Sandeep Ghatuary

Kolhan University
Semiester - 4

[INVESTMENT MANAGEMENT]

Investment management Unit 1:- Investment Risk & Return, Operation of Indian Stock Market Investment is economic activity. It is the employment of fund on assets in aim of earning

income. It has two attributes *Risk*Return. Present consumption is sacrifice (risk) to get in return in future. The sacrifice that has to be born in certain but the return in the future may be uncertain. The attributes of investments indicate the risk factors. The risk is undertaken with the view to in clue to gets some return from investment. Example A person commitment to purchase a Flat or House for his personal use this can't considered as an actual investment as it involve risk but not yield return.

Concept of Risk & Return: - Investment return and risk are essential to understanding market behavior .Risk and return on
investment are directly correlated; higher risk begets a smaller chance of high return. Investor has many motives for investing the most important of all it's is to earn return of investment. However selecting investment on the basis of maximization is of return is not enough. The fact that most investor invests their funds in more than one security suggests that other factor beside return must consider. So in order to discuss portfolio section within Risk & Return What is required is the clear understanding of what Risk & Return are What creates them? How can they be measured?

Return: - The return of motivating force and principle reward in the investment process. The return may be define in terms of
realized return means the return which was earn could have been earned.

Expected Return The return the investor anticipated to earn over some future period. The expected return is a predicted return and may not occur. The measuring the realized return allows an investor to assess how the future return may be. For an investor the return from investment is the expected cash inflows in terms of Dividend, Capital Gain, Interest and Bonus, e.tc

Risk: - Risk in the investment means that the future returns from that investment are unpredictable .the concept of risk may be
defined as the possibilities that the actual return may not be same as expected. Risk consists of two components: - 1. The Systematic risk 2. The Unsystematic Risk Systematic risk It affects the entire market .the systematic risk is caused by factors external to the particular company and it is uncontrollable by the company. The economic condition, Political situation and sociological changes affect the security market. It has three categories Market Risk Jack Clark Francis define market risk as that portion of total variability of return caused by the alternating force of bull and bear market. Variability in market affected 80 % of the Securities. Interest rate risk It is the variation in the single period rate of return caused by the fluctuation in the market interest rate. It mostly affects the prices of Bonds, Debenture and stock. It generally caused by the changes in Government monetary policy. Purchasing Power Risk- It is probable loss in the purchasing power of the return to be received. It is cause due to inflation may be Demand Pull or Cost Push Inflation. Unsystematic Risk Its factors are specific, unique and related to the particular industry or company .this is cause due to inefficient technological change in the production, process, availability of raw material, change in consumer preference and labor problem .It is classified into two categories * Business Risk * Financial risk Business risk- It is that portion of the systematic risk caused by the operating environment of the business. It arises from the inability of a firm to maintain its competitive edge and the growth or stability of the earning. It can be divided into External Business Risk and Internal Business Risk. Internal Business Risk:-1. Fluctuation in the sales 2. Research & Development 3. Personnel Management 4. Fixed Cost 5. Single Product External Business Risk: - 1. Social & Regulatory factors 2. Political Risk- 3. Business CycleFinancial Risk: - It is associated with the capital structure of the company consist of equity fund and borrowed fund.

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Stock Exchange and its Regulation -Stock exchange is an organized market to enable buyers and sellers to effect their transactions more quickly and economically in existing securities. A stock exchange is to provide marketability for long term investment. Stock exchange serves by providing a forum for free transferability of shares and others securities held by public. Stock exchange not only effects purchase and sale transaction in securities but also makes a continues valuation of securities traded.
Characteristics of stock exchange
Organized market stock exchanges are organized market for sale and purchase of securities. Dealing in securities different kinds of securities like shares, debenture, and bonds are bought and sold here. Working according to rules and regulations all transaction on stock exchange are conducted according to bye-laws of stock exchange and SEBI guidelines Dealing in listed securities only only listed securities can be bought and sold in the stock exchange. Dealing between authorized persons only only those persons can do buying or selling in a stock exchange who are members of that stock exchange.

Functions and objects of stock exchange Stock exchange perform important economic functions among other things they
help in proper working of the corporate sector. Ready market of securities stock exchange provides a ready market for sale and purchase of existing i.e. old securities. Continuous appraisal of securities under stock exchange rules all the transaction done there are required to be recorded and made public so that the prices paid and received become the official market quotation. Protects investors stock exchange work under strict rules and regulation the investor are assured of fair dealing. Channelization of capital in profitable ventures stock exchange provides mobility of capital in the direction of profitable avenues. If a company does not perform well, its investors sell off their shares and invest that money in the securities of better companies. Encourage capital formations the publicity which stock exchange give to various securities through price quotation and reports in the press and television induce people to invest their saving in industry which encourages capital formation in the country. Facilities for speculation smart investors who can correctly speculate as o what way the things will things will move in the security market, can use stock exchange to make quick money.

Importance or role of stock exchange - stock exchange play a vital role in the economic prosperity of the society, the company and the investor. Their role in different fields is summarized under three heads. A. Role towards community Generate economic growth stock exchange generates economic growth of the country by encouraging investors to invest their saving in productive enterprises. Facilitate marketability of securities by providing an organized and regulated platform for sale and purchase of securities, stock exchange increase marketability of securities. Encourage capital formations Stock exchanges encourage capital formation in the country. B. Role towards company Greater reputation a company whose shares are listed on a stock exchange enjoys greater reputation in the credit market. Wide market if the shares of a company are listed in many stock exchanges their market is widened. Higher price if the shares of a company are bought and sold in a stock exchange, their market value is prone to be higher in relation to company earning capacity and its net assets value. C. Role towards investors Fair dealing stock exchange are governed by strict rules and regulations, the investor is assured of fair dealing. Liquidity stock exchange provide liquidity to investment made by investors because listed securities can be easily sold in the market. Security to loan when a security is listed in a stock exchange it makes it a security worthy for a loan.

