Banking and Indian Financial System Part A Q&A || MBA

Banking and Indian Financial System

Important Concepts:

Benefits of Mutual Funds

Functions of NABARD

Short Note on Venture Capital

Functions of Stock Exchange

Importance of Commercial Bill Market

Non-Banking Finance Companies

Functions of Merchant Bankers

Financial Services in Commercial Banks

Role of Commercial Bank in the development of industry

Role of Merchant Bankers

Importance of Indian Capital Market

Role of NABARD

Growth and Development of SEBI

Difference b/w Hire purchase and Leasing

Role of Foreign Investment in India

Part A Q&A:

1. What is the importance of banking services in the development of an economy?

1. Capital Formation

Banks play an important role in capital formation, which is essential for the economic development of a country. They mobilize the small savings of the people scattered over a wide area through their network of branches all over the country and make it available for productive purposes.

Now-a-days, banks offer very attractive schemes to attract the people to save their money with them and bring the savings mobilized to the organized money market. If the banks do not perform this function, savings either remains idle or used in creating assets, which are low in scale of plan priorities.

2. Creation of Credit

Banks create credit for the purpose of providing more funds for development projects. Credit creation leads to increased production, employment, sales and prices and thereby they cause faster economic development.

3. Channelizing the Funds to Productive Investment

Banks invest the savings mobilized by them for productive purposes. Capital formation is not the only function of commercial banks. Pooled savings should be distributed to various sectors of the economy with a view to increase the productivity of the nation. Then only it can be said to have performed an important role in the economic development of the nation.

Commercial Banks aid the economic development of the nation through the capital formed by them. In India, loan lending operation of commercial banks subject to the control of the RBI. So our banks cannot lend loan, as they like.

4. Fuller Utilization of Resources

Savings pooled by banks are utilized to a greater extent for development purposes of various regions in the country. It ensures fuller utilization of resources.

5. Encouraging Right Type of Industries

The banks help in the development of the right type of industries by extending loan to right type of persons. In this way, they help not only for industrialization of the country but also for the economic development of the country. They grant loans and advances to manufacturers whose products are in great demand. The manufacturers in turn increase their products by introducing new methods of production and assist in raising the national income of the country.

6. Bank Rate Policy

Economists are of the view that by changing the bank rates, changes can be made in the money supply of a country. In our country, the RBI regulates the rate of interest to be paid by banks for the deposits accepted by them and also the rate of interest to be charged by them on the loans granted by them.

7. Bank Monetize Debt

Commercial banks transform the loan to be repaid after a certain period into cash, which can be immediately used for business activities. Manufacturers and wholesale traders cannot increase their sales without selling goods on credit basis. But credit sales may lead to locking up of capital. As a result, production may also be reduced. As banks are lending money by discounting bills of exchange, business concerns are able to carry out the economic activities without any interruption.

8. Finance to Government

Government is acting as the promoter of industries in underdeveloped countries for which finance is needed for it. Banks provide long-term credit to Government by investing their funds in Government securities and short-term finance by purchasing Treasury Bills.

9. Bankers as Employers

After the nationalization of big banks, banking industry has grown to a great extent. Bank’s branches are opened in almost all the villages, which leads to the creation of new employment opportunities. Banks are also improving people for occupying various posts in their office.

10. Banks are Entrepreneurs

In recent days, banks have assumed the role of developing entrepreneurship particularly in developing countries like India. Developing of entrepreneurship is a complex process. It includes the formation of project ideas, identification of specific projects suitable to local conditions, inducing new entrepreneurs to take up these well-formulated projects and provision of counselling services like technical and managerial guidance.

Banks provide 100% credit for worthwhile projects, which is also technically feasible and economically viable. Thus commercial banks help for the development of entrepreneurship in the country.

2. What is the role of RBI in Cooperative credit to weaker section?

i.                        Target for lending to total priority sector and weaker section will continue as 40 per cent and 10 per cent, respectively, of Adjusted Net Bank Credit (ANBC) or credit equivalent of off-balance sheet exposure, whichever is higher, as hitherto.

ii.                        Agriculture: Distinction between direct and indirect agriculture is dispensed with.

iii.                        Bank loans to food and agro processing units will form part of Agriculture.

iv.                        Medium Enterprises, Social Infrastructure and Renewable Energy will form part of priority sector.

v.                        A target of 7.5 per cent of ANBC or credit equivalent of off-balance sheet exposure, whichever is higher, has     been prescribed for Micro Enterprises.

vi.                        Education: Distinction between loans for education in India and abroad is dispensed with.

vii.                        Micro Credit ceases to be a separate category under priority sector.

viii.                        Loan limits for housing loans qualifying under priority sector have been revised.

ix.                        Priority Sector assessment will be monitored through quarterly and annual statements.

3. What do you mean by non- Banking Finance Company?(Guide pgno 24)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

4. Describe the different kinds of mutual funds?

> Open-ended funds

In an open-ended mutual fund, an investor can invest or enter and redeem or exit at any point of time. It does not have a fixed maturity period.

> Close-ended funds

Close-ended mutual funds have a fixed maturity date. An investor can only invest or enter in these type of schemes during the initial period known as the New Fund Offer or NFO period. His/her investment will automatically be redeemed on the maturity date. They are listed on stock exchange(s).

Let's take a look at the various types of equity and debt mutual funds available in India:

1. Equity or growth schemes

These are one of the most popular mutual fund schemes. They allow investors to participate in stock markets. Though categorised as high risk, these schemes also have a high return potential in the long run. They are ideal for investors in their prime earning stage, looking to build a portfolio that gives them superior returns over the long-term. Normally an equity fund or diversified equity fund as it is commonly called invests over a range of sectors to distribute the risk.

Equity funds can be further divided into three categories:

>  Sector-specific funds:

These are mutual funds that invest in a specific sector. These can be sectors like infrastructure, banking, mining, etc. or specific segments like mid-cap, small-cap or large-cap segments. They are suitable for investors having a high risk appetite and have the potential to give high returns.

> Index funds:

Index funds are ideal for investors who want to invest in equity mutual funds but at the same time don't want to depend on the fund manager. An index mutual fund follows the same strategy as the index it is based on.

For example, if an index fund follows the BSE Index as the replicating index and if it has a 20% weightage in let's say Stock A, then the index fund will also invest 20% of its assets in Stock A.

Index funds promise returns in line with the index they mirror. Further, they also limit the loss to the proportional loss of the index they follows, making them suitable for investors with a medium risk appetite.

> Tax saving funds:

These funds offer tax benefits to investors. They invest in equities and are also called Equity Linked Saving Schemes (ELSS). These type of schemes have a 3 year lock-in period. The investments in the scheme are eligible for tax deduction u/s 80C of the Income-Tax Act, 1961.

2. Money market funds or liquid funds:

These funds invest in short-term debt instruments, looking to give a reasonable return to investors over a short period of time. These funds are suitable for investors with a low risk appetite who are looking at parking their surplus funds over a short-term. These are an alternative to putting money in a savings bank account.

3. Fixed income or debt mutual funds:

These funds invest a majority of the money in debt - fixed income i.e. fixed coupon bearing instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return outlook and are ideal for investors with a low risk appetite looking at generating a steady income. However, they are subject to credit risk.

4. Balanced funds:

As the name suggests, these are mutual fund schemes that divide their investments between equity and debt. The allocation may keep changing based on market risks. They are more suitable for investors who are looking at a combination of moderate returns with comparatively low risk.

