301 Capital & Financial Markets.pdf

Dr. D. Y. (Deemed Patil Vidyapeeth, to be University) Pune (Re-accredited by NAAC with a CGPA of 3.62 on a four-point scale at A Grade) (An ISO 9001: 2015 Certified University) Centre for Online Learning Semester III Course 4 Specialization Financial Credits Management Course Code OMBI-301 Type Specialization Course Course Title Capital & Financial Markets Course Description: This course will be useful for students to know about the concept of financial market and its use in an organization. A financial market brings buyers and sellers together to trade in financial assets. Money markets are used by the government and corporate entities to borrow and lend in the short-term. Capital markets are used for long-term assets, which have maturities of greater than one year. Course Objectives: 1. To understand the concept of financial market and its types. 2. To analyse the operation of Capital and Money markets. 3. To understand the working mechanism of Stock Exchanges and mutual funds. 4. To Study how trading is done in derivatives market. 5. To understand concepts like Merchant Banking and Credit Rating. Course Outline: Unit 1: Financial Institutions: Different Groups of Institutions, Reserve Bank of India, Commercial Banks, Development Financial Institutions, Insurance Institutions, and Other Financial Institutions. Unit 2: Securities and Exchange Board of India: Overview of the Securities and Exchange Board of India Act, 1992, Powers and Functions of SEBI, Investigations by SEBI, Registration Certificate by SEBI, Penalties and Adjudication, Securities Appellate Tribunals, and Private Placement to Qualified Institutional Buyers. Unit 3: Non-Banking Financial Companies: Functions of Non-Banking Financial Companies, Role of Different Non-Banking Financial Companies, Regulations Regarding Non-Banking, Financial Companies, Causes for Failure of NBFCs. Sant Tukaram Nagar Pimpri, Pune – 411018, Maharashtra, India. Ph. +91-20-2780 5709/5711 e-mail: Dr. D. Y. (Deemed Patil Vidyapeeth, to be University) Pune (Re-accredited by NAAC with a CGPA of 3.62 on a four-point scale at A Grade) (An ISO 9001: 2015 Certified University) Centre for Online Learning Unit 4: Venture Capital: Functions of Venture Capital, Modes of Finance by Venture Capital, Role of SEBI in Venture Capital, and Venture Capital Scenario in India. Unit 5: Stock Exchanges in India: Functions of Stock Exchange, Bombay Stock Exchange, National Stock Exchange, Trading in Stock Exchange, and Depositories Services. Unit 6: Stock Markets Indicators and Interest Rates: Objectives of Indices, Types of Indices, Sensex, Nifty, Interest Rates. Unit 7: Capital Markets: Functions of Capital Market, Players in Capital Market, Role of SEBI in Capital Market, Investment Instruments in Capital Market, Modes of Raising Finance in Capital Market. Unit 8: Money Markets: Functions of Money Market, Role of RBI in Money Market, Players in Money Market, and Instruments Used in Money Market. Unit 9: Merchant Banking: Evolution of Merchant Banking, Role of Merchant Banker in Capital Market, SEBI Guidelines Regarding Merchant Banker. Unit 10: Mutual Funds: The Evolution of Mutual Funds, The Concept of Mutual Fund, Types of Mutual Fund Schemes, Net Asset Value, Mutual Funds Functioning in India. Unit 11: Trading In Derivatives: Intra-day Trading, Trading in Futures, Trading in Options, Risk in Derivatives Trading. Unit 12: Credit Rating: Need for Credit Rating, Parameters of Credit Rating, Credit Rating, Agencies, Credit Rating Symbols, Country Risk Rating. Unit 13: Taxation and Dividend: Relevant provisions of Income Tax Act, Short -term Capital gain, Log-term capital gain, Carry Forward of losses, Service Tax, Securities Transactions Tax. Sant Tukaram Nagar Pimpri, Pune – 411018, Maharashtra, India. Ph. +91-20-2780 5709/5711 e-mail: Dr. D. Y. (Deemed Patil Vidyapeeth, to be University) Pune (Re-accredited by NAAC with a CGPA of 3.62 on a four-point scale at A Grade) (An ISO 9001: 2015 Certified University) Centre for Online Learning Course Outcome: On successful completion of the course the learner will be able to: CO# Cognitiv Outcom e es Abilitie s CO301. Remember Learn the types of products traded in Financial Markets 1 CO301. Understand The working mechanism of Stock market 2 CO301. Analyze How can investment in stock market benefit both the business 3 and the investor CO301.4 Apply The implementation of the knowledge of stock market in acquiring finances for business Suggested Reading: 1. Derivatives Market: Robert L McDonald. 2. How to Save Income Tax Through Tax Planning by R N Lakhotia and SubhasLakhotia Sant Tukaram Nagar Pimpri, Pune – 411018, Maharashtra, India. Ph. +91-20-2780 5709/5711 e-mail: UNIT 1 FINANCIAL INSTITUTIONS Objectives After completing this unit, you will be able to: Describe the role of Reserve Bank of India. Explain the Deposit Schemes of Banks. State the objectives of Development Financial Institutions. Explain the utility of Insurance institutions. Structure 1.1 Introduction 1.2 Different groups of institutions 1.3 Reserve Bank of India 1.4 Commercial Banks 1.5 Development Financial Institutions 1.6 Insurance Institutions 1.7 Other Financial Institutions 1.8 Summary 1.9 Keywords 1.1 INTRODUCTION Financial institutions offer financial services to customers. These services may pertain to acceptance of deposits or granting of loans or any other ancillary service. They play an important role in taking the money from surplus sector of the economy to the needy sector of economy. Money is the life blood of economy. It is kept in circulation with the help of various financial institutions. 1.2 DIFFERENT GROUPS OF INSTITUTIONS The Financial institutions can be grouped as under: Regulatory institutions like Reserve Bank of India, Insurance Regulatory Development Authority, Securities Exchange Board of India etc Commercial Banks like Nationalized Banks, Foreign Banks, private Sector Banks etc. All India Financial Institutions like National Housing Bank ( NHB ) Developmental Financial Institutions like Industrial Finance Corporation of India ( IFCI ) Insurance Institutions like Life Insurance Corporation of India ( LIC ) and General Insurance Corporation of India ( GIC ) Intermediaries like Mutual Funds, Depositories’ Participants, Authorised Dealers in foreign Exchange, Depositories Other institutions like Venture Capital Fund of India, Export Credit Guarantee Corporation. The financial institutions normally offer few of the following services: Project finances Project appraisal Medium and Long Term Finance Issue management Loan syndication Foreign Exchange buying and selling Investment management Mergers and Acquisition Working Capital Finance The roles of SEBI, Mutual Funds and Merchant Banks have already been covered in the earlier later units. Hence, they will not be repeated in this unit. 1.3 RESERVE BANK OF INDIA The Government of India, Ministry of Finance, heads the Indian financial system. The Reserve Bank of India which works under Finance Ministry controls the Banks in India. There is a department called Department of Banking Operations and Development (DBOD) in Reserve Bank of India to regulate banking matters. There is a separate department called Urban Cooperative Banking Division (UBD) to regulate urban cooperative banks. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Banking Regulation Act, 1949 is the main Law that governs the Banks in India. The Reserve Bank of India is the Central Bank of India and carries various central banking functions. The main functions of Reserve Bank of India are as under; Banker to Government of India Banker to State Governments Banker to the other Bankers Credit Control Regulation and Supervisions of Banks Note Issue Foreign Exchange control and Management Conducting National Clearing Transactions with Central Banks of Other countries Transactions with international financial institutions Custodian of foreign Exchange Reserves Management of Exchange Rates RBI’s role in Foreign Exchange control and Management In exercise of the powers conferred by clause (a) of sub-section (1), sub-section (3) of section 7 and sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank has made the following regulations. Foreign Exchange Management (Export of Goods and Services) Regulations, 2000 Foreign Exchange Management (Export and Import of Currency) Regulations, 2000 vide its Notification No. FEMA 6/RB-2000 dated 3rd May 2000 Foreign Exchange Management (Guarantees) Regulations, 2000, notified vide Reserve Bank Notification No. FEMA 8 / RB dated 3rd May 2000 Foreign Exchange Management (Manner of Receipt & Payment) Regulations, 2000 notified vide Notification No. FEMA 14/2000-RB dated May 3, 2000. Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2000 notified under Notification No. FEMA 10/2000-RB dated May 3, 2000 Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations, 2000 Foreign Exchange Management (Realisation, Repatriation and Surrender of Foreign Exchange) Regulations, 2000 “Foreign Exchange Regulation Act of 1973” (FERA) gave wider powers of control to the RBI. Govt. introduced Foreign Exchange Management Act 2000 & repealed FERA1973. The bill received the presidential assent on 29th December, 1999. RBI as the exchange control authority One of the important central banking functions of the RBI is maintenance of external value of the rupee. As such it has been given the custody of foreign exchange reserves and sole agency for administration of exchange controls in India. All receipts and payments in and out of India require general or special permission of the RBI. The dealings in foreign exchange and foreign securities in India, payments to person resident outside India and export and import of currency notes, bullion or precious stones etc., are subject to general or special permission of RBI or are prohibited. The RBI with the help of Authorised Dealers and moneychangers carries on the administration of controls. The types of transactions, which are controlled by the RBI and the government are in general, those having international financial implications and include inter alia the following important items. Many of them are liberalised and some of them withdrawn since 1991 economic reforms. Purchase and sale of and other dealings in foreign exchange and maintenance of balances at foreign centers, by residents. Realization of proceeds of exports of goods and services. Payments to non-residents or to their accounts in India for imports and others. Transfer of securities as between residents and non-residents and acquisition and holding of foreign securities. Foreign travel (with or without foreign exchange). Export and import of currency, cheques, drafts, travellers’ cheques and other financial instruments, securities, gold, jewelleries, etc. Acquisition, holding and disposal of immovable property in India by foreign nationals and companies. Acquisition, holding and disposal of immovable property outside India by persons resident in India. RBI has permitted the banks to exchange mutilated currency notes which are genuine and where mutilations are such as not to cause suspicion or fraud. 1.4 COMMERCIAL BANKS Types of Banks: The Banks can be grouped as under: 1) Public Sector Banks: a) State Bank Group b) Nationalized Banks c) Regional Rural Banks 2) Private Sector Banks: a) Foreign Banks b) Co-operative Banks c) Other Private Banks 1) Public Sector Banks: More than 50% shares are owned by State Govt. or Central Govt. or Govt. undertaking. A) State Bank Group: State Bank of India, State Bank of Patiala, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, B) Nationalized banks: Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sindh Bank Syndicate Bank Union Bank of India United Bank of India Uco Bank Vijaya Bank C) Regional Rural Banks: These are the Banks sponsored by nationalized Banks or State bank and co sponsored by State Government and Central Government. There are about 197 banks. They mainly operate in rural areas. 2) Private Sector Banks: A) Foreign Banks: Banks founded outside India having branches in India. They operate mainly in big cities. Examples: Standard Chartered Bank, Honkong and Shanghai Banking Corporation (HSBC), Bank of America, BNP Paribas B) Cooperative Banks: a) District Central Co-operative Banks : Example: Pune DCC, Ahmednagar DCC, b) Urban Co-operative Banks: Examples: Cosmos Co-op Bank, Saraswat Co-op Bank c) Primary Agricultural and Rural Development Banks: C) Old generation Private Sector Banks: Examples: Karnataka Bank, Jammu and Kashmir Bank, Ratnakar Bank D) New Generation Private Sector Banks. ICICI Bank, HDFC Bank, IDBI Bank, Axis Bank, Yes Bank, Kotak Mahindra Bank. The services of Banks can be grouped into three categories: Deposits, Advances and Ancillary Services Deposit Schemes of Banks Deposit schemes of Banks can be grouped into three categories. 1 Savings Deposits 2 Current Deposits 3 Fixed deposits/Term Deposits Fixed deposits/Term Deposits can be grouped into the following schemes based on the mode of deposit and the mode of withdrawal. S.N How deposited How withdrawn Name of the scheme 1 Installments Lump sum Recurring Deposit 2 Lump sum Lump sum Cumulative Deposit Monthly Interest Deposit 3 Lump sum Interest: Installments Quarterly Interest Principal: Lump sum Deposit 4 Installments Installments Annuity 5 Lump sum Installments Not in existence Deposits converted into 6 Units scheme units Two-in-one a/c. Cheque 7 Unfixed deposit OD facility book against FD 8 Star Scheme Short Term Automatic Renewal Amount invested will be eligible for tax benefit under 9 Tax Savings Scheme Sec 80 C. However interest on such scheme taxable If the amount is invested in this scheme, there will be 10 Capital Gain Scheme exemption from tax on capital gain Now let us know more about these schemes. A. Savings Bank Account Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. Presently, the rate of interest is 3.5% compounded half yearly. Interest is paid on the minimum balance between 10 th and the last day of the month. Savings Bank Account can be opened in the name of an individual or in joint names of the depositors. Savings Bank Accounts can also be opened and operated by the minors provided they have completed ten years of age. Accounts by Hindu Undivided Families (HUF) not engaged in any trading or business activity can be opened in the name of the Karta of the HUF. B. Current Account Current Account is primarily meant for businessmen, firms, companies, public enterprises etc. that have numerous daily banking transactions. In a Current Account, a customer can deposit any amount of money any number of times. He can also withdraw any amount as many times as he wants, as long as he has funds to his credit. Banks do not pay interest on the balances in current accounts. Service charges are levied for Ledger folio used, Cheque books issued and Non- maintenance of minimum balance, Return of cheques, etc. Current and Saving Accounts are treated as Low cost Deposits for Banks. In short they are also called a CASA (Current Account Savings Account) C. Term Deposits A deposit held at a financial institution that has a fixed term. Term deposits are an extremely safe investment and are therefore very appealing to conservative, low-risk investors. By having the money tied up you'll generally get a higher rate with a term deposit compared with a demand deposit. 1. Recurring Deposit Recurring Deposit Scheme you can save a little every month so that at the time of need you have sufficient funds to achieve your financial goals. 2. Cumulative Deposit This plan helps you to earn interest on interest, thus giving you a two-fold income. You deposit your money with a Bank for any period between six months to 10 years. Thus your interest gets compounded every quarter giving you higher returns. Interested is accumulated and merged with Principal after every quarter. 3 a) Monthly Interest Deposit Scheme (MIDS) Interest is paid every Month. Principal is returned on the date of maturity. Interest is paid at a discounted rate. 3 b) Quarterly Interest Deposit Scheme (QIDS) Interest is paid every Quarter. Principal is returned on the date of maturity. Interest paid under QIDS us slightly more than the interest paid on MIDS even though the rate of interest for both the scheme is same. A. Annuity Scheme If the investor needs money for meeting recurring expenditure like meeting education expenses of a son, the annuity scheme is suitable. If a person has a son studying in 8 th Standard, father can open annuity account for 4 years depositing Rs.4,000/- PM after 4 years the Bank will pay every month Rs.4,000/- PM plus interest to his son to meet his monthly expenses. Similarly a person due for retirement after 10 years can open Annuity account for 10 years. He will get the same amount every month plus interest for the next ten years after retirement. This can be treated as pension scheme. B. Units Scheme Suppose a depositor has invested Rs.1,00,000/-. If he needs only Rs.1,000/- he may have to break the deposit of Rs. 1,00,000/- or he can take a loan against deposit. If he keeps the same Rs.1,00,000/-. In Unit scheme, this deposit will be treated as 100 deposits of Rs.1,000/- each. If he needs Rs.1,000/- he can break only one unit of Rs.1,000/-. The remaining Rs.99,000/- remains intact. C. Unfixed Deposit Scheme In State Bank of India it is called as the Multi Option Deposit (MOD) Account. This is a combination of Savings Bank or Current Account with Term/ Special Term Deposit Accounts, so that one can securely write cheques up to the balance in the MOD account or up to the drawing power available as overdraft in the Current account. This is also called two in one account or Cheque Book against FD account. D. Star Scheme (Short Term Automatic Renewal) A deposit kept for a period below one year is called a Short Term Deposit. If the instructions are given to Bank to renew it automatically on the due date for the same period as held early then it is called Short Term Automatic Renewal scheme. Customer need not remember the due dates and need to remind the bank to renew it. 8 Tax Savings Scheme, 2006 It is a unique product which offers higher rate of interest along with tax benefits, specially designed to cater to the needs of the Income Tax assesses. The scheme enables the customers to place long term deposits to earn higher rate of interest and also to avail the tax benefits under section 80C of Income Tax Act, 1961. However interest on such scheme is taxable. E. Capital Gain Scheme: There is a lock in period of 7 years. The amount can be withdrawn before seven years for purchasing the same class of asset on which capital gain was received. If the amount is invested in this scheme, there will be exemption from tax on capital gain Interest on Deposits: The Banks pay interest on deposits as per various deposit schemes. Interest rates are revised from time to time and made known to public. The interest rates slightly differ from bank to bank. Revised interest rates are applicable only to the renewals and fresh deposits while existing deposits continue to get interest at