financial system in country

8/8/2019 Financial System in Country

1/18

Financial system in country-

To sustain rapid GDP growth and spread its benefits more broadly, the country needs a financial

system that is comprehensively market oriented and efficient.

The financial system's shortcomings fall largely into three areas. First, formal financialinstitutions attract only half of India's household savings and none of the $200 billion its people

keep tied up in gold. Second, these financial institutions allocate more than half of the capital

they do attract to the economy's least productive areas: state-owned enterprises (SOEs),

agriculture, and the unorganized sector (made up mostly of tiny businesses).

Third, since the financial system is inefficient in both of its main tasksmobilizing savings and

allocating capitalIndian borrowers pay more for capital and depositors receive less than they

do in comparable economies.

Financial system in india

-INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economicunits, broadly classified into corporate sector, government and household sector. Whileperforming their activities these units will be placed in a surplus/deficit/balanced budgetarysituations.

There are areas or people with surplus funds and there are those with a deficit. A financialsystem or financial sector functions as an intermediary and facilitates the flow of funds fromthe areas of surplus to the areas of deficit. A Financial System is a composition of variousinstitutions, markets, regulations and laws, practices, money manager, analysts, transactionsand claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closelyconnected or interlined institutions, agents, practices, markets, transactions, claims, andliabilities in the economy. The financial system is concerned about money, credit and finance-


2/18

the three terms are intimately related yet are somewhat different from each other. Indianfinancial system consists of financial market, financial instruments and financial intermediation.These are briefly discussed below;

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created ortransferred. As against a real transaction that involves exchange of money for real goods orservices, a financial transaction involves creation or transfer of a financial asset. Financial Assetsor Financial Instruments represents a claim to the payment of a sum of money sometime in thefuture and /or periodic payment in the form of interest or dividend.

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid,short-term instrument. Funds are available in this market for periods ranging from a single dayup to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. Thetransactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met bythe exchange of currencies. Depending on the exchange rate that is applicable, the transfer offunds takes place in this market. This is one of the most developed and integrated marketacross the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium andlong-term loans to corporate and individuals.

Constituents of a Financial System


3/18

FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these financial assets reachthe ultimate investor in order to garner the requisite amount. When the borrower of fundsapproaches the financial market to raise funds, mere issue of securities will not suffice.

Adequate information of the issue, issuer and the security should be passed on to take place.There should be a proper channel within the financial system to ensure such transfer. To servethis purpose, Financial intermediaries came into existence. Financial intermediation in theorganized sector is conducted by a widerange of institutions functioning under the overallsurveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary wasmostly related to ensure transfer of funds from the lender to the borrower. This service wasoffered by banks, FIs, brokers, and dealers. However, as the financial system widened alongwith the developments taking place in the financial markets, the scope of its operations alsowidened. Some of the important intermediaries operating ink the financial markets include;investment bankers, underwriters, stock exchanges, registrars, depositories, custodians,portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers,satellite dealers, self regulatory organizations, etc. Though the markets are different, there maybe a few intermediaries offering their services in move than one market e.g. underwriter.However, the services offered by them vary from one market to another.

Intermediary Market Role

Stock Exchange Capital MarketSecondary Market tosecurities

Investment Bankers Capital Market, Credit MarketCorporate advisory services,Issue of securities

Underwriters

Capital Market, Money

Market

Subscribe to unsubscribed

portion of securities

Registrars, Depositories,Custodians

Capital Market

Issue securities to theinvestors on behalf of thecompany and handle sharetransfer activity

Primary Dealers SatelliteDealers

Money MarketMarket making in governmentsecurities

Forex Dealers Forex MarketEnsure exchange inkcurrencies

FINANCIAL INSTRUMENTS

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets thatare near substitutes for money. The term short-term means generally a period upto one yearand near substitutes to money is used to denote any financial asset which can be quickly