5. Hybrid / Monthly Income Plans (MIP):

These funds are similar to balanced funds but the proportion of equity assets is lesser compared to balanced funds. Hence, they are also called marginal equity funds. They are especially suitable for investors who are retired and want a regular income with comparatively low risk.

6. Gilt funds:

These funds invest only in government securities. They are preferred by investors who are risk averse and want no credit risk associated with their investment. However, they are subject to high interest rate risk.

5. Write a short note on venture capital?

‘Venture Capital’ is an important source of finance for those small and medium- sized firms, which have very few avenues for raising funds. Although such a business firm may possess a huge potential for earning large profits in the future and establish itself into a larger enterprise. But the common investors are generally unwilling to invest their funds in them due to risk involved in these types of investments. In order to provide financial support to such entrepreneurial talent and business skills, the concept of venture capital emerged. In a way, venture capital is a commitment of capital, or shareholdings, for the formation and setting-up of small scale enterprises at the early stages of their lifecycle.

Features of Venture Capital

1) For New Entrant: Venture Capital investment is generally made in new enterprises that use new technology to produce new products, in expectation of high gains or sometimes, spectacular returns.
2) Continuous Involvement: Venture capitalists continuously involve themselves with the client’s investments, either by providing loans or managerial skills or any other support.
3) Mode of Investment: Venture capital is basically an equity financing method, the investment being made in relatively new companies when it is too early to go to the capital market to raise funds. In addition, financing also takes the form of loan finance/ convertible debt to ensure a running yield on the portfolio of the venture capitalists.
4) Long-term Capital: The basic objective of a venture capitalist is to make a capital gain on equity investment at the time of exit, and regular return on debt financing. It is a long-term investment in growth- oriented small/medium firms. It is a long-term capital that is an injected to enable the business to grow at a rapid pace, mostly from the start-up stage.
5) Hands-On Approach: Venture capital institution take active part in providing value – added services such as providing business skills, etc., to investee firms. Thy do not interfere in the management of the firms nor do they acquire a majority / controlling interest in the investee firms. The rationale for the extension of hands- on management is that venture capital investments tend to be highly non- liquid.
6) High risk- return Ventures: Venture capitalists finance high risk-return ventures. Some of the ventures yield very high return in order to compensate for the heavy risks related to the ventures. Venture capitalists usually make hug capital gains at the time of exit.
7) Source of Finance: Venture capitalists usually finance small and medium- sized firms during the early stages of their development, until they are established and are able to raise finance from the conventional industrial finance market. Many of these firms are new, high technology- oriented companies.
8) Liquidity: Liquidity of venture capital investment depends on the success or otherwise of the new venture or product. Accordingly, there will be higher liquidity where the new ventures are highly successful.

Process:

Deal Origination:

Venture capital financing begins with origination of a deal. For venture capital business, stream of deals is necessary. There may be various sources of origination of deals. One such source is referral system in which deals are referred to venture capitalists by their parent organizations, trade partners, industry association, friends, etc.

Screening:

Venture capitalist in his endeavour to choose the best ventures first of all undertakes preliminary scrutiny of all projects on the basis of certain broad criteria, such as technology or product, market scope, size of investment, geographical location and stage of financing.

Evaluation:

After a proposal has passed the preliminary screening, a detailed evaluation of the proposal takes place. A detailed study of project profile, track record of the entrepreneur, market potential, technological feasibility future turnover, profitability, etc. is undertaken.

Deal Negotiation:

Once the venture is found viable, the venture capitalist negotiates the terms of the deal with the entrepreneur. This it does so as to protect its interest. Terms of the deal include amount, form and price of the investment.

Post Investment Activity:

Once the deal is financed and the venture begins working, the venture capitalist associates himself with the enterprise as a partner and collaborator in order to ensure that the enterprise is operating as per the plan.

Exit Plan:

The last stage of venture capital financing is the exit to realise the investment so as to make a profit/minimize losses. The venture capitalist should make exit plan, determining precise timing of exit that would depend on an a myriad of factors, such as nature of the venture, the extent and type of financial stake, the state of actual and potential competition, market conditions, etc.

6. Explain the general obligation and regulation of merchant banking?

Obligation # 1. Merchant Banker not to Associate with any Business other than that of the Securities Market:

No merchant banker, other than a bank or a public financial institution, who has been granted a certificate of registration under these regulations, shall [after June 30th, 1998] carry on any business other than that in the securities market.

Obligation # 2. Maintenance of Book of Accounts, Records, etc.:

Every merchant banker shall keep and maintain the following books of accounts, records and documents, namely:

(a) A copy of balance sheet as at the end of each accounting period;

(b) A copy of profit and loss account for that period:

 (c) A copy of the auditor’s report on the accounts for that period; and

(d) a statement of financial position.

Every merchant banker shall intimate to the Board the place where the books of accounts, records and documents are maintained. Without prejudice to sub-regulation (I), every merchant banker shall, after the end of each accounting period furnish to the Board copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting years when required by the Board.

Obligation # 3. Submission of Half-yearly Results:

Every merchant banker shall furnish to the Board half-yearly unaudited financial results when required by the Board with a view to monitor the capital adequacy of the merchant banker.

Obligation # 4. Maintenance of Books of Accounts, Records and other Documents:

The merchant banker shall preserve the books of accounts and other records and documents for a minimum period of five years.

Obligation # 5. Report on Steps taken on Auditor’s Report:

Every merchant banker shall within two months from the date of the auditors’ report take steps to rectify the deficiencies, made out in the auditor’s report.

Obligation # 6. Appointment of Lead Merchant Bankers:

All issues should be managed by at least one merchant banker functioning as the lead merchant banker:

Provided that, in an issue of offer of rights to the existing members with or without the right of renunciation the amount of the issue of the body corporate does not exceed rupees fifty lakhs, the appointment of a lead merchant banker shall not be essential. Every lead merchant banker shall before taking up the assignment relating to an issue, enter into an agreement with such body corporate setting out their mutual rights, liabilities and obligations relating to such issue and in particular to disclosures, allotment and refund.

Obligation # 7. Restriction on Appointment of Lead Managers:

The number of lead merchant bankers may not, exceed in case of any issue of;

Obligation # 8. Responsibilities of Lead Managers:

(1) No lead manager shall agree to manage or be associated with any issue unless his responsibilities relating to the issue mainly, those of disclosures, allotment and refund are clearly, defined, allocated and determined and a statement specifying such responsibilities is furnished to the Board atleast one month before the opening of the issue for subscription:

Provided that, where there are more than one lead merchant banker to the issue the responsibilities of each of such lead merchant banker shall clearly be demarcated and a statement specifying such responsibilities shall be furnished to the Board atleast one month before the Opening of the issue for Subscription. No lead merchant banker shall, agree to manage the issue made by anybody corporate, if such body corporate is an associate of the lead merchant banker.

Obligation # 9. Lead Merchant Banker not to Associate with a Merchant Banker without Registration:

A lead merchant banker shall not be associated with any issue if a merchant banker who is not holding a certificate is associated with the issue.

Obligation # 10. Underwriting Obligations:

In respect of every issue to be managed, the lead merchant banker holding a certificate under Category I shall accept a minimum underwriting obligation of five per cent of the total underwriting commitment or rupees twenty-five lacs, whichever is less:

Provided that, if the lead merchant banker is unable to accept the minimum underwriting obligation, that lead merchant banker shall make arrangement for having the issue underwritten to that extent by a merchant banker associated with the issue and shall keep the Board informed of such arrangement.

