Management of Financial Services

Management Of Financial
Services ( MFS )
Prof. Anand D. Mehta
( M.COM, LL.M, MBA-Finance, UGC NET & SLET )

Core Faculty & Head Of Department GLS BBA College, Ahmedabad
Corporate Trainer, Consultant & Advisor
HR, Legal & Management
Tel. No. 9427027118
Email : anandreiki1008@yahoo.com
Reference Books (1) The Indian Financial Systems

( Markets, Institutions & Services )
2nd/3rd Edition Prof Bharti V. Pathak
Pearson
(2) Financial Services M. Y. Khan
Tata McGraw Hill
(3) Indian Financial Systems M. Y. Khan
Tata McGraw Hill
Module 1 Financial Markets &

Its Insturments
(1) Money Market ( Ch. 4 BP )
(2) Capital Market ( Ch. 5 BP )
(3) Primary Market ( Ch. 6 BP )
(4) Secondary Market ( Ch. 7 BP )
(5) Debt Market ( Ch. 9 BP )
Module 2 Financial Institutions

& their Services - I
(1) MBFC Prudential Norms ( Ch. 1 MYK )

(2) Hire Purchase Finance ( Ch. 5 MYK )
(3) Leasing Types ( Ch. 2 MYK )
Module 3 - Financial Institutions

& their Services - II
(1) Housing Finance Regulatory Body Its

Roles & Prudential Norms ( Ch. 8 MYK )
(2) Venture Capital Financing ( Ch.10 MYK )
(3) Mutual Funds ( Ch. 17 BP )

& their Services - III
(1) Depository & Custodian ( Ch.8 BP )
(2) Credit Rating ( Ch.13 BP )
(3) Factoring & Forfeiting ( Ch. 6 MYK )
(4) Stock Broking ( Ch.15 MYK )

& their Services - IV
(1) Banking Contemporary Issues
(2) Banking Regulatory Body Its Roles &
Prudential Norms ( Ch. 12 MYK-IFS)
(3) Insurance- Regulatory Body Its Roles
& Prudential Norms ( Ch. 9 MYK )
Ch. 1 Introduction
The Indian Financial
System
Markets, Institutions and Services
1
Financial System: An Introduction
The Indian Financial System
Chapter Objectives
To understand the
meaning of financial system

components of the financial system
functions of the financial system
key elements of the financial system
key elements of a well functioning financial system
bank-based and market-based financial systems
nature and role of financial institutions and markets
link between money market and capital market
link between primary market and secondary market
functions and characteristics of financial markets.
Meaning of the Financial System
A set of sub systems of financial institutions,

markets, instruments and services
Intermediates with the flow of funds between savers
and borrowers.
Facilitates transfer and allocation of scarce
resources efficiently and effectively
Types of Financial System

Formal financial system organized,
Informal financial system
Advantages
Low transaction costs
Minimum default risk
Transparency of procedures
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated
institutional and regulated
Components of the Financial System
Financial Institutions
Financial Markets
Financial Instruments
Financial Services
Types of Financial Institutions

Banking: creators and purveyors of credit.
Types
Commercial Banks
Cooperative Banks
Non-banking: purveyors of credit
Types
Developmental financial institutions
Mutual funds
Insurance companies
NBFCs
Functions of Financial Institutions

Provide three transformation services
Liability, asset and size transformation
Maturity transformation
Risk transformation
Financial Markets
Types
Money Market A market for short-term debt
instruments
Capital Market A market for long-term equity and debt instruments
Segments
Primary Market A market for new issues
Secondary Market A market for trading outstanding
issues
Link Between Primary and Secondary

Capital Market
A buoyant secondary market is indispensable for
the presence
of a vibrant primary market.

The secondary market provides a basis for the determination of
prices of new issues.
Depth of the secondary market depends on the primary market.
Bunching of new issues affects prices in the
secondary market.
Financial Instruments
Types
Primary
Secondary
Distinct Features
Marketable
Tradable
Tailor-made
Financial Services
Major Categories
Funds intermediation
Payments mechanism
Provision of liquidity
Risk management
Financial engineering
Functions of Financial System

Mobilise and allocate savings
Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and reduction
Disseminate prize related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening and broadening
Key Elements of a Well-functioning

Financial System
A strong legal and regulatory environment
Stable money
Sound public finances and public debt management
A central bank
Sound banking system
Information system
Well-functioning securities market
Financial System Designs

Types
Bank-based
Market-based
Market-based Financial System

Advantages
Provide attractive terms to both investors and
Facilitate diversification
Allow risk sharing
Allow financing of new technologies
Drawbacks
Prone to instability
Exposure to market risk
Free-rider problem
borrowers
Bank-based Financial System

Advantages
Close relationships with parties
Provide tailor-made contracts
Efficient inter-temporal risk sharing
No free-rider problem
Drawbacks
Retards innovation and growth
Impedes competition
Functions of Financial Markets

Enabling economic units to exercise their time preference
Separation, distribution, diversification and reduction
of risk
Efficient payment mechanism
Providing information
Enhancing liquidity
Providing portfolio management services
4
Module 1Ch. 4.Money Market
Chapter Objectives
To understand
characteristics, functions and benefits of
money market
development of money market in India
different money market instruments
money market intermediaries
link between money market and monetary
policy
tools for managing liquidity in the money
market
money market derivatives.
Characteristics of Money Market

A collection of markets for several short-term debt
instruments
Wholesale market
Principal feature is honour

Need-based market
Functions of Money Market

To provide
a balancing mechanism
the focal point for central bank
an intervention
reasonable access to short-term funds
Benefits of an Efficient Money Market

Provides a stable source of funds to banks
Encourage development of non-bank entities

Facilitates government market borrowing
Makes effective monetary policy actions
Helps in pricing different floating-interest products
Role of the Reserve Bank in the Money

Market
Ensure liquidity
Ensure an adequate flow of credit to the productive
sectors of the economy
Bring about order in the foreign exchange market
Money Market Instruments

Treasury bills
Commercial paper
Call/Notice money market
Certificates of deposit
Commercial bills
Collateralised borrowing and lending obligation
Features of T-bills
Short-term instruments issued by RBI on behalf of the
government
Negotiable and highly liquid securities
Absence of default risk
Assured yield, low transaction cost
Security for SLR purposes
Not issued in scrip form
Types of T-bills
On tap bills
Ad hoc bills
Auctioned T-bills
91-day, 182-day, and 364-day T-Bills
Sale of T-bills
Conducted through an auction
Non-competitive bids also accepted
Types of auctions
Multiple price auction
Uniform price auction
Size of T-Bills Market (Rs in Crores)

O/S
2002-03
2003-04
2004-05 2005-06
91-day
10,672
7139
27792 16318
364-day
26126 26136
47132
45018
182-day
9771
Implicit yield at cut-off prices (Average)
91-day
5.24%
6.51%
364-day
5.63%
6.66%
182-day
6.42%
Yield spread at end March 2006
91day and 364day:15bps
1 year and 10 year:98bps
Commercial Paper
An unsecured short-term promissory note issued at a
discount
Issuers
creditworthy corporates
primary dealers
All India financial institutions
Largest issuers of CPsLeasing and Finance
companies
Usually privately placed with investors
Attracts stamp duty
Underwriting not mandatory
Process for Issuing CP

A resolution to be passed by the Board of Directors
CP issue to be rated
Select an Issuing and Paying Agent for verification of
documents
Arrange for dealers for placement of CP
Report to the RBI regarding the issue
Guidelines Relating to CPs

Corporates, primary dealers and all India financial
institutions eligible to issue a CP
Minimum credit rating P2 of Crisil
Maturity period of minimum of 7 days and maximum
up to one year from the date of issue
Minimum of Rs 5 lakh and multiples
To be issued in demat form

Banks can provide credit enhancement facility
Size of CP Market (Rs in Crores)
O/S
2002-03
2003-04
2004-05
2005-06
5749
9131
14235
12693
Commercial Bills
A short-term, negotiable and self liquidating instrument
with low risk.
Types
Demand bill
Usance bill
Clean bill
Documentary bill
Inland bill
Foreign bill Hundi
Derivative Usance Promissory Note
Certificates of Deposit
A short- term tradable time deposit issued by commercial
banks and financial institutions.
Issued at a discount to face value.
Minimum amount Rs 1 lakh and in multiples thereof
Maturity period
7 days to one year for banks
1 to 3 years for FIs
No lock-in period
Transferable by endorsement
Banks to maintain appropriate reserve requirement on issue
of CDs.
Issued in demat form
Key investors--Mutual Funds
Cost attractive vis--vis time deposits
Size of CD Market
O/S
2002-03
908
2003-04
4764
2004-05
12078
Constitutes 4.3% of aggregate deposits
2005-06
36931
Call/Notice Money Market

Banks borrow/lend money for a period ranging
between 1 and 14 days.
No collateral security required
Highly liquid, risky, and volatile market
Banks trade money to adhere to CRR requirement
Average daily turnover in March 2005 Rs15294 cr
and in March 2006 Rs 18290 cr.
Call Money Borrowing and Lending rate 5% to 5.9%
Factors Influencing Call Rate Volatility

Liquidity conditions
Reserve requirement prescriptions
Structural factors
Investment policy of non-bank participants.
Liquidity changes and gaps in the foreign exchange
market
Measures for Curbing High Volatility

Increasing the number of participants
Through repos
Freeing of inter-bank liabilities from reserve
requirements
Collateralised Borrowing and Lending

Obligations (CBLO)
Launched by CCIL
To provide liquidity to non-bank entities
No lock-in period
Original tenure varies between one day and one year
Trading volumes have grown
Average daily turnover during March 2005 was
Rs 9625 crore which increased to Rs 35775 crore
in March 2006
CBLO segment of CCIL increased from 110 as on
March 2005 to 152 on April 12, 2006
Money Market Intermediaries

The Discount and Finance House of India--set up in
1988 by RBI.
Role is to stimulate activity in money market.
DFHI is an accredited primary dealer.
Money Market Mutual Funds: Introduced in April 1991.
Mobilize savings from small investors.
Invest in money market instruments
Link Between Money Market and Monetary

Policy in India
Objectives of the monetary policy
Price stability
Growth
Instruments used to influence monetary conditions
Direct instruments such as reserve requirements,
limits on refinance, administrative interest rates,
Qualitative and Quantitative restrictions on credit
Indirect instruments such as open market operation
and repos
Tools for Managing Liquidity in the Money

Market
Reserve requirements: CRR (5%) & SLR(25%)
Interest rates
Prime lending rate:10 .25% -10 .75%
Bank rate :6%(Long-term rate)
Refinance from RBI
Liquidity Adjustment Facility: operates through repo and
reverse repo auctions; coupled with OMOs and MSS
provides RBI greater flexibility in managing liquidity
Types of Repos: Interbank repos, RBI repos: Reverse Repo
(Borrowing of overnight funds by RBI)- rate 6% and
Repo (Lending to banks)- rate 7%(Short-term rates)
Market stabilisation scheme (MSS): deals with enduring
capital inflows without affecting short-term liquidity
management role of LAF.
Money Market Derivatives
Interest rate swap

Forward rate swap
Interest rate futures
5
Ch. 5 - Capital
Market
Chapter Objectives
To understand the
functions of capital market
primary capital market and secondary capital market
history of the Indian capital market
capital market scams
reforms in the capital market.
Capital Market
A market for long term funds
Aids economic growth through capital formation
by:
Issue of primary securities
Issue of secondary securities
Secondary market transactions
Functions of a Capital Market

Mobilise savings
Provide risk capital
Provide liquidity
Lower costs
Disseminate information
Enable valuation of assets
Insurance against risk
Provide operational efficiency
Develop integration among markets and segments
Channelise funds to productive sectors
Primary Market
A market for new issues
Leads to capital formation
Nature of fund raising
Domestic
equity and debt issues
External
GDRs, ADRs and ECBs
FDI, FII and NRI deposits
FDI and FII