4/18

converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money

2. Treasury Bills3. Term Money4. Certificate of Deposit5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. Whenmoney is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidaysand/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid onthe next working day, (irrespective of the number of intervening holidays) is "Call Money".When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money".No collateral security is required to cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term moneymarket. The entry restrictions are the same as those for Call/Notice Money except that, as perexisting regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government.It is an IOU of the Government. It is a promise by the Government to pay a stated sum afterexpiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year).They are issued at a discount to the face value, and on maturity the face value is paid to theholder. The rate of discount and the corresponding issue price are determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued indematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other

eligible financial institution for a specified time period. Guidelines for issue of CDs are presentlygoverned by various directives issued by the Reserve Bank of India, as amended from time totime. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks(RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have beenpermitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Bankshave the freedom to issue CDs depending on their requirements. An FI may issue CDs within theoverall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term


5/18

money, term deposits, commercial papers and intercorporate deposits should not exceed 100per cent of its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper thedebt obligation is transformed into an instrument. CP is thus an unsecured promissory noteprivately placed with investors at a discount rate to face value determined by market forces. CPis freely negotiable by endorsement and delivery. A company shall be eligible to issue CPprovided - (a) the tangible net worth of the company, as per the latest audited balance sheet, isnot less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from thebanking system is not less than Rs.4 crore and (c) the borrowal account of the company isclassified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by otheragencies. (for more details visit www.indianmba.com faculty column)

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than one yearperiod, financial instruments; In the equity segment Equity shares, preference shares,convertible preference shares, non-convertible preference shares etc and in the debt segmentdebentures, zero coupon bonds, deep discount bonds etc.

Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instruments is

called as hybrid instruments. Examples are convertible debentures, warrants etc.

2---- Banking system in the country-

A central bank, reserve bank, or monetary authority is a public institution that usually issues

the currency, regulates the money supply, and controls the interest rates in a country. Central

banks often also oversee the commercial banking system within its country's borders. A central

bank is distinguished from a normal commercial bank because it has a monopoly on creating

the currency of that nation, which is usually that nation's legal tender.

Activities and responsibilities

Functions of a central bank include (not all functions are carried out by all banks):

y implementing monetary policyy determining Interest rates


6/18

y controlling the nation's entire money supplyy the Government's banker and the bankers' bank ("lender of last resort")y managing the country's foreign exchange and gold reserves and the Government's stock

registery regulating and supervising the banking industry

y setting the official interest rate used to manage both inflation and the country'sexchange rate and ensuring that this rate takes effect via a variety of policymechanisms

2-Banking system in india-

Current Indian Banking System Scenario

It is true that banks in India are facing difficulty in getting deposits. There are many reasonsbehind this problem.

Two points for what was happening in banking and investment sector in the last 5 years

1. Increased consumerism: If we look at the consumption pattern in last 5 years, people were

moving from being savers to consumers, i.e., more emphasis on benefits gained today

rather than gains received through savings in future, this changing attitude is one of the

reasons for higher growth in lending compared to deposits.

2. Alternatives and risks: People were looking for more alternatives like mutual funds,

different insurance schemes, stock market, etc. People were moving to these productswith higher return expectations. These instruments also have higher risk and increased

income level people who deposit high amounts of money into banks were ready to take

these high-risk alternatives.

But now the situation will be slightly better for banking system in India because investors are

losing a lot of wealth in stock markets and mutual funds. People will realize the importance of

safer investment vehicle and will start diversifying their portfolio with increased exposure to

safer instruments like bank deposits.

The banks in India generate their funds from two types of sources:

Long-Term Sources:

1. Tier one and Tier two Capital in the form of equity/subordinate

debts/debentures/preference shares.

2. Internal accrual generated out of profits.


7/18

3. Long-term fixed deposits generated from public and corporate clients, financial

institutions, and mutual funds, etc.

4. Long-term borrowings from financial institutions like NABARD/SIDBI.

Short-Term Sources:

1. Call money market, i.e., funds generated among interbanking transactions where there is

online trading of money between bankers.