Obligation # 11. Submission of Due Diligence Certificate:

The lead merchant banker, who is responsible for verification of the contents of a prospectus or the letter of offer in respect of an issue and the reasonableness of the views expressed therein, shall submit to the Board atleast two weeks prior to the opening of the issue for subscription, a due diligence certificate in Form C.

Obligation # 12. Documents to be Furnished to the Board:

(1) The lead manager responsible for the issue shall furnish to the Board, the following documents, namely:

 (i) Particulars of the issue;

(ii) Draft prospectus or where there is an offer to the existing shareholders, the draft letter of offer;

(iii) Any other literature intended to be circulated to the investors, including the shareholders; and

(iv) Such other documents relating to prospectus or letter of offer, as the case may be.

The documents referred to in sub-regulation (1) shall be furnished atleast two weeks prior to date of filing of the draft prospectus or the letter of offer, as the case may be, with the Registrar of Companies or with the Regional Stock Exchanges, or with both.The lead manager shall ensure that the modifications and suggestions, if any, made by the Board on the draft prospectus or the letter of offer, as the case may be, with respect to information to be given to the investors are incorporated therein.

Obligation # 13. Continuance of Association of Lead Manager with an Issue:

The lead manager undertaking the responsibility for refunds or allotment of securities in respect of any issue shall continue to be associated with the issue till the subscribers have received the share or debenture certificates of refund or excess application money. Provided that where a person other than the lead manager is entrusted with the refund or allotment of securities in respect of any issue, the lead manager shall continue to be responsible for ensuring that such other person discharges the requisite responsibilities in accordance with the provisions of the Companies Act and the listing agreement entered into by the body corporate with the stock exchange.

Obligation # 14. Acquisition of Shares Prohibited:

No merchant banker or any of its directors, partner or manager or principal officer shall either on their respective accounts or through their associates or relatives enter into any transaction in securities of bodies corporate on the basis of unpublished price sensitive information obtained by them during the course of any professional assignment either from the clients or otherwise.

Obligation # 15. Information to the Board:

Every merchant banker shall submit to the Board complete particulars of any transaction for acquisition of securities of anybody corporate whose issue is being managed by that merchant banker within fifteen days from the date of entering into such transaction.

Obligation # 16. Disclosures to the Board:

A merchant banker shall disclose to the Board as and when required, the following information, namely:

(i) His responsibilities with regard to the management of the issue;

(ii) Any change in the information or particulars previously furnished, which have a bearing on the certificate granted to it;

(iii) The names of the body corporate whose issues he has managed or has been associated with;

(iv) The particulars relating to breach of the capital adequacy requirement;

(v) Relating to his activities as a manager, underwriter, consultant or adviser to an issue as the case may be.

Obligation # 17. Appointment of Compliance Officer:

Every merchant banker shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc. issued by the Board or the Central Government and for redressal of investors’ grievances. The compliance officer shall immediately and independently report to the Board any non-compliance observed by him and ensure that the observations made or deficiencies pointed out by the Board on/in the draft prospectus or the Letter of Offer as the case may be, do not recur.

Obligation # 18. Board’s right to Inspect:

The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents of the merchant banker for any of the following purposes:

(a) To ensure that the books of account are being maintained in the manner required.

(b) That the provisions of the Act, rules, regulations are being complied with;

(c) To investigate into the complaints received from investors, other merchant bankers or any other person on any matter having a bearing on the activities of the merchant banker, and

(d) To investigate suo moto in the interest of securities business or investors interest into the affairs of the merchant banker.

Obligation # 19. Obligations of Merchant Banker on Inspection by the Board:

It shall be the duty of every director, proprietor, partner, officer and employee of the merchant banker, who is being inspected, to produce to the inspecting authority such books, accounts and other documents in his custody or control and furnish him with the statements and information relating to his activities as a merchant banker within such time as the inspecting authority may require.

7. How does the SBI differ from other nationalized banks in India?

Ownership

SBI is almost wholly owned by the RBI, while the subsidiary banks are almost owned by the SBI. On the other hand nationalised banks are almost wholly owned by the Government of India. 

Functioning

The SBI besides carrying out its normal banking functions also acts as an agent of the RBI According to the Section 45 of the RBI Act, 1934, “The Reserve Bank shall appoint the State Bank as its sole agent at all places in India where it does not have any office or branch of its banking department and there is a branch of the State Bank or branch of a subsidiary bank. This privilege has not been conferred upon the nationalised banks. However, after the enforcement of the Banks Laws (Amendment) Act, 1983, the RBI can appoint any nationalised bank to act as an agent at all places where it has a branch for the following purposes:

1. Paying, receiving, collecting and remitting money, bullion and securities on behalf of the Government in India and,
2. Undertaking and transacting any other business entrusted by the Reserve Bank from time to time.
Organizational Structure The organisational structure of the State Bank of India is somewhat different from the other nationalised banks. It has a well-defined system of decentralisation of authority. The whole country has been divided into nine circles for administrative control purposes The Head Offices of each circle is known as Local Head Office with a Local Board of Directors which has a statutory status. Each circle has been further divided into a number of Regions. There is a Chief General Manager (formerly known as the Secretary and Treasurer) for each Circle He is the Chief Executive for his circle and has under him Regional Managers for the different regions in his circle. The Chief General Manager enjoys vast powers for control over branches and has also extensive discretionary powers regarding loans and advances. All this has resulted in taking the operational control nearer to the area of operation. The Bank is further trying to strengthen the Regional Offices so as to reduce the span of control of the controlling authority (i.e., the Chief General Manager), leading to further decentralisation.

Salary and Perks

There are 4 additional increments in SBI at the time of joining itself as compared to any other bank. Hence, you get around INR 3700 per month (Basic+DA) more salary in SBI. Perks given to officers in SBI are much more than any other bank.

Lease House Facility

Lease house facilities are much better in SBI as it has much higher rent ceilings as compared to other banks.

Exposure

SBI PO gets much wider range of exposure as compared to PO of any other bank, ranging from specialized outfits on credit, forex to treasury etc.

Opportunities for Foreign Postings

There is always a possibility of foreign posting as PO in SBI, with the increasing global presence of SBI and its focus on global presence.

8. Discuss the functions of NABARD? (Guide- 18, 19)

Credit Functions:

• Framing policy and guidelines for rural financial institutions.
• Providing credit facilities to issuing organizations
• Monitoring the flow of ground level rural credit.
• Preparation of credit plans annually for all districts for identification of credit potential.

Development Functions:

• Help cooperative banks and Regional Rural Banks to prepare development actions plans for themselves.
• Help Regional Rural Banks and the sponsor banks to enter into MoUs with state governments and cooperative banks to improve the affairs of the Regional Rural Banks.
• Monitor implementation of development action plans of banks.
• Provide financial support for the training institutes of cooperative banks, commercial banks and Regional Rural Banks.
• Provide financial assistance to cooperative banks for building improved management information system, computerisation of operations and development of human resources.

Supervisory Functions:

• Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.
• Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
• Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs).
• Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks and Regional Rural Banks (RRBs).

9. Outline the Guidelines issued by RBI prescribing the prudential norms of NBFC?

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC. The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.

10. What are the features of SEBI guidelines regarding Mutual Funds?

a. Categorization of schemes into five groups – Equity, Debt, Hybrid, Solution Oriented, Others

b. To ensure uniformity, large, mid and small cap has been defined clearly

c. There is a lock-in period specified for solution-oriented schemes

d. Permission of only one scheme in each category, except for Index Funds/ Exchange Traded Funds (ETF), Sectoral/Thematic Funds and Funds of Funds.