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Cause of price fluctuations on stock exchange

Earning of companies the demand as well as price of shares of those companies will rise which are performing better and their earning are better than those of other companies. Actions of financial institutions large scale buying of securities of some companies by domestic and foreign financial institutions have great effect on the prices of securities. Bank rates this is the lending rate which the central bank of the country, i.e. Reserve bank of India declares from time to time. A decrease in bank rate implies that ore money is available at lower interest rates with brokers. Action of underwriters under writers, through bogus transaction of sale and purchase at high prices of shares of those companies this cause rise in their prices. Trade cycle in boom period of trade cycle prices of shares rise and during depression they fall. Political factors if political parties with capitalistic outlook come to power the price of the shares rise but when a socialist party comes to power prices of the shares falls. Sympathetic fluctuations it is s strange phenomenon that if price of shares of few companies rise there is all round increase in price of share of other companies. Demand and supply If a particular security supply is more than its demand its price will naturally fall and if its demand is more than the supply its price will rise. Speculative pressure the battle between bulls and bears is both the cause and the effect of fluctuation in prices of securities.

Suggestions for improvement of stock exchange

Greater transparency in prospectus Strict action should be taken against companies which do not disclose full information as per SEBI norms. Controlling insider trading through there are provisions against insider trading but these have not proved effective. To curb insider trading the SEBI should be more vigilant. Devising new instrument to help in capital formation new kinds of instrument should be introduced which can meet the needs of different kinds of investors. Banning grey market operations Unofficial and unregulated market operations should be banned. Publishing of unofficial rates by newspapers should be stopped. Streamlining the stock broking No doubt SEBI has laid down code of conduct for share brokers and sub brokers should be computerized and made more transparent. Coordinating the activities of different stock exchanges to solve the problems of the investors, proper coordination should be ensured between traditional stock exchange, over the counter exchange and the national stock exchange. Improving liquidity It should be ensured that the shares are bought and sold for the purpose of delivery only and not for speculation.

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Unit 2 New issue markets, listing of securities and cost of investing in securities New issue markets -Companies issue securities from time to time to raise funds in order to meet their financial requirements
for modernization, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. It is called as initial public offer. Primary market is most useful to the newly established and existing business concerns. The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities.

Features of Primary Market

This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issue new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public. Classification of New issue Primary market facilitates transfer of funds from the saver to the borrower. It can be classified as follows First issue of newly established companies (promoters without a track record) First issue of new companies (set up by existing companies with a track record). First issue by existing private/closely held company (less than 3 years track record). First issue by existing private/closely held company (with 3 years track record). Public issue by existing listed companies.

Methods of issuing securities in the Primary Market

Initial Public Offer or IPO; Rights Issue (For existing Companies); Preferential Issue. The NIM provides funds directly to the corporate sector but secondary market does not flow any additional fund to the companies. The NIM deals with fresh equity and secondary market deals with old shares. The NIM does not have a physical geographical location but the secondary market have excellent physical infrastructure. The NIM provides particular scrip during subscription period but the secondary market provides the scrip to the investors at any time.

Difference between New issue market (NIM) and Secondary market

Listing of securities on stock markets

- No company is automatically entitled to have its shares dealt on a stock exchange. It has to seek the permission from the stock exchange. Authorities check the credentials of the applicant company and decide whether to enlist its shares or not, when permission has been granted it is termed as listing. Before listing the securities of a company the stock exchange will ask for certain details about its organisation, past history and an assurance that it will comply with the rules and regulations of the stock exchange. By listing the securities the stock exchange does not guarantee companies financial soundness or recommend its securities to the public Legal requirement of listing Minimum issued capital the minimum issued capital of the company should be Rs. 3crore. Listing on more than one exchange when paid up capital of a company is above Rs. 5crore it is obligatory for the company to seek listing on more than one stock exchange. Number of shareholder for every Rs. 1lakh of fresh issue of capital there should be at least ten shareholders. Document to be submitted for listing Three certified copies of the memorandum and articles of association and debenture trust deed. Copies of prospectus or offer of sale and circular and advertisement regarding the offer made during made during the last five years. Copy of every report, letter, balance sheet, court order any other document that is stated in the prospectus. Certified copies of underwriting contracts, brokerage, vendors, and sales managers' agreement

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Certified copies of service agreements of secretaries, treasurers, directors, and mangers. Particulars regarding materials contract, technical advice and collaboration and other similar document. Delisting - Stock exchange can delist securities of companies. Nonpayment of listing fee Violation of listing agreement If trading in that company's shares are negligible or thin If the company fails to settle grievance of investors. If it indulges in unfair trade practices at the behest of promoters or mangers (like issue of fake or duplicate shares).

Advantage of listing
Ready marketability listing provides greater marketability and liquidity to those who have invested money in a listed company. Fair dealing dealing through brokers on stock exchange ensures fairness in dealing and trade practices. Capital formation enhanced investors confidence helps in flow of saving in the capital market. Better Status a company whose shares are listed on a stock exchange enjoys better status, goodwill and creditworthiness in the market. Wider market the market for the securities of a listed company widens especially if the securities are listed on many stock exchanges. Facilitates in borrowing a listed company can find borrowing a bit easier as compared to an unlisted company. Drawbacks of listing - Listing of big companies is more or less compulsory now and so there is hardly any choice, and it is useless to think of disadvantage of listing. However, for discussions sake the main disadvantage of listing are Encourages speculation speculators may manipulate the prices of securities at stock exchange which may be detrimental to the interest of the company. The price may be influenced more by speculative forces rather than by performance of the company. Bad publicity companies, sometimes, have to pass through lean periods when their performance is not up to the mark, this reflected in the prices of their securities on the stock exchange which leads to bad publicity and loss to its reputation.