FDI
In the form of fully-owned subsidiary or a joint venture, stable,
enhances management quality, transfer of technology and generation of
employment.
FII
In the form of portfolio investment; augments the pool of
investible funds; volatile.
Data for 2003-05
India(in US $ bn)
Total net FDI flows
11
Total portfolio investments
29
Other non-FDI flows
25
Fund Raising in the Primary Market

Public issue by prospectus
Private placement
Rights issues
Preferential issues
Secondary Market
A market for outstanding securities
Facilitates liquidity, marketability, and valuation of securities

Helps in price discovery
Creates a wealth effect
Segregation of Indian Secondary

Market
Secondary market for corporate and financial
intermediaries
Secondary market for government securities and
PSU bonds
History of the Indian Capital Market

British rule Not organised and developed
Post independence Small size and supervised by CCI
In 1950s Rampant speculation; Government enacted
Securities Contract (Regulations) Act and Companies Act,
1956;Development of Financial Institutions.
In 1960s Ban on badla, UTI set up in 1964
In 1970s Badla resumed; Promulgation of the Dividend
Restriction Ordinance slump in BSE sensex; FERA issues
revive stock markets
In 1980s Small investor participation; Introduction of PSU
bonds; popularity of convertible debentures.
In 1990s Capital Issues (Control) Act repealed.
Emergence of SEBI; Free pricing; entry of new players and
new trading mechanism; Capital market scams
Under
Capital Market Scams

The 1991-92 Securities Scam (Harshad Mehta Scam)
Misuse of public sector banks, mutual funds, bank receipts, and
SGL ledger accounts; a bank scam, repos banned

The 2001 Ketan Parekh Scam
Misuse of pay orders, private sector banks and cooperative banks; a
securities scam; badla banned
Reforms in the Capital Market

Specialised Regulator
Emergence of specialised intermediaries
Entry to FIIs
Pricing of securities through book building
Access to international markets
Emphasis on corporate governance
Screen-based trading system
Rolling settlement
Dematerialisation of securities
Derivatives trading
Comprehensive risk management systems
Capital Market Scams

The 1991-92 Securities Scam (Harshad Mehta Scam)
Misuse of public sector banks, mutual funds, bank receipts, and
SGL ledger accounts; a bank scam, repos banned

The 2001 Ketan Parekh Scam
Misuse of pay orders, private sector banks and cooperative banks; a
securities scam; badla banned
Reforms in the Capital Market

Specialised Regulator
Emergence of specialised intermediaries
Entry to FIIs
Pricing of securities through book building
Access to international markets
Emphasis on corporate governance
Screen-based trading system
Rolling settlement
Dematerialisation of securities
Derivatives trading
Comprehensive risk management systems
6
Ch. 6 - The Primary
Market
Chapter Objectives
To understand
fund raising
book-building
green-shoe option
online IPOs
trends in resources mobilised from the primary market
trends in resources mobilised from international capital markets
Primary Issues
Intermediaries to an Issue
Merchant banker
Registrars to the issue
Bankers to the issue
Free Pricing Regime

Before 1992, CCI regulated price
After 1992, the promoter and the merchant
banker decide the pricing
Earlier, it was misused
Now the issue price is to be justified
Fixed Price Offerings

Made to uninformed investors
Investors demand not taken into account
An alternative method, book building
Uses investors demand for shares at various
Investors watch the book being built
prices
Book-building Process
The company appoints a book runner
Book runner submits draft documents to SEBI
Offer of shares at a specified price range
Based on the bids, cut-off rate is decided
Public subscription, allotment and listing
Allotment of a Book-built Issue

Category % of issue to be allotted on a proportionate
QIB
50% (5% of the QIB to be reserved for MFs)
HNI
15%
basis
Retail Investor 35%

Retail individual investor who bids in a book built issue for a value not
more than Rs 1,00,000
.
Reverse Book-building
Used by companies to delist their shares
Helps in discovering exit price
Similar to reverse auctions
Green-shoe Option
An option of allocating shares in excess of the shares
public issue.
Post listing price stabilising mechanism
Mitigates volatility
Enhances investor confidence
included in the
Rights Issue
Issue of new shares to existing shareholders on a
basis
To be kept open for at least 30 days and not more
Why rights?
to reward shareholders
to reflect the stocks true worth
to hike promoters stake
pro-rata
than 60 days
Preferential Allotment
An issue of shares to a select group of persons under
Section 81 of the Companies Act. Select group
consists of
Promoters
Foreign partners
Technical collaborators
Private equity funds
Why preferential allotment?

to enhance promoters holding
to cash in on the bull run

to issue shares by way of ESOPs.
for takeover of company
quick fund raising at low cost
Private Placement Market

Direct sale of securities to a few investors through
bankers.
Preferred route between 1997-98 to 2002-03
Dormant conditions in the capital market
Time as well as cost of issue is low
Tailor made issues
Less formalities
Private placement now regulated
463 issues of Rs 97517 cr. privately placed in 2005-06
merchant
Trends in Resource Mobilisation from

Primary Market
Three trends
An increasing trend from 1991-92 to 1994-95
A decreasing trend from 1995-96 to 2002
An increasing trend since 2002-03
Resource Mobilisation from Primary

Market
2005-06
2004-05
Particulars
No.
Amount
(Rs.cr.)
No.
Amount
(Rs. cr.)
Public
issues
102
23168.74
34
24640.14
IPOs
79
10918.82
23
12382.04
Listed
23
12249.92
11
12258.10
Rights
issues
36
4125.85
26
3615.69
Total
138
27249 59
60
28255 83
Resource Mobilisation from International

Capital Markets
Sources
GDRs / ADRs
FCCBs
ECBs
GDRs and ADRs
equity instruments issued abroad
represent one or more shares of the issuing company
two- way conversion
GDRs sold to institutional investor
ADRs sold both to institutional and retail investors
Listed and traded on a foreign stock exchange
GDRs can be converted into ADRs
FCCBs
Bonds issued by Indian companies in foreign
Fixed interest/coupon rate
Convertible into ordinary shares
Bonds listed and traded abroad
currency
ECBs
Supplement domestic resources
Low cost of borrowing
Two routes of access
Automatic
Approval
7
Ch. 7 - The Secondary
Market
Chapter Objectives
To understand
functions of the secondary market

post-reforms stock market scenario
organisational structure of stock exchanges
listing of securities, trading and settlement arrangements
Internet trading
Stock Market Index
stock exchanges
measures to boost liquidity in the secondary market
Functions of Secondary Market

Facilitate liquidity and marketability
Channelise funds to the efficient sector
Provide valuation of securities
Protect investors interests
Induce companies to improve performance
Post-reforms Stock Market Scenario
Stock Exchanges
BSE
1875
19 regional
State exchanges
OTCEI
Sept 1990
NSE
Nov 1992
ICSE
1999
Indonext
January 2005
Organisation of Stock Exchanges

Regional including BSE
Voluntary non profit making associations/Section 25
companies under the Companies Act
Trading members own and manage the exchanges
OTCEI and NSE
demutualised exchanges
BSE in the process of demutualisation
Demutualisation of Stock Exchanges

Separation of ownership rights and trading rights
Similar to a company going public
Stock exchange is a corporate tax paying entity
Safeguards the interest of investors
Greater transparency in the functioning of stock
Can be successful if functioning of the regional stock
improves
exchange
exchanges
Listing of Securities
Basic norms for listing uniform
Companies to pay listing fees annually
SEBI has setup a Central Listing Authority (CLA)
Trading Arrangements
Open-outcry system replaced by online screen based
trading system. Online screen based system
ensures transparency
increases information efficiency
increases operational efficiency
improves depth and liquidity
provides a single trading platform
electronic
Types of Trading Systems

Order-driven
Quote-driven
Trading Rules and Regulations

Margin system
Intra-day trading limit
Exposure limit
Circuit breakers
halt /suspension in trading to contain
Index -wide circuit breakers
volatility in prices
Risk Management
Trading rules and regulations
Market Surveillance System

Trade / Settlement Guarantee Fund
A Clearing Corporation
Stock Market Index

A leading economic indicator.
Functions
To serve as barometer of the equity market
To serve as a benchmark for portfolio of stocks
To serve as underlying for futures and options contracts
Methodologies for Calculating the Index

Market capitalisation weighted index
Full market capitalisation method

Free-float market capitalisation method
Modified capitalisation weighted method
Price-weighted index
Equal-weighting index
Global Stock Market Indices

Dow Jones Industrial Average
Nasdaq Composite Index
Nasdaq 100 Index
S & P 500 index
FTSE 100
MSCI Indices
Major Indices in India

BSE Sensex
Comprises 30 shares and its base year is 1978-79
S & P CNX Nifty
Comprises 50 shares and launched on July 8, 1996
Bombay Stock Exchange

Set up in 1875 at Dalal Street
A premier stock exchange
Introduced BOLT system nationwide in 1996
Badla was its unique feature
Three listings groups: A, B1 and B2
Promoted Central Depository Services in March 1999.
Introduced trading in derivatives in June 2000
Launched enterprise market for SMEsINDOnext on
Lost a substantial market share to NSE
In the process of corporatisation and demutualisation
January 7, 2005
BSE Sensex
Badla
A unique feature of Indian stock exchanges
Carrying forward the transaction from one
Facilitated share financing and lending
Risk hedging instrument
Completely banned from July 2001
Types of Badla transactions
Vyaj badla known as mandi badla
Tej badla known as mal badla
settlement to another
National Stock Exchange

Incorporated in Nov. 1992
Promoted by leading financial institutions
Demutualised stock exchange
Started operations in June 1994
Introduced screen-based trading system
Largest IT set up
In April 1995, established NSCCL, the first clearing
Becomes largest stock exchange in the country in Oct.
Launched S & P CNX Nifty now a widely used stock
Accounts for over 85 per cent of the traded volume in
futures segment
corporation
1995
index
the cash and
BSE and NSE- A Comparison

Particulars
BSE
NSE
2004-05
2005-06
2004-05
2005-06
Index (Avg)
5741
8280
1805
2517
Volatility (CV)
11.16
16.68
11.28
15.59
P/E ratio
15.61
20.92
14.60
20.26
Turnover
518716
816074
1140071
1569558
Mkt. Cap.
1698429
3022189
1585585
2813201
BSE Sensex all time high of 12000 on April 20,2006.