11. What are the recent changes regarding the registration of Merchant Bankers?

For registration as a Merchant Banker, an applicant is required to pay a non-refundable application fee of Rs.50,000/- by way of demand draft drawn in favour of ‘Securities and Exchange Board of India’, payable at Mumbai. The application in Form A along with Additional Information Sheet (available under ‘Application for registration / renewal of intermediaries > Merchant Banker- How to apply’ on SEBI Website: www.sebi.gov.in) need to be submitted to the below mentioned address: Market Intermediaries Regulations and Supervision Department Division 5 Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, ‘G’ Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051.

12. What are the obligations of Listed Companies?

1. Material disclosures

The 2015 Regulations have rearranged and augmented the existing disclosure obligations of a listed entity. Regulation 30 which corresponds to Clause 36 of the equity listing agreement requires every listed entity to make such event based and information disclosures which are "material" in the opinion of the board of directors.

2. Stricter governance requirements on board of directors

The 2015 Regulations in certain instances moves beyond mere alignment with governance requirements and thresholds as provided under the Companies Act and adopts a stricter approach towards the composition of board, its committees and the duties of directors. It tends to retain the higher requirements of Clause 49 of the equity listing agreement as well as amends some of the voluntary guidelines, to make them mandatory.

3. Related Party Transactions

Related party transactions ("RPTs") continue to garner constant attention for Indian companies. The Companies Act initially mandated special resolution for specific RPTs exceeding prescribed threshold. The Ministry of Corporate Affairs through an amendment in 2015 replaced the requirement of special resolution by an ordinary resolution. It also issued a circular⁷ clarifying that only such related parties who are related to the particular transaction should abstain from voting on the proposed resolution.

4. Corporate governance for listed start-ups

In August 2015, SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to enable listing of certain categories of start-ups⁸ without undergoing an initial public offer. The underlying objective was to liberalize the stricter listing compliances and disincentives start-ups opting to list on foreign stock exchanges. These start-ups must alter their structure into public companies prior to listing. Further, they can raise capital only through rights issue and private placement (which were otherwise available under Companies Act) and cannot invite retail investments or make any public offer. 

13. The SEBI is trying to integrate functioning of stock exchanges for better investor service. Discuss.

• the exchange provides a fair, equitable and growing market to investors
• the exchange’s organisation, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed thereunder
• the exchange has implemented the directions, guidelines and instructions issued by the SEBI from time to time
• The exchange has complied with the conditions, if any, imposed on it at the time of renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.

Based on the observations/suggestions made in the inspection reports, the exchanges are advised to send a compliance report to SEBI within one month of the receipt of the inspection report by the exchange and thereafter quarterly reports indicating the progress made by them in implementing the suggestions contained in the inspection report. The SEBI nominee directors and public representatives on the governing board/council of management of the stock exchanges also pursue the matters in the meetings of the governing board/council of management. If the performance of the exchanges whose renewal of recognition is due, is not found satisfactory, the SEBI grants further recognition for a short period only, subject to fulfilment of certain conditions.

14. Write a note on evolution of Commercial Banking?

The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta. British India at the time established three Presidency banks, namely,

1.      Bank of Bengal (established in 1809)

2.      Bank of Bombay (established in 1840)

3.      Bank of Madras (established in 1843)

In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a bankers’ bank and a banker to the Government. The Imperial Bank of India was established mainly with European shareholders. After the establishment of the Reserve Bank of India (RBI) as the central bank of the country in 1935, the role of the Imperial Bank of India came to an end. Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. However, the increasing diversification of the Indian economy, the range of services extended by commercial banks. Currently, commercial banks in India are categorised into five different groups according to their ownership and/or nature of operation:

1.      State Bank of India and its Associates

2.      Nationalised Banks

3.      Private Sector Banks

4.      Foreign Banks

5.      Regional Rural Banks

15. What are the conditions for recognition of a stock exchange?

(i)		the qualifications for membership of stock exchanges;
(ii)		the manner in which contracts shall be entered into and enforced as between members;
(iii)		the representation of the Central Government on each of the stock exchange by such number of persons not exceeding three as the Central Government may nominate in this behalf; and
(iv)		the maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by the Central Government.

(3) Every grant of recognition to a stock exchange under this section shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office as of the stock exchange is situate, and such recognition shall have effect as from the date of its publication in the Gazette of India.

(4) No application for the grant of recognition shall be refused except after giving an opportunity to the stock exchange concerned to be heard in the matter; and the reasons for such refusal shall be communicated to the stock exchange in writing.

(5) No rules of a recognised stock exchange relating to any of the matters specified in sub-section (2) of section 3 shall be amended except with the approval of the Central Government.

16. Explain the different ways of making fresh issues of securities?

Public Issue

This is the most common way to issue securities to the general public. Through an IPO, the company is able to raise funds. The securities are listed on a stock exchange for trading purposes.

Rights Issue

When a company wants to raise more capital from existing shareholders, it may offer the shareholders more shares at a price discounted from the prevailing market price. The number of shares offered is on a pro-rata basis. This process is known as a Rights Issue.

Preferential Allotment

When a listed company issues shares to a few individuals at a price that may or may not be related to the market price, it is termed a preferential allotment. The company decides the basis of allotment and it is not dependent on any mechanism such as pro-rata or anything else.

Secondary Market

The secondary market is where existing shares, debentures, bonds, etc. are traded among investors. Securities that are offered first in the primary market are thereafter traded on the secondary market. The trade is carried out between a buyer and a seller, with the stock exchange facilitating the transaction. In this process, the issuing company is not involved in the sale of their securities.

Composite Issue: A composite issue is one in which an already listed company offers shares on the public-cum-rights basis and makes concurrent allotment of the shares.

Bonus Issue: As the name itself suggests, it is the free additional shares distributed to the current shareholders in the proportion of the fully paid-up equity shares held by them on a particular date. The issue of these shares is made out of the company’s free reserves or securities premium account.

17. Difference between equity shares and preference shares?

Points of difference	Equity Shares	Preference Shares
1. Term of financing	Used as a method of long term financing	Used for both long term and medium term financing.
2. Nature of return	Rate of return is fluctuating, depending upon the earning	Dividend at fixed rate may be paid or accumulated.
3. Owners	Equity shareholders are the owners. They have voting rights.	These shareholders are not owners. They have no voting rights.
4. Reedeemability	They are not subject to redemption during the lifetime of the company.	It can be redeemed after achieving the purpose or at the end of a certain period.
5. Type of Investors	Suitable for those investors who are adventurous by nature.	It has appeal for relatively less adventurous investors.
6. Right of receiving dividend	Residual claimant. Rank next to preference shares.	Entitled for first preference
7. Right of receiving back invested capital during liquidation.	Entitled for first preference	Entitled for first preference
8. Financial burden	Payment of equity dividends is optional. It is dependent on the discretion of the Board of Directors. Therefore there is no fixed financial commitment.	Payment of preference dividend is a fixed financial commitment.
9. Voting rights	Enjoy voting rights	Do not enjoy voting rights
10. Reduction of capital	By reorganization	By repayment
11. Denomination	Generally of lower denomination.	Generally of higher denomination.
12. Type of investors.	Even small investors can invest because of the lower denomination.	Preferred by medium and large investors. Small investors would find it difficult to invest because of the higher denomination.
13. Borrowing capacity	Strengthens borrowing capacity.	Reduces borrowing capacity.
14. Capitalization	There are chances for over-capitalisation.	Lesser chances for over-capitalization.