Cost of Investing in Securities The cost basis of any investment is the original value of an asset adjusted for stock splits,
dividends and capital distributions. It is used to calculate the capital gain or loss on an investment for tax purposes. At the most basic level, the cost basis of an investment is just the total amount invested into the company plus any commissions involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per share price that you paid for the investment. The calculation of cost basis can be complicated, however, due to the many changes that will occur in the financial markets such as splits and takeovers. For the sake of simplicity, we will not include commissions in the following examples, but this can be done simply by adding the commission amount to the investment amount ($10,000 + $100 in commissions = $10,100 cost basis). Imagine that you invested $10,000 in ABC Inc., which gave you 1,000 shares in the company. The cost basis of the investment is $10,000, but it is more often expressed in terms of a per share basis, so for this investment it would be $10 ($10,000/1,000). After a year has passed, the value of the investment has risen to $15 per share, and you decide to sell. In this case, you will need to know your cost basis to calculate the tax amount for which you are liable. Your investment has risen to $15,000 from $10,000, so you face capital gains tax on the $5,000 ($15 - $10 x 1,000 shares). If the company splits its shares, this will affect your cost basis per share. Remember, however, that while a split changes an investor's number of shares outstanding, it is a cosmetic change that affects neither the actual value of the original investment, nor the current investment. Continuing with the above example, imagine that the company issued a 2:1 stock split where one old share gets you two new shares. You can calculate you cost basis per share in two ways: First, you can take the original investment amount ($10,000) and divide it by the new amount of shares you hold (2,000 shares) to arrive at the new per share cost basis ($5 $10,000/2,000). The other way is to take your previous cost basis per share ($10) and divide it by the split factor (2:1). So in this case, you would divide $10 by 2 to get to $5. However, if the company's share price has fallen to $5 and you want to invest another $10,000 (2,000 shares) at this discounted price, this will change the total cost basis of your investment in that company. There are several issues that come up when numerous investments have been made. The Internal Revenue Service (IRS) says that if you can identify the shares that have been sold, then their cost basis can be used. For example, if you sell the original 1,000 shares, your cost basis is $10. This is not always easy to do, so if you can't make this identification, the IRS says you need to use a first in, first out (FIFO) method. Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the original or oldest cost basis of $10, followed by 500 shares at a cost basis of $5. This would leave you with 1,500 shares at a cost basis of $5 to be sold at another time. In the event that the shares were given to you as a gift, your cost basis is the cost basis of the original holder, or the person who gave you the gift. If the shares are trading at a lower price than when the shares were gifted, the lower rate is the cost basis. If the shares were given to you as inheritance, the cost basis of the shares for the inheritor is the current market price of the shares on the date of the original owner's death. There are so many

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different situations that will affect your cost basis and because of its importance with regards to taxes, if you are in a situation in which your true cost basis is unclear, please consult a financial advisor, accountant or tax lawyer.

National Stock Exchange (NSE) - NSE was set up to establish a nation-wide trading. The national stock exchange started
its operations Bangalore, Vadodra, Kolkata, Chennai, Delhi, Hyderabad, and Pune. NSE is managed by a 13 member board of directors including the chairman. It is India's first national online stock market with segments for debt and equity securities. NSE was set up to establish a nationwide trading.

Objectives of NSE
To Provide nationwide trading facility its aim is to provide nationwide trading for equities, debt, and instrument e.tc. To provide access to all investors its objective is to ensure equal access to all investors, all over the country through an appropriate communication network. Use of electronic trading systems it aims to provide a fair, efficient and transparent securities market to investors using electronic trading systems. Shorter settlement cycles it provides shorter settlement cycles and book entry settlement. To attain international standards it aims to attain current international standards prevalent in the world security market. Meeting international benchmark and standards.

Special features NSE has two segments

The capital market segment covers equities, convertible debenture and retail trade in unconvertible debenture Wholesale debt segment is a market for high value transaction in government securities, public sector bonds, and commercial papers e.tc. Listing All medium and large sized companies with paid up equity of Rs.10 crore and above, eligible to be listed on any regular stock exchange. Computerized All members operating in the capital market segment and whole debt segment are connected to the central computer in Mumbai through satellite links. Trading system it employs screen based; order driven trading system i.e. the computer stores the orders in terms of price and time. Buying and selling rates are independent of each other. The settlement cycle The settlement cycle is T+2 days. T stands for the day of trading within the settlement take place. All scrips are handled by its clearing house. It assures a legal guarantee of all guarantees of all transactions and settlements to investors.

Advantages of NSE
Wider accessibility NSE offers wider accessibility through satellite linked trading system. Computer terminals and links with very small aperture terminal help dealers to have easy contract with their counterparts in whole of India. Computer based trading Every transaction is done through computer which has considerably reduced the paper work. The right based trading and shouting on floors or rings of stock exchange has become a thing of the past. Easy and quick settlement all the amount of sale, purchase interest and dividend are debited and credited directly in the clearing accounts of the members, this helps in the speedy settlement of accounts. Transparent transactions The investor can find out the price of the deal, identity of the other party and the tie of execution of deal e.tc. Better quality Dealing in dematerialized form has led to reduction in bad deliveries. Consolidation of market at national level has resulted in lowering of transaction costs. Less brokerage the brokerage fee is about 0.1 % of the value of transacted at NSE while in Bombay stock exchange it is 0.5%.