Secondary market buoyant during 2005-06 on account of
Raising FII limit in debt market

Treating open-ended and close-ended equity oriented scheme on
par for dividend distribution tax
Rationalisation of excise duties and relaxation in FBT
OTCEI
Promoted jointly by financial institutions and
insurance companies
in Sept. 1990
Based on the model of NASDAQ
The first ring less, electronic and national exchange
with a screenbased system for SMEs.
Commenced operations from Oct. 6, 1992
Trading documents on OTCEI: initially counter receipts later share
certificates
Languishing stock exchange
Interconnected Stock Exchange of India

Promoted by 15 RSEs
Commenced operations on Feb. 26, 1999
A stock exchange of stock exchanges
Languishing stock exchange
Regional Stock Exchanges

Served as a link between local companies and local
Listing fees a major source of income

Online trading a death bell for RSEs
Now stock brokers of BSE or NSE
investors
INDOnext
Enterprise market for SMEs.
Launched by BSE on Jan 7, 2005 as S Group
Set up on the lines of Euronext
Creates a nationwide electronic order
4200 companies trade with a uniform trading cycle
recorded a daily average volume of 59 lakh shares in
November 2005 as against 3.5 crore shares in
August 2005
Measures to Boost Liquidity in the

Secondary Market
Investment by FIIs
Buyback of shares
Market making
Rolling settlement
Margin trading
FII Investment in the Indian Stock Market

Investment routes:
Direct route
Participating Notes
FII sub account
FIIs in the domestic bond market
100 % debt funds
equity oriented FIIs
Robust FII inflows
Strong fundamentals
Positive economic growth forecast
Replaced conventional Market Movers
INVESTMENT :Rs. 48487 cr. in 2005-06 as against Rs.40991 cr in
2004-05
No. of FIIs registered
2005-06
2004-05
2003-04
787
685
540
Buyback of Shares
Why buyback?
Surplus cash
Threat of hostile takeover
Target capital structure
Arrest in fall of share prices
An exit route to investors
Methods of share buyback
Tender offer
Open market repurchase
Market Making System and Stock

Lending and Borrowing
Market making
Two way quotes by market makers
Provides liquidity to stocks
Not yielded the expected results due to absence of bank financing
Stock lending and borrowing
Clearing corporation of exchanges can borrow stocks to meet
settlement obligation
Advantages
Avoids settlement failures and process of
auctions
An avenue to earn income for lenders
Aids in development of derivatives market
Failed to take off Absence of short selling
Rolling Settlement
Introduced in January 2000
Initially T + 5 and now moved to T + 2
Advantages
Simplicity
Aids price discovery
Reduces price volatility
Reduces settlement risk
Shortens the conversion cycle
Margin Trading
Borrowing money to part-finance purchases
financing
Introduced in September 2001
Margin requirement hiked to 50% from 40%
Through brokers/ NBFCs: Initial margin 50%
through bank
Impact of Reforms and Measures on the

Secondary Market Activities
Impact on
Volatility
Liquidity
Size
Transaction cost
Volatility: Large Fluctuations in Market

Prices
Factors leading to volatility
Speculation
Settlement system
Government budget
Inflation
Rumours
Day trading
External factors
Short selling
Measures of Liquidity
Two measures
Turnover ratio = Value of domestic shares traded

Market capitalisation
Value traded ratio = Value of domestic shares traded
Gross domestic product
2004-05
53.1%
2005-06
67.6%
Size of Stock Market

Measure: Market Capitalisation Ratio
= Value of listed domestic shares

GDP
2004-05
2005-06
54.4%
85.6%
Transaction Cost
Transaction cost = Explicit cost + Implicit cost
brokerage
securities transaction tax
stamp duty
A drastic reduction in transaction cost due to
impact cost
clearing cost
bid-ask spread
improved liquidity.
A round trip transaction cost of a transaction of Rs 50,000 is 2.3%.
National Securities Depository Limited (NSDL) and Central Depository Service

(India) Limited (CDSL)
Business Partners of NSDL and CDSL
Depository Participants
Issuing companies
Clearing corporations/houses
Clearing Members
NSDLs pioneering systems
SPEED e
STeADY
IDeAS
NSDL and CDSL at a glance (February 2005)
NSDL
NSDL
DPs
215
258
Demat custody
(number in millions)
1,25,238
18,050
Investor accounts
61,61,909
9,56,130
9
Ch. 9 - Debt Market
Chapter Objectives
To understand the
meaning, history and characteristics of debt market

participants in the debt market
private corporate debt market
public sector undertaking bond market
government securities market
tools for managing liquidity in the government securities market
measures to strengthen the government securities market infrastructure
impact of reforms on the government securities market.
Debt market: Long-term Fixed Income

Securities Market
Segment
Private Corporate Debt market
Public Sector Undertaking Bond Market
Government Securities Market
Importance
Helps in mobilisation and allocation of resources
Helps in financing development activities
Helps in facilitating liquidity management
Helps in pricing of non-government securities
Regulation
Government Securities Market RBI
Corporate Debt Market SEBI
Participants in the Debt Market

Participants in the debt market
Central and State governments
Primary dealers
Public sector undertakings
Corporates
Banks
Mutual funds
Foreign institutional investors
Provident funds
Charitable institutions and trusts
Types of Instruments Traded in the Debt

Market
The Private Corporate Debt Market

Primary Market
Funds raised through prospectus or private placement
Debt issues compromise debentures and bonds
Dominant investors includes
mutual funds
insurance companies
banks
Secondary market
Securities traded on the WDM segment of NSE, OTCEI and on the BSE.
Traded volume on NSE 2004-05 Rs 17521.27 crore
Factors Inhibiting the Growth of Private

Corporate Debt Market
Narrow issuer and investor base
Primary issuance through private placement
Lack of transparency
Absence of a benchmark rate
Absence of Market Making
Dull secondary market
Accessible only to high rated borrowers
Foreign funds not allowed to invest
Differential stamp duties levied by different states inhibiting the growth of
primary market
Public Sector Undertaking Bonds Market

A phenomenon of late eighties
Two types of bonds: Tax free and Taxable

Preferred route: Private Placement
Level of activity quite low
The Government Securities Market

(GSM)
Gilt edged securities and SLR securities
Constitutes the principal segment of the debt market
Issuers
Central government
State government
Semi-government authorities including local government
authorities
Investors
Nationalised banks
Insurance companies
State Governments
Provident funds and trusts
Individuals
Corporates, NBFCs, Primary dealers, FIs, FIIs and NRIs
Types
Treasury bills
Government dated securities
GSM in the pre-1991 Period

1930s
Cheap money policy

1950s
Programme of borrowing stepped up
Interest rates stepped up
Brokers and Jobbers carried out OMOs
Government securities more popular with individuals

1960s and 1970s
GSM dormant
1980s
Volume of debt expanded
Maturity structure skewed in favour of long-term debt
Passive internal debt management
Objectives of Reforms in the GSM

Increase operational autonomy of RBI
Improve institutional infrastructure
Improve breadth and depth of the market
Enable sound legal framework
Bring in technology related improvements
Improve transparency
Some Policy Measures Undertaken in

1990s
Introduction of Repos
Introduction of auction system
Elimination of ad hoc T-bills
Introduction of delivery versus payment system
Introduction of scheme of Ways and Advances
FIIs permitted to invest
Setting up of an electronic Negotiated Dealing System (NDS)
and Clearing Corporation of India Ltd (CIL)
Some Policy Measures Undertaken in

1990s
Introduction of the system of publishing a calender by RBI
Introduction of Screen based order driven trading on stock
exchanges
Introduction of Retail trading
Debt buy-back scheme
Interest rate derivatives
Introduction of Real time Gross Settlement (RTGS)
STRIPS
Conversion of one underlying security into a
coupon securities
Improves liquidity
Benefits both issuers and investors
number of zero
The System of Ways and Means Advances

(WMA) for the Centre
Financing of ad hocs led to
increase in money supply
inflation
passive internal debt management
Elimination of ad hocs in 3 stages

through limits on creation of ad-hocs
through a transtition period of 2 years

the full-fledged system of WMA
Ways and Means advances

Accomodates temporary mismatches in government
receipts and payments

Charged at market related interest rates
Limit for WMA and interest rate mutually agreed
between the RBI and government from time to time.
Primary Market of Government Securities

Types
Treasury bills
91- day
182-day
364- day
Government dated securities
Issue Mechanism
Auctions
Uniform Price Auction
Multiple Price Auction
Competitive bidding
Non-competitive bidding
Sale
Private Placement with the Reserve Bank
Market Borrowings, Ownership Pattern,

Maturity Structure and Interest Rates
Market borrowing increased more than ten-fold
Captive investors are banks and insurance
companies
Maturity structure tilted at the short-end but now
shifted to longterm
Weighted Average coupon rates on a declining trend
Yield spread narrowed
Government Dated Securities:

Secondary Market
Two segments
Wholesale institutional segment
Retail segment
Trading system
Earlier on telephone
Now screen based order-driven system
Trades
Outright trades
Repo transactions
Settlements
Physical form
Dematerialised SGL form: SGL I and SGL II
DVP system of settlement: DVP III system allows netting
of transactions
Improves liquidity
Order Matching System (OMS) for Trading in

Government Securities
OMS is an anonymous platform on the NDS of
RBI.
Banks and primary dealers allowed to trade.

Allows sellers and buyers to interface by placing
Transactions executed by matching
quotes.
Bond brokers will be out of business.
quotes.
Secondary Market Transactions in

Government Securities
Turnover increased
Outright transactions predominant
Factors inhibiting the growth
Hardening interest rates
A long only market (cannot short sell)
Higher inflation
Rigid regulations
A bearish outlook
Tools for Managing Liquidity in

GSM
Open-market operations
Sale/purchase of government securities by the
Uses
Neutralises excess liquidity
Contains wide fluctuations in money and foreign

exchange markets
Types
Open-market sales
Open-market purchase
Central Bank
Infrastructure Development of the GSM

Primary dealer system
Act as market makers
At present 18 PDs
Subsidiaries of banks and FIs
Categorised as NBFCs
Obligations of PDs and Facilities extended to them
Underwrite primary issues
A favoured access to the OMOs
Guidelines
Capital adequacy
Brought under the purview of the Board for FinancialSupervision
Permitted to borrow up to 200 % of their funds
Guidelines for non-government securities
Measures to Strengthen GSM

Infrastructure
Negotiated Dealing System (NDS)
Screen-based electronic dealing and reporting of

Clearing Corporation of India Limited
Acts as the Central counterparty in the settlement of
Manages various risks
Clears all transactions in government securities and

on NDS
Recognised as a systemically important payment
transactions
all trades
repos reported
system
Impact of Reforms on GSM

Increased operational autonomy of RBI
Introduction of a new instrument
Improvement of infrastructure
Increase in transparency
Increase in trading volumes
Retail participation encouraged
Improvement in clearing and settlement systems
Module 2
Ch. - 5
HIRE-PURCHASE FINANCE And

CONSUMER CREDIT
(1) Meaning Of Hire Purchase HP Agreement Is a peculiar kind of transaction

in which the goods are let on hire with the option
to the hirer to purchase them.
HP Is a Mode Of financing the price of goods to
be sold on a future date.
In HP Transaction the goods are
(a) let on hire,
(b) purchase price is to be paid in installments
(c) the hirer Is allowed an option to purchase the
goods by paying all the Instalments
(2) Stipulations Under HP 1.

2.
3.
4.
5.
6.
7.
Payment to be made in Instalments over a specified

period.
Possession Is delivered to the hirer at the time of
entering into the Contract.
Property In goods passes to the hirer on payment of
last Instalment.
Each Instalment Is treated as Hire Charges
Incase Of default In Instalment Payment, the Seller
becomes entitled to take away the goods
Hirer/Purchaser Is free to return the goods without
being required to pay any further Instalments falling
due after the return
Bailment + Prospect to Sale ( Option to Purchase with
Intended Buyer )
(3) Interest Component Under HP

Instalment Is Computed On the basis of
a. Flat rate of Interest
b. Effective rate of Interest is applied to the declining
balance of the original loan amount to determine the
Interest component of each Instalment
Note for a given flat rate of Interest equivalent effective
rate of Interest Is higher.
Hirer Can Opt
early repayment & repurchase the asset by paying the
remaining Instalments Interest Rebate
Hirer has Right to Terminate the Contract after giving due
notice ( Call Option )
(4) HP Vs Instalment 1. Under HP, Ownership Is transferred to Buyer

On the payment of first/initial payment while
under Instalment Sale, Ownership Is
transferred to the hirer only when he exercise
the option to purchase or on payment of the
last instalment.
2. Under HP, Buyer has Option to Purchase
goods or hirer has right to terminate the
agreement at any time before the payment of
last Instalment while under Instalment Sale
Buyer is Committed to pay the full price.
(5) HP Vs Lease Financing 1. Ownership Under HP, Ownership Is

transferred to Hirer (User) on payment of last
Instalment (before that Ownership Is with
Seller) while Under Lease, ownership Is
never transferred to the User (lessee) with
rights given for usage of leased assets and
remains with Lessor only.
2. Depreciation Under HP, hirer gets
depreciation shield on Assets hired while
under lease, Depreciation on Asset Is
charged in the books of the lessor.
3. Magnitude Of funds Under HP, Cost of

Acquisition of Assets, funds Involved is
very low while Under lease its very high.
4. Extent Under HP, margin = 20-25% of
cost of equipment is reqd. to be paid by
the hirer. Hirer has to invest an equivalent
amount on fixed deposits with the finance
company which is returned after the
payment of the last instalment while Under
lease it is 100% financing which requires
no margin money or immediate cash down
payment by the lessee
5. Cost Of Maintainance of Asset Under HP,

