Poland, UK, India, China, Hong Kong and
Singapore. CRISIL’s majority shareholder is Standard & Poor’s. It also works
with governments and policy-makers in India and other emerging markets in the
infrastructure domain.
101
CREDIT RATING AGENCIES IN
INDIA
2. Investment Information and Credit rating agency (ICRA) The second credit
rating agency incorporated in India was ICRA in 1991. It was set up by
leading financial/investment institutions, commercial banks and financial
services companies as an independent and professional investment Information
and Credit Rating Agency. It is a public limited company. It has its head
office in New Delhi. ICRA’s majority shareholder is Moody’s.
3. Credit Analysis & Research Ltd. (CARE) The next credit rating agency to be
set up was CARE in 1993. It is the second-largest credit rating agency in
India. It has its head office in Mumbai. CARE Ratings is one of the 5
partners of an international rating agency called ARCRatings.
4. ONICRA It is a private sector agency set up by Onida Finance. It has its
head office in Gurgaon. It provides ratings, risk assessment and analytical
solutions to Individuals, MSMEs and Corporates. It is one of only 7 agencies
licensed by NSIC (National Small IndustriesCorporation) to rate SMEs. They
have Pan India Presence with offices over 125 locations
102
FUNCTIONS OF CREDIT RATING
(1) Provides superior Information: Provides superior information on credit risk for three reasons: (i) An
independent rating agency, unlike brokers, financial intermediatories, underwriters who have vested
interest in an issue, is likely to provide an unbiased opinion; (ii) Due to professional and highly trained
staff, their ability to assess risk is better, and finally, (iii) the rating firm has access to a lot of information
which may not be publically available.
(2) Low cost information: Rating firm gathers, analyses, interprets and summarizes complex information in
a simple and readily understood formal manner. It is highly welcome by most investors who find it
prohibitively expensive and simply impossible to do such credit evaluation of their own.
(3) Basis for a proper risk and return: If an instrument is rated by a credit rating agency, then such
instrument enjoys higher confidence from investors. Investors have some idea as to what is the risk
associated with the instrument in which he/she is likely to take, if investment is done in that security.
(4) Healthy discipline on corporate borrowers: Higher credit rating to any credit investment tends to
enhance the corporate image and visibility and hence it induces a healthy discipline on corporate.
(5) Greater credence to financial and other representation: When credit rating agency rates a security, its
own reputation is at stake. So it seeks financial and other information, the quality of which is acceptable
to it. As the issue complies with the demands of a credit rating agency on a continuing basis, its financial
and other representations acquire greater credibility.
(6) Formation of public policy: Public policy guidelines on what kinds of securities are eligible for
inclusions in different kinds of institutional portfolios can be developed with greater confidence if debt
securities are rated professionally.
103
TYPES OF CREDIT RATING
• Each credit agency uses its own terminology to determine
credit ratings. That said, the notations are strikingly similar
among the three credit agencies. Ratings are bracketed into
two groups: investment grade and speculative grade.
• Investment grade ratings mean the investment is considered
solid by the rating agency, and the issuer is likely to honor the
terms of repayment. Such investments are typically less
competitively priced in comparison to speculative grade
investments.
• Speculative grade investments are high risk and, therefore,
offer higher interest rates to reflect the quality of the
investments.
104
ASSIGNMENT
Q.1. What are financial services?
Q.2. Describe credit rating in 500 words.
105
THANK YOU
106

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Financial Markets

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Financial Markets

MSMSR/BBA/605 (F) DSE

Dr. Akshita Sharma

MSMSR/BBA/605 (F) DSE Financial Markets 1

MSMSR/BBA/605 (F) DSE Financial Markets 2

MSMSR/BBA/605 (F) DSE Financial Markets 3

. In Financial Market, we directly lend money to companies and get

Capital market is an institutional arrangement for the trading of

The market participants in capital markets is widespread and

MSMSR/BBA/605 (F) DSE Financial Markets 8

MSMSR/BBA/605 (F) DSE Financial Markets 9

MSMSR/BBA/605 (F) DSE Financial Markets 10

MSMSR/BBA/605 (F) DSE Financial Markets 11

MSMSR/BBA/605 (F) DSE Financial Markets 12

MSMSR/BBA/605 (F) DSE Financial Markets 13

MSMSR/BBA/605 (F) DSE Financial Markets 14

MSMSR/BBA/605 (F) DSE Financial Markets 15

MSMSR/BBA/605 (F) DSE Financial Markets 16

MSMSR/BBA/605 (F) DSE Financial Markets 17

MSMSR/BBA/605 (F) DSE Financial Markets 18

MSMSR/BBA/605 (F) DSE Financial Markets 25

MSMSR/BBA/605 (F) DSE Financial Markets 28

MSMSR/BBA/605 (F) DSE Financial Markets 29

MSMSR/BBA/605 (F) DSE Financial Markets 33

MSMSR/BBA/605 (F) DSE Financial Markets 34

MSMSR/BBA/605 (F) DSE Financial Markets 40

MSMSR/BBA/605 (F) DSE Financial Markets 41

MSMSR/BBA/605 (F) DSE Financial Markets 42

MSMSR/BBA/605 (F) DSE Financial Markets 43

MSMSR/BBA/605 (F) DSE Financial Markets 44

MSMSR/BBA/605 (F) DSE Financial Markets 45

MSMSR/BBA/605 (F) DSE Financial Markets 47

MSMSR/BBA/605 (F) DSE Financial Markets 48

MSMSR/BBA/605 (F) DSE Financial Markets 49

MSMSR/BBA/605 (F) DSE Financial Markets 52

MSMSR/BBA/605 (F) DSE Financial Markets 53

MSMSR/BBA/605 (F) DSE Financial Markets 54

vi. Grievance redressal system: Facilitate redressal of

It has set up a comprehensive arbitration mechanism in stock

MSMSR/BBA/605 (F) DSE Financial Markets 56

MSMSR/BBA/605 (F) DSE Financial Markets 57

MSMSR/BBA/605 (F) DSE Financial Markets 58

4. Charging excess brokerage from clients.

As per Reserve Bank of India (RBI) guidelines,

Credit rating system can be defined as an act of assigning values

Not for company as a whole. Credit rating is done for a particular

Merchant bankers' and brokers' job made easy.

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