the contracted rate. Ancillary Services Services other than Deposits and Loans are called as Ancillary Services. a) Pension Payments: Pensioners of Central and State Governments can open a separate pension account in any of authorized banks. The pension will be credited by the branch to the pensioner’s account b) Remittance Service Customers may remit funds from one center to another center by Demand Draft (DD) or Telegraphic Transfer (TT) or Mail Transfer (MT) etc., by paying specified charges as per the Bank’s rules. The customers can utilize the facility of Electronic Funds Transfer (EFT) System operated through RBI for transferring funds to and from Kolkata, Chennai, Delhi and Mumbai up to Rs. 5 Lac. Demand drafts, telegraphic transfers and travellers’ cheques for Rs.50,000 and above will be issued by the banks only by debit to the customer’s account or against cheques or other instruments tendered by the purchaser and not against cash payment. Similarly, such payments for Rs.50,000 and above will be made through banking channels and not in cash. Pay order & Banker’s cheque Pay Order is issued for making payment locally. Validity period of Pay Order is 6 months. This can be revalidated by the issuing branch on written request of the purchaser. c) Collection services Immediate credit of local as well as outstation cheques up to Rs. 7, 500/- (as per RBI guidelines from time to time) is provided to the individuals (personal customers) who are maintaining satisfactory accounts. However, the customers will have to bear usual service charges as well as the postal charges. In the event of cheques being returned unpaid, the customer will have to pay interest for the period for which funds are utilized. All cheques (local and outstation) deposited by the customers are cleared by the Bank as follows: High Value Clearing: This facility is available for the clients of selected branches at designated centers. Cheques of high value (of not less than Rs. 1 lac per instrument) are cleared on the same day. Local Clearing: Cheques are cleared normally on the third working day, depending on the centre, subject to depositing of the cheques/instruments in time. National Clearing: Cheques drawn on Metropolitan centres listed in national clearing are cleared in 8 days. All cheques drawn on other centers are cleared in 14 days. The Bank will credit the proceeds of an outstation cheque within the following time norms - State Capital other than North Eastern States & Sikkim - 10 working days - Other centers - 14 working days If the Bank fails to do so, interest will be paid at the rate applicable for appropriate tenure of fixed deposit for the period of delay beyond the stipulated days mentioned above. Further, if the delay is abnormal then penal interest at the rate of 2% above fixed deposit rate applicable will also be paid. A Cheque or Bill drawn on outstation centre given to bank for collection, is called as Outward Bills for Collection (OBC). Cheques or Bills drawn by an outstation centre received by bank for collection are called Inward Bills for Collection (IBC) d) Collection of Government dues: The Bank handles collection of various taxes on behalf of Government of India through selected designated branches. e) Exchange of soiled notes. All the branches of the Bank will exchange freely soiled/slightly mutilated currency notes and certain other types of mutilated currency notes of all denominations. The Bank’s currency chest branches will exchange all categories of mutilated currency notes. Currency exchange facility is offered to the Bank’s customers and others. f) Plastic Money Banks issue the following types of Cards: 1) ATM Cards: This card is used for withdrawing money from ATM and other transactions through ATM 2) Debit Cards: It acts as ATM Card. It also can be used for making purchases. You can use it only if you have balance in your account. 3) Credit Cards: It acts as ATM Card. It also can be used for making purchases. You can use it up to a certain limit even if you have balance in your account. You have to pay the amount to Bank before due date. Otherwise, you will have to pay exorbitant interest 4) Smart Card: These are the cards which combine all the functions of the above cards. In view of the development in the Information Technology the Banks offer the following services. a) Any where banking: The customer of any branch of a bank can withdraw money from any other branch of that bank. b) Tele banking: You can contact the bank on phone and do certain transactions. c) Internet Banking: You can do transaction through Internet. d) Real Time Gross Settlement (RTGS): Transfer of money from one place to another place. Safe Deposit Locker and Safe Custody are the other services offered by Banks. They accept standing instructions to pay your electricity bills and telephone bills etc. Service Charges: The Bank provides various services to customers for which service charges are levied. The charges are revised from time to time. Service charges are levied for collection and remittance of funds, processing of loan proposals, issue of guarantees, safe custody, issue of duplicate instruments/statements, ledger folio charges etc. Details of service charges are available at branches on request. 1.5 DEVELOPMENTAL FINANCIAL INSTITUTIONS (DFIS) Financial Institutions providing medium term and long term finance to business units aiming at economic and industrial development of India are called Development Financial Institutions (DFIs). Some time they are also referred to as Development Banks. ICICI has become ICICI Bank and IDBI has become IDBI Bank. In this unit, we will discuss about the following DFIs a) National Bank for Agricultural and Rural Development (NABARD) b) Industrial Finance Corporation of India (IFCI) c) Small Industries Development Bank of India (SIDBI) d) Export Import Bank of India a) National Bank for Agricultural and Rural Development (NABARD) Earlier Reserve Bank of India was looking after the work pertaining to Agricultural Finance through its department called “Agricultural Finance Department”. Later on it was converted into a separate institute, NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also supports all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. NABARD is entrusted with providing refinance to lending institutions in rural areas, bringing about or promoting institutional development and evaluating, monitoring and inspecting the client banks. The functions of NABARD areas under:- 1) Acts as a coordinator in the operations of rural credit institutions. 2) Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development. 3) Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development. 4) Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development. 5) Acts as regulator for cooperative banks and Regional Rural Banks (RRBs) Some of the milestones in NABARD's activities are: 1) Refinance disbursement under Short Term-Agri & Others and Medium Term- Conversion/ Liquidity support aggregated Rs.16952.83 crore during 2007-08. 2) Refinance disbursement under Investment Credit to commercial banks, state cooperative banks, state cooperative agriculture and rural development banks, RRBs and other eligible financial institutions during 2007-08 aggregated Rs.9046.27 crore. 3) Through the Rural Infrastructure Development Fund (RIDF) Rs.8034.93 crores were disbursed during 2007-08. With this, a cumulative amount of Rs.74073.41 crore has been sanctioned for 280227 projects as on 31 March 2008 covering irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, flood protection, forest management etc. 4) Under Watershed Development Fund with a corpus of Rs.613.71 crore as on 31 March 2008, 416 projects in 94 districts of 14 states have benefited. 5) Farmers now enjoy hassle free access to credit and security through 714.68 lakh Kisan Credit Cards that have been issued through a vast rural banking network. 6) Under the Farmers' Club Programme, a total of 28226 clubs covering 61789 villages in 555 districts have been formed, helping farmers get access to credit, technology and extension services b) Industrial Finance Corporation of India (IFCI) The Industrial Finance Corporation of India Limited was incorporated on July 1, 1948 by the Government of India as a tool to overcome the scarcity of long-term finance plans in the industrial sector. IFCI is the first Development Financial Institution in India. During the period of independence in 1947, the capital market scenario was horrendous. The commercial banks were not equipped to render long-term financial plans in the industrial sector. The Government of India decided to launch the IFCI with the aim to provide long-term financial plans to all the sectors of Indian industry. The Government also felt that The Industrial Finance Corporation of India Limited needed to access directly to the capital market for any kinds of funds or other financial issues. In 1993, the Government of India took the decision of converting IFCI in to a company that would come under the Indian Companies Act, 1956. The main focus of The Industrial Finance Corporation was to provide long-term financial benefits to various sectors in Indian industry and it has fulfilled it quite efficiently. IFCI has also been quite subservient in implementing the number of things that the Government of India planned up to ensure financial benefits into services. IFCI carried out all the responsibilities regarding Government's industrial policy initiatives till the establishment of ICICI in 1956 and IDBI in 1964. Some of the noteworthy