2. Fixed deposits generated from public and corporate clients, FIs, and MFs, etc.

3. Market-linked borrowings from RBI.

4. Sale of liquid certificate deposits in the open market.

5. Borrowing from RBI under Repo (Repurchase option).

6. Short and medium-term fixed deposits generated from public and corporate clients,

mutual funds, and financial institutions, etc.

7. Floating in current and saving accounts.8. Short-term borrowings from FIs by way of rated papers placed, etc.

RBI plays a role of regulator apart from money provider in specific cases.

Right now this seems to be a short-term crisis unless the production figures of the next month

also shows negative trend like it has shown in the month of August @ 1.30% (very low

compared to the previous figures of between a band of 5 to 9%).

If IIP figure goes down continuously for the next 2 to 3 months, we have to assume, there is a

recession in the country. As the service industry may not grow at the volumes shown

previously. The industrial growth is a big hope for the future sustenance of the growth in India.

Now let us analyze the situation of all these sources in the present scenario for the banks:

A) This is not the right time to generate the funds from long-term sources due to the bad

market scenario, so let us focus on the short-term sources.

B) Call money market is very tight. RBI borrowings and placing short term papers is not the best

way to generate funds as the mutual funds and FIs are facing acute pressure due to

withdrawals from the foreign investors including NRIs.

Hence pressure is on retail deposits and now every bank wants to concentrate on these as asource. The rates are increasing. This is a very good time to keep money in a 2- to 3-year lock

deposit with nationalized banks. You may be offered 10.50 to 10.75%. It would be 0.25-0.50%

higher in case of the private/foreign and co-operative banks.

I would like to give all credit to the regulatory system in India, which has withstood to the acute

pressure on banking sector. You would remember the co-operative bank fiasco 3 years back


8/18

and now foreign and private banks are under scanner. Thanks to the mature regulatory system,

we are relatively safe as far as banking in India is concerned.

3--- commodity and stock exchange

Commodity exchange may refer to:

y Commodities exchange, any exchange where various commodities and derivativesproducts are traded.

y Commodity markets, for the markets trading on commodities in general.

A commodities exchange is an exchange where various commodities and derivatives products

are traded. Most commodity markets across the world trade in agricultural products and otherraw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork

bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices,

forwards, futures and options on futures. Other sophisticated products may include interest

rates, environmental instruments, swaps, or ocean freight contracts.

News for commodity exchange-- 1-Gold falls 0.59 per cent to Rs 20,120.

The Multi Commodity Exchange (MCX), the country's largest commodity derivatives platform, isclosely monitoring volatility in precious metals to take a call on raising margins. Traders believe

MCX may raise margins next week if last week's high volatility continues on Monday.

Last Wednesday, MCX raised the silver margin from five per cent to nine per cent in tandemwith the benchmark New York Mercantile Exchange (Nymex). Nymex's action controlledspeculative volatility immediately, with silver falling from $29.36 during intra-day trade to$26.34. It closed with a marginal gain at $29.93.

2-NEW DELHI: Amid a weak trend in global markets and subdued domestic demand, copper

futures prices fell 1.93 per cent to Rs 387.85 per kg today. Profit-booking by speculators also

weighed on the copper futures prices.

At the Multi Commodity Exchange , copper for delivery in November-month contract traded at

Rs 7.65, or 1.93 per cent down at Rs 387.85 per kg, with a trade volume of 8 lots. It ended 1.5

per cent down at Rs 395.50 per kg in the previous session.


9/18

3-NEW DELHI: Silver prices dropped by Rs 618 to Rs 40,561 per kg in futures trade today as

speculators reduced their holdings on the back of a weak global trend. At the Multi Commodity

Exchange , silver for July-month contract dropped by Rs 618, or 1.50 per cent, to Rs 40,561 per

kg in a single lot.

Similarly, the metal for delivery in December-month contract fell by Rs 419, or 1.03 per cent, to

Rs 40,170 per kg with a business turnover of 3 lots. Marketmen said positions reduced by

speculators amid a weak global trend mainly led to the fall in silver prices in the futures trade.