Is borne by hirer while Under Lease,
responsibility of the lessee and it is the lessor
(seller) who has to bear the maintenance cost
in an operating lease.
6. Tax Benefits Under HP the hirer is allowed
the depreciation claim and finance charge
and the seller may claim any interest on
borrowed funds to acquire the asset while
Under lease, the lessor is allowed to claim
depreciation and the lessee is allowed to
claim the rentals and maintainance cost
against taxable Income
(6) Parties to HP Contract There are 2 parties

(1)Intending Seller (2) Intending Purchaser
(Hirer)
Now a days under HP, 3 parties
(1)Seller (2) financier (3) hirer
Now a days A dealer arranges HP Agreement
thru finance Co. with the Customer which
becomes tripartite deal which Is arranged
with following modalities
1. Dealer enters into HP deals with finance Co.
with terms and warranties in transactions
2. Customers select goods to be acquired thru

HP for which dealer assists to make HP
documents which is printed by the finance Co.
3. Customer makes Cash down payment to the
dealer as a payment on account of the price
which is to be paid to dealer by finance Co.
4. Dealer sends HP documents to finance Co. to
acquire goods & accept HP transactions.
5. Finance Co. sanctions HP Agreements and
send a copy to Hirer with details of Instalment
Payments which is also notified to dealer.
6. Dealer delivers goods to hirer against acknow.
& goods passess to finance Co.
7. Hirer makes payment of HP Instalment

periodically.
8. On Completion of HP term, Hirer pays last
Instalment and gets HP Completion Certificates
from finance Co. and receives the Property In
Goods.
(7) Legal FrameWork HP Act was passed In 1972 & amended in 1989
HP Act contains provisions for regulating
1. format/contents of HP Agreements
2. Warrants & Conditions Under HP Agreements
3. Ceiling on the HP Charges
4. Rights & Obligations of the Hirer & Owner
In absence of any Specific law, HP transaction Is
governed by Indian Contract Act, 1872 &
Sale Of Goods Act, 1930
Bailment + Prospect to Sale ( Option to Purchase
with Intended Buyer )
(8) Sale of Goods Act, 1930

(a )Definition of Sale ( u/s 4 )
1. A Contract of Sale of goods Is a Contract
whereby,
(i) the Seller
(ii) Transfers
(iii)Agrees to transfer
(iv)The property
(v) In goods
(vi)To the buyer
(vii)For a price
2. An Contract Of Sale may be absolute and

conditional.
3. Where under the contract of Sale the property
in goods is transfer from Seller to Buyer Is
Called a Sale but When the property in goods
is to takes place in future or subject to
conditions to be fulfilled is an Agreement to
Sell.
4. An Agreement to Sell becomes a Sale when
the time lapses or the conditions are fulfilled
subject to the property in goods is transferred.
(b) Essentials of Contract of Sale It is contract, i.e. all requirements of contract must be fulfilled
It is of goods
"goods" means every kind of moveable property other than
actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of
the land
Transfer of property is required
General property - means full ownership
and not special property means hire, lease, hire purchase or
pledge
Contract is between buyer and seller
Sale should be for price
in case of contract of sale of goods, the consideration should be
price i.e. money consideration
Contract may be absolute or conditional.
(c) How Contract of sale is made By an offer to buy or sell goods for a price and the acceptance of
such offer.
May provide for the

immediate delivery of the goods
immediate payment of the price or both,
for the delivery or payment by installments,
delivery or payment or both shall be postponed. [section 5(1)]
A contract of sale may be made in writing or by word of mouth, or
partly in writing and partly by word of mouth or may be implied
from the conduct of the parties. [section 5(2)]
Credit sale is also a sale
A verbal contract or contract by conduct of parties is valid. e.g.
putting goods in basket in super market or taking food in a hotel.
(d) Sale Vs Bailment 1. Ownership Transfer

Not Transferred
Immediately Immediately
Seller to Buyer Bailor to Bailee
2. Possession May or may Immediately
not Transfer to buyer transfer to Bailee
3. Purpose No Specific
Specific
4. Consideration- Money for Cash Or In kind
the Price
5. Property Use- Anyway likes As per instruction
by buyer
of Bailor
6. Goods Return- Not done
Is done
(e) Sale Vs Mortgage, Pledge & Hypothecation Sale Transfer Of general property in goods &
Purpose Is transfer Of Ownership
Under following contracts, purpose is to secure a
debt
Mortgage Transfer of Interest in the goods from
a mortgagor to a mortgagee to secure a debt.
Pledge Is a bailment of goods by one person to
another to secure a payment of a debt
Hypothecation Is an equtable charge on goods
without possession, but not amounting to
mortgage
(f) Sale Vs HP 1. Ownership - Transfer

Immediately from
Seller to buyer
2.Possession May or maynot
given to buyer immediately
Transfer
on payment of
last Instalments.
Is Immediately
given to Hire
Purchaser
3.Type of Contract- Executed
Executory
4. Position- of buyer Is owner of hire purchaser is
of bailee
5. Payment In Instalment In Instalment is for
is for goods price hire / rental charge.
(g) Goods U/s 2(7)

Goods means
(1)Every kind of movable goods other than
actionable claims and money and includes
(2) stocks and shares, growing crops, grass and
things attached to or forming part of land which
is agreed to be severed (separated), before
Sale or under the Contract of Sale
It Includes Gold, Natural Gas, petrol etc.
Types of Goods Are Existing ( Specific,
ascertained & unascertained ) , Future &
Contingency Goods
(h) Destruction of Goods Before

Making Of Contract Incase of Specific goods Without Sellers
knowledge goods are destroyed, perished
or damaged contract turns to void and null
Incase Of Unascertained & generic goodsdoesnot apply
(i) Destruction of Goods after Agreement to

Sell Before Sale Incase Of Specific goods Without fault of
buyer or seller is destroyed Contract becomes
void provided ownership is not passed
and
Incase title of goods is passed to buyer he
must pay for the goods though the goods
cannot be delivered.
(j) Document of Title to Goods Entitles the Rightful holder to deal with the
goods represented by it as if were the Owner
(k) Documents Of Title to Goods 1. Bill Of Lading Is A document which

acknowledges receipt of goods on Board
of ship & Is signed by the Captain of the
ship.
2. Dock Warrant Is a document Issued by
a dock owner giving details of the goods
and certifying that the goods are held to
the order of the person named in it. It
Authorises the person to receive
Possession Of Goods.
3. Wharfingers Certificate Is a document

Issued by a Warehouse keeper Or
Wharfinger stating that the goods In the
documents are in his warehouse.
4. Railway Receipt Is a document Issued by
a Railway Company acknowledging receipt
of goods. It Is to be presented by a holder
at the destination to take delivery of goods.
5. Delivery Order Is document containing an
Order by the Owner of the goods to the
holder of the goods on his behalf, asking
him to deliver the goods to the Person.
(l) Price Price Means Money Consideration for transfer

of property in goods from seller to buyer.
Price may be fixed by
1. Contract
2. An agreed manner
3. Course of dealing
4. Reasonable price
(m) Earnest Money or Security Deposit Buyer pays an amount in advance as

earnest deposit or Security for the due
performance of his part of the contract
Earnest Money is adjustible towards the
price of the goods which may differs from
the prices when payment towards prices is
recoverable, earnest money is liable to be
forfeited if buyer fails to perform his part
and contract goes off.
(n)Time Stipulations for Payment Of Price Parties May agree to pay the Price
Immediately In Installments or at a future
date and buyer is obliged to make the
payment at the time of delivery of goods.
(o) Conditions and Warranties Conditions (sec 12(2)) is a stipulation essential to the main
purpose of the contract. Breach of which gives rise to a right to
treat the contract as broken
Warranty (Sec 12(3)) is a stipulation collateral to the main
purpose of the contract. The breach of which gives rise to claim
for damages and not to reject the whole contract
Remedies available to the buyer on breach of
Condition
Reject the goods
Elect to treat as breach of warranty
Waive the condition
Warranty
File a suit for extinction of prices
File a suit for damages
(p) Implied warranties and conditions Conditions as to the title:

The seller has the right to sell the goods
Buyer will have the good title to goods
Goods shall be free from any charge
Sale by description:
Goods shall correspond with the description
Breach of this will give buyer the right to reject the goods
Sale by Sample:
Goods should correspond with the sample shown
Sale by sample and description

Goods should correspond with both sample and
description
Cont..
Warranty as to Quality or Fitness
The buyer makes known to the seller the particular
purpose for which the goods are required,
The buyer relies on the seller's skill or judgment,
The goods are of a description which the sellers ordinarily
supplies in the course of his business, and
The goods supplied are not reasonably fit for the buyer's
purpose.
Remedies available in case of implied conditions

and warranties
May reject the goods or
Accept them and claim damages
(q) Caveat Emptor ( Buyer Beware) Buyer is expected to be careful while purchasing the
goods and seller is not liable for any defects in
goods sold by him
Exceptions in case of implied warranties under
following circumstances
Custom or usage of trade
Fraud
For the specific purpose known to seller and buyer relies
on sellers judgment
Merchantable quality or commercially sellable
(r ) RIGHTS AND DUTIES OF THE BUYER RIGHT
DUTIES
1.
To have delivery of the goods as per 1 To accept the delivery of goods,

contract. (sec. 31 & 32)
when the seller is willing to make the
delivery as per the contract
(Sec. 31)
2.
To reject the goods when they are not of 2 To pay the price in exchange for
the description, quality or quantity as . possession of the goods
specified in the contract (Sec 37).
3.
To be informed by the seller, when the 4 To demand delivery of the goods at a

goods are to be sent by sea route, so that
reasonable hour ( sec 36 (4)
he may arrange for their insurance [Sec 39
(30]
4.
To have a reasonable opportunity to 5 To accept delivery of the goods in

examine the goods for ascertaining
installments and pay for them, in
whether they are in conformity with the
accordance with the contract. (Sec. 38
contract. (sec. 41)
(2)
5.
To sue the seller for recovery of the 5.

price, if already paid, when the seller
fails to deliver the goods.
To bear the risk of deterioration in

the course of transit, when the goods
are to be delivered at a place other
than where they are sold ( sec 40)
6.
To sue the seller for damages if the 6

seller wrongfully neglects or refuses to
deliver the gods to the buyer ( sec 57)
To inform the seller in case the buyer

refuses to accept or rejects the goods (
sec 43)
To sue the
performance
specific 7
To take the delivery of the goods

within a reasonable time after the
seller tenders the delivery (Sec. 44)
8.
To sue the seller for damages for 8.

breach of a warranty or for breach
of a condition treated as breach of
a warranty ( Sec 59)
To pay the price, where the property

in the goods are passed to the
buyer, in accordance with the terms of
the contract ( Sec 55)
9.
To sue the seller the damages for 9.

anticipatory breach of contract (
Sec 60)
To pay damages for non-acceptance

of goods ( Sec 56)
10
To sue the seller for interest where

there is a breach of contract on the
part of the seller and price has to be
refunded to the buyer ( sec 61)
seller
for
(s) RIGHTS AND DUTIES OF THE SELLER RIGHT
DUTIES
1
.
To reserve the right of disposal of 1 To make the arrangement for transfer of

the goods until certain conditions
property in the goods to the buyer.
are fulfilled. ( sec 25 (1)
2
.
To assume that the buyer has 2 To ascertain and appropriate the goods
accepted the goods , where the . to the contract of sale
buyer
I)
Conveys
his
acceptance;
ii) Does an act adopting the sale; or
iii) Retains the goods without giving
a notice of rejection, beyond the
specified date (or reasonable time),
in a sale on approval. ( sec 24)
3
.
To deliver the goods only when 3 To pass an absolute and effective title to
applied for by the buyer ( sec 35) . the goods, to the buyer.
4
.
To make delivery of the goods in 4 To deliver the goods in accordance with

installments, when so agreed ( sec . the terms of the contract ( sec 31)
39 (1)
5.
To
exercise
lien
and
retain 5.
possession of the goods, until
payment of the price ( sec 47 (1))
To ensure that the goods supplied

conform to the implied / express
conditions and warranties.
6.
To stop the goods in transit and 6.