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Over the counter exchange of India (OTCEI) As a result of recommendation of GS Patel and Abid Hussain Committee, over the counter exchange of India was incorporated in 1992 as a nonprofit limited company jointly promoted by ICICI, LIC, GIC, SBI Capital e.tc. With paid up capital of Rs. 5 crore. Through OTCEI shares can be bought and sold over the counters by licensed dealers spread over whole of the country. Every counter is treated or a trading floor for OTCEI where investor can do buying or selling. It is working is modeled on NASDAQ stock exchange of USA. OTCEI is a recognized stock exchange by the Government of India under securities contract (regulation) act, 1956. Characteristics or Feature No fixed place of trading it is a national ringless stock exchange. Ringless means it has no fixed place for trading. The dealer may be located at any place within the city or the country. Computerized It is computerized stock exchange. Computers allow dealers to transact business through central OTC computer using telecommunication. Deals in all kinds of securities OTCET deals in various kinds of securities like equity and preference shares, bonds, debentures, warrants, etc. Transparency Every investor can see the current price of his security on the computer screen. He can also see the prices being offered by market- makers. Sessions and working hours The first session is called the general session which is from 10 a.m. to 3.30 p.m. the second session works from 4.30 p.m. to 7.30 p.m. which is called OTCEI III trade market. Settlement period The weekly settlement period of OTCEI is different from other stock exchange. The settlement period is from Friday to Thursday. Objective Listing of small and medium sized companies OTCEI was established to provide facilities for listing of small companies. Reduction in issue expenses OTCEI objective is to facilities issue of securities at lower cost, i.e. bring economy of the issue by small companies. Efficient and transparent deals The objective of OTCEI is to provide the investors facilities of efficient and transparent method of buying and selling securities and save them from the clutches of unscrupulous brokers and sub-brokers. Quick settlement Another objective of OTCEI is to free the investors from delays in settlement of transaction. It aims to provide immediate delivery of securities. Liquidity OTCEI aims to provide liquidity to all kinds of securities by appointment of market makers. Providing nationwide market OTCEI aims to provide a nationwide market for the sale and purchase of securities.
Participants of the OTCEI
Investors who trade on OTCEI Any investor can purchase or sell any listed scrip at any OTCEI counter Registrar Registrar of OTCEI keeps custody of share certificate and maintains registrar of members. Settlement Bank Settlement bank of OTCEI clears the payment between the counter operators. SEBI and the government SEBI and the government exercise overall supervision on the OTCEI. Settler He is the person to whom all documents prepared at the counters are sent for preparation of records. Clearing house The clearing house makes arrangement for taking and giving delivery of bought and sold securities. Counter It is the place where investors contact the dealers/the members of OTCEI. The counters are run by OTCEI members/dealer. Mechanics or methods of trading on OTCEI 1. Primary market In OTCEI two methods are adopted of securities through public issue that is primary market. In first method the allotment through public issue the issuer company directly invites applications from the public and directly allots shares to them. In second method sale through sponsors the issuer company allots all the shares to a sponsorer to the issue under a bought out deal. Under this arrangement the sponsorer to the issue purchases all the shares from the company and is at liberty to issue them to the public later at any price. 2. Secondary market Purchase scrips The purchaser approaches a particular counter and expenses his intention to purchase specific scrip. The counter and expenses his intention to purchase a specific scrip. Sale of scrips when an investor approaches a counter with the intention of selling some shares he is required to produce the counter receipt containing details like counter code, name and signature of the authorized representatives.

Investment management Unit 3 Security Credit Rating, Objectives of security analyses. Credit rating: - Credit Rating Agencies rate the mentioned before debt instruments

of companies. They do not rate the companies, but their individual debt securities. Rating is an opinion regarding the timely repayment of principal and interest thereon; it is expressed by assigning symbols, which have definite meaning. A rating reflects default risk only, not the price risk associated with changes in the level or shape of the yield curve. It is important to emphasize that credit ratings are not recommendations to invest. They do not take into account many aspects, which influence an investment decision. Ratings also do not take into account the risk of prepayment by the issuer, or interest rate risk or exchange rate risks. Although these are often related to the credit risk, the rating essential is an opinion on the relative quality of the credit risk. It has to be noted that there is no privities of contract between an investor and a rating agency and the investor is not protected by the opinion of the rating agency. Ratings are not a guarantee against loss. They are helpful in making decisions based on particular preference of risk and return. The Determinant of credit rating: The issuer's ability to pay, The strength of the security owner's claim on the issue, The economic significance of the industry and market place of the issuer. Rating Methodology: Business Risk: To ascertain business risk, the rating agency considers Industry's characteristics, performance and outlook, operating position, technological aspects, business cycles, size and capital intensity. Financial Risk: To assess financial risk, the rating agency takes into account various aspects of its Financial Management, projections with particular emphasis on the components of cash flow and claims thereon, income recognition, inventory valuation, foreign currency transactions, etc. Management Evaluation: Management evaluation includes consideration of the background and history of the issuer, corporate strategy and philosophy, organizational structure, personnel policies etc. Business Environmental Analysis : This includes regulatory environment, operating environment, national economic outlook, areas of special significance to the company, pending litigation, tax status, possibility of default risk under a variety of scenarios. Credit rating agencies in India Credit Rating and Information Services of India Limited (CRISIL). Investment Information and Credit Rating Agency of India Limited (ICRA). Credit Analysis and Research Limited (CARE).iv) Duff and Phelps Credit Rating of India (Pvt.) Ltd. Benefits of Credit Rating Investors: Rating safeguards against bankruptcy through recognition of risk. It gives an idea of the risk involved in the investment. Rating symbols give information on the quality of instrument in a simpler way that can be understood by lay investor and help him in taking decision on investment without the help from broker. Issuers of Debt Instruments: A company whose instruments are highly rated has the opportunity to have a wider access to capital, at lower cost of borrowing. Rating also facilitates the best pricing and timing of issues and provides financing flexibility. Companies with rated instruments can use the rating as a marketing tool to create a better image in dealing with its customers, lenders and creditors. Financial Intermediaries: Financial intermediaries like banks, merchant bankers, and investment advisers find rating as a very useful input in the decisions relating to lending and investments. Business Counter-parties: The credit rating helps business counter-parties in establishing business relationships particularly for opening letters of credit, awarding contracts, entering into collaboration agreements, etc. Regulators: Re~wlatorsc an, with the help of credit ratings, determine eligibility criteria and entry barriers for new securities, monitor financial soundness of organizations and promote efficiency in debt securities market. This increases transparency of the financial system leading to a healthy development of the market. Limitation of credit rating Credit ratings are changed when the agencies feel that sufficient changes have occurred. The rating agencies are physically unable to constantly monitor all the firms in the market. The use of credit ratings imposes discrete categories on default risk, while, and in reality default risk is a continuous phenomenon. Moody's recognized this way back in 1982 by adding numbers to the letter system, thereby increasing its number of rating categories from 9 to 19. Nevertheless, this limitation still pertains. Owing to time and cost constraints, credit ratings are unable to capture all characteristics for an issuer and issue. A borrowing company can reduce the cost of borrowing, if it obtains a higher rating for its contemplated issue.