contributions of IFCI include improvement of Indian industry, export promotion, import permutation, development in business, pollution control measures, energy preservation and rendering direct and indirect employment. There are a number of industrial sectors that have been massively benefited from The Industrial Finance Corporation of India Limited. They are as follows: Capital & intermediate goods industry that includes products such as electronics, synthetic plastics, synthetic fibers and miscellaneous chemicals Service industries that include hotels and hospitals Consumer goods industry such as textiles, paper and sugar Infrastructure sector which involves power generation and telecom services Basic industries involving products such as cement, iron & steel, fertilizers, basic chemicals IFCI has sanctioned funds of an amount of Rs. 462 billion to 5707 companies and has disbursed Rs. 444 billion in totality. c) Small Industries Development Bank of India (SIDBI) Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of Indian Parliament as the principal financial institution for Promotion, Financing, Development of industry in the small scale sector and Co-ordinating the functions of other institutions engaged in similar activities Since its inception, SIDBI has been assisting the entire spectrum of SSI Sector including the tiny, village and cottage industries through suitable schemes tailored to meet the requirement of setting up of new projects, expansion, diversification, modernisation and rehabilitation of existing units. The Small Scale Industries (SSIs) sector is a vibrant and dynamic sector of the Indian economy. The sector presently occupies an important place and its contribution in terms of generation of employment, output and exports is quite significant. The Small Scale Industries sector including tiny units, comprises the domain of SIDBI's business. Besides, the projects in the services sector with total cost upto Rs.250 million are also taken within the area of SIDBI's operations. The Bank also finances industrial infrastructure projects for the development of SSI sector. Channels of Assistance SIDBI's financial assistance to small scale sector has three major dimensions: 1. Indirect assistance to primary lending institutions (PLIs); 2. Direct assistance to small units; and 3. Development and Support Services Indirect Assistance SIDBI's schemes of indirect assistance envisages credit to SSIs through a large network of 913 primary lending institutions (PLIs) spread across the country with a branch network of over 65000. The assistance is provided by way of refinance, bills rediscounting and resource support in the form of short term loans/Line of Credit (LoC) in lieu of refinance, etc. Direct Assistance The objective behind SIDBI's direct assistance schemes has been to supplement the efforts of PLIs by identifying the gaps in the existing credit delivery mechanism for Small Scale Industries. Direct assistance is provided under several tailor made schemes through SIDBI's 41 Regional/Branch offices spread across the country. Development and Support Services The Bank extends development and support services in the form of loans and grants to different agencies working for the promotion and development of SSIs and tiny industries. Over the years, the initiatives of SIDBI under promotional and developmental activities have crystallized into the following important areas: Enterprise promotion with emphasis on rural industrialization Human resource development to suit the SSI sector needs Technology up-gradation Quality and environment management Marketing and promotion and Information dissemination Address of the Head Office of SIDBI is as under:- Small Industries Development Bank of India Taj Plaza, 3-Way Road, Madan Mohan Malviya Marg, Lucknow - 226 001 Phone: 91-522-209517-21/209565 Fax : 91-522-209513 Source: www.sidbi.com D) Export Import Bank of India EXIM Bank was set up by an act of parliament in September 1981 for providing financial assistance to exporters and importers and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade. It acts as an Apex financial institution wholly owned by government of India. It commenced operations in March 1982. It acts on business principles with due regard to public interest. EXIM Bank is a service institution set up to serve the foreign trade sector in the form of finance, advice, consultancy, market intelligence, credit information services, etc. It has both developmental and finance functions. The objectives are clearly set out as “granting loans and advances in India solely or jointly with commercial banks and other financial bodies to persons exporting or importing or intending to export from India goods and services including export of turnkey projects, joint ventures and civil construction services”. In short, it is an Apex institution providing finance and refinance in connection with the foreign trade of the country, comparable to NABARD in respect of agricultural finance and IDBI in respect of industrial finance. Functions of EXIM bank: The operations of EXIM Bank includes funded assistance and guarantees, Funded assistance takes the form of supplier’s credit, pre-shipment credit finance for EOUs (Export Oriented Units), Export marketing finance. Besides it provides lines of credit, buyers’ credit, refinance of export credit bulk import finance, Export Product Development Finance, Pre-shipment Finance, Bridge loans, overseas investment finance, production equipment finance, finance for leasing etc. The EXIM Bank performs the following functions: (1) Granting loans and advances in India solely or jointly with commercial banks to persons exporting or intending to export from India, goods including export of turnkey projects, civil construction contracts or other contracts and services including consultancy services. (2) Granting loans and advances solely or jointly with commercial banks to persons outside India for import from India of goods, including turnkey projects, civil constructions contracts or other contracts and services, including consultancy services. (3) Granting lines of credit to governments, financial institutions and other suitable organizations in foreign countries to enable persons outside India to import from India, goods including turnkey projects, services, including consultancy services. (4) Handling transactions where a mix of government-to-government credit and commercial credit for exports is involved. (5) Issuing bid bonds or guarantees and other similar facilities in India or abroad solely or jointly with commercial banks on behalf of persons exporting or intending to export from India goods including turnkey projects, consultancy, etc. (6) Purchasing, discounting and negotiating export bills etc. Incidental functions: (1) Maintaining of foreign currency accounts with banks and correspondents abroad for purposes connected with the business of Exim Bank. (2) Buying and selling currencies or foreign exchange and undertaking such other functions of authorized dealers as may be necessary for the discharge of its functions. (3) Undertaking and financing of research surveys, studies etc., in connection with promotion and development of international markets. (4) Providing technical, administrative and financial assistance to any exporter in India or any other person who intends to export goods from India for promotion, management and expansion of any industry with a view of promoting international trade. (5) Planning, promoting, developing and financing export-oriented industries. (6) Forming or conducting subsidiaries for carrying out its functions. (7) Acting as an agent of the Central and State Governments, RBI, IDBI etc. Source: Website www.eximbank.com Industrial Investment Bank of India Ltd. (IIBI) The Government of India had set up Industrial Reconstruction Corporation of India in the year 1971 with an objective of dealing with the problems of sick units and to provide assistance for rehabilitation of sick units. In 1985 Industrial Reconstruction Corporation of India was converted into Industrial Reconstruction Bank of India Ltd. (IRBI). In 1996, IRBI has been converted into Industrial Investment Bank of India Ltd. (IIBI). Services offered by IIBI. i. Financial assistance to industries in the form of term loan and working capital finance ii. Giving deferred payment guarantees on behalf of industries iii. Underwriting of IPOs of the industries iv. Subscribing to the share capital of the industries v. Merchant banking services vi. Managing the portfolio of sick industries 1.6 INSURANCE INSTITUTIONS Insurance is a tool to manage the risk. Risk means uncertainty. It means what you get may be different from what you expect. Risk means the possibility of loss or damage to the asset. Insurance does not prevent loss. It compensates the loss. People who are exposed to risk come together and contribute certain sums called premium which is used to compensate the losses suffered by any of them. The risk is spread among the community. The likely big loss for any one is reduced to manageable small losses for all. Insurance is considered as a social security tool. Insurance is defined as an economic device whereby the individual substitutes a small certain cost (the premium) for a large uncertain financial loss (the contingency insured against) which would exist if it were not for the insurance contract. It is an economic device for reducing and eliminating risk through the process of combining a sufficient number of homogeneous exposures into a group in order to make the losses predictable for the group as a whole. Insurable interest means the possibility of a financial loss to an individual which can be protected against through insurance. Insurance Company is an organization chartered to operate as an insurer. Any corporation primarily engaged in the business of furnishing insurance protection to the public is called Insurance Company. An insurance product is defined as a product that is provided by an insurance company. Insurance Policy is a Legal document issued to the insured setting out the terms of the contract of insurance. Insured is the person to whom or on whose behalf benefits are payable under the policy. Insurer is a licensed legal entity, which underwrites insurance, including a mutual insurance company (but note the exemption of pure reinsurers). Policyholder is the person (or persons) whose risk of financial loss from an insured peril is protected by the policy. Insurance industry, as on 1.4.2000, comprised mainly two players and both were the state insurers: Life Insurers: Life Insurance Corporation of India (LIC) General Insurers: General Insurance Corporation of India (GIC) GIC had four subsidiary companies namely. 