Stock exchange-

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders,

to trade stocks and other securities. Stock exchanges also provide facilities for the issue and

redemption of securities as well as other financial instruments and capital events including the

payment of income and dividends. The securities traded on a stock exchange include shares

issued by companies, unit trusts, derivatives, pooled investment products and bonds.

News for stock exchang- 1-

The Bombay Stock Exchange 30-share barometer index opened slightly higher at 21,041.97 and

moved up further to 21,075.71 but immediately declined to 20,108.40 before closing the week

at 20,156.89, showing a sharp loss of 848.07 points or 4.04 per cent from its last weekend'slevel. The NSE 50-share nifty also tumbled by 240.80 points or 3.81 per cent to 6,071.65 from

6,312.45 previously.

4--The Role of the Investment Banker in the IPO Process

the activities or roles of the investment banker in the IPO process cannot be discounted. Thesuccess of the IPO will to a large extent depend on the capabilities of the investment bankerselected (Ellis, 1989). However, in the absence of a model to guide issuers of securities inselecting investment banks, how does a company come up with the right investment banker tomanage its IPO? Despite the numerous efforts made by academics to investigate into issuesconcerning the market for IPOs, not much has been done on the capabilities of investmentbanks. However by examining critically the roles and responsibilities of investment banks in theIPO process, we can glean some qualities or capabilities an investment banker must possess in


10/18

order to survive in its market. Weston and Copeland (1989) identified three main functions orroles investment banks play in the IPO process and these include: Underwriting, Distributionand, Advice and Counsel.

Underwriting: This is the insurance function of bearing the risk of adverse price fluctuations

during the period in which a new issue of securities is being distributed. There are twofundamental ways of doing this, and they are the firm commitment and best effortsunderwriting agreements. The firm commitment agreement obligates the investment banker toassume all the risks inherent in the issue. On the other hand, the best efforts agreementabsolves the investment banker from any risks in the issue. Under this underwriting agreement,the investment banker undertakes to help sell at least a minimum amount of the issue with anyunsold amounts returned to the issuing firm. Where the investment banker is not able to sellthe minimum quantity agreed upon, the whole issue is cancelled and reissued when the marketis ready to accommodate the issue.

Distribution: Another related function to the one described above is the ability of the issuingfirm to reach as many investors as possible with its security. According to Weston and Copeland(1989), investment banks play a very crucial role here, because of their expertise in doing thisrelative to the issuing firm assuming this responsibility when issuing securities.

Advice and Counsel: This involves the investment banker making valuable inputs into decisionsconcerning its client ability to succeed in the capital market with an IPO. Its ability to makevaluable inputs in this direction may largely depend on its experience in origination and sellingof securities.

In addition, Ellis (1989), identified two categories of factors critical to evaluating and choosing

an investment bank. In his assessment, the most important factors include.

1. Understand our company2. Earn credibility with our senior management3. Make useful recommendations to our company

The least important are:1. Expertise in Eurobond market2. Expertise in equity underwriting

Ellis (1989), again identified six (6) reasons why investment banks gain importance with theircorporate clients. These are:

1. Credibility with the client corporations senior management-earned over several years.2. Understanding the client companys needs for service and its financial goals and

policies.3. Making useful recommendations to the company over a period of time.4. Innovating with new financing techniques.


11/18

5. Having special expertise in a specific service.6. Recommending a specific transaction.

Credibility with Senior ManagementHis postulation on the role of an investment banker goes beyond the IPO process to include

other activities or capabilities of the investment banker, which tends to impact on choice of aninvestment banker by senior management who are interested in strategic issues of theorganisations they are responsible for. Thus if an investment bankers capabilities fit well withfinancial strategies of the organisation, it is made an integral part of implementing the financialstrategy.

Understand Client CompanyAnother reason he finds important to corporate executives is the investment bankersknowledge of their companies and their operations. More conservative corporate executivesrated this as a critical success factor in dealing with investment banks, especially when theinvestment banking industry in US has over the years survived, by maintaining a relationshipwith their clients. In his study, 3 of the 4 different industries he studied ranked this variable asthe most important of all in dealing with an investment banker.

Making Useful RecommendationsA more IPO related factor is the ability of the investment banker to make valuablerecommendations to the issuing firm over time. This is because it reinforces the reliability andconsistency of the investment banks capabilities to its corporate clients. In this light aninvestment banker that is able to consistently make valuable inputs into the financial decisionsof a client strengthens the relationship between itself and its client.

Expertise in Equity UnderwritingAnother important IPO related capability is the ability of the investment banker to underwritesecurities. In the absence of any model to determine the overall capabilities of an investmentbanker, this has been one of the criteria for ranking the performance of investment banks.

Having Expertise in a Specific ServiceThe competitive wave sweeping the US investment banking industry has caused mostinvestment banks to concentrate on their capabilities where they can gain a competitiveadvantage. The era where one investment banker was at the centre of a corporate entitysfinancial strategy is over. Corporate entities are shopping for specific capital market

capabilities of investment banks. This has eventually changed the structure of the investmentbanking industry where size used to be a competitive factor.

Supplementing Capabilities

Other capabilities such as Euro market capabilities, recommending specific transactions andinnovating with new financing techniques are all additives to the more generic functionsdescribed above. These capabilities, though not really taken to be very important then are nowmaking very important inputs into the choice of firms by corporate clients. Grinblatt and Titman


12/18

(2002), point out that investment banks have been motivated in various ways to developcapabilities in these areas to expand their client-base beyond their domestic financial markets.

5differene between IB, commercial banking and merchant bankingHistorically, three different kinds of banks provided services in separate areas. Commercial

banks lent capital to businesses and individuals and provided retail banking services.

Investment banks provided securities underwriting. Merchant banks concentrated on

international trade and facilitated private financing for large institutions. These functions now

overlap among banking organizations, a situation made more complex by the 2008 financial

meltdown.

Banks offering financial services and advices to wealthy individuals and corporations arereferred to as merchant banks. Investment banks are financial institutions supporting

governments and corporations, that help to raise capital.

This is mainly done by acting as agent in issuing securities.

Main difference between merchant banking and investment banking is mode of wealthmanagement and services offered. Merchant banks invest their own capital in businessoperation of clients. Investment bank primarily trades and distributes securities of their clientswhile raising capital.

Both types of banks offer advisory services including those related to mergers and acquisitions.In addition to this, investment banks offer services like trading of foreign exchange, and fixed

income securities.

Investment banks do not take deposits like retail or commercial banks.

In United States, only a licensed broker-dealer can provide service of investment banking.Corporations are advised by investment banks on issues like how and when to place securitiesin market. An investor is guided by investment banker about the potential risk of investmentinstruments.

Merchant banks are traditionally focused to service small scale companies. They offer variousservices like bridge financing, equity financing and various corporate credit products for theirclients.

Companies that are too large to be managed or serviced by venture capital and too small foroffering public share are target for merchant banks.


13/18

Large merchant banks are inclined towards placing equity with other financial institutions. Theyalso take over sizeable ownership of companies that they believe to have strong growthpotential.

Investment banks have three mode of operations namely front office, middle office and back

office. Front office offers investment products and services. Each sector targets different levelsof clients by providing array of services.

Although investment banks are primarily meant for large companies and governments, thereare several core banking products that an individual investor can avail. Such investment can besteered through specific industry or investment instruments like shares, bonds or derivatives.

Financial markets in last few years have evolved in such a way that the thin line that separatesfunctions of merchant banks and investment banks tend to blur. Modern merchant banks areventuring in the field of securities underwriting and investment banks are expanding in tradefinancing.

The world of banking and finance is one of many intricacies. Many types of financial institutionsexist, including commercial banking and merchant banking. The difference between commercialbanking and merchant banking lies mainly in the services they provide, and to whom they areprovided. Commercial banking is generally accessible to anyone for basic banking needs,whereas merchant banks serve mainly large companies and very wealthy individuals.

Commercial banks are what people typically refer to as banks. A commercial bank can provideloans to individuals and small businesses. It raises funds by collecting deposits from these samegroups of people, as well as from interest charged on loans. It also purchases bonds from

governments and corporate entities

The banks described above are the most common definition of commercial banks. Commercialbanking is also sometimes defined as the provision of banking services such as checking andloans to large businesses, as distinguished from individual citizens. In this case, bankingprovided to individuals is referred to as retail banking to differentiate it from the seconddefinition of commercial banking.

-

6- fdi foreign direct investment=

Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually

involves participation in management, joint-venture, transfer of technology and expertise. There are

two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a

netFDI inflow(positive or negative) and "stock of foreign direct investment", which is the cumulative

number for a given period. Direct investment excludes investment through purchase of shares.


14/18

Types

A foreign direct investor may be classified in any sector of the economy and could be any one ofthe following:[citation needed]

y an individual;y a group of related individuals;y an incorporated or unincorporated entity;y a public company or private company;y a group of related enterprises;y a government body;y an estate (law), trust or other societal organisation; ory any combination of the above.

[edit] Methods

The foreign direct investor may acquire voting power of an enterprise in an economy throughany of the following methods:

y by incorporating a wholly owned subsidiary or companyy by acquiring shares in an associated enterprisey through a merger or an acquisition of an unrelated enterprisey participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

y

low corporate tax and income tax ratesy tax holidaysy other types of tax concessionsy preferential tariffsy special economic zonesy EPZ - Export Processing Zonesy Bonded Warehousesy Maquiladorasy investment financial subsidiesy soft loan or loan guaranteesy free land or land subsidiesy relocation & expatriation subsidiesy job training & employment subsidiesy infrastructure subsidiesy R&D supporty derogation from regulations (usually for very large projects)

y Foreign direct investment in Indiay A recent UNCTAD survey projected India as the second most important FDI destination

(after China) for transnational corporations during 2010-2012. As per the data, the


15/18

sectors which attracted higher inflows were services, telecommunication, constructionactivities and computer software and hardware. Mauritius, Singapore, the US and theUK were among the leading sources of FDI. FDI for 2009-10 at USD 25.88 billion waslower by five per cent from USD 27.33 billion in the previous fiscal. Foreign directinvestment in August dipped by about 60 per cent to USD 1.33 billion, the lowest in

2010 fiscal, industry department data released showed.[7]

FII- foreign institutional investors-

An investor or investment fund that is from or registered in a country outside of the one in which it is

currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual

funds.

Foreign Institutional Investor - FIIThe term is used most commonly in India to refer to outside companies investing in the financial markets of India.International institutional investors must register with the Securities and Exchange Board of India to participate inthe market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership inIndian companies.

7--ADR- Americal dipostary recipt-

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign

stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by

a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be

levied on each transaction.

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in

U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in anothercountry. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expensesand foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX orNasdaq.

Each ADR is issued by a U.S. depository bank and can represent a fraction of a share, a singleshare, or multiple shares of the foreign stock. An owner of an ADR has the right to obtain theforeign stock it represents, but US investors usually find it more convenient simply to own theADR. The price of an ADR often tracks the price of the foreign stock in its home market,adjusted for the ratio of ADRs to foreign company shares. In the case of companiesincorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax

(SDRT) charge by the UK government.

Depositary banks have various responsibilities to an ADR shareholder and to the non-UScompany the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the Britishretailer Selfridges. There are currently four major commercial banks that provide depositarybank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York Mellon.


16/18

GDR--

What Does Global Depositary Receipt - GDR Mean?1. A bank certificate issued in more than one country for shares in a foreign company. Theshares are held by a foreign branch of an international bank. The shares trade as domestic

shares, but are offered for sale globally through the various bank branches.

A GDR is very similar to an American Depositary Receipt.

2. These instruments are called EDRs when private markets are attempting to obtain euros.

A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by adepository bank, which purchases shares of foreign companies and deposits it on the account.GDRs represent ownership of an underlying number of shares.

Global Depository Receipts facilitate trade of shares, and are commonly used to invest in

companies from developing or emerging markets.

A GDR is similar to an ADR, but is a depositary receipt sold outside of the United States

and outside of the home country of the issuing company. Most GDRs are, regardless of

the geographic market, denominated in United States dollars, although some trade in

Euros or British sterling. There are more than 900 GDRs listed on exchanges worldwide,

with more than 2,100 issuers from 80 countries.

Although ADRs were the most prevalent form of depositary receipts, the number of

GDRs has recently surpassed ADRs because of the lower expense and time savings in

issuing GDRs, especially on the London and Luxembourg stock exchanges.

GDR is based on a Deposit Agreement between the depositary bank and the corporate

issuer, and specifies the duties and rights of each party, both to the other party and to

the investors. Provisions include setting record dates, voting the issuers underlying

shares, depositing the issuers shares in the custodian bank, the sharing of fees, and the

execution and delivery or the transfer and the surrender of the GDR shares.

A separate custodian bank holds the company shares that underlie the GDR. The

depositary bank buys the company shares and deposits the shares in the custodian


17/18

bank, then issues the GDRs representing an ownership interest in the shares. The DR

shares actually bought or sold are called depositary shares.

GDR Advantages and Disadvantages

GDRs, like ADRs, allow investors to invest in foreign companies without worrying about foreign

trading practices, different laws, or cross-border transactions. GDRs offer most of the same

corporate rights, especially voting rights, to the holders of GDRs that investors of the underlying

securities enjoy.

Other benefits include easier trading, the payment of dividends in the GDR currency, which is

usually the United States dollar (USD), and corporate notifications, such as shareholdersmeetings and rights offerings, are in English. Another major benefit to GDRs is that institutional

investors can buy them, even when they may be restricted by law or investment objective from

buying shares of foreign companies.

GDRs also overcome limits on restrictions on foreign ownership or the movement of capital

that may be imposed by the country of the corporate issuer, avoids risky settlement

procedures, and eliminates local or transfer taxes that would otherwise be due if the companys

shares were bought or sold directly. There are also no foreign custody fees, which can range

from 10 to 35 basis points per year for foreign stock bought directly.

8--Fungibility-

What Does FungibilityMean?

A good or asset's interchangeability with other individual goods/assets of the same type. Assets

possessing this property simplify the exchange/trade process, as interchangeability assumes

that everyone values all goods of that class as the same.

Fungibility is the property of a good or a commodity whose individual units are capable ofmutual substitution. Examples of highly fungible commodities are crude oil, wheat, orangejuice, precious metals, and currencies.


18/18

It refers only to the equivalence of each unit of a commodity with other units of the samecommodity. Fungibility has nothing to do with the ability to exchange one commodity foranother different commodity. It refers only to the ease of exchanging one unit of a commoditywith another unit of the same commodity

Fungibility versus liquidity

Fungibility is different from liquidity. A good is liquid if it can be easily exchanged for money oranother differentgood. A good is fungible if one unit of the good is substantially equivalent toanother unit of the same good of the same quality at the same time and place.

Examples:

y Cash is fungible: one US$10 bank note is interchangeable with another.y Crude oil is fungible: a barrel of West Texas Intermediate crude oil is fungible (direct

exchange) with another barrel of the same type and grade of crude oil.y Different issues of a government bond (maybe issued at different times) are fungible

with one another if they carry precisely the same rights and any of them is equallyacceptable in settlement of a trade.

Fungibility does not imply liquidity, and liquidity does not imply fungibility. Diamonds can be

readily bought and sold (the trade is liquid) but individual diamonds, being unique, are not

interchangeable (diamonds are not fungible). Indian rupee bank notes are mutually

interchangeable in London (they are fungible there) but they are not easily traded there (they

cannot be spent in London). In contrast to diamonds, gold coins of the same grade and weight

are fungible, as well as liquid.

financial system in country

Documents