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If the company comes to know that its issue is going to get a low quality rating, it may approach another agency and then use the best rating among them since it is not under obligation to disclose all ratings.

Security analysis- Security analysis refers to the analysis of trading securities from the point of their prices, returns and risks. All investments are risky and the expected return is related to the quantum of risk. All investors try to earn more return with low level of risk or without risk.
Objective of security analysis
Regular income - the income from the investment should be regular and consistent one. The high fluctuation is income stream is not suitable for the long-term growth. Capital appreciation - the investment must yield regular income as well as growth in value i.e, capital appreciation. It is the difference between the selling price and purchase price. Safety of capital - the capital invested in assets requires the safety. Safety is the important element which protects the loss of capital and return from the investments. Liquidity - liquidity is the ease of convertibility or marketability of assets. Hedge against Inflation - the inflation is the biggest problem we are facing today, hence the rate of return from the investment requires high yield to beat inflation rate. These are the major objectives of an investor; to attain these objectives a careful and critical security analysis is necessary. The literature on security analysis can be consolidated to form three approaches to explaining the behavior of share prices and their valuation. These analysis are used to find out the answer for the question like, why share prices fluctuate, how they are determined, what to buy or sell and when to buy or sell.

Investment management Unit 4 Investment Alternatives

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An investment that is not one of the three traditional asset types (stocks, bonds and cash) Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts. Characteristics - Alternative investments are sometimes used as a tool to reduce overall investment risk through diversification. Some of the characteristics of alternative investments may include: Low correlation with traditional financial investments such as stocks and shares. Alternative investments may be relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis may be required before buying. Costs of purchase and sale may be relatively high. Difficulty in establishing appropriate benchmarks and thus in performance appraisal. Relative illiquidity, for which investors require a higher return. Improved diversification benefits compared to a portfolio consisting solely of stocks and bonds.

There are a wide range of investment alternatives available for investing.

Cash and deposits - It refers to all liquid instruments that bear minimum risk, only that the principal amounts invested can be lost in this type of investments. Fixed income securities - These are a group of investment vehicles that offer a fixed periodical return. A fixed income security is a security or certificate which shows that the investor has lent money to the issuer in return for fixed interest income and repayment of principal on maturity. Shares - Shares are different from stock in that a shareholder is a part owner of the company. A company is a separate legal individual, which is owned by all of its shareholders. The value of a share changes according to the market's view of the worth of the company. Others factors too can influence the share prices, like how the country's economy is doing, the interest rates, inflation rates, company earnings, currency performance, etc. Unit trusts - These are useful avenues for small private investors who do not have huge funds or time to receive professional investment management advice. Unit trust investments can generate income in the form of interest, dividends and capital gains. Investment trusts - An investment trust is a company registered under the Companies Act. An investor can purchase shares in that company. The company itself will invest in a wide range of equities and other investments. In a unit trust, the investor buys units in the trust itself and not shares in the company. Properties - There are 3 types of real estate investments such as: the agricultural property, the domestic property and the commercial / industrial property. Properties can provide high capital appreciation and a steady flow of income. Also they are considered low risk investment. Derivatives - Derivatives are financial instruments whose values are linked to the price of underlying instruments in the stock markets. For instance, a stock index future is linked to the performance of a specified stock market. Stock options and financial futures are two popular derivative instruments for investors. Commodities - Commodities can be bought as physicals where the goods exist and are delivered right away or as futures, where the goods may not yet exist and will only be delivered in the future. Commodity prices can be unstable as they depend on supply and demand as well as on the other variable factors such as the weather or unexpected pest attacks Life insurance - Life insurance can be closely connected with the national interest because it is a means of reducing financial suffering that death may bring. It is also a method of saving and to a degree, of investing. There are 4 basic forms of life insurance cover: * Term insurance *Whole life insurance *Endowment insurance *Annuity Annuities - Annuities are contrary to insurance protection against death. It is a contract where, for a cash consideration, the insurer agrees to pay the annuitant, a predetermined sum (annuity) on a periodical basis during a fixed period of time or for the duration of the survival of the respective life. This is done with the understanding that the principal sum shall be considered liquidated immediately on the death of the annuitant.

Investment management Unit 5 Valuation theories of fixed & variable income securities