1. The Oriental Insurance Company Limited 2. The New India Assurance Company Limited, 3. National Insurance Company Limited 4. United India Insurance Company Limited. With effect from Dec'2000, these subsidiaries have been de-linked from the parent company and made as independent insurance companies. After the opening up of the insurance Industry to the private sector as a result of financial sector reforms a lot of private sector players have entered the industry. Insurance Industry had the following new entrants. Life Insurers: HDFC Standard Life Insurance Company Ltd. Max New York Life Insurance Co. Ltd. ICICI Prudential Life Insurance Company Ltd. Kotak Mahindra Old Mutual Life Insurance Limited Birla Sun Life Insurance Company Ltd. Tata AIG Life Insurance Company Ltd. SBI Life Insurance Company Limited ING Vysya Life Insurance Co Private Limited Bajaj Allianz Life Insurance Company Limited Metlife India Insurance Company Pvt. Ltd. Future Generali India Life Insurance Co Limited IDBI Fortis Life Insurance Company Ltd. AMP Sanmar Life Insurance Company Limited. Aviva Life Insurance Co. India Pvt. Ltd. Sahara India Insurance Company Ltd. General Insurers: Royal Sundaram Alliance Insurance Co Ltd Reliance General Insurance Company Limited. IFFCO Tokio General Insurance Co. Ltd TATA AIG General Insurance Company Ltd. Bajaj Allianz General Insurance Co Limited ICICI Lombard General Insurance Co Limited. Apollo DKV Insurance Company Limited Future Generali India Insurance Co Limited Universal Sompo General Insurance Co Ltd. Cholamandalam General Insurance Co Ltd. Export Credit Guarantee Corporation Ltd. HDFC-Chubb General Insurance Co. Ltd. Shriram Life Insurance Company Ltd. Insurance Business: Insurance business is divided into four classes: 1) Life Insurance 2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous Insurance. Life Insurers transact life insurance business; General Insurers transact the rest. No composites are permitted as per law. The primary legislation that deals with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority Act, 1999. Insurance products Life Insurance: Popular Products: Endowment Assurance (Participating) and Money Back (Participating). More than 80% of the life insurance business is from these products. General Insurance: Fire and Miscellaneous insurance businesses are predominant. Tariff Advisory Committee (TAC) lays down tariff rates for some of the general insurance products (Please visit website of GIC for details) 2001 onwards new products have been launched by life insurers. These include linked- products. For details, please visit the websites of life insurers. Customer protection Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress customer grievances in respect of insurance contracts on personal lines where the insured amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Addresses can be obtained from the offices of LIC and other insurers. Life Insurance Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against. The contract is valid for payment of the insured amount during: The date of maturity or Specified dates at periodic intervals or Unfortunate death, if it occurs earlier. Among other things, the contract also provides for the payment of premium periodically to the Corporation by the policyholder Health Insurance The policy covers reimbursement of hospitalization expenses only for illness/diseases contracted or injury sustained by the Insured person. In the event of any claim becoming admissible under the policy the Company will pay to the Insured person the amount of such expenses as are reasonably and necessarily incurred in respect thereof anywhere in India by or on behalf of such insured person but not exceeding in any one period of Insurance the amounts mentioned in the Table of Benefits. Motor Vehicle Insurance Motor Vehicle insurance is compulsory. Salient features of Motor Vehicle insurance. Items Covered: Motor vehicle which includes private cars, Motorized Two wheelers and Commercial vehicles excluding vehicles running on rails. Owners of the vehicle, Financiers or Lessee, who have insurable interest in motor vehicles, can insure the vehicle. Insured's Declared Value (IDV) (a) In case of vehicle not exceeding 5 years of age, the IDV has to be arrived at by applying the percentage of depreciation specified in the tariff on the showroom price of the particular make and model of the vehicle. (b) In case of vehicles exceeding 5 years of age and Obsolete models (manufacture of those vehicles which have been stopped by the manufacturers), they have to be insured for the prevailing market value of the same as agreed to between the insurer and the insured. Marine Cargo Policy This policy covers goods, freight and other interests against loss or damage to goods whilst being transported by rail, road, sea and/or air. Different policies are available depending on the type of coverage required ranging from an All Risk cover to a restricted Fire Risk Only cover. This policy is freely assignable and is basically an agreed value policy. To encourage insurance, some benefits are given under income Tax Act, 1961 for payment of insurance premium on life insurance policies under Sector 80 C and mediclaim policies under Sector 80 D. Website: www.irda.org 1.7 OTHER FINANCIAL INSTITUTIONS Export Credit Guarantee Corporation of India Export Credit Guarantee Corporation of India Limited (ECGC) was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce, Government of India. A Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community manages it. ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs. 390 crores, which is expected to be enhanced to Rs. 500 crores by the year 2003. ECGC: 1. Provides a range of credit risk insurance covers to exporters against loss in export of goods and services. 2. Offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them. 3. Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan. 4. Offers insurance protection to exporters against payment risks 5. Provides guidance in export-related activities 6. Makes available information on different countries with its own credit ratings 7. Makes it easy to obtain export finance from banks/financial institutions 8. Assists exporters in recovering bad debts 9. Informs about credit-worthiness of overseas buyers Credit Insurance Policies SCR or Standard Policy To cover risks in respect of all shipments on short-term credit by exporters with anticipated annual turnover of more than Rs. 50 lacs. Turnover Policy A variation of SCR policy with additional discounts and incentives is available to exporters who pay a premium of not less than Rs. 10 lacs per year. Small Exporters Policy Similar to SCR Policy, but for exporters with anticipated annual turnover of Rs. 50 lacs or less. Specific Shipment Policy (Short term) To cover risks in respect of a specific shipment or shipments against a specific contract Buyer wise Policy To cover risks in respect of all shipment to one or a few buyers Specific Policy for Supply Contract To cover risks in respect of export of capital goods or turnkey projects involving medium/long term credit. Export Production Finance Guarantee To enable Banks to sanction advances at the pre-shipment stage, to the full extent of cost of production when it exceeds the f.o.b. value of the contract/order, the difference representing incentives receivable. Post-Shipment Credit Guarantee To enable Banks to extend post-shipment finance to exporters through purchase, negotiation or discount of export bills or advances against such bills. Export Finance Guarantee Covers post-shipment advances granted by Banks to exporters against export incentive receivable in the form of cash assistance, duty drawback, etc. Export Performance Guarantee A counter-guarantee to protect a Bank against losses that it may suffer on account of guarantees given by it on behalf of exporters. Export Finance (Overseas Lending) Guarantee To protect a Bank financing an overseas project by providing a foreign currency loan to the contractor from the risk of non-payment by the contractor. Since its inception, ECGC has strengthened India's exports by covering the risk of exporting on credit and, today has more than 13,000 policyholders. Currently, it has 24 diverse products in its portfolio customized to suit the requirements of various kinds of exporters and banks. With a paid up capital of Rs 800 crore