18. Comment on modern customer relationship and bankers?

The Major Benefits of Analytical CRM to Banks are

 1. Customer Retention 2. Fraud Detection 3. Optimizing marketing efforts as per customer life time value 4. Credit Risk Analysis 5. Segmentation and targeting 6. Development of customized new products matching the specific preferences and priorities of customers.

CRM to banks are

1. Providing efficient customer communication across a variety of channels

2. Online services to reduce customer service costs

3. Providing access to customer data while interacting with customers.

Thus, CRM can be understood as a catalyst enabling transformation of Banking from Traditional Transactional banking to Relationship Banking by use of technology.

19. Define Assets and Liabilities Management?

Meaning of Asset Liability Management (ALM):

Asset Liability Management in practical terms amounts to management of total balance sheet items, its size and quality. It involves conscious decisions with regard to asset liability structure in order to maximize interest earnings within the frame work of perceived risk with quantification of risk.

ALM encompasses the process of managing Net interest Margin (NIM), within the overall risk. It calls for an integrated approach to decision making with regard to type (demand/time maturities) and size (portfolios) of financial assets and liabilities and their mix and volumes (turnover). The success of ALM hinges on matching of assets and liabilities in terms of Rate and maturity to optimize the yield and maintain/improve the NIM.

A sound ALM system for the bank should include:

1. Interest rate movement and outlook,

2. Pricing of assets and liabilities,

3. Review of investment portfolio and credit risk management,

4. Review of investment of foreign exchange operations,

5. Management of liquidity Risk,

6. Management of NIM and of balance sheet ratios, and 

7. Formulation of budgets and operational planning.

20. What are specialised financial institutions and give examples?

1. Specialised Financial Institutions (SFIs):- are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.
• IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme' . Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialisation of indigenous technology for new processes, products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects.

• ICICI Venture Funds Ltd:- formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.

• Tourism Finance Corporation of India Ltd. (TFCI):- is a specialised financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries for inland water transport, etc.

21. What is rural financing and why it is important?

Rural Finance is one of the biggest agricultural, commercial and industrial finance brokerage company’s operating throughout England, Scotland, Wales and Northern Ireland. Getting finance is the corner stone of every business and because every business is different Rural Finance offers bespoke services tailored to each company’s needs.

Rural financing is provided through cooperatives and self-help groups. This strategy is highly beneficial to individuals associated with non-market enterprises or household businesses. Whether such institutions are governmental or NGOs, the self-help group can make them profitable by availing resources. People from rural areas in India have shown significant interest in modern methods of farming. They also seek other areas of investment such as the stock market or chit funds. Self-help groups and micro financing in combination with rural banking, cooperatives, entrepreneur agencies, and small-scale investments present a safe place for people to invest. Microfinance is not limited to loans and deposits because it has wide socioeconomic impacts on health, education, and poverty alleviation. Self-help group consists of groups of individuals that take up different economic activities in combination. The activities taken up by these groups include poultry farming, food processing, and vegetable selling among others in the agricultural supply chain.

22. Describe the role of FDI in India? (Guide- 41)

FDI plays an important role in the economic development of a country. The capital inflow of foreign investors allows strengthening infrastructure, increasing productivity and creating employment opportunities in India. Additionally, FDI acts as a medium to acquire advanced technology and mobilize foreign exchange resources. Availability of foreign exchange reserves in the country allows RBI (the central banking institution of India) to intervene in the foreign exchange market and control any adverse movement in order to stabilize the foreign exchange rates. As a result, it provides a more favourable economic environment for the development of Indian economy.

1) Helps in Balancing International Payments:

FDI is the major source of foreign exchange inflow in the country. It offers a supreme benefit to country’s external borrowings as the government needs to repay the international debt with the interest over a particular period of time. The inflow of foreign currency in the economy allows the government to generate adequate resources which help to stabilize the BOP (Balance of Payment).

2) FDI boosts development in various fields:

For the development of an economy, it is important to have new technology, proper management and new skills. FDI allows bridging of the technology gap between foreign and domestic firms to boost the scale of production which is beneficial for the betterment of Indian economy. Thus, FDI is also considered an asset to the economy.

3) FDI & Employment:

FDI allows foreign enterprises to establish their business in India. The establishment of these enterprises in the country generates employment opportunities for the people of India. Thus, the government facilitates foreign companies to set up their business entities in the country to empower Indian youth with new and improved skills.

4) FDI encourages export from host country:

Foreign companies carry a broad international marketing network and marketing information which helps in promoting domestic products across the globe. Hence, FDI promotes the export-oriented activities that improve export performance of the country.

Apart from these advantages, FDI helps in creating a competitive environment in the country which leads to higher efficiency and superior products and services.

23. Write a note on International Capital Market?

A capital market is a system that allocates financial resources in the form of debt and equity according to their most efficient uses. Its main purpose is to provide a mechanism to borrow or invest money efficiently.

MAIN COMPONENTS OF THE INTERNATIONAL CAPITAL MARKET

A. International Bond Market

Consists of all bonds sold by issuing companies, governments, and other organizations outside their own countries. Buyers include medium- to large-size banks, pension funds, mutual funds, and governments.

1. Types of International Bonds

a. Eurobond Issued outside the country in whose currency it is denominated (e.g., Issued in Venezuela in U.S. dollars, and sold in Britain, France, and Germany). It accounts for 75-80% of all international bonds. Absence of regulation reduces the cost of issuing a bond but increases its risk.

b. Foreign Bond Sold outside borrower’s country and denominated in currency of country in which it is sold (e.g., Yen-denominated bond issued by German carmaker BMW in Japan’s bond market). It accounts for 20-25% of all international bonds. Issuers must meet certain regulatory requirements and disclose details about company activities, owners, and upper management.

2. Interest Rates: A Driving Force

a. Borrowers from newly industrialized and developing countries borrow money from nations where interest rates are lower.

b. Investors in developed countries buy bonds in newly industrialized and developing nations to obtain a higher return.

c. Many emerging countries see the need to develop their own national markets. Volatility in currency market hurts projects that earn funds in those currencies and pay debts in dollars.

B. International Equity Market

Consists of all stocks bought and sold outside the issuer’s home country. Companies and governments issue equity and buyers include other companies, banks, mutual funds, pension funds, and individuals.

1. Spread of Privatization

a. A single privatization often places billions of dollars of new equity on stock markets.

b. Increased privatization in Europe is expanding worldwide equity. European Union integration has made investors willing to invest in stocks from other European nations.

2. Economic Growth in Developing Countries

a. Growth in newly industrialized and developing countries contributes to growth in the international equity market.

b. Because of a limited supply of funds in emerging economies, the international equity market is a major source of funding.

3. Activity of Investment Banks

a. Investment banks facilitate the sale of stock worldwide by bringing together sellers and large potential buyers.

b. Becoming more common than listing a company’s shares on another country’s stock exchange.

4. Advent of Cyber markets

a. Stock markets that have no central geographic location, but consist of online global trading activities that allow listing of stocks worldwide for electronic 24-hour trading.

C. Eurocurrency Market (PPT #9)

1. All the world’s currencies banked outside their countries of origin are called Eurocurrency and trade on the Eurocurrency market (e.g., U.S. dollars in Tokyo are called Eurodollars. British pounds in New York are called Euro pounds). Characterized by large transactions involving only the largest companies, banks, and governments.

2. Four Sources of Deposits:

• Governments with excess funds from prolonged trade surplus.

• Commercial banks with excess currency.

• International companies with excess cash.

• Extremely wealthy individuals.

