study of mutual funds an offshore investment

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STUDY OF MUTUAL FUNDS AN OFFSHORE

INVESTMENT

A report submitted to IIMT, Greater Noida as a partial fulfillment

of Full time

Postgraduate Diploma in Marketing Management

Submitted to:

Submitted by:

Director Academics Tiwari Deepak kumar

IIMT,

Enr. No.-1031

Greater Noida.

PGDMM ,1ST Batch

Ishan Institute of Management & Technology

A1, Knowledge Park-1, Greater Noida.

Gautam Buddh Nagar


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Website:www.ishanfamily.com

E-mail: - [email protected]

Reliance Money Limited


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DECLARATION

The summer project on STUDY OF MUTUAL

FUNDS AND OFFSHORE INVESTMENT, from

Reliance Money Ltd is the original work done by me.

This is the property of the institute and use of this

report without prior permission of the institute will be

considered illegal and actionable.

Tiwari Deepak kumar

Enr no:1031


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CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that the project entitled MutualFund and Offshore Investment,presented byMr. Tiwari Deepak kumar, Student of PGDMM 1ST

Batch, bearing Enr. No. 1031 (Session 2006-2008),in partial fulfillment of the requirement for the awardof degree of PGDMM, is a bonafied work carried outby his under my supervision.

In my knowledge, this work has not been submitted,either in part or in full, to any other institute for theaward of degree or diploma.

DATE:Name of

the Guide:


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Seal/Stamp of the Organization Mr.Sumeet chattwal


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PREFACE

Mutual funds have been around for a long time, dating back to the

early 19th century. The first modern American mutual fund opened

in 1924, yet it was only in the 1990's that mutual funds became

mainstream investments, as the number of households owning

them nearly tripled during that decade. With recent surveys

showing that over 88% of all investors participate in mutual funds,

you're probably already familiar with these investments, or perhaps

even own some. In any case, it's important that you know exactly

how these investments work and how you can use them to your

advantage.

A lone UTI with just one scheme in 1964 now competes with as

many as 400 odd products and 34 players in the market. In spite of

the stiff competition and losing market share, UTI still remains a

formidable force to reckon with.
http://www.investorwords.com/2130/funds.htmlhttp://www.investorwords.com/1285/dating.htmlhttp://www.investorwords.com/3173/mutual_fund.htmlhttp://www.investorwords.com/2130/funds.htmlhttp://www.investorwords.com/2130/funds.htmlhttp://www.investorwords.com/1285/dating.htmlhttp://www.investorwords.com/3173/mutual_fund.htmlhttp://www.investorwords.com/2130/funds.html


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Last six years have been the most turbulent as well as exiting ones

for the industry. New players have come in, while others have

decided to close shop by either selling off or merging with others.

Product innovation is now pass with the game shifting to

performance delivery in fund management as well as service.

Those directly associated with the fund management industry like

distributors, registrars and transfer agents, and even the regulators

have become more mature and responsible.

The industry is also having a profound impact on financial

markets. While UTI has always been a dominant player on the

bourses as well as the debt markets, the new generations of private

funds, which have gained substantial mass, are now seen flexing

their muscles. Fund managers; by their selection criteria for stocks

have forced corporate governance on the industry. By rewarding

honest and transparent management with higher valuations, a

system of risk-reward has been created where the corporate sector

is more transparent then before.

Funds have shifted their focus to the recession free sectors like

pharmaceuticals, FMCG and technology sector. Funds

performances are improving. Funds collection, which averaged at

less than Rs.100bn per annum over five-year period spanning

1993-98 doubled to Rs.210bn in 1998-99. In the current year


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mobilization till now have exceeded Rs.300bn. Total collection for

the current financial year ending March 2000 is expected to reach

Rs.450bn.

What is particularly noteworthy is that bulk of the mobilization has

been by the private sector mutual funds rather than public sector

mutual funds. Indeed private MFs saw a net inflow of Rs.7819.34

crore during the first nine months of the year as against a net

inflow of Rs.604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in

the race for retail investors savings and corporate float money.