and an authorized capital Rs 1,000 crore, ECGC has set up a separate fund with a corpus of Rs 2,000 crore called the national export insurance account (NEIA). Foreign Exchange Dealers’ Association of India Reserve Bank of India permitted several scheduled commercial banks to undertake foreign exchange business and it was considered desirable to form an Association comprising of all Authorized Dealers in foreign exchange as its members. Foreign Exchange Dealers’ Association of India (FEDAI) was established and an undertaking was given by each Authorised Dealer to Reserve Bank of India to abide by the exchange rates and other terms and conditions prescribed by this Association for transacting foreign business. FEDAI took the opportunity of revising and updating its rules and has brought out a Rule Book containing FEDAI Rules and Schedule of Charges. This publication, is available to customers on application, with their Bankers. Credit Information Bureau of India Limited (CIBIL) Credit Information bureau of India – the country’s first credit information bureau promoted by HDFC and SBI with Dun and Bradstreet and Trans Union as minority partners has commenced operations with effect from 23rd October 2002. In the first phase , the company provided limited information on willful defaulters upto Rs 25 lakhs.It will also publish data of all borrowers against whom suits have been filed for Rs 1 crore and above on CIBIL’s website www.cibil.com CIBIL maintains the credit history of two sets of borrowers. The first is the corporate borrower and the technology to maintain corporate credit profile is being provided by Dun and Bradstreet. The second set of borrowers is the individuals who seek retail loans. Trans Unions will be providing the technology to track individual credit history. Credit Guarantee Trust for Small Industries (CGTSI) Credit Guarantee Trust for Small Industries (CGTSI) has been established to give guarantee cover to the financial institutions extending credit facility to the Small Scale Industries. The Corpus of CGTSI is Rs.2,500 Crores. Initial contribution of Rs.125 crores has been made by Govt. of India and Rs.25 crores by SIDBI. Advances up to 25 lakhs to Small Scale Industries will be covered. Maximum claim per borrower will be Rs.18.75 lakhs or 75% of dues. The trust will pay 75% of the claim on initiation of recovery proceedings and balance 25% after conclusion of recovery proceedings. Guarantee fee is one time 2.5% and 1% service fee every year on outstanding balance. Guarantee fee and service fee can be passed on to borrower. Lock in period of 24 months from the date of last disbursement or the date of payment of premium whichever is later. 1.8 SUMMARY Financial institutions offer financial services to customers. The Financial institutions can be grouped as Regulatory institutions, Commercial Banks, All India Financial Institutions, Developmental Financial Institutions etc. The Reserve Bank of India is the Central Bank of India and carries various central banking functions such as Government’s Bank, Bankers’ Bank, Note issue, Exchange Control etc. Banks can be grouped as under: 1) Public Sector Banks: a) State Bank Group b) Nationalized Banks c) Regional Rural Banks 2) Private Sector Banks: a) Foreign Banks b) Co-operative Banks c) Other Private Banks Deposit schemes of Banks can be grouped into Savings Deposits, Current Deposits and Fixed deposits/Term Deposits. Tax Savings Scheme, 2006 enables the customers to place long term deposits to earn higher rate of interest and also to avail the tax benefits under section 80C of Income Tax Act, 1961. However interest on such scheme is taxable. Services other than Deposits and Loans are called as Ancillary Services. Remittance services, collection services, Locker facilities and credit/debit cards come under ancillary services. The Industrial Finance Corporation of India Limited was incorporated on July 1, 1948 by the Government of India as a tool to overcome the scarcity of long-term finance plans in the industrial sector. IFCI has sanctioned funds of an amount of Rs. 462 billion to 5707 companies. Small Industries Development Bank of India (SIDBI) was established in April for Promotion, Financing and Development of industry in the small scale sector. SIDBI's financial assistance to small scale sector include Indirect assistance to primary lending institutions (PLIs), Direct assistance to small units; and Development and Support Services. 1.9 KEYWORDS Ancillary Services: Services other than Deposits and Loans Bank: Institute licencsed by RBI ro accept deposits and lend Public Sector Banks : More than 50% ownership is with the Government.Insurance: Economic device whereby the individual pays the premium to cover a large uncertain financial loss. UNIT 2 SECURITIES AND EXCHANGE BOARD OF INDIA Objectives After completing this unit, you will be able to: Describe powers and functions of SEBI. Describe the role of SEBI in investigations. Explain the rules regarding Certificate of Registration by SEBI. Explain penalties and adjudication by SEBI. Structure 2.1. Introduction 2.2. Overview of the Securities and Exchange Board of India Act, 1992 2.3. Powers and Functions of SEBI 2.4. Investigations by SEBI 2.5. Registration Certificate by SEBI 2.6. Penalties and Adjudication 2.7. Securities Appellate Tribunals 2.8. Private Placement to Qualified Institutional Buyers 2.9. Keywords 2.10. Summary 2.1 INTRODUCTION Objectives of SEBI are to protect interests of investors, to promote development of securities market and to regulate securities market Capital market is controlled by Securities Exchange Board of India (SEBI) through Securities Contracts Regulations Act (SCRA) and Rules as well as SEBI regulations for the various operators in the Capital market. The Government of India has passed “The securities and exchange board of India Act, 1992 No. 15 of 1992”. The primary markets are witnessing a healthy growth, with funds raised showing a significant increase from Rs.1,225 crores in fiscal 2001-02 to Rs.28,255 crores in fiscal 2004- 05. Also, the numbers of issues hitting the market have increased from 14 issues (in 2001- 02) to 56 issues (in 2004-05). 2.2 OVERVIEW OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 2.3 POWERS AND FUNCTIONS OF SEBI Chapter IV deals with powers and functions of the Board. Functions of the Board Section 11 (1) It shall be duty of the Board to protect the interests of the investors in securities and to promote and development of and to regulate the securities market by such measures as it thinks fit. (2) The measures referred to therein may provide for - (a) Regulating the business in stock exchanges and any other securities markets; (b) Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner. (b.1) Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf. (c) Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds; (d) Promoting and regulating self-regulatory organisations; (e) Prohibiting fraudulent and unfair trade practices relating to securities markets; (f) Promoting investors' education and training of intermediaries of securities markets; (g) Prohibiting insider trading in securities; (h) Regulating substantial acquisition of shares and take-over of companies; (i) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market and intermediaries and self- regulatory organizations in the securities market; (i.i) Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board; (j) Performing such functions and exercising such powers under the provisions of Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government; (k) Levying fees or other charges for carrying out the purpose of this section; (l) Conducting research for the above purposes; (la) Calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions; (m) Performing such other functions as may be prescribed. (2.1) The Board may take measures to undertake inspection of any book or register or other document or record of any listed public company or a public company which intends to get its securities listed on any recognized stock exchange where the Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. (3) The Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters, namely: (i) The discovery and production of books of account and other documents, at such place and such time as may be specified by the Board; (ii) Summoning and enforcing the attendance of persons and examining them on oath; (iii) Inspection of any books, registers and other documents of any person referred to in section 12, at any place (iv) Inspection of any book or register or other document or record of the company referred to in sub-section (2A); (v) Issuing commissions for the examination of witnesses or documents. (4) The Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely: a. Suspend the trading of any security in a recognized stock exchange; b. Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; c. Suspend any office-bearer of any stock exchange or self-regulatory organization from holding such position; d. Impound and retain the proceeds or securities in respect of any transaction which is under investigation; e. Attach, after passing of an order on an application made for approval, by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of this Act or the rules or the regulations made thereunder: f. Direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation: The Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned. Section 11A: Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities. (1) The Board may, for the protection of investors a. Specify, by regulations – i. The matters relating to issue of capital, transfer of securities and other matters incidental thereto; and ii. The manner in which such matters shall be disclosed by the companies; b. By general or special orders – i. Prohibit any company from issuing prospectus, any offer document or advertisement soliciting money from the public for the issue of securities; ii. Specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited, may be issued. (2) The Board may specify the requirements for listing and transfer of securities and other matters incidental thereto." Section 11AA (1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) shall be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which, i. The contributions or payments made by the investors, by whatever name called, are pooled and utilized solely for the purposes of the scheme or arrangement; ii. The contributions or payments are made to such scheme or arrangement by the investors with a view to receive the profits, income, produce or property, whether movable or immovable from such scheme or arrangement; iii. The property, the contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; iv. The investors do not have day to day control over the management and operation of the scheme or arrangement. Power to issue directions Section 11B If after making or causing to be made an enquiry, the Board is satisfied that it is necessary,- (i) In the interest of investors or orderly development of securities market; or (ii) To prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or (iii) To secure the proper management of any such intermediary or person, it may issue such directions;- (a) To any person or class of persons referred to in section 12 or associated with the securities market; or (b) To any company in respect of matters specified in section 11A as may be appropriate in the interests of investors in securities and the securities market 2.4 INVESTIGATIONS BY SEBI Section 11C (1) Where the Board has reasonable ground to believe that – a. The transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or b. Any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by the Board there under. It may, at any time by order in writing, direct any person (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs of such intermediary or persons associated with the securities market and to report thereon to the Board. (2) It shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorised by it in this behalf, all the books, registers, other documents and record of or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power. (3) The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to or produce such books or registers or other documents or record before it or any person authorized by it in this behalf as it may consider necessary if the furnishing of such information or the production of such books or registers or other documents or record is relevant or necessary for the purposes of its investigation. (4) The Investigating Authority may keep in its custody any books, registers, other documents and record produced under sub-section (2) or sub-section (3) for six months and thereafter shall return the same to any intermediary or any person associated with securities market by whom or on whose behalf the books, registers, other documents and record are produced: Provided that the Investigating Authority may call for any book or register, other document and record if they are needed again: (5) Any person, directed to make an investigation under sub-section (1), examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally. (6) If any person fails without reasonable cause or refuses – a) To produce to the Investigating Authority or any person authorised by it in this behalf any book, register, other document and record which it is his duty under sub- section (2) or sub-section (3) to produce; or b) To furnish any information which it is his duty under sub-section (3) to furnish; or c) to appear before the Investigating Authority personally when required to do so under sub-section (5) or to answer any question which is put to him by the Investigating Authority in pursuance of that sub-section; or d) To sign the notes of any examination referred to in sub-section (7), e) He shall be punishable with imprisonment for a term which may extend to one year or with fine, which may extend to one crore rupees or with both and also with a further fine which may extend to five lakh rupees for every day after the first during which the failure or refusal continues. (7) Notes of any examination under sub-section (5) shall be taken down in writing and shall be read over to or by and signed by, the person examined and may thereafter be used in evidence against him. (8) Where in the course of investigation, the Investigating Authority has reasonable ground to believe that the books, registers, other documents and record of or relating to, any intermediary or any person associated with securities market in any manner, may be destroyed, mutilated, altered, falsified or secreted, the Investigating Authority may make an application to the Judicial Magistrate of the first class having jurisdiction for an order for the seizure of such books, registers, other documents and record. (9) After considering the application and hearing the Investigating Authority, if necessary, the Magistrate may, by order, authorize the Investigating Authority – a) To enter, with such assistance, as may be required, the place or places where such books, registers, other documents and record are kept; b) To search that place or those places in the manner specified in the order; and c) To seize books, registers, other documents and record it considers necessary for the purposes of the investigation: (10) The Investigating Authority shall keep in its custody the books, registers, other documents and record seized under this section for such period not later than the conclusion of the investigation as it considers necessary and thereafter shall return the same to the company or the other body corporate, or, as the case may be, to the managing director or the manager or any other person, from whose custody or power they were seized and inform the Magistrate of such return; Provided that the Investigating Authority may, before returning such books, registers, other documents and record as aforesaid, place identification marks on them or any part thereof. (11) Save as otherwise provided in this section, every search or seizure made under this section shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 relating to searches or seizures made under that Code. Cease and desist proceedings Section 11D. If the Board finds, after causing an inquiry to be made, that any person has violated or is likely to violate any provisions of this Act or any rules or regulations made there under, it may pass an order requiring such person to cease and desist from committing or causing such violation. 2.5 REGISTRATION CERTIFICATE BY SEBI Chapter V deals with Registration Certificate. Registration of stock broker, sub-broker, share transfer agents etc. Section 12 (1) No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act. (1.1) No depository, depository participant, custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act. (1.2) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations. (2) Every application for registration shall be in such manner and on payment of such fees as may be determined by regulations. (3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations. Provided that no order under this sub-section, shall be made unless the person concerned has been given a reasonable opportunity of being heard. Chapter VA Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities and control Section 12A No person shall directly or indirectly – a. Use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under; b. Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; c. Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made there under; d. Engage in insider trading; e. Deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made there under; f. Acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognized stock exchange in contravention of the regulations made under this Act. 2.6 PENALTIES AND ADJUDICATION Penalty for failure to furnish information, return, etc. Section 15A If any person, who is required under this Act or any rules or regulations made there under,- (a) To furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (b) To file any return or furnish any information, books or other documents within the time specified there for in the regulations, fails to file return or furnish the same within the time specified there for in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (c) To maintain books of accounts or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for failure to enter into an agreement with clients Section 15B If any person, who is registered as an intermediary and is required under this Act or any rules or regulations made there under, to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for failure to redress investors' grievances Section 15C If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for certain defaults in case of mutual funds 15D. If any person, who is - (a) Required under this Act or any rules or regulations made there under to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to a penalty of one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds or one crore rupees, whichever is less. (b) Registered