3. Eurocurrency market is valued at around $6 trillion, with London accounting for about 20 percent of all deposits.

4. Appeal of the Eurocurrency Market

a. Complete absence of regulation lowers costs. Banks charge borrowers less and pay investors more but still earn profit.

b. Low transaction costs because transactions are large.

c. Interbank interest rates are interest rates that the world’s largest banks charge one another for loans. London Interbank Offer Rate (LIBOR) is the interest rate charged by London banks to other large banks borrowing Eurocurrency. London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits.

5. Downside of Eurocurrency market is greater risk due to a lack of government regulation. Still, Eurocurrency transactions are fairly safe because of the size of the banks involved.

24. What is Crossing Cheque? Explain the types of Crossing?

Crossing of a cheque is nothing but instructing the banker to pay the specified sum through the banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the payee. Hence, it is not instantly en-cashed by the holder presenting the cheque at the bank counter. If any cheque contains such an instruction, it is called a crossed cheque. The crossing of a cheque is done by making two transverse parallel lines at the top left corner across the face of the cheque.

Types of Crossing

The way a cheque is crossed specified the banker on how the funds are to be handled, to protect it from fraud and forgery. Primarily, it ensures that the funds must be transferred to the bank account only and not to encash it right away upon the receipt of the cheque. There are several types of crossing

1.      General Crossing: When across the face of a cheque two transverse parallel lines are drawn at the top left corner, along with the words & Co., between the two lines, with or without using the words not negotiable. When a cheque is crossed in this way, it is called a general crossing.

2.      Restrictive Crossing: When in between the two transverse parallel lines, the words ‘A/c payee’ is written across the face of the cheque, then such a crossing is called restrictive crossing or account payee crossing. In this case, the cheque can be credited to the account of the stated person only, making it a non-negotiable instrument.

3.      Special Crossing: A cheque in which the name of the banker is written, across the face of the cheque in between the two transverse parallel lines, with or without using the word ‘not negotiable’. This type of crossing is called a special crossing. In a special crossing, the paying banker will pay the sum only to the banker whose name is stated in the cheque or to his agent. Hence, the cheque will be honoured only when the bank mentioned in the crossing orders the same.

4.      Not Negotiable Crossing: When the words not negotiable is mentioned in between the two transverse parallel lines, indicating that the cheque can be transferred but the transferee will not be able to have a better title to the cheque.

5.      Double Crossing: Double crossing is when a bank to whom the cheque crossed specially, further submits the same to another bank, for the purpose of collection as its agent, in this situation the second crossing should indicate that it is serving as an agent of the prior banker, to whom the cheque was specially crossed.

The crossing of a cheque is done to ensure the safety of payment. It is a well-known mechanism used to protect the parties to the cheque, by making sure that the payment is made to the right payee. Hence, it reduces fraud and wrong payments, as well as it protects the instrument from getting stolen or en-cashed by any unscrupulous individual.

25. Explain the functions of central bank?

(i) Bank of issue:

Possesses an exclusive right to issue notes (currency) in every country of the world. In the initial years of banking, every bank enjoyed the right of issuing notes. However, this led to a number of problems, such as notes were over-issued and the currency system became disorganized. Therefore, the governments of different countries authorized central banks to issue notes. The issue of notes by one bank has led to uniformity in note circulation and balance in money supply.

 (ii) Government’s banker, agent, and advisor:

Implies that a central bank performs different functions for the government. As a banker, the central bank performs banking functions for the government as commercial banks performs for the public by accepting the government deposits and granting loans to the government. As an agent, the central bank manages the public debt, undertakes the payment of interest on this debt, and provides all other services related to the debt.

 (iii) Custodian of cash reserves of commercial banks:

Implies that the central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain amount of public deposits as cash reserve, with the central bank, and other part is kept with commercial banks themselves.

 (iv) Custodian of international currency:

Implies that the central bank maintains a minimum reserve of international currency. The main aim of this reserve is to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.

 (v) Bank of rediscount:

Serve the cash requirements of individuals and businesses by rediscounting the bills of exchange through commercial banks. This is an indirect way of lending money to commercial banks by the central bank. Discounting a bill of exchange implies acquiring the bill by purchasing it for the sum less than its face value.

 (vi) Lender of last resort:

Refer to the most crucial function of the central bank. The central bank also lends money to commercial banks. Instead of rediscounting of bills, the central bank provides loans against treasury bills, government securities, and bills of exchange.

(vii) Bank of central clearance, settlement, and transfer:

Implies that the central bank helps in settling mutual indebtness between commercial banks. Depositors of banks give checks and demand drafts drawn on other banks. In such a case, it is not possible for banks to approach each other for clearance, settlement, or transfer of deposits.

 (viii) Controller of Credit:

Implies that the central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. For instance, the central bank can influence the deposits of commercial banks by performing open market operations and making changes in CRR to control various economic conditions.

26. Explain the services of IBRD?

Technical Assistance - The World Bank Group can provide professional technical advice that supports legal, policy, management, governance and other reforms needed for a country's development goals. Our wide-ranging knowledge and skills are used to help countries build accountable, efficient public sector institutions to sustain development in ways that will benefit their citizens over the long term. Bank staff offer advice and support governments in the preparation of documents, such as draft legislation, institutional development plans, country-level strategies, and implementation action plans. We can also assist governments to shape or put new policies and programs in place. 

Reimbursable Advisory Services (RAS) - Through RAS, the Bank can provide clients access to customized technical assistance on a reimbursable basis, either as a stand-alone or to complement an existing program. This allows us to provide advisory services that the client demands, but that the Bank cannot fund in full within the existing budget envelope. RAS programs have been used in more than 70 countries since the 1970s. World Bank member countries of all income levels can access RAS. Clients can be countries and government entities, but also states and municipalities, state-owned enterprises, civil society organizations, and multilateral agencies. RAS brochure with project examples

Economic and Sector Work - In collaboration with country clients and development partners, Bank country staff gather and evaluate information (data, policies and statistics) about the existing economy, government institutions or social services systems. This data provides a starting point for policy and strategic discussions with borrowers and helps enhance a country's capacity and knowledge. Studies and analytical reports help us support clients to plan and implement effective development programs and projects.

Donor Aid Coordination
 - The World Bank Group acts on occasion as a coordinator for organized regular interaction among donors (governments, aid agencies, humanitarian groups, foundations, development banks). Activities range from simple information sharing and brainstorming, to co-financing a particular project, to joint strategic programming in a country or region. It also includes the preparation of donor coordination events such as consultative group meetings (joint meetings of partners) focused on a particular issue or country. Other partnership information.