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Investment Alternatives - The investment alternatives ranging from financial securities to traditional non-security investments the financial security may be negotiable or non-negotiable. 1. Negotiable securities - The negotiable securities are financial securities that are transferable. The negotiable securities may yield variable income or fixed income. Securities like equity shares are variable income securities. Bonds, debentures, Government securities and money market securities yield a fixed income. Variable Income Securities Equity shares- The equity shares attract the interest of many. The stock market classifies shares into Growth shares - The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. Income shares - These stocks belong to companies that have comparatively stable operations and limited growth" opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares. Defensive shares - Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy. Cyclical shares - The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles. Speculative shares - Shares that have lot of speculative trading in them are referred to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the traders. Fixed Income Securities Preference shares - Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed Rs.150 Cr. worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also make it attractive. Debentures - Corporate debentures are an option available to the investors who are willing to sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. Bonds - Bonds are similar to the debentures but they are issued by the public sector undertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate, would appreciate. LOBI and ICICI have issued various bonds to suit the needs of the investors. IVPs and KVPs - These are saving certificates issued by the post office with the name Indira Vikas Patra (IVP) and Kisan Vikas Patra (KVP). IVPs are like bearer bonds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment. Government securities - The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim 1m the Government, the rate of interest on these securities is relatively lower because of their high liquidity and safety. Money market securities - Money market securities have very short term maturity say less than a year. Common money market instruments are: Treasury bills, Commercial paper and Certificate of deposit. 2. Non Negotiable securities The non-negotiable financial investment as the name itself suggests is not transferable. This is also known as non-securitized financial investments. Deposit schemes offered by the post offices, banks, companies, and non-banking financial companies are of this category. The tax-sheltered schemes such as public provident fund, national savings certificate and national savings scheme are also non-securitized financial investments. (A) Deposits - Deposits earn fixed rate of return. Even though bank deposits resemble fixed income securities they are not negotiable instruments. Some of the deposits are dealt subsequently. Bank deposits - It is the simple investment avenue open for the investors. Traditionally the banks offered current account, savings account and fixed deposit account. The deposits in the banks are considered to be safe because of the RBI regulation. The risk averse investors prefer the bank deposits. Post office deposits - Like the banks, post office also offers fixed deposit facility and monthly income scheme

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NBFC deposits - In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. (B) Tax sheltered savings schemes - Tax sheltered savings schemes offer tax relief to those who participate in their schemes. The important tax sheltered savings schemes are Public Provident Fund Scheme, National Savings Scheme, and National Savings Certificate VIII series (c) Life Insurance - Life insurance is a contract for payment of a sum of money to the person assured on the happening of event insured against. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs.

Unit 6. The return of risk & the investment decision Risk-Adjusted Rate of Return - Knowing an investments risk-adjusted return goes a long way toward determining just
how much bang for the buck is really being generated What It Measures - How much an investment returned in relation to the risk that was assumed to attain it? Why It Is Important - Being able to compare a high-risk, potentially high-return investment with a low-risk, lower-return investment helps to answer a key question that confronts every investor: Is it worth the risk? By itself, the historical average return of an investment, asset, or portfolio can be quite misleading and a faulty indicator of future performance. Riskadjusted return is a much better barometer. The calculation also helps to reveal whether the returns of the portfolio reflect smart investment decisions or the taking on of excess risk that may or may not have been worth what was gained. This is particularly helpful in appraising the performance of money managers. How It Works in Practice - There are several ways to calculate risk-adjusted return. Each has its strengths and shortcomings. All require particular data, such as an investments rate of return, the risk-free return rate for a given period (usually the performance of a 90-day US Treasury bill over 36 months), and a markets performance and its standard deviation. Which one to use? It often depends on an investors focus, principally whether the focus is on upside gains or downside losses.

Perhaps the most widely used is the

1. Sharpe ratio - This measures the potential impact of return volatility on expected return and the amount of return earned per unit of risk. The higher a funds Sharpe ratio, the better its historical risk-adjusted performance, and the higher the number the greater the return per unit of risk. The formula is: Sharpe ratio = (Portfolio return Risk-free return) Standard deviation of portfolio return Take, for example, two investments, one returning 54%, and the other 26%. At first glance, the higher figure clearly looks the better choice, but because of its high volatility it has a Sharpe ratio of 0.279, while the investment with a lower return has a ratio of 0.910. On a risk-adjusted basis the latter would be the wiser choice. 2. Treynor ratio - also measures the excess of return per unit of risk. Its formula is: Treynor ratio = (Portfolio return Riskfree return) Portfolios beta .In this formula (and others that follow), beta is a separately calculated figure that describes the tendency of an investment to respond to marketplace swings. The higher the beta, the greater the volatility, and vice versa 3. Jensens measure, is often used to rate a money managers performance against a market index, and whether or not an investments risk was worth its reward. The formula is: Jensens measure = Portfolio return Risk-free return Portfolio beta (Benchmark return Risk-free return) Tricks of the Trade A fourth formula, the Sortino ratio, also exists. Its focus is more on downside risk than potential opportunity, and its calculation is more complex. There are no benchmarks for these values. In order to be useful the numbers should be compared with the ratios of other investments. No single measure is perfect, so experts recommend using them broadly. For instance, if a particular investment class is on a roll and does not experience a great deal of volatility, a good return per unit of risk does not necessarily reflect management genius. When the overall momentum of technology stocks drove returns straight up in 1999, Sharpe ratios climbed with them, and did not reflect any of the sectors volatility that was to erupt in late 2000. Most of these measures can be used to rank the risk-adjusted performance of individual stocks, various portfolios over the same time, and mutual funds with similar objectives.

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Unit 7 Government Securities on securities form of investment Government Securities - Government Securities are securities issued by the Government for raising a public loan or as
notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated Government Securities. Government securities are one of the safest in the market. Available at the primary and secondary market of securities, they are avidly searched by all kinds of financial institutions. Their faultless history, spectrum of choices and high liquidity gives government index securities a top notch qualification. Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the Government of India. GOI uses these funds to meet its expenditure commitments. These securities are generally fixed maturity and fixed coupon securities carrying semi-annual coupon. Since the date of maturity is specified in the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly. Features of

Government Securities
Issued at face value No default risk as the securities carry sovereign guarantee. Ample liquidity as the investor can sell the security in the secondary market Interest payment on a half yearly basis on face value No tax deducted at source Can be held in Demit form. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change Redeemed at face value on maturity Maturity ranges from of 2-30 years. Securities qualify as SLR (Statutory Liquidity Ratio) investments.