The power shift towards mutual funds has become obvious. The

coming few years will show that the traditional saving avenues are

losing out in the current scenario. Many investors are realizing thatinvestments in savings accounts are as good as locking up their

deposits in a closet. The fund mobilization trend by mutual funds

in the current year indicates that money is going to mutual funds in

a big way.

The total assets under management of the mutual fund industryincreased by 7.1% from Rs 258031 crore as on April end to Rs

276342 crore as on May end. Growth Funds managing corpus of

Rs 93748 crore as on May end witnessed a downfall of 3.98%


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compared to previous month. The total assets under management

of Balanced Fund also saw a decrease of 7% from Rs 7829 crore as

on April end to Rs 7279 crore as on May end. Income funds

reported marginal reduction in assets by Rs 110 crore with total

assets under management at Rs 57436 crore as on May end.


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ACKNOWLEDGEMENT

Enumerating and enlisting all the individuals whose contributions

went into the making of the project is a very difficult task

I offer my great sense of gratitude and thanks to Late Mr.

Dhirubhai Ambani (great visionary), who gave me a chance to

work under him. I am obliged to him for encouraging me and for

providing me valuable knowledge.

I am highly indebted to Mr Sumeet Chhatwal Central

manager for giving his valuable time and advice regarding this

project.

I am extremely grateful to Dr. D.K. Garg, Chairman (I.I.M.T.)

for providing me an opportunity to undergo this project.

Last but not the least I am very obliged to the management and

member Reliance Money Ltd, Delhi who cooperated with me,


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devoting their valuable time for working and preparing this project

report.

Finally I express my sincere thanks to all those who directly or

indirectly helped me in the success of this project.

Tiwari Deepak kumar


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TABLE OF CONTENTS

Topic : Mutual Fund and Offshore investment

Page No.

1. Executive Summary

2. Introduction

3. Objective

4. Company Profile 25

About Reliance capital ltd26

About Reliance money ltd. 32

Vision 38

Founders and Promoters 43

Why Reliance Money ltd62

Product and Services


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HR Policy

Marketing Policies

6. Project Details

Project Topic

Capital Market

Offshore investment

Mutual Fund (Introduction)

Fund structure and constituents

Regulatory aspect of Mutual Fund

Accounting and Valuation

Tax aspect

Performance measure

Types of mutual fund

Process of investing

Asset allocation

Benefits of mutual fund

Myths about mutual fund

Global Scenario and Market Trend

7. Feedback


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Competitors

Limitation

8. Bibliography

9. Annexure

What I learnt

Work culture at Reliance money

10. Word of Thanks


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EXECUTIVE SUMMARY

Reliance Money Ltd. is one of the leading Brokerage Houserecently started its IPO and Mutual Fund department . Mutual

Fund is one of the best investment alternative avilable in the the

market and make safer than other investment options.

The mutual fund industry is also having a profound impact on

financial markets. While UTI has always been a dominant playeron the bourses as well as the debt markets, the new generations of

private funds, which have gained substantial mass, are now seen

flexing their muscles. Fund managers; by their selection criteria for

stocks have forced corporate governance on the industry. By

rewarding honest and transparent management with higher

valuations, a system of risk-reward has been created where the

corporate sector is more transparent then bank.


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Funds have shifted their focus to the recession free sectors like

pharmaceuticals, FMCG and technology sector. Funds

performances are improving. Funds collection, which averaged at

less than Rs.100bn per annum over five-year period spanning

1993-98 doubled to Rs.210bn in 1998-99. In the current year

mobilization till now have exceeded Rs.300bn. Total collection for

the current financial year ending March 2000 is expected to reach

Rs.450bn.

What is particularly noteworthy is that bulk of the mobilization has

been by the private sector mutual funds rather than public sector

mutual funds. Indeed private MFs saw a net inflow of Rs.7819.34

crore during the first nine months of the year as against a net

inflow of Rs.604.40 crore in the case of public sector funds.

Reliance Money Ltd. provides professional portfolio management

which helps the investor to invest wisely. Reliance Money is the

Member of NSE, BSE, F&O, NCDEX, MCX. Company offer

large avenues of Investment Solutions, catering to all classes of

Investors.