27. Explain the objectives of Monetary Policy in India?

i. To Regulate Money Supply in the Economy:

Money supply includes both money in circulation and credit creation by banks. Monetary policy is farmed to regulate the money supply in the economy by credit expansion or credit contraction. By credit expansion (giving more loans), the money supply can be expanded. By credit contraction (giving less loans) money supply can be decreased.

ii. To Attain Price Stability:

Another major objective of monetary policy in India is to maintain price stability in the country. It implies Control over inflation. Price level, is affected by money supply. Monetary policy regulates money supply to maintain price stability.

iii. To promote Economic Growth:

An important objective of monetary policy is to make available necessary supply of money and credit for the economic growth of the country. Those sectors which are quite significant for the economic growth are provided with adequate availability of credit.

iv. To Promote saving and Investment:

By regulating the rate of interest and checking inflation, monetary policy promotes saving and investment. Higher rates of interest promote saving and investment.

v. To Control Business Cycles:

Boom and depression are the main phases of business cycle. Monetary policy puts a check on boom and depression. In period of boom, credit is contracted, so as to reduce money supply and thus check inflation. In period of depression, credit is expanded, so as to increase money supply and thus promote aggregate demand in the economy.

vi. To Promote Exports and Substitute Imports:

By providing concessional loans to export oriented and import substitution units, monetary policy encourages such industries and thus help to improve the position of balance of payments.

vii. To Manage Aggregate Demand:

Monetary authority tries to keep the aggregate demand in balance with aggregate supply of goods and services. If aggregate demand is to be increased than credit is expanded and the interest rate is lowered down. Because of low interest rate, more people take loan to buy goods and services and hence aggregate demand increases and vice-verse.

viii. To Ensure more Credit for Priority Sector:

Monetary policy aims at providing more funds to priority sector by lowering interest rates for these sectors. Priority sector includes agriculture, small- scale industry, weaker sections of society, etc.

ix. To Promote Employment:

By providing concessional loans to productive sectors, small and medium entrepreneurs, special loan schemes for unemployed youth, monetary policy promotes employment.

x. To Develop Infrastructure:

Monetary policy aims at developing infrastructure. It provides concessional funds for developing infrastructure.

xi. To Regulate and Expand Banking:

RBI regulates the banking system of the economy. RBI has expanded banking to all parts of the country. Through monetary policy, RBI issues directives to different banks for setting up rural branches for promoting agricultural credit. Besides it, government has also set up cooperative banks and regional rural banks. All this has expanded banking in all parts of the country.

28. Explain the Advantages of Foreign Capital?

1. Economic Development Stimulation.
Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.

3. Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.

4. Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce.

5. Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.

6. Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.

7. Reduced Disparity Between Revenues and Costs.
Foreign direct investment can reduce the disparity between revenues and costs. With such, countries will be able to make sure that production costs will be the same and can be sold easily.

8. Increased Productivity.
The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.

9. Increment in Income.
Another big advantage of foreign direct investment is the increase of the target country’s income. With more jobs and higher wages, the national income normally increases. As a result, economic growth is spurred. Take note that larger corporations would usually offer higher salary levels than what you would normally find in the target country, which can lead to increment in income.

29. What are the objectives of National Housing Banks?

(a) To promote a sound, healthy viable and cost effective housing finance system to cater to all segments of the population and to integrate the housing finance system with the overall financial system.

(b) To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.

(c) To augment resources for the sector and channelize them for housing.

 (d) To make housing credit more affordable.

(e) To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.

(f) To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country.

(g) To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.

30. Define Financial Intermediaries. What are the types of Financial Intermediaries?

A financial intermediary is an entity that facilitates a financial transaction between two parties. Such an intermediary or a middleman could be a firm or an institution. Some examples of financial intermediaries are banks, insurance companies, pension funds, investment banks and more. One can also say that the primary objective of the financial intermediaries is to channel savings into investments. These intermediaries charge a fee for their services.\

 1. Commercial Banks.

They act as intermediary between savers and users (investment) of funds.

 2. Savings and Credit Associations

These are firms that take the funds of many savers and then give the money as a loan in form of mortgage and to other types of borrowers. They provide credit analysis services.

 3. Credit Unions

These are cooperative associations whose members have a common bond e.g employees of the same company. The savings of the member are loaned only to the members at a very low interest rate e.g. SACCOS charge p.m interest on outstanding balance of loan.

 4. Pension Funds

These are retirement schemes or plans funded by firms or government agencies for their workers. They are administered mainly by the trust department of commercial banks or life insurance companies. Examples of pension funds are NSSF, NHIF and other registered pension funds of individual firms.

 5. Life Insurance Companies

These are firms that take savings in form of annual premium from individuals and them invest, these funds in securities such as shares, bonds or in real assets. Savers will receive annuities in future.

 6. Brokers

These are people who facilitate the exchange of securities by linking the buyer and the seller. They act on behalf of members of public who are buying and selling shares of quoted companies.

 7. Investment Bankers

These are institutions that buy new issue of securities for resale to other investors.

 They perform the following functions:

1. Giving advice to the investors
2. Giving advice to firms which wants to
3. Valuation of firms which need to merge
4. Giving defensive tactics in case of forced takeover
5. Underwriting of securities.

31. Explain the issues and challenges of Indian Capital Market?

A capital market is a market for securities which can be either debt or equity, where business enterprises which includes companies and governments can raise long-term funds. In other words it is defined as a market in which money is provided for a period of more than a year.

Following are the main challenges which act as a hurdle in the growth of capital market:

1) Inflation – Inflation is the rate at which the prices for goods and services are rising and subsequently, purchasing power is falling. The inflation situation in the economy continues to be a cause of concern. Despite tightening of the monetary policy by the apex of India, RBI and other steps taken by the government, inflation continues to remain close to the double digit mark. High international oil prices, high global food prices are some of the causes of high inflation.

2) GDP – The growth figures for Indian economy are highly disappointing and highlight an unmistakable downward trend. GDP is expected to grow by ~5-6% 2012-13. Sectors like manufacturing and mining have seen a considerable erosion of growth momentum.

3) Index of Industrial Production – Weakness in industrial production trend continues to be a point of concern for the economy. The recent IIP numbers was registered below expectation. Weakness was seen with growth in the capital goods segment, intermediate goods segment and consumer goods segment which slowed down drastically during these months.

4) Population – The current population of India is over 1.23 billion, making it the second most populous country in the world after China, with over 1.35 billion people. India represents almost 17.31% of the world’s population which is a serious concern. If the trend of growth continues, the crown of the world’s most populous country will move on India from China by 2030. The population growth rate is at 1.58% with which it is predicted India would reach 1.5 billion mark by 2030.

India’s Population in 2012	1.23 billion
Population of India in 1947	350 million

5) Non uniform Tax reforms – With the non-uniformity in the tax system across the states it is a difficult task to carry out the businesses which resulted in undergrowth of the same. The different tax rates implemented in some states across pan India is a major challenge to carry out the business smoothly and also it accounts for a reason of increasing prices of goods and services.

6) Foreign Policy – Foreign investment flows into India saw a dip of about 17% in the year 2010-11 over the previous year. This dip is largely on account of a slowdown seen in case of FDI. In 2009-10, FDI inflows totalled US$ 37.7 billion which was reduced to US$ 27 billion in 2010-11. Of the top 25 sectors, 15 sectors have seen a dip in FDI flows during April – Feb 2010-11, compared to the same period in 2009-10. These sectors involve services, construction, housing and real estate, telecommunication and agricultural services, where investment flows have slowed down considerably.

7) Education and Unemployment – 9.4 % of the population is unemployed which is yet another alarming issue for the growing nation. The literacy rate in India is 74.04% as of April 2011 which constitutes of 65.46% females and 82.14% males. The literacy rate is increasing but the rate of increment is low, which again is a matter of concern.

8) Poverty – About 37 % of Indian population lies below poverty line which is a very alarming situation for a growing economy like India. The main reason for such diversity is the uneven distribution of wealth in the economy where a handful of people are the owner of maximum revenue and the majority of the population is too poor to even arrange for their daily bread.

32. Define Bank and briefly describe how technology has facilitated better serving of customers by banks?

“Banking is the business of accepting for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdraw-able by cheque, draft, and order or otherwise.” Indian Banking Regulation Act, 1949

·         E-banking: This enables the bank to deliver its services easily to its high end customers. To make the system user friendly to all clients, banks have used a Graphical User Interface (GUI) , with this software , customers can access their bank details on their own computers, make money transfers from one account to another, print  bank statements and  inquire about their financial transactions. Another technology used by banks to exchange data between the bank and clients is called Electronic Date Interchange (EDI); this software can be used to transmit business transaction in a computer-readable form. So the client on the other end will be in position to read the information clearly.