resume possession of the goods, until
payment of the price ( sec 49 (2) and
50)
To put the goods in a deliverable

state and to deliver the goods as and
when applied for by the buyer ( sec 35)
To resell the goods under certain 7

circumstances ( sec 54)
To deliver the goods within the time

specified in the contract or within a
reasonable time and a reasonable hour.
[ sec 36 (2) and (4)]
To withhold delivery of the goods 8

when the property in the goods has not
passed to the buyer (sec 46 (2))
To bear all expenses of and

incidental to making a delivery ( i.e.
upto the stage of putting the goods into
a deliverable sate (sec 36 (5))
To sue the buyer for price when the 9

property in the goods has passed to the
buyer or when the price is payment on a
certain day, in terms of the contract, and
the buyer fails to make the payment
(sec 55)
To deliver the goods in the agreed

quantity. (Sec. 37 (1))
(9) Transfer Of Property In

Goods -
(a) Property, Possession & Risk
Major 3 Stages In the Performance Of

Contract of Sale Of Goods By A Seller
1. The Transfer Of Property In the Goods

2. The Transfer Of Possession of the
Goods ( i.e. delivery )
3. The passing of the Risk
Transfer Of Property from Seller to Buyer is
the Main Object Of Contract Of Sale
Property Of Goods means - the Ownership

Of Goods
&
Possession Of Goods refers to the Custody or Control Of Goods
(b) Time of Passing of the Property 1. Risk follows Ownership Is a general

rule that Risk of loss falls on the Owner
whether delivery has been made or not,
whether Price has been Paid or not.
Incase, If delivery of Goods Is delayed
by Buyer or Seller, the Goods are at the
Risk of party at fault.
2. Action Against Third Party If Goods are
destroyed due to Action Of Third party,
then only Owner Can take Action.
3. Insolvency Of Buyer Or Seller In the

Event Of Insolvency Of Buyer Or Seller,
the Official Receiver Can take Over the
Goods.
4. Suit for Price The Seller Can Sue for the
Price, unless otherwise agreed, only if the
Goods have become the Property Of the
Buyer.
(c) Passing Of Property The Primary Rules for Ascertaining When

the Property In Goods Passes to the
Buyer Are As follows
1. Goods Must Be Ascertained
2. Intention of the Parties
Incase, When the Intention of the parties Is
not Ascertained from the Contract, the
Rules Contained In Sec. 20 to 24 Applies
1. For Ascertained & Specific Goods

Specific Goods are Identified & agreed upon
at the time of the Contract of Sale While
Ascertained Goods are Identified In
Accordance with the Agreement after the
time a Contract Of Sale Is Made.
Property In Goods Cannot be transferred to
Buyer Until the Goods Are Ascertained.
The following are its Rules -
(a) When Goods Are In Deliverable State It

means the Property In Goods passes to Buyer
When the Sale Is Made.
(b) When Goods Have to be put in a Deliverable
State If Seller Is bound to do something on
the Goods to Put them In deliverable State, the
Property In Goods will be transferred to Buyer
when such thing Is done by Seller.
(c) When Goods have to be Measured In
Contract Of Sale, If Seller Is bound to Measure
or Count or Weigh the Goods to determine the
Price then Ownership will Transfer only When
Such Act Is done By Seller.
2. For UnAscertained Goods In Contract of Sale Of Unascertained

Goods, the property will not Pass from
Seller to Buyer, Until the Goods are
Ascertained and there Is Unconditional
Appropriation to the Contract.
3. Goods Sent On Approval Or

Sale Or Return Basis When the Goods Are delivered to the Buyer
on Approval Or On Sale Or Return
basis, the Property there Is passes to the
Buyer(a) Signifies his Approval When Buyer thru
his spoken or Written Words Expresses
his Acceptance Of Goods then property
in goods passess from Seller to Buyer.
(b) Through Conduct When Buyer does

not make known to Seller expressely But
does any Other Act adopting the
transaction, then property Is transferred to
Buyer.
But If Seller gives the goods on terms that
the Goods were to Remain his Property
Until the Price Is Settled, then Property
would not pass to Buyer
( c ) Lapse Of Time The Buyer Retains the

Goods Of Seller Without giving Notice Of
Rejection and beyond the time fixed for
return of goods, then Property has passed
from Seller to Buyer.
(d) Performance Of a Sale Contract Seller delivers the goods and buyer
accepts the goods and makes payment as
per agreed terms of contract
(10) Delivery Of Goods Delivery means Voluntary transfer of

possession of goods from one person to
another.
Delivery may be
(a) actual physical handed over goods or
(b) symbolic goods are bulky and incapable to
actual deliver or
(c) constructive attornment which takes place
when person in possession of goods
acknowledges that he holds the goods on
behalf & at disposal of the other (seller & hirer)
Rules Of Delivery 1. Part Delivery

2. Buyer to apply for Delivery
3. Sellers duty to deliver
4. Place of delivery
5. Time of delivery
6. Delivery by allotment
7. Cost of delivery
8. Quantity to be delivered
9. Delivery In Installments
10.Delivery to Carrier or Wharfinger
(a) Risk Of Deterioration during

Transit Buyer bears any Risk of deterioration in
goods incidental to the course of transit
when Seller agrees to deliver goods at his
risk at a place other then that they were
agreed.
(b) Buyers Right Of Examination Where Buyer has not Examined goods
previously he is not deemed to have accepted
them unless and until he had a reasonable
opportunity of examining them for the purpose
of ascertaining whether they are in conformity
with the contract.
When Seller tenders delivery goods he is bound
on request to afford the buyer a reasonable
opportunity to examine the goods.
(c) Acceptance Of Delivery By Buyer Buyer Is deemed to accepted the goods

when1. Intimates Seller of his acceptance &
consent
2. Retains goods beyond reasonable time
without intimating seller that he has
rejected
3. Does Inconsistent act relating to goods
with the sellers ownership
(d) Buyer Not Reqd to Return Rejected Goods Where buyer rightfully rejects the goods
delivered to him he is not bound to return
them to seller and is sufficient if he
intimates his intention to Seller for
rejection by him.
(e) Buyers liability for failure to accept

delivery When Seller offers to deliver goods &
buyer doesnot within reasonable time after
such request take delivery of goods, he is
liable to seller for any loss occasioned by
his neglect or refusal to take delivery and
also for reasonable charge for care &
custody of the goods.
(11) Rights Of An Unpaid Seller Definition Of An Unpaid Seller U / S 45

A Seller Of Goods Is deemed to be an Unpaid
Seller When
(a) the whole of the price has not been paid or
tendered
(b) a B/E or other NI has been received as a
Conditional Payment and Condition on which it
was recd. Has not been fulfilled by reason of the
dishonour of the Instument or Otherwise
OR
A Seller Is Said to be Unpaid Vendor
when the whole of the Price Is Not paid to
him or when he has recd. a B/E, but B/E
has been returned dishonoured when the
goods are sold on Credit and the period of
Credit has expired and the buyer has not
paid the price
Inshort,
Unpaid Seller Refers to
1. The price Is due & seller Is Unpaid.
2. The whole Or part of the Price Is Not
paid.
3. The B/E or any NI was received but the
same has been dishonoured.
Here, Seller Includes Actual Seller & Any
Person who is in Position Of Seller i.e
Agent.
(A) Against the Goods - S 46-54

=> ( I ) When Ownership Is Passed to Buyer
( S 46 (1) )
(1) Right Of Lein ( S 47, 48 & 49 )

(2) Right Of Stoppage Of Goods In Transit
( S 50, 51 & 52 )
(3) Right Of ReSale ( S 54 )
=> ( II ) When Ownership Is Not Passed to

Buyer ( S 46 (2) ) (1) To Withhold delivery of Goods
(2) Other Similar Rights
( B ) Against the Buyer S 55-61

(1) Suit for Price ( When Ownership Is
Transferred ) S 55
(2) Suit for Damages ( When Ownership Is
Not Transferred ) S 56
(3) Repudiation Of Contract S 60
(4) Suit for Interest S 61
(A) Against the Goods - S 46-54

( I ) When Ownership Is Passed to Buyer
( S 46 (1) )
(1) Right Of Lein ( S 47, 48 & 49 )

(2) Right Of Stoppage Of Goods In Transit
( S 50, 51 & 52 )
(3) Right Of ReSale ( S 54 )
( II ) When Ownership Is Not Passed to

Buyer ( S 46 (2) ) (1) To Withhold delivery of Goods
(2) Other Similar Rights
(1) Right Of Lein A Lein means a Right to Retain the Possession Of

Goods, Until the Payment Of Price Is Made
=> Conditions
1. The Seller Must be Unpaid Seller
2. When the Goods are given WithOut Any Credit
3. If the Goods are given on Credit and the Credit
Period has Expired
4. When the Buyer Becomes Insolvent
5. The Goods are lying In Possession Of Seller
So, Right Of Lein Exists till there Is Possession.
The Moment the Possession Is Lost, the Right Of
Lein Is Lost.
Termination ( When Lein Comes

to An End ? )
1. When the Buyer has paid the Price
2. When the Seller has delivered the Goods to the
Carrier for giving It to the Buyer i.e. When
Possession Is Gone Lein Is Gone
3. When the Buyer Lawfully gets the Possession
Of Goods i.e. When Possession Is With Buyer
Lein Is Gone
4. When the Seller Waives the Right Of Lein
(2) Right Of Stoppage Of Goods In

Transit => Conditions
1. When the Seller Is An Unpaid Seller
2. The Buyer Should Be Insolvent
3. Seller should have left Possession
4. When the Goods are In Transit
Termination 1. When the Buyer has Paid the Price

2. When Seller takes the delivery of Goods, from
the Carrier Or Transit
3. When the Goods are given to Carrier Who has
delivered the Goods to the Buyer
4. When the Goods are given to Agent Of Buyer (
When Carrier Is Agent Of Buyer )
5. When there Is A part Delivery Of Goods by the
Carrier, the remaining part can be stopped.
But If part of delivery cannot be Separated from
the whole, transit comes to an End.
The Right Of Stoppage In Transit Can Be

Exercised giving a Notice By Seller to the
Carrier, asking him not to deliver the
Goods to the Buyer.
Inspite Of this Notice, If the Carrier

Wrongfully deliver the Goods to the Buyer,
the Right Is Not Lost & Seller Can Recover
the Goods.
(3) Right Of ReSale Conditions

1. Before ReSale, Notice Is Required to be given
to the Buyer. If Notice Is given the Seller Can
Retain the Profits that Arises On Re Sale. But
If Notice Is Not Given then it Cannot Recover
the Loss from the Buyer Which May Arise On
ReSale.
2. Incase Of Perishable goods, a Notice Is Not
Required.
3. When ReSale takes place, the Second Buyer
Gets a Better title Compared to that Of the
Original Buyer.
Right Of Lein Vs Right of

Stoppage Of Goods In Transit
1. Can be Exercised 1. Can be Exercised
when buyer Is able to
when buyer Is
pay but does not pay.
Insolvent.
2. Can be Exercised
2. Can be Exercised
on goods In Actual or
on goods when
Constructive Possession are in Possession
Of the Seller.
Of Middleman
parted by seller &
not Acquired by buyer
3. Comes to an End
3. Commences when
when the possession
the goods have left
of goods Is surrendered the possession of the
by the Seller.
Seller & Continues
until the Buyer Or his
Agent has Acquired
their Possession.
4. Is to Retain
4. Is to Regain/Resume
Possession.
Possession.
(4) Right Of Withholding Delivery Where the Property in Goods has not
passed to the Buyer, an Unpaid Seller
has, In addition to his Other Remedies,
a Right Of Withholding delivery of Goods
similar to and Co-existence with his rights
of Lein and Stoppage In Transit where the
property has Passed to the Buyer.