with the Board as a collective investment scheme, including mutual funds, for sponsoring or carrying on any investment scheme, fails to comply with the terms and conditions of certificate of registration, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (c) Registered with the Board as a collective investment scheme including mutual funds, fails to make an application for listing of its schemes as provided for in the regulations governing such listing, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less. (d) Registered as a collective investment scheme, including mutual funds, fails to dispatch unit certificates of any scheme in the manner provided in the regulation governing such dispatch, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (e) Registered as a collective investment scheme, including mutual funds, fails to refund the application moneys paid by the investors within the period specified in the regulations, he shall be liable to pay a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (f) Registered as a collective investment scheme, including mutual funds, fails to invest money collected by such collective investment schemes in the manner or within the period specified in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for failure to observe rules and regulations by an asset management company Section 15E Where any asset management company of a mutual fund registered under this Act fails to comply with any of the regulations providing for restrictions on the activities of the asset management companies, such asset management company shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for failure in case of stock brokers Section 15F. If any person, who is registered as a stock broker under this Act, - (a) Fails to issue contract notes in the form and manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker; (b) Fails To deliver any security or fails to make payment of the amount due to the investor in the manner or within the period specified in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (c) Charges an amount of brokerage which is in excess of the brokerage specified in the regulations, he shall be liable to a penalty of one lakh rupees or five times the amount of brokerage charged in excess of the specified brokerage whichever is higher. Penalty for insider trading Section 15G. If any insider who - (i) Either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or (ii) Communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or (iii) Counsels or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information, shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. Penalty for non-disclosure of acquisition of shares and take-over Section 15H. If any person, who is required under this Act or any rules or regulations made there under, fails to- (i) Disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or (ii) Make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher. (iii) Make a public offer by sending letter of offer to the shareholders of the concerned company; or (iv) Make payment of consideration to the shareholders who sold their shares pursuant to letter of offer. Penalty for fraudulent and unfair trade practices Section 15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. Penalty for contraventions where no separate penalty has been provided 15HB Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees. Power to adjudicate 2.7 SECURITIES APPELLATE TRIBUNAL Chapter VIB deals with Establishment, Jurisdiction, Authority And Procedure Of Appellate Tribunal. Appeal to the Securities Appellate Tribunal. Section 15T (1) Save as provided in sub-section (2), any person aggrieved, a. By an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act or the rules or regulations made there under; or b. By an order made by an adjudicating officer under this Act, may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter (2) No appeal shall lie to the Securities Appellate Tribunal from an order made a. By the Board on and after the commencement of the Securities Laws (Amendment) Act, 1999; b. An adjudicating office, with the consent of the parties. (3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Board or the adjudicating officer, as the case may be, is received by him and it shall be in such form and be accompanied by such fee as may be prescribed: Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. (4) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. (5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, the parties to the appeal and to the concerned Adjudicating Officer. (6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal. Procedure and powers of the Securities Appellate Tribunal, Section 15U (1) The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice and, subject to the other provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings. (2) The Securities Appellate Tribunal shall have, for the purposes of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely: (3) (a) Summoning and enforcing the attendance of any person and examining him on oath; (b) Requiring the discovery and production of documents; (c) Receiving evidence on affidavits; (d) Issuing commissions for the examination of witnesses or documents; (e) Reviewing its decision; (f) Dismissing an application for default or deciding it ex-parte; (g) Setting aside any order of dismissal of any application for default or any order passed by it ex-parte; (h) Any other matter, which may be prescribed. (4) Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196, of the Indian Penal Code and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Right to legal representation Section 15V The appellant may either appear in person or authorise one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal. Limitation Section 15W The provisions of the Limitation Act, 1963, shall, as far as may be, apply to an appeal made to a Securities Appellate Tribunal. Civil Court not to have jurisdiction Section 15Y No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. Appeal to Supreme Court Section 15Z Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order. Provided that the Supreme Court may, if it is satisfied that the applicant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days. 2.8 PRIVATE PLACEMENT TO QUALIFIED INSTITUTIONAL BUYERS Companies who wish to raise money from capital market follow guidelines relating to disclosure, laid down by the Securities and Exchange Board of India. Some of the disclosure norms are: Details of other income if it constitutes more than ten percent of total income. All adverse event affecting the operations of the company. Any change in key managerial personnel. Risk factors specific to the project and those which are external to the company. An alternative mechanism of fund raising route for listed companies in the domestic market would be through a regulated placement to qualified institutional buyers (QIBs). As the placement would be to a set of informed investors, the disclosures and procedural stipulations would be relatively less as compared to the public issue process. This mechanism would complement the existing public issue and preferential issue mechanisms. The main features of the alternative mechanism are given hereunder: (I) Applicability a This mechanism would be applicable only to listed companies i.e. companies whose equity shares are listed in a stock exchange. b The placement of shares by listed companies through this mechanism would be treated as a private placement as it will be in compliance with the restrictions on the number of investors (i.e. not more than 49) as prescribed under Sec.67(3) of Companies Act 1956. c The aggregate of the proposed placement and all previous placements made in the same financial year (through this mechanism) in terms of placement size , shall not exceed five times the pre issue net worth as per the audited balance sheet of the last financial year. (II) Nature of Investors/ participants Only QIBs as defined in the DIP guidelines would be permitted to participate. No allotment would be permitted directly or indirectly to promoters or persons acting in concert with them. Foreign Institutional Investors, Venture Capital (VC) funds and Foreign VC funds can participate in above placement only if they have no special arrangements in the form of shareholder agreements including board representation etc. (if they do, then they must come in through the preferential route). (III) Number of investors a The company law restriction of private placements i.e. maximum of 49 investors will continue to apply. b There should be at least two investors for an issue of size up to Rs.250 crores and at least five investors for an issue of size in excess of Rs.250 crores. (IV) Allocation / Allotment a At least 10% shall be allocated / allotted to mutual funds registered with SEBI. Balance 90% shall be allocated on discretionary basis. b No single allottee shall be allotted greater than 50 per cent of the issue. (Entities belonging to the same group of investors shall be considered to be a single allottee.) (V) Lock-in requirements There will be no lock on the securities allotted under this route. However for a period of one year from the date of allotment, securities can only be transferred on the floor of the stock exchange or in a bulk / block transaction in accordance with the procedures prescribed by SEBI. (VI) Pricing The pricing requirements shall be on par with those for GDR issues, in terms of MOF guideli

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