Company have the most advanced, hi-tech in house R&D wing

equipped with some of the best people, process and technology

resources providing complete research solutions on Equity,


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Commodities, IPOs and Mutual Funds. SMC is contributing one

of the highest average daily turnovers in NSE, F&O, BSE,

NCDEX &MCX.

SMC Trading Platform offers online equity & derivative trading

facilities for investors who are looking for the ease and

convenience and hassle free trading experience. Company provides

ODIN Application, which is a high -end, integrated trading

application for fast, efficient and reliable execution of trades.Investor can now trade in the NSE and BSE simultaneously from

any destination at your convenience. Investor can access a

multitude of resources like live quotes, charts, research, advice,

and online assistance helps you to take informed decisions.

Investor can also trade through our branch network by registering

with us as our client. Investor can also trade through company on

phone by calling companys designated representatives in the

branches where investors are registered as a client.

Reliance Money Ltd. is a member of two major national level

commodity exchanges, i.e. National Commodity and Derivative

Exchange and Multi Commodity Exchange and offers you trading

platform of NCDEX; MCX & NMCE. You can get Real-Time

streaming quotes, place orders and watch the confirmation, all on a


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single screen. We use technology using ODIN application to

provide you with live Trading Terminals. In this segment, we have

spread our wings globally by acquiring Membership of Dubai Gold

and Commodities Exchange. We provide trading platform to trade

in DGCX and also clear trades of trading members being a clearing

member.

. We are one of the leading DP and enjoy the trust of more than

75,000 investors. We offer a quick, secure and hassle free

alternative to holding the securities and commodities in physical

form. We are one of the few Depository Participants offering

depository facilities for commodities. We are empanelled with

both NCDEX, MCEX. &NMC.

Reliance money is a member of three major national level

commodity exchanges, i.e. National Commodity and Derivative

Exchange (NCDEX), Multi Commodity Exchange (MCX) and

Nation Multi Commodity Exchange (NMCE). Investor can get

Real-Time streaming quotes, place orders and watch the

confirmation, all on a single screen. Company uses technology

using ODIN application to provide you with live TradingTerminals. In this segment, company has spread their wings

globally by acquiring Membership of Dubai Gold and

Commodities Exchange. Company provide trading platform to


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trade in DGCX and also clear trades of trading members being a

clearing member.


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OBJECTIVE

Mutual fund and asset allocation is very vast topic and as well as

interesting also. Mutual Fund is one of the best investment

alternatives with minimum risk and fair returns among different

investment alternative available in the financial risk and asset

allocation is one of the financial technique for designing the

portfolio of the customer according to their profile and risk

appetite. Following are the main objective of the project.

To know about the mutual fund industry in India

Evolution of mutual fund industry and its global scenario

and market trend of mutual fund.

To know about the mutual fund and its type.

To understand the valuation method of the mutual fund and

its pricing

To know about the Asset Management Company and its

functioning.

Income and expenses of the mutual funds.


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Regulatory frame work of the Mutual Fund

SEBI guidelines for the Mutual Fund and provisions.

To understand different method of measuring risk and return

involved in mutual fund.

Asset allocation and different theories of asset allocation and

its application.

To understand the different strategies followed by the

portfolio manager for allocating the securities.

Comparison between Mutual Fund and other investment

alternatives.

To know about the risk and return grid of Mutual Fund.

Benefits of the mutual fund

To know about the myths about the mutual fund.


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THE GROUP

Reliance Money ltdo Member : NSE (cash & derivative segment)

o Member :BSE (Equity & Derivative segment)

Reliance Securities ltd.

o Member : BSE(cash & derivative segment)

o Member : NSE(equity 7 derivative segment)

Reliance Commodities ltd.

o Member : NCDEX , MCX & NMCE

About Group

One of the top brokerage houses of India.

A one stop shop for diversified financial servicescustomized for our vast clientele.

Headquartered in Mumbai

Offices at New Delhi & Kolkata and a mammoth network offranchisees across

India.


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Milestones

Acquired membership of DSE in 2006.

Became member of NSE in 2006.

Became member of BSE & depository participant with

CDSL in 2006.