The dated Government securities market in India has two segments:

1. Primary Market: The Primary Market consists of the issuers of the securities, viz., Central and Sate Government and buyers include Commercial Banks, Primary Dealers, Financial Institutions, Insurance Companies & Co-operative Banks. RBI also has a scheme of non-competitive bidding for small investors. 2. Secondary Market: The Secondary Market includes Provident Funds, Trusts, Mutual Funds, Primary Dealers and Reserve Bank of India. Even Corporate and Individuals can invest in Government Securities. The eligibility criteria are specified in the relative Government notification. Auctions: Auctions for government securities are either multiple- price auctions or uniform price auction - either yield based or price based. Yield Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned. The bidders submit bids in term of the yield at which they are ready to buy the security. If the Bid is more than the cut-off yield then its rejected otherwise it is accepted Price Based: In this type of auction, RBI announces the issue size or notified amount and the tenor of the paper to be auctioned, as well as the coupon rate. The bidders submit bids in terms of the price. This method of auction is normally used in case of reissue of existing Government Securities. Bids at price lower then the cut off price are rejected and bids higher than the cut off price are accepted. Price Based auction leads to a better price discovery then the Yield based auction. Underwriting in Auction: One day prior to the auction, bids are received from the Primary Dealers (PD) indicating the amount they are willing to underwrite and the fee expected. The auction committee of RBI then examines the bid on the basis of the market condition and takes a decision on the amount to be underwritten and the fee to be paid. Who Can Invest In Government Securities? - Any organization or individual who wished to invest in them. There are no limits or impediments to do it. You may buy them through two kinds of organizations. The first is the Legacy Treasury Direct, in which the individual buys the security directly from the US Government. The other one is the Commercial Book-Entry System, where brokers, dealers and other kind of intermediaries buy them to the US Government How Many Types of Government Debt Securities Exist? - There are several types of government securities available in the market, and each one of them is used by different kind of investors: Zero Coupon Bonds The main difference of a zero coupon bond is that it doesn't make any kind of payment during the period of the bond, only at the end. They have become quite popular in the last years. Benefits and Risks of Investing In Government Securities - One of the benefits of government securities is that some of them don't pay state or local taxes. That means a higher return on security investment. US Treasury Notes, Bills and Bonds fall within this category. Zero coupon bonds are included too. Unfortunately, TIPS have a limited advantage regarding taxes. Although they don't pay local or state taxes, they do pay federal taxes. The main risk is the cost of opportunity. Since this kind of securities offer a

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very low risk, the interest rate is also lower than the ones offered by private entities. So, if you pursue this path, you may ma find yourself wondering what if scenario.

Unit 8. Recent development in the Indian stock market

What are recent developments s in the Indian Capital Market?

It is not only important question for finance students but there are large number of investors, , researchers and companies may also be interested in this topic. We want to know its recen recent t developments and its effect on our economy. So, we will cover a new thing which shows the latest development of Indian capital market market. 1. New Measures of Risk Management System in Indian Capital Market - every shareholder or investor wants to protect his investment and promote it as his source of earning. So, my always concentration is on new measures the Risk management system of SEBI I which is the controller of Indian Capital Market. SEBI did several steps in this regards. {A} Measures for Reducing Price Volatility - Price volatility is the relative ive rate at which the price of a security moves up and down. But this technique of profit maximization which is used by bad guys for wrong purposes they buy shares at very cheap rates and sell when overpriced. Because, they get idea of trend of next price of shares with invalid source instead of using mathematical formula which is given below

2. 3.

4.

5.

Volatility is often viewed as a negative term in the market that represents uncertainty and risk. Higher volatility brings wo worry to the investors as they watch the value of their portfolios move wildly and decrease in value. To reduce price volatility an and stability in the prices of stock market, A major reform undertaken by SEBI was the introduction of derivatives products: Index futures, Index options, stock options and stock futures {B} Place Circuit Breakers - this is another recent development in Indian Capital Market. We all know an excessive speculation is always risky for every investor. For reducing it, SEBI has introduced place circuit breakers. A circuit breaker breake is the system which ch stops to trade in stock market when prices move after a specific level. For example, if a stock is at Rs. 100 and circuit breaker is fixed at 5%, then stock trading will stop if it hit of Rs. 95 or Rs. 105. There are mainly two types of o circuit breakers. . One is index wise circuit breakers and other is stock wise circuit breakers. C} Intraday Trading Limit - Intraday Trading, also known as Day Trading, is the system where you take a position on a stock and release that position before the end of that day' day's s trading session. Thereby making a profit for yourself in that buy-sell buy or sell-buy exercise. All in one day. {D} Mark to Market Margin - MTM margin is imposed to cover loss that a member may incur, in case the transaction is closed out at a closing price different from a price at which the transaction has been entered. It is just collection in cash for all futures contracts and adjusted against the available Liquid Net worth for option positions. In the case of futures Contracts Contra MTM may be considered as Mark to Market Settlement. Investigations - If any company law or SEBI Act's rules regarding Indian capital market are violated, its investigation is done by SEBI. This is the list of cases resulted in compounding in the prosecution filed by SEBI Investor Awareness Campaign - For making Indian capital market more secure for Indian and foreign investors, SEBI has started investors' awareness campaign. For this, SEBI has made his official site's sub domain at http://investor.sebi.gov.in/ Under this campaign, Workshops/ Seminars Conducted by Investor Associations recognized by SEBI Ban on Inside Trading - Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals iduals with potential access to non non-public public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors. To ban on insider trading, SEBI has made (Prohibition of Insider Trading) Regulations, 1992. Its updated amendment in 2010 says in clear words Trading Cycle Under T + 2 - T' represents the trade day. 'T + 2' imply the settlement on the 2th trading day. SEBI has reduced the settlement cycle upto T +2 and in future, it may be T + 1 settlement cycle. But SEBI accepted shorter settlement cycles will mean more pressure on trade processing systems so that funds/securities are ready for pay-in/pay-out pay on the next day.

Investment management Securities and exchange board of India (SEBI)

16

The establishment of the SEBI was a landmark government measure to monitor and regulate capital market activities and to promote healthy development of the market. The SEBI was conducted in 1988 by a resolution of government of India and it was made a statutory body by the Securities and exchange board of India Act, 1992. The board of members of SEBI shall consist of a chairman, two members from amongst the officials of the ministries of the central government dealing with finance and law, one member from amongst the official of the RBI, two other members to be appointed by central government, who shall be professionals and interalia have experience or special knowledge relating to securities market. The act empower the central government to supersede SEBI, if on account of grave emergency, SEBI is unable to discharge the functions and duties under any provisions of the Act. Objective The objective of SEBI are to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market for matters connected therewith or incidental thereto. Role/Power/Functions Regulating the business in stock exchange and any other securities market. Registering and regulating the working of collective investment schemes, including mutual funds. Promoting and regulating self regulatory organizations. Prohibiting fraudulent and unfair trade practices in securities market. Promoting investor education and training of intermediaries in securities market. Prohibiting insider trading in securities. Performing such other functions as may be prescribed by the government.

Limitations of SEBI:
Government control Board of members dominated by nominees No freedom to file criminal case. A paper tiger. Some practical problems are: Limited transparency in working. Lack of professionalism in working. Weak constitution. Minimum accountability. Lengthy and time consuming procedures of work.

Treasury bills - A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the Treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day Treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, Treasury bill of 28-day Was introduced on auction basis. Further, it was decided to reintroduce 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the treasury bills are very low, individuals very rarely invest in them. These kinds of bonds are the shortest government security available. Considered a high risk investment, they don't offer any kind of interest gain during the lifetime of the bill, only at the end. They are very similar to zero coupon bonds, but the main difference is the amount of time they endure (only a few months instead of decades). Commercial papers - Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicates the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favor them. The minimum maturity of CP was brought down from 3 months to 30 days. National savings scheme (NSS) - This scheme helps in deferring the tax payment. Individuals and HUF are eligible to
open NSS account in the designated post office. The NSS-87 gives100per cent income tax rebate but the interest as well as the capital are fully taxable if withdrawn during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years qualify for a rebate of 20 per cent under Section 88 of the Income Tax Act, subject to a maximum of Rs 12,000. The investment also earns an interest rate of 11per cent per year covered by Sec 80L. Compared to other tax savings' instruments the return offered by this scheme is lower. On the liquidity aspect, withdrawal is permitted at any time after four years from the end of the financial year in which the account is opened. The entire amount can be withdrawn. The account can be closed on the expiry of 4 years. There is no fixed tenure for investment. One can also keep the account alive and earn interest at 11percent per annum. As a tax saving

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instrument "anytime" withdrawal after 4 years is the only interesting feature to the prospective investor. The tax deduction at source at the rate of 20 percent on the entire amount withdrawn has proved too costly to the investors. - The Indian law defines a stockbroker simply as a member of a recognized stock exchange. Therefore, a registered stockbroker is a member of at least one of the recognized Indian stock exchanges. Majority of sub brokers are not registered with SEBI; and The function of the sub broker is not clearly defined. Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a certificate granted by SEBI. Each stockbroker is subject to capital adequacy requirements consisting of two components: basic minimum capital and additional or optional capital related to volume of business. The basic minimum capital requirement varies from one exchange to another. A SEBI regulation requires stockbrokers of BSE or NSE to maintain a minimum of Rs500, 000 (about $14,000), which is the largest requirement among the stock exchanges. However, BSE and NSE require their respective members to deposit with them larger amounts. The additional or optional capital and the basic minimum capital combined have to be maintained at 8 percent or more of the gross outstanding business in the exchange Sales and purchases on behalf of customers may not be netted but may be included to those of the broker. There is no mandatory qualification test for stockbrokers and other market participants in India, unlike other countries such as Japan, United Kingdom, and United States.

Stockbrokers

Sub brokers - Most stockbrokers in India are still relatively small. They cannot afford to directly cover every retail investor in a geographically vast country and in such a complex society. Thus, they are permitted to transact with sub brokers as the latter play an indispensable role in intermediating between investors and the stock market. An applicant for a sub broker certificate must be affiliated with a stockbroker of a recognized stock exchange. A sub broker application may take the form of sole proprietorship, partnership, or corporation. There are two major issues concerning subbrokers in the Indian capital market Majority of sub brokers are not registered with SEBI; and The function of the sub broker is not clearly defined. No sub broker is supposed to buy, sell, or deal in securities, without a certificate granted by SEBI. The Indian law defines a sub broker as any person, not being a member of a stock exchange, who acts on behalf of a stockbroker as an agent, or otherwise, to assist the investors in buying, selling, or dealing securities through such a stockbroker. The sub broker is either a stockbrokers agent or an arranger for the investor. The stockbroker as a principal will be responsible to the investor for a sub broker's conduct if a sub broker acts as his or her agent. Merchant Bankers - Under the old regulations, there were four categories of registered merchant bankers with different
minimum net worth requirements Category I minimum amount of net worth Rs50 million, Category II minimum amount of Rs5 million, Category III minimum amount of Rs 2 million and Category IV no amount is required. Under the new regulations, the categories were abolished. Among other provisions, a merchant banker applicant is required to have a minimum net worth of Rs50 million. The new regulations have drawn a clear-cut line between the merchant banker and the nonbanking finance company under the old regulations, a merchant banker is permitted to carry out fund based activities such as deposit-taking, leasing, bill discounting and hire-purchasing. The new regulations no longer allow a merchant banker to engage in these fund-based activities except for those related exclusively to the capital market such as underwriting. The merchant banker is required to cease such activities within two years. The merchant banking industry in India has many problems, the main ones being that there are too many merchant bankers, and that they are considered to be relatively incompetent. Only 20 merchant bankers account for 60-85 percent of the merchant banking business, while 148 of them are in business only on paper. SEBI listed 134 merchant bankers of Categories I, II, and III who broke their underwriting Commitments for possible disciplinary actions. Of this number, 95 were in Category I.