Transferred ) S 55

Transferred) S 55
When Property In Goods has Passed to the Buyer &
Buyer wrongfully neglects or refuses to pay for the
goods, the Seller may Sue Buyer for the Price Of the
Goods.
When Property In Goods has Not Passed to the Buyer
& Buyer Is Asked to Pay the Price Of Goods On A
Certain Day Irrespective of Delivery & the Buyer
wrongfully neglects or refuses to pay such price, the
Seller May Sue him for the Price. It Makes No
difference Even If Property In Goods has Not passed
and the goods have not been appropriated to the
Contract.

Where Buyer Wrongfully Neglects or
Refuses to Accept and Pay for the Goods,
the Seller May Sue Buyer for NonAcceptance. As Regards Measure Of
Damages, S 73 & Dealing with Buyers
liability for Neglecting Or Refusing delivery
Of Goods, S 44 Of Indian Contract
Act,1872 applies.

Before Due date, Where the Buyer
repudiates the Contract before the date
of delivery, the seller may either
(a) treat the Contract as Subsisting and wait
till the date of delivery, or
(b) he may treat the Contract As Rescinded
and Sue for damages for the Breach.
This Rule Is known as the Rule Of
Anticipatory Breach Of Contract

Where there Is a specific Agreement between
the Seller & the Buyer as to Interest on the Price
of the Goods from the date on which payment
becomes due, the seller may recover Interest
from the Buyer. If, however there Is No Specific
Agreement to this effect, the seller may Charge
Interest on the price when It becomes due from
such day as he may notify to the Buyer.
In Absence of Contract, the Court May Award
Interest to the Seller In A Suit by him at such
rate as it thinks fit on the amount of the Price
from the date of the tender of the goods or from
the date on which the Price was payable.
(12) HP Agreement Important Clauses Are1.

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Nature, Term & Commencement of Agreement

Delivery Of Equipment
Location
Inspection
Hire Charges
Repairs
Alteration
Termination
Risk
Registration & F ees
Indemnity Clause
Stamp Duty
Schedule of equipments forming sub j ect matter of agreement
Schedule of hire charges
Accompanied by signed promissory note signed by Hirer for full amount
payable under HP Agreement Including Interest or finance charges etc.
(13) Taxation Aspects (a) Income Tax

(b) Sales Tax
(c) Interest Tax
(a) Income Tax Assessment of Hire-purchaser (Hirer) : Hirer is entitled to

The tax shield on depreciation
The tax shield on the consideration for hire (total charge for
credit)
a) Level/equal distribution,
b) Distribution on the basis of sum-of-years-digits method, or
c) Rate of return method.
If the agreement/contract expressly provides for the option of

purchasing the goods at any time or of returning the same
before the total amount is paid, no deduction of tax at source
is to be made.
Income Tax
Tax Planning in Hire-purchase :
The net income can be inflated at the rear end of the

transaction and thereby defer tax liability.
Instead of a direct lease an intermediate financier is

introduces.
(b) Sales Tax Aspects Hire-purchase as sale:

Hire-purchase, though not sale in the true sense, is
demand to be sale. Such transaction are liable to sales
tax.
Delivery vs. Transfer of Property
States Entitled to impose Tax
Rate of Tax
(c) Interest-tax Interest tax is payable on the total amount of interest

earned less bad debts In the previous year
Accounting and Reporting :

The hire-vendor should record them (a) as hire-asset
stock-in trade or as receivables (b) the hirer should be
entitled to the depreciation claim
Interest-tax
In the Books of the Hirer:
The cash purchase price less down payment, if any, is
recorded as liability. The depreciation is based on the
cash purchase price of the asset in conformity with the
policy regarding similar owned assets. The total charge
for credit is allocated over the hire-period, using one of
the several alternative method,
Effective rate of Interest Method
Sum-of-the-years-digits method and
Straight-line Method
Interest-tax
In the Books of Hire-Vendor (Finance
Company)
The finance company should record the hire-purchase
installments receivables as a current asset and the
(unearned) finance income component of these installments
as a current liability under the head Unmatched Finance
charages. Unmatured finance income should be recognised
as current income for the period. It would be allocated over
the relevant accounting periods on the on the basis of any of
the following methods,
Effective rate of Interest Method
Sum-of-the-years-digits method and
Straight-line Method
(d) Financial Evaluation

From the point of view of the Hirer (Hirepurchaser):
In hire purchase deal, the hirer is entitled to claim
depreciation and the deduction for the finance charge
(interest) component of the hire installment.
Financial Evaluation
From the viewpoint of Finance Company
(Hire-Vendor):
The decision-criterion, is based on a comparison of the
net present values of the two alternatives, namely, hirepurchase and lease financing. The alternative with a
higher net present value would be selected and the
alternative having a lower net present value would be
rejected.
(14) CONSUMER CREDIT CC Includes all asset based financing plans offered to
primarily individuals to acquire durable consumer
goods.
CC transaction the individual consumer buyer pays a
fraction of the cash purchase price at the time of the
delivery of the asset and pays the balance with
Interest over a specified period of time.
Main Suppliers of CC are Foreign/MN Banks,
Commercial Banks, Finance Cos.
Items like Cars, Scooters, DVDs, TVs,
Refregerators, Washing Machines, Computers,
cooking ranges, food processors, home appliances etc
(a) Salient features of CC 1. Parties to Transaction depends upon nature

of transactions like
(a)Bipariate 2 parties-borrower-consumercustomer and dealer cum financier
(b)Tripariate 3 parties dealer, financier &
customer where dealer arranges the credit
from the financier
(b) Structure Of Transaction 1. Hire-Purchase Option to purchase the Asset by

Consumer. He may not exercise option and return
the goods as per terms of agreement. Most of
Tipariate Consumer Credit Transaction are of this
type.
2. Conditional Sale Ownership Is Not transferred to
Consumer until total purchase price Including
credit charge is paid and the customer cannot
terminate the agreement before the payment of full
price.
3. Credit Sale Ownership Is transferred to
customer on payment of first Instalment & cannot
cancel the agreement.
(c) Mode Of Payment CC arrangement can be done in 2 ways

(1)Down payment schemes ranges between
20-25% of cost
(2)Deposit linked schemes- deposit may vary
between 15-25% of the amount financed at
compound rate of Interest
Some arrangements may provide zero deposit
scheme with higher equated monthly
Instalment (EMI)
(d) Payment Period & Rate of Interest(1)Repayment Period ranges between 12-60
monthly instalments
(2) Rate of Interest is expressed at a flat rate &
effective rate of interest is not disclosed
(3) In some schemes rate of interest is not
disclosed but EMI associated with different
repayment periods is mentioned
(4) Most of Schemes provide for easy repayment
with either a rebate for prompt payment and
charge for delayed payment
(e) Security -
Security Is In the form of a first Charge on the

Asset and Consumer Cannot sell / pledge /
hypothecate the asset.
18
Ch. 17- Mutual Funds
Chapter Objectives
To understand the
meaning and benefits of mutual funds

history of mutual funds
growth of mutual funds in India
types of mutual fund schemes
net asset value
organisation of a mutual fund
SEBI guidelines relating to mutual funds
association of mutual funds in India
Unit Trust of India and US-64
growth and performance of mutual funds in India.
Mutual Funds
Meaning: A financial
intermediary that pools the savings of

investors for collective investment in a diversified portfolio of
securities.
Benefits
Professional management
Portfolio diversification
Reduction in transaction cost
Liquidity
Convenience
Flexibility
Tax benefits
Transparency
Stability of the stock market
Equity research
Difference Between Stock IPO and MF IPO

Stock IPO
MF IPO
Share allotted at a price arrived

through the book-building process
Units are issued at a face value of

Rs 10
The post-issue price is linked to the

demand-supply forces
The NAV is linked to the market

price of underlying assets
The listing price may differ from the

Cut-off (subscription) price
The NAV of the scheme opens

lower than the par value
History of Mutual Funds

Dates back to 19th century Europe
Robert Fleming set up the first investment trust in 1868
First mutual fund set up in the US in March 1924
First international stock mutual fund introduced in the US in 1940
In 1979, the first money market mutual fund created
Growth of Mutual Funds in India

The growth of mutual funds took place in four phases:
Phase I (1964-87) Setting up of the UTI, launch of US-64 and
Master share
Phase II (1987-92) Entry of mutual fund companies sponsored
by banks and insurance companies; popularity of assured return
schemes
Phase III (1992-97) Entry of private sector mutual funds, 1995
the beginning of the sluggish phase
Phase IV (after 1997) Significant growth till 2001,
trend reversed in 2000-01, due to debacle of US-64 UTI
lost to private sector players, record growth from new offerings
during 2004-05, cumulative assets under management as on March
31, 2006, Rs 2,17,707 crore.
Types of Mutual Fund Schemes
Comparison of Open-ended and Closeended Schemes

Open- ended scheme
Close- ended scheme
Not listed on the

stock exchange
Listed on the stock exchange
Do not have a fixed corpus
Have a fixed corpus
Continuous offer to sell and repurchase

units at NAV
Scheme remains open for a

fixed period and has a stipulated
maturity period
Types of Mutual Funds

Income funds: Invest predominantly in income bearing instruments
Growth funds: Invest predominantly in equity shares with growth potential
Balanced funds: Investment divided between equity shares and fixed interest
bearing instruments
Money market mutual fund: Invest in short- term money market instruments
Domestic funds: Invest in securities issued and traded in the domestic financial
markets

Offshore funds: Invest in securities of foreign companies
Sectoral funds: Invest in specific core sectors
Tax- saving schemes : Close- ended and carry special
tax incentives
Equity- linked savings scheme: Open- ended,
diversified, tax-saving schemes with a lock- in period of three
years
Gilt funds: Invest in government securities
Load funds
Charge selling expenses known as load
It is of two types: Front- end load and Back- end load
No load schemes do not charge a load
P/E ratio fund: The proportion of the investment
determined by on- going price- earning multiple
Index Funds
Invests in securities in the index on which it is based
Follows a passive investment strategy
Mirrors the performance of its benchmark index
Tracking error can occur but gains over the index owing to stocklending and index arbitrage
Exchange-traded Funds
Hybrid of open-ended mutual funds and listed individual stocks traded on
stock exchanges
Passively managed funds
Advantages
Allow for intra-day trading

Simple to understand
Provide benefits of diversification
Used as an arbitrage opportunity
Low operating expenses
Beneficial for financial institutions
First ETF Nifty BeES

Fund-of-Funds: Invests in other mutual fund schemes. Kotak Mutual fund,
Standard Chartered Mutual fund and Prudential ICICI Mutual fund offer this
scheme.
Advantages
Provides diversification benefits through a single product and higher

returns with low risk.
In-built rebalancing feature ensures a steady asset allocation.
Simplifies the investment process for investors in a tax-efficient manner
Factors restraining growth
Dividend distribution tax and Capital gains taxes
Major investment in own schemes

Floating rate funds
Invest in floating rate instruments
Coupon rate linked to a benchmark rate.
38 floating rate fund schemes. Templeton floating rate fund the largest
Theme based mutual fund: Popular three broad schemes Leadership,
Valuation and sector specific
Real estate mutual funds Will invest in shares and debentures of property
related companies and mortgaged based securities
Risks in Mutual Funds

Equity- oriented mutual fund more risky compared to a debt mutual fund.
Proportion of risk varies from scheme to scheme
Net Asset Value

Reflects the performance of the scheme on a day- to- day basis
NAV = Market price of securities + other assets total liabilities / Units

outstanding as at the NAV date
Mutual Fund Investors
Residents: Resident Indian individuals, Indian companies, Indian

trusts/ charitable institutions, Banks, NBFCs, insurance companies
and provident funds
Non-residents
FIIs registered with SEBI
Some Mutual Fund Regulations
Three key players:

Sponsor
Mutual fund trust
Asset management company
Some Mutual Fund Regulations

Each mutual fund shall have at least 20 investors and no single investor
should hold more than 25% of the total corpus of the scheme
The daily schedules for sales and redemption fixed
MFs advised to collect bank account number and PAN from investors
Investors can issue their demat accounts for buying and selling units
MFs allowed to invest in securitised paper
Association of Mutual Funds in India

(AMFI)
Established in 1993
Dedicated to developing MF industry protecting and promoting the
interests of mutual funds and their unit holders
Catalyst for setting new standards
Maintains a liaison with different regulators
Launched market indices
Conducts investor awareness programmes
Role of Intermediaries in MF Industry

Offer two levels of services
Value-added
Basic
UTI
First mutual fund organisation
Single largest mutual fund
Set up in 1964 as a trust
54 branch offices, 266 chief representatives, 67000 agents,
72 schemes, 20.02 million investors
UTIs associates
UTI bank limited

UTI Securities Exchange Limited
UTI Institute of Capital Markets
UTI Investment Advisory Services Ltd
UTI International Limited
UTI promoted institutions
ILFS, CRISIL, SHCIL, TDCIL, OTCEI, NSDL & NEDFCL
US-64
The flagship open-ended scheme
Around 20 mn investors
Launched as a debt fund
Administered pricing and high dividend payments depleted reserves
A bail out package in the form of SUS1999
Failure to implement recommendations of Deepak Parekh Committee
Repurchase and Sale of US64 units freezed in July 2001. NAV dipped
to a low of Rs 9.60. Government set up two committeesTarapore and
Malegam Committee
US 64 moved to NAV basis on Jan. 1, 2002
In 2002, problems of liquidity and redemption pressures surfaced again
UTI bifurcated into UTI-I and UTI-II on Feb 1,2003
UTI Iall the assured return schemes
UTI IIother schemes and under the regulatory ambit of SEBI
US 64 shortfall wiped out by stock market rally in Oct. 2003.
Net Resource Mobilization by Mutual

Funds
UTI
Other public sector
Private sector
Total
Cumulative assets under management
(Source: SEBI)
2005-06 (Rs in crores)

3424
6378
42977
52779
231863
Investment by Mutual Funds

Equity Debt Total Asset under management
2004-05 448
2005-06
16981 17429
36481
149600
231863
Mutual funds emerged as the dominant institutional players in 200506
MUTUAL FUNDS
What is a Mutual Fund?

A mutual fund is just the connecting bridge or a
financial intermediary that allows a group of
investors to pool their money together with a
predetermined investment objective.
(When you invest in a mutual fund, you are buying
units or portions of the mutual fund and thus on
investing becomes a shareholder or unit holder of
the fund.)
Diversification
Diversification is nothing but spreading out your
money across available or different types of
investments.
(Mutual funds are set up to buy many stocks.

Beyond that, you can diversify even more by
purchasing different kinds of stocks, then adding
bonds, then international stocks, and so on.)
Asset Management Company (AMC)

It is the investment manager for the mutual fund.
set up primarily for managing the investment of mutual funds
makes investment decisions in accordance with the scheme
objectives, deed of Trust and other provisions of the
Investment Management Agreement.
E.g.
1. AIG Global Asset Management Company (India) PVT. LTD.
2. Birla Sun Life Asset Management Company LTD.
3. HDFC Asset Management Company LTD.
Types of Mutual Funds Schemes

(in India)
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc.
1.OPENENDED
2.CLOSEENDED
SCHEMES
SCHEMES
3.INTERVAL
SCHEMES
1.Open - Ended Schemes

An open-end fund is one that is available for
subscription all through the year.
These do not have a fixed maturity.
Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices.
The key feature of open-end schemes is liquidity.
2.Close - Ended Schemes

These schemes have a pre-specified maturity period.
One can invest directly in the scheme at the time of the initial
issue.
Two exit options available to an investor after the initial offer
period closes.
1. Investors can transact (buy or sell) the units of the
scheme on the stock exchanges where they are listed.
2. Alternatively some close-ended schemes provide an
additional option of selling the units directly to the
Mutual Fund through periodic repurchase at the
schemes NAV;
(however one cannot buy units and can only sell units during the liquidity
window. SEBI Regulations ensure that at least one of the two exit routes is
provided to the investor.)
3. Interval Schemes
Combines the features of open-ended and closeended schemes.

The units may be traded on the stock exchange
or may be open for sale or redemption during
pre-determined intervals at NAV related prices.
RISK-RETURN MATRIX
Existing schemes in mutual funds

BY NATURE
BY INVESTMENT
OBJECTIVE
OTHER
Equity funds
Debt funds
Balanced funds
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes
Tax Saving Schemes

Index Schemes
Sector Specific Schemes
BY NATURE
1.Equity funds
These funds invest a maximum part of their corpus into

equities holdings.
The structure of the fund may vary different for different
schemes and the fund managers outlook on different
stocks.
The Equity Funds are sub-classified depending upon their
investment objective, as follows:
1.
2.
3.
4.
Diversified Equity Funds

Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
(Equity investments are meant for a longer time horizon,

thus Equity funds rank high on the risk-return matrix.)
BY NATURE
2.Debt funds
The objective of these Funds is to invest in debt papers.

Gilt Funds
popularly known as Government of India debt papers.
associated with Interest Rate risk.
carries
zero Default risk but are
Income Funds
Invest a major portion into various debt instruments such as bonds, corporate debentures and
Government securities.
Monthly Income Plans(MIPs)

Invests maximum of their total corpus in debt instruments while they take minimum exposure in
equities.
Short Term Plans (STPs)

for three to six months. primarily invest in short term papers like Certificate of Deposits (CDs) and
Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds
Also known as Money Market Schemes, provides easy liquidity and preservation of capital. Invest
in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs.
BY NATURE
3.Balanced funds
As the name suggest they, are a mix of both equity

and debt funds.
They invest in both equities and fixed income
securities, which are in line with pre-defined
investment objective of the scheme.
Equity part provides growth and the debt part

provides stability in returns.
BY INVESTMENT OBJECTIVE
Growth Schemes
also known as equity schemes. The aim of these schemes is to provide capital
appreciation over medium to long term.
Income Schemes
also known as debt schemes. The aim of these schemes is to provide regular and
steady income to investors. Capital appreciation in such schemes may be limited.
Balanced Schemes
Balanced Schemes aim to provide both growth and income by periodically distributing
a part of the income and capital gains they earn. These schemes invest in both shares
and fixed income securities, in the proportion indicated in their offer documents
(normally 50:50).
Money Market Schemes

Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments,
such as treasury bills, certificates of deposit, commercial paper and inter-bank call
money.
OTHER SCHEMES
Tax Saving Schemes
Tax-saving schemes offer tax rebates to the investors under tax laws
prescribed from time to time. Under Sec.88 of the Income Tax Act,
contributions made to any Equity Linked Savings Scheme (ELSS) are
eligible for rebate.
Index Schemes
Index schemes attempt to replicate the performance of a particular
index such as the BSE Sensex or the NSE 50.
Sector Specific Schemes

These are the funds/schemes which invest in the securities of only
those sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc.
TYPES OF RETURN
There are three ways, where the total returns provided by mutual funds can be
enjoyed by investors:
1. Income is earned from dividends on stocks and interest on bonds. A fund pays
out nearly all income it receives over the year to fund owners in the form of a
distribution.
2. If the fund sells securities that have increased in price, the fund has a capital
gain. Most funds also pass on these gains to investors in a distribution.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for
distributions or to reinvest the earnings and get more shares.
ADVANTAGES
Diversification
Economies of Scale
Professional
Management
Liquidity
Simplicity
DISADVANTAGES
Professional
Management
Costs
Dilution
Taxes
REFERENCES
THANK YOU
8
Module - 4
Ch. 8 Depositories
and Custodians
Chapter Objectives
To understand the
meaning of a depository system

need for setting up the depository system in India
difference between a demat share and a physical share
move on the depository system in India
NSDL and CDSL
meaning of custodians
Depository
Organisation holding securities in an
form
Acts as a securities bank
Forms
Dematerialised or Immobilised
electronic
Need for Setting Up a Depository

System
Securities scam
Increased volume of transactions

Problems with dealing in physical
Attract FII investment
shares
Services Provided by Depository

Primary Market Services
Secondary Market Services

Ancillary services
Distinct Features of a Demat

Share
Holding and handling electronically
Does not have a folio number
No stamp duty on transfer
Interface: Depository Participant
Benefits of a Depository System

Eliminates all problems related to holding of
Costs saving
Increased liquidity
Loan against pledged shares
Convenient portfolio shuffling
Facilitates rolling settlement
physical shares
The Depository Process

Opening an account
Dematerialisation
Rematerialisation
Distributing dividend
Closing an account
National Securities Depository Limited (NSDL) and Central Depository Service

(India) Limited (CDSL)
Business Partners of NSDL and CDSL
Depository Participants
Issuing companies
Clearing corporations/houses
Clearing Members
NSDLs pioneering systems
SPEED e
STeADY
IDeAS
NSDL and CDSL at a glance (February 2005)
NSDL
NSDL
DPs
215
258
Demat custody
(number in millions)
1,25,238
18,050
Investor accounts
61,61,909
9,56,130
Custodians
Services
Safekeeping of shares
Physical transfer of certificates
Collecting dividends
Collecting interest warrants
Updating clients
Keeping a track of book closures
Clearing Members
13
Ch. 13 - Credit Rating
Chapter Objectives
To understand the
meaning of credit rating
importance of credit rating
origin of the concept of credit rating
growth of credit rating industry in India
rating methodology
credit rating agencies in India
Credit Rating
Meaning
Assessment of borrowers credit quality

Current opinion of the borrowers debt
obligations
Importance
Helps in the development of financial markets
Helps investor and lending agencies in their

process
A marketing tool for the issuer
Affects the quantum of fund flows to a country
service
decision-making
Prominent Credit Rating Agencies in India

CRISIL: Credit Rating Information Services of
ICRA: Investment Information and Credit Rating
CARE: Credit Analysis and Research Limited
Fitch-Fitch India
India Limited
agency
Rating Methodology
Based on objective and subjective analysis
Business analysis
Industry risk
Market position
Operating efficiency
Legal position
Financial analysis
Accounting quality
Earnings potential
Adequacy of cash flows
Financial flexibility
Management evaluation
Track record, goals, philosophies and strategies of management

Fundamental analysis
Liquidity management
Asset quality
Profitability
Interest and tax sensitivity
Rating Symbols
AAA, AA, BBB, B, C, D
Symbols convey safety grade to the investor

Three grades
High investment grades
Investment grades
Speculative grades
CRISIL
First credit rating agency in India set up in January
Prominent provider of rating and advisory services:
Strategic tie up with Standard and Poors USA
Publicly listed company
Crisils Subsidiaries
1988
market leader
CRIS Infac
Crisil.com
Crisil Market wire
Global Data service of India Ltd
The EconoMatters Group of Companies
Crisils Centre for Economic Research
Crisils Investment and Risk Management Services
India Index Services and Products Limited
ICRA
Incorporated on January 16, 1991
Tied up with Moody Investor Services
Earnings Prospects and Risk Analysis (EPRA)
Launched Corporate Governance Rating Services
Launched two services in 1992
Credit Assessment
General Asessment
Group offers two services
Equity Assessment
Equity Grading
CARE
Launched in Nov. 1993
Main Services
Credit rating of debt instruments
Information services
Equity research
Tied up with Fitch Ratings
Limitations of Credit Rating in India

Credibility of rating questionable
Frequent revision of grading
Competition leading to relaxation of standards
Rating process compromised
Biased rating
Timely warnings not issued to investors
14
Ch. 14 - Factoring and
Forfaiting
Chapter Objectives
To understand the
meaning and origin of factoring

types of factoring
factoring mechanism
legal aspects of factoring
comparison of factoring with bills discounting and cash credit
international factoring and flow chart
meaning of forfaiting
flow chart of a forfaiting transaction
difference between forfaiting and factoring.
Factoring
A continuing arrangement between a factor and a
concern to provide services such as:
purchase of accounts receivables
credit management
prepayment of funds
collection of debts
administration of the sales ledger
business
Types of Factoring
Recourse factoring
Advance recourse factoring
Old line factoring
Cross-border factoring
Invoice
Factoring Mechanism
1.
2.
3.
4.
5.
6.
Customer places an order

Client assigns invoice to factor
Factor makes prepayment upto 80%
Monthly statement of accounts to customer and follow
up
Customer makes payment to factor
Factor makes balance 20% payment
Legal Aspects of Factoring

Client serves a notice of assignment
Client provides all evidences
Legal status of the factor is that of an assignee
Letter of disclaimer required by factor in case of
Attracts stamp duty
multiple finance
Advantages of Factoring
To the client
Conversion of credit sales into cash
Competitive credit terms to buyers
Free from tensions of monitoring sales ledger
Close interaction among working capital components
Expand business
To the customer (buyers)
Facilitates credit purchases
Save on bank charges
Less paperwork
Does not impinge on the customers rights
Bills Discounting vis--vis Factoring

Bills Discounting
Individual transaction
Factoring
A package of financial service
Each bill to be individually accepted
One time notification taken from

customer
Expensive source
Less expensive
More paperwork
Less paperwork
Grace period-3days
Higher grace period
Submission of original
documents required
Upfront charges
Only copies of such documents
Domestic related
No assignment of debts
May be domestic or international

Assignment of debts
No upfront charges
Cash Credit vis--vis Factoring

Cash Credit
Factoring
Margin retained 40-50%
Margin retained 20%
Drawing power computed once a month
Prepayments made as and when

factored
Client submits various statements to banks Factor furnishes report to both
client and customer

Banks do not render debt collection
services
Factor renders debt collection

services
No grace period allowed
Grace period allowed
Variable processing fees
Fixed processing fees
International Factoring
Seller and Buyer located in different countries with a factoring arrangement.
A two factor system: export factor and import factor
Benefits to exporter
Dealing with only one factor
Benefit of experience of the factor
Reduction in risk and bad debts
Can explore new markets
Benefits to importer
Payment in his own country
Gets access to open account credit terms
International Factoring Transaction
Factors Inhibiting the Growth of

Factoring in India
Lack of a credit appraisal system
Higher stamp duty

Restrictions on financing capacity
Not eligible for reference
Forfaiting
Meaning: A non recourse long-term financing of
international trade.
Characteristics
A non recourse 100% financing
Credit periods range from 60 days to 10 years
Flexible and tailor-made
Importers obligation supported by local bank guarantee or aval
Suitable for high value exports
Benefits of Forfaiting
Helps in eliminating risks
Exporter receives full export value
Improves liquidity
Expands business
Enhances competitive advantage
Simple and no administrative hassles
No effect on banking limits
Transition specific
Saves costs
Flow Chart of Forfaiting Transaction
Difference Between Forfaiting and

Factoring
Forfaiting
Factoring
For International credit

For transactions of short-term maturities
transactions of long-term maturity
100% financing without recourse Can be with or without recourse
Cost borne by importer
Cost borne by seller
Forfaiting structuring and costing Continuous and revolving facility
tailor-made and on a case to

case basis
A forfaiter and a bank involved
Two-factor system and no bank involved
19
Module 5
Ch. 9- Insurance
Chapter Objectives
To understand the
meaning and principles of insurance

origin and development of insurance
opening up of the insurance sector in India
Insurance Regulatory and Development Authority (IRDA)
health insurance
insurance intermediaries
risk management in insurance
Chapter Objectives
general insurance
reinsurance
micro-insurance
General Insurance Corporation of India
non-life insurance sector
life insurance
Life Insurance Corporation of India
life insurance industry.
Insurance
A social device to reduce and eliminate risk of loss to life and
property
Principles
Principle of Uberrima fides
Principle of Indemnity
Doctrine of Subrogation
Principle of Causa Proxima
Principle of insurable interest
Origin and Development of Insurance

About 4500 years ago in Babylonia
First insurance contract entered into by European maritime nations in
1347
Lloyds is the first modern insurance company
First fire insurance company set up in 1967
Oldest life insurance company: Society for the Equitable Assurance of
Lives and Survivorship in 1756
Mortality tables constructed in seventeenth century
Insurance History in India

Found in the Rigveda
Practised by Aryans around 1000 BC

Oriental Life insurance company the first to be set up in
India
First Indian insurance company the Bombay Mutual Life
Assurance Society set up in 1870
Insurance Act enacted in 1570
Life Insurance Companies Act promulgated in 1912
Insurance History in India

Insurance Act, 1938 enacted for both life and non life
By the mid 1950s : 154 Indian insurers, 16 foreign
insurers and 75 provident fund societies
LIC set up in 1956 by taking over 245 life insurance
companies
Nationalisation of general insurance in 1972
R N Malhotra Committee set up in 1993
Insurance sector thrown open to private sector in
2000
IRDA
Constituted on April 19, 2000
IRDA Act enacted in 1999
Objectives of IRDA
Policy holder protection
Healthy growth of the insurance market

Constituted the Insurance Advisory Committee and issued regulations in areas
of:
Registration of insurers
Conduct of insurers
Solvency of reinsurance business

Licensing
Code of conduct of intermediaries
IRDA
Steps taken to protect the interest of policy holders
Notified the regulations in 2002
Specified the file and use procedure
Constitution of a cell to look into public grievances
Customers consulted for policy decisions
Consumer representative on Insurance companys board
Disclosure of Information
Introduced Third Party Administrators
Brokers licensed as intermediaries
Ombudsman in insurance
Health Insurance
Minimum capital of Rs100 crore for a stand-alone health insurance
business
Companies offer riders
Third Party Administrators (TPAs) are distributors
Insurance Intermediaries
Agents
Surveyors and Loss Assessors
Brokers
Third party Administrators
Bancassurance
Alternate channels
Direct marketing
Automobile manufacturer tie ups
Forex dealers
Work site marketing
Internet
Departmental stores/ Retailers of white goods
Marine Cargo Insurance through clearing and forwarding agents/

transporters/ carrier companies
Risk Management
Risk emanating from both internal and external environment
Unanticipated changes such as
changes in demographic structure
information explosion
volatility in financial markets
deregulation in insurance industry
volatility risks in reinsurance markets
rapid growth of financial services regulatory

changes
de-tariffing of premium structures
Risk Management Strategies

Diversification of assets and liabilities
Selective underwriting
Hedging in derivatives market
Risk adjusted pricing targets
Setting up underwriting risk classification
Reinsurance
General Insurance
For short- term coverage
Nationalised on January 1, 1973
At present four nationalised and nine private sector general insurance
companies
GIC now an Indian reinsurer
Products
Fire Insurance
Motor Insurance
Marine Cargo Insurance
Marine Hull Insurance
Non Traditional/Rural Insurance
Weather insurance
Tariff Advisory Committee (TAC)

Statutory body created under the Insurance Act, 1938
Looks into pricing of non-life insurance products
Marine, hull insurance detariffed from April 1, 2005
Motor insurance to be detariffed from January 2007
Tariff regime to be gradually phased out
Pattern of Investment
Solvency Margin of General Insurers

Ratio of free capital to be the total business done by a company. A
solvency ratio of 1.5 times the normal requirements
A minimum solvency margin of Rs.50 crore (Rs100 crore in the case of a
reinsurer) or a sum equivalent of 20% of net premium income or a sum
equivalent to 30% of net incurred claims whichever is higher.
Reinsurance
Primary insurer transfers a part or all of the risks to another insurer
Uses
To increase the companys underwriting Capacity
To spread risks
To obtain advice and assistance
To stabilise profits
To provide protection against catastrophic losses
To retire from the business
Types of Reinsurance
Facultative and Treaty
Reinsurance Treaties
Quota share treaty

Surplus share treaty
Excess of loss treaty
Reinsurance pool
GIC is the official Reinsurer
Micro-insurance
Insurance to the poor
Draft regulations
Term and endowment insurance: minimum sum assured Rs 10,000
and a maximum of Rs 50,000
Health insurance: Maximum sum assured Rs 15,000
General Insurance Corporation of India

Commenced business in Jan. 1, 1973 for superintending, controlling and
carrying on the business of general insurance
In November 2000, notified as the Indian Reinsurer
All domestic insurers to cede 20% of the gross direct premium in India
Offers crop insurance, now transferred to Agricultural Insurance
Company of India
Its four subsidiaries now function as board-managed companies
Life Insurance
A long-term contract which provides a sense of security to the assured
and his family
Satisfies five needs: Dying young, living too long, disability, care for
children and wealth generation
Total players 14 (1 public sector and 13 private sector)
Life Insurance Products

Endowment plan
Money back plan
Whole life policies
Term insurance policies
Pension plans
Unit-linked insurance plans
Benefits of Life Insurance

Safeguards the insureds family against an untimely death
Means of compulsory savings
Source of income during old age
Helps in meeting certain periodic financial needs
Improves life of the insureds family
Takes care of disabilities
Brings in tax benefits u / s 88 of the Income Tax Act
Solvency Margin of Life Insurance

To maintain an excess of value of its assets over the amount of its
liabilities of not less than Rs 50 crore (Rs 100 crore in the case of a
reinsurer)
OR
A sum equivalent not exceeding 5% of the mathematical reserves and
a percentage not exceeding 1% of the sum at risk for the policies on
which the sum at risk is not negative which ever is the highest.

Set up on Sept. 1, 1956 by nationalising 154 Indian insurers, 16 foreign
insurers and 75 provident funds
Strong distribution network consisting of 7 zonal offices, 100 divisional
offices, 2048 branch offices and 8.5 lakh agents
Objectives
Spreading life insurance
Mobilising savings
Deploying funds effectively

Subsidiaries
LIC (International) EC
Overseas Ventures
LIC Mutual fund

Products
Individual Plans
Group Schemes
Social Security Group Insurance Schemes
Pension Plans
Market leader
Share of over 90% in policies sold and 80% in premium levels

Management of Financial Services

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Management Of Financial

( M.COM, LL.M, MBA-Finance, UGC NET & SLET )

Reference Books (1) The Indian Financial Systems

Module 1 Financial Markets &

Module 2 Financial Institutions

(1) MBFC Prudential Norms ( Ch. 1 MYK )

Module 3 - Financial Institutions

(1) Housing Finance Regulatory Body Its

Module 4 - Financial Institutions

Module 5 - Financial Institutions

The Indian Financial System

meaning of financial system

Meaning of the Financial System

A set of sub systems of financial institutions,

Types of Financial System

institutional and regulated

Components of the Financial System

Types of Financial Institutions

Functions of Financial Institutions

Capital Market A market for long-term equity and debt instruments

Link Between Primary and Secondary

of a vibrant primary market.

Functions of Financial System

Key Elements of a Well-functioning

Financial System Designs

Market-based Financial System

Bank-based Financial System

Functions of Financial Markets

Characteristics of Money Market

Principal feature is honour

Functions of Money Market

Benefits of an Efficient Money Market

Encourage development of non-bank entities

Role of the Reserve Bank in the Money

Money Market Instruments

Size of T-Bills Market (Rs in Crores)

Process for Issuing CP

Guidelines Relating to CPs

To be issued in demat form

Size of CP Market (Rs in Crores)

Constitutes 4.3% of aggregate deposits

Call/Notice Money Market

Factors Influencing Call Rate Volatility

Measures for Curbing High Volatility

Collateralised Borrowing and Lending

Money Market Intermediaries

Link Between Money Market and Monetary

Tools for Managing Liquidity in the Money

Money Market Derivatives

Interest rate swap

Interest rate futures

functions of capital market

primary capital market and secondary capital market

history of the Indian capital market

capital market scams

reforms in the capital market.

Functions of a Capital Market

equity and debt issues

FDI, FII and NRI deposits

FDI and FII

Data for 2003-05

Total net FDI flows

Total portfolio investments

Other non-FDI flows