Acquired Membership of NCDEX & MCX in 2007.

Mission

To give value added and quality services to the investors and

enable them to maximize their returns on investment.

To give risk management back up to clients through the

expertise of our technical analysts.

To work together with customers, combining our skills,

technologies and experience, thereby giving entirely new

dimensions to online brokerage services.

Infrastructure

Head office at 5th

floor,Lexington Building ,Hiranandani

Estate , Ghodbandar Road ,Thane (West).

Offices at Noida, Mumbai & Kolkata and presence at more

than 100 locations across India.


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A conglomerate consisting of many franchisees and sub-

brokers

Networking and Technology

Technical tie-up with HCL Comnet,BSNL, Financial

Technologies

Manned by skillful Technicians & hardware professionals

Significant number of trading terminals in the Head Office.

Wired to Perfection

VPN with state of the art networking facilities

More than 250 VSATs/Leaselines

1400 trading terminals of NSE, BSE, NCDEX and MCX

21 Online Depository Branches

41 Offline Branches connected through Back Office Software


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RELIANCE MONEY Ltd.

Reliance Money is an Endeavour to change the way India trades infinancial markets and avails of various financial services. RelianceMoney ensures maximum security with a unique security token tokeep your online account safe. It is driven by ethical and dynamic

process for wealth creation. Based on this, the company started itsEndeavour in the financial market.

Reliance money Limited (A Reliance Capital Company) throughReliance money Limited, Reliance life insurance Limited, RelianceMutual Fund Limited and Reliance General Insurance Limited

provides integrated financial solutions to its corporate, retail andwealth management clients. Today, we provide various financialservices which include Investment Banking, Corporate Finance,

Portfolio Management Services, Equity & Commodity Broking,Insurance and Mutual Funds. Plus, theres a lot more to come yourway.

Reliance Money is proud of being a truly professional financialservice provider managed by a highly skilled team, who have

proven track record in their respective domains. Reliance Moneyoperations are managed by more than 1500 highly skilled

professionals who subscribe to ADAG philosophy and are spreadacross its country wide branches.

Today, we have a growing network of more than 100 branches andmore than 350 business partners spread across more than 250cities/towns in India.


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Unlike a traditional broking firm, Reliance Money works on thephilosophy of partnering for wealth creation. We not only executetrades for our clients but also provide them critical and timelyinvestment advice. The growing list of financial institutions with

which Reliance Money is empanelled as an approved broker is areflection of the high level service standard maintained by thecompany.


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BACKGROUND AND HISTORY

Late Mr. Dhirubhai Ambani (Founder) was a true leader --practical and realist and yet, talked the language of a visionaryand an idealist. For it was his vision to start integrated financialservices driven by the relationship of trust and confidence. From

here Reliance money Limited, a Reliance capital Company startedits operations.

To realize its vision, the Reliance money has taken one step ahead.Today, Reliance money provides various financial services whichinclude broking (stocks & commodities), depository participantservices, portfolio management services, advisory on mutual fundinvestments and many more.

Unlike a traditional broking firm, Reliance money works on thephilosophy of being Financial Care Partner. We not only executethe trades for our clients but also provide them critical and timelyinvestment advice. The growing list of financial institutions withwhich Reliance money is empanelled as an approved broker is areflection of the high level service standard maintained by thecompany.

Reliance money is proud of being a truly professional financial

service provider managed by a highly skilled team, who have proven track record in their respective domains. Through itsregional, zonal and branch offices, Reliance money has the widestreach and is available to you across the length and breadth of thecountry.


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GROUP OF COMPANIES

Reliance money Limited

1. Member of National Stock Exchange of India and BombayStock Exchange of India.

2. Depository Participant with National Securities DepositoryLimited and Central Depository Services (I) Limited

3. A SEBI approved Portfolio Manager

RSL serves a platform to all segments of investors to avail theopportunities offered by investing in Indian equities either on theirown or through managed funds in Portfolio Management.