·         NRI Banking Services: This technology has been embraced in countries like India, USA, UAE, just to mention but a few.  Since many people go abroad to work, they have a need of supporting their families. So technology has made it simple for them to send money to their loved ones easily.

·         RURAL Banking:  Unlike in the past when banking was centralized in urban areas, now day’s technology has made it simple to set up banking facilities in rural areas. For example: In Africa, they have introduced Mobile money banking facilities. In this case a user in a rural area will have an account with a mobile company which is opened for free. They can then deposit money on that account via a nearby mobile money operating centre. This money can be withdrawn at any time any were in that area and they can also receive or send money using the same system.

·         Plastic money:  Credit cards or smart cards like ‘’VISA ELECTRON’’ have made the banking industry more flexible than before. With a credit card, a customer can borrow a specific amount of money from the bank to purchase any thing and the bank bills them later. In this case, they don’t have to go through the hassle of borrowing small money. Then with ‘’Smart Cards’’ like visa electron , a customer can pay for anything using that card and that money is deducted from their bank accounts automatically, they can also use the same card to deposit  or withdraw money from their accounts using an ATM machine.

·         Self-inquiry facility: Instead of customers lining up or going to the help desk, banks have provided simple self inquiry systems on all branches. A customer can use their ATM card to know  their account balance, or to get their bank statement. This saves time on both sides.

·         Remote banking: Banks have installed ATM machines in various areas; this means a customer does not have to go to the main branch to make transactions. This facility has also enabled anytime banking, because customers can use ATM machines to deposit money on their accounts. Remote banking has helped people in rural areas improve on their culture of saving money.

·         Centralized Information results to quick services: This enables banks to transfer information from one branch to another at ease.  For example, if a customer registered their account with a rural branch, they can still get details of their account while at the main bran in an urban area.

·         Signature retrieval facilities:  Technology has played a big role in reducing fraud in banks which protects its clients. For example, banks use a technology which verifies signatures before a customer’s withdraws large sums of money on a specific account and this reduces on the errors or risks which might arise due to forgery.

33. Explain the procedure of collection of cheque by paying banker?

1.      Banker must take at most care while presenting the cheque for collection.

2.      Collecting banker must present the cheque within reasonable time.

3.      Notice to customer in case of dishonour of cheque.

4.      The banker has to credit the proceeds of the cheque to the account of the customer

5.      Should undertake the collection of cheque only for customer and not for stranger.

6.      Must receive the payment as an agent of the customer.

7.      Cheque must be crossed

34. Explain the different types of deposit mobilised by banks?

Types of Deposits

A primary function for a bank is to mobilise public money. They do so in the form of deposits. There are two types of deposit accounts that you can open in a bank. They are time deposits and demand deposits.

Time Deposits

A Time Deposit also known as a Term Deposit is a deposit which has a fixed tenure and earns interest for the customer. The tenure varies for each instrument and may even change from bank to bank.

The most widely used name for time deposits is Fixed Deposits. The common feature among all Time deposits is that they cannot be withdrawn prematurely. One should thus plan their deposits according to their requirement for money going forward.

Fixed Deposits earn higher interest than a Savings Account because the former gives Banks leg room to lend to people who need the money for roughly the same time limit. For example, a one year fixed deposit in a bank can allow the bank to lend money to a person who requires a personal loan for one year period.

Commercial banks have over the years made Fixed Deposits more attractive by offering various frills like overdraft facility, zero cost credit cards, nomination facility, safe deposit lockers, internet banking among others.

Recurring Deposits

In this case, a fixed amount, as decided by the depositor, is deposited at regular intervals till the end of the tenure. The accumulated interest and the principal is given back to the depositor at the end of the tenure. The tenure of a recurring deposit can be anything from six months to 120 months.

Demand Deposits

As the name suggested, you can withdraw this deposit on demand. Such funds are held in accounts where it is easier to withdraw money either by going to the bank or an ATM. Savings and Current accounts are the two types of commonly used Demand Deposits account.

35. What are the significance of crossing cheques?

The significance of crossing of a cheque is that a crossed cheque cannot be en-cashed by the bearer but can only be collected from the drawee bank in the bank account. (Sec. 123 and 126 of the Negotiable Instruments Act) Therefore, Crossing of cheque provides protection and safeguard to the issuer of the cheque. In case of a crossed cheque one can easily detect who en-cashed the said cheque, unlike the case of non-crossed cheque. Hence, Crossing protects both payer and the payee of the cheque. Also, both bearer and order cheques can be crossed.

36. Difference between Capital and Money Market:

BASIS FOR COMPARISON	MONEY MARKET	CAPITAL MARKET
Meaning	A segment of the financial market where lending and borrowing of short term securities are done.	A section of financial market where long term securities are issued and traded.
Nature of Market	Informal	Formal
Financial instruments	Treasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc.	Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, Euro Issues etc.
Institutions	Central bank, Commercial bank, non-financial institutions, bill brokers, acceptance houses, and so on.	Commercial banks, Stock exchange, non-banking institutions like insurance companies etc.
Risk Factor	Low	Comparatively High
Liquidity	High	Low
Purpose	To fulfil short term credit needs of the business.	To fulfil long term credit needs of the business.
Time Horizon	Within a year	More than a year
Merit	Increases liquidity of funds in the economy.	Mobilization of Savings in the economy.
Return on Investment	Less	Comparatively High

37. Difference between FDI and FII. Which of the two is better for the economy?

BASIS FOR COMPARISON	FDI	FII
Meaning	When a company situated in one country makes an investment in a company situated abroad, it is known as FDI.	FII is when foreign companies make investments in the stock market of a country.
Entry and Exit	Difficult	Easy
What it brings?	Long term capital	Long/Short term capital
Transfer of	Funds, resources, technology, strategies, know-how etc.	Funds only.
Economic Growth	Yes	No
Consequences	Increase in country's Gross Domestic Product (GDP).	Increase in capital of the country.
Target	Specific Company	No such target, investment flows into the financial market.
Control over a company	Yes	No

Firstly FDI is a direct investment made in one particular business or company. The aim is to get a controlling interest in the business. FII, on the other hand, are funds which are invested in the foreign financial market.

There are many regulations and rules with respect to FDI. In fact, there are some industries like nuclear energy, agriculture etc. where there can be no foreign direct investment. But FII has fewer barriers for entry or exit from the market.

FDI is not only transfer of funds or capital. There is a transfer of technology, R&D, know-how, strategies, technical knowledge, and many other such aspects. In the case of FII, only the transfer of funds is there.

As far as the economy in which the money is being invested, they would generally prefer FDI. Since FDI causes long-term economic growth by increasing the GDP of the country. FII will increase the capital in an economy, but may not have a significant effect on the economic growth of a country.

38. Discuss the objectives of India’s Fiscal policy?

1. Development by effective Mobilisation of Resources

The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by:-

1.      Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.

2.      Public Savings: The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.

3.      Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial Resources

The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc.

But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

3. Reduction in inequalities of Income and Wealth

Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

4. Price Stability and Control of Inflation

One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment Generation

The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self-employment scheme is taken to provide employment to technically qualified persons in the urban areas.

6. Balanced Regional Development

Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment

Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by providing fiscal benefits to import substitute industries, imposing customs duties on imports, etc.

8. Capital Formation

The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income

The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of Infrastructure

Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.