RELIANCE MUTUAL FUND LIMIED

RELIANCE LIFE INSURANCE LIMITED

RELIANCE GENERAL INSURANCE LIMITED

Reliance money is one of the leading and experienced

brokerage houses having its corporate office in Delhi ,

besides offices in Mumbai, Kolkata and a mammoth network

of more than 500 offices spread across the country. Member of NSE, BSE, F&O, NCDEX, MCX, NMCE

Clearing Member in NSE certified DP for shares and

commodities.


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VISION

Vision

To be a global major in providing complete investment solutions,

with relentless focus on investor care, through superior efficiency

and complete transparency.

To build a global enterprise for all our stakeholders, and A great future for our country,

To give millions of young Indians the power to shape theirdestiny,

The means to realize their full potential


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PROMOTERS AND FOUNDERS

Mr. Anil Dhiru Bhai Ambani is the Chairman and Managing

Director of Reliance Money Ltd.. He is an embodiment of

professional excellence. They are the visionaries who planted thesampling of the giant tree called Reliance Money. With rock solid

reserve and firm commitment, they have shaped their vision to

reality. They have a rich experience in the capital market. His

exceptional leadership skills and outstanding commitment has

made Reliance Money as one of the leading investment solutions

and services provider. Both of them are professionals to the core.

Their specialization in risk management and surveillance and their

disciplined style of working is an inspiration to the workforce of

Reliance Money. Their experience of the securities as well as the

commodity market and their leadership qualities has made

Reliance Money a force to reckon with.


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Management

Mr. Anil Bhai Ambani Chairman and

Managing Director

Reliance money is led by individuals who are professional leadersand are committed to reface the financial services industry in India.

Each of the individual works constantly towards Reliance

moneys objective of Indias first truly MNC in financial

services.

Reliance money team is led by a very eminent Board ofDirectors who provide policy guidance and work under theactive leadership of its CEO & Managing Director and supportof its Central Guidance Team.

BOARD OF DIRECTORS

Following is the list of BOD of Reliance money Limited

Chairman Mr. Anil dhirubhai AmbaniManaging

DirectorMr. Anil dhirubhai Ambani

C.E.O.Mr. Sudip Bandyopadhyay

Head H.R. Mr.Adrian Williams


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Head MarketingMr. Bosco D'mello

Marketing Division:-Bosco D'mello 79203 9322193348Zahid Gawandi 79238 9323609245Dinesh (VishramDhuri) 79231 9323609340Nazish Ahmed 79236 9323135220Mukesh Waje 79233 9322321006

HUMAN RESOURCES DIVISION:-

Adrian Williams 79201 9324951811Jigesh 79221 9322424024Faye 79398 9322144577Vikas Master 79399 9322144575Sumit Ghosh 79226 9322157455Shruti C. Wali 79225 9322952419

Shweta Sant 79224 9322144580Sunil Somrajan 79227 9322952421Abhijeet 79228 9321044695Alpesh 79229 9322955753

EQUITY DIVISION:-

Ravi Doshi 79204 9322933952Anand

Krishnamoorthy 79242 9322655088Ravi Jain 79243 9324714684

OFFSHORE DIVISION:-

Ravi Doshi 79204 9322933952Anand 79242 9322655088


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Companys Approach

Value for Investor's Trust: We value the trust reposed in usby our clients and are committed to uphold it at all cost.

Integrity and Honesty: We at Reliance Money are men of

integrity and believe in transparency and discipline.

Personalized Attention: Our most valued asset is our

relationship with the clients, which we have built by giving

personalized attention to all our clients.

Network Which Works: We have a vast network extending

to 130+cities but we ensure that it WORKS for the investors

in terms of accessibility, convenience and hassle free trading

experience.

Research Based Advisory Services: We offer proactive andtimely world-class research based advice and guidance to our

clients so that they can take informed decisions.

Specialized Services

Investor care is of paramount importance at Reliance Money.

We offer large avenues of investment solutions for all classesof investors under one roof.


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Our experience is one of our prized possession. We have an

experience of more than 15 years wherein we have grown

phenomenally.

Mammoth network of offices and our nation wide presence,

ensures personal touch and easy accessibility to investors

across the country.

One of the most competitive brokerage structure.

Hassle free trading experience.

Timely advice along with research support to the clientsthrough SMS and E-Mails on Equities, Derivatives,

Commodities, IPOs and Mutual Funds.

Product and services

Equity Trading.

Derivative Trading.

Commodities Trading.

Commodities Trading in International Markets through

DGCX.

Mutual Fund & IPO Distribution.

Depository Services for Shares & Commodities.


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Real time Internet Trading.

Research support to the clients through SMS

Clearing Services for Trading Members in NSE F&O and

NMCE

Equity & Derivative Trading

Reliance Money Trading Platform offers online equity &

derivative trading facilities for investors who are looking for the

ease and convenience and hassle free trading experience. We

provide ODIN Application, which is a high -end, integrated

trading application for fast, efficient and reliable execution of

trades. You can now trade in the NSE and BSE simultaneously

from any destination at your convenience. You can access a

multitude of resources like live quotes, charts, research, advice,

and online assistance helps you to take informed decisions. You

can also trade through our branch network by registering with us as

our client. You can also trade through us on phone by calling our

designated representatives in the branches where you are registered

as a client.

Clearing Services

Being a clearing member in NSE (derivative) segment we are

clearing massive volumes of trades of our trading members in this

segment.


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Commodity Trading

Reliance Money is a member of two major national levelcommodity exchanges, i.e. National Commodity and Derivative

Exchange and Multi Commodity Exchange and offers you trading

platform of NCDEX , MCX &NMCE. You can get Real-Time

streaming quotes, place orders and watch the confirmation, all on a

single screen. We use technology using ODIN application to

provide you with live Trading Terminals. In this segment, we have

spread our wings globally by acquiring Membership of Dubai Gold

and Commodities Exchange. We provide trading platform to trade

in NMCE and also clear trades of trading members being a

clearing member.

Distribution of Mutual Funds & IPOs

Reliance Money offers distribution and collection services of

various schemes of all Major Fund houses and IPOs through its

mammoth network of branches across India . We are registered

with AMFI as an approved distributor of Mutual Funds. We assure

you a hassle free and pleasant transaction experience when youinvest in mutual funds and IPOs through us. We are registered

with all major Fund Houses including Fidelity, Franklyn

Templeton etc. We have a distinction of being leading distributors


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of IPOs.Shortly we will be providing the facility of online

investment in Mutual Funds and IPOs

Online back office support

To provide robust back office support backed by excellent

accounting standards to our branches we have ensured connectivity

through FTP and Dotnet based Application. To ensure easy

accessibility to back office accounting reports to our clients, we

have offered facilities to view various user-friendly, easilycomprehendible back office reports using the link My SMC

Account.

Reliance money Depository

We are ISO 9001:2000 certified DP for shares and commodities.

We are one of the leading DP and enjoy the trust of more than

75,000 investors. We offer a quick, secure and hassle free

alternative to holding the securities and commodities in physicalform. We are one of the few Depository Participants offering

depository facilities for commodities. We are empanelled with

both NCDEX, MCX &NMCE..
http://59.144.163.142/onlineasp/smconline.aspxhttp://59.144.163.142/onlineasp/smconline.aspxhttp://59.144.163.142/onlineasp/smconline.aspxhttp://59.144.163.142/onlineasp/smconline.aspx


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Reliance money Research Based Advisory Services

Our massive R&D facility caters to the need of Investors, who are

continuously in need of opportunities for striking rich rewards on

their investment. We have one of the most advanced, hitech in-

house R&D wing with some of the best people, process and

technology resources providing complete research solutions on

Equity, Commodities, IPOs and Mutual Funds. We offer proactive

and timely world class research based advice and guidance to our

clients so that they can take informed decisions. Click on Research

to unveil the treasure.

Reliance Money Investor Awareness Forum

Our dedicated team of professionals is conducting investor

meet/seminars across India . We believe that a well-informedinvestor is an empowered investor. We also seek your feedback on

our services in these Investor meets.
http://www.contentlinks.asiancerc.com/smc/fundamental/research.asphttp://www.contentlinks.asiancerc.com/smc/fundamental/research.asp


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MARKETING POLICY

a] Basis of preparation

The financial statements have been prepared to comply with themandatory Accounting Standards issued by the Institute ofChartered Accountants of India (`ICAI') and the relevant

provisions of the Companies Act, 1956 (the `Act'). The financialstatements have been prepared under the historical cost conventionon accrual basis. The accounting policies have been consistentlyapplied by the Company unless otherwise stated.

[b] Fixed assets

Fixed assets are stated at cost less accumulated depreciation andimpairment losses. Cost comprises the purchase price and anyattributable cost of bringing the asset to its working condition forits intended use.

[c] Intangibles

Patents, Trademarks and Designs

Costs relating to patents, trademarks and designs, which areacquired, are capitalized and amortized on a straight-line basis overa period of 5 years.

Computer software

Pursuant to adoption of Accounting Standard 26 - IntangibleAssets, issued by the ICAI, software which is not an integral partof the related hardware, is classified as an intangible asset and is

being amortised over a period of 6 years, being the estimateduseful life.


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Raw materials, stores and spares and packing materials

Lower of cost and net realizable value. However, materials andother items held for use in the production of inventories are not

written down below cost

if the finished products in which they will be incorporated areexpected to be sold at or above cost. Cost is determined on aweighted average basis.

Finished goods

Lower of cost and net realizable value. Cost includes direct

materials and labour and a proportion of manufacturing overheadsbased on normal operating capacity. Cost of finished goodsincludes excise duty.

Work-in-process

At cost upto estimated stage of process. Cost includes directmaterials and labour and a proportion of manufacturing overheads

based on normal operating capacity.

Net realizable value is the estimated selling price in the ordinarycourse of business, less estimated costs of completion and theestimated costs necessary to make the sale.

Where duty paid/indigenous materials are consumed, prior to duty-free import of materials under the Advance License Scheme, inmanufacture of products for export, the estimated excess cost ofsuch materials over that of duty free materials is carried forward in

the cost of raw materials and charged to revenue on consumptionof such duty-free materials.


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[h] Revenue recognition

Revenue is recognized to the extent that it is probable that theeconomic benefits will flow to the Company and the revenue can

be reliably measured.

Sale of Goods:

Revenue from sale of goods is recognised when the significantrisks and rewards of ownership of the goods are transferred to thecustomer and is stated net of trade discounts, excise duty, salesreturns and sales tax.

Royalties, Technical Know-how and Licensing income:

Revenue is recognised on an accrual basis in accordance with theterms of the relevant agreement.

Interest:

Revenue is recognised on a time proportion basis taking intoaccount the amount outstanding and the rate applicable.

Dividends:

Revenue is recognized when the right to receive the income isestablished.

[i] Research and development costs

Revenue expenditure incurred on research and development is

charged to revenue in the year it is incurred. Capital expenditure isincluded in the respective heads under fixed assets.

[j] Expenditure on regulatory approvals


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Expenditure incurred for obtaining regulatory approvals andregistration of products for overseas markets and productsacquisition is charged to revenue.

[k] Employee stock option plan

The accounting value of stock options representing the excess ofthe market price over the exercise price of the shares granted under"Employees Stock Option Scheme" of the Company is amortizedon straight-line basis over the vesting period as "Deferredemployees compensation" in accordance with the SEBI(Employee Stock Option Scheme and Employee Stock PurchaseScheme) Guidelines, 1999.

[1] Foreign currency translation

Foreign currency translations

(i) Initial Recognition

Foreign currency transactions are recorded in the reportingcurrency, by applying to the foreign currency amount the exchange

rate between the reporting currency and the foreign currency at thedate of the transaction.

(ii) Conversion

Foreign currency monetary items are reported using the closingrate. Non-monetary items which are carried in terms of historicalcost denominated in a foreign currency are reported using theexchange rate at the date of the transaction; and investments in

foreign companies are recorded at the exchange rates prevailing onthe date of making the investments.

(iii) Exchange Differences


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Exchange differences arising on the settlement of monetary itemsor on reporting company's monetary items at rates different fromthose at which they were initially recorded during the year, orreported in previous financial statements, are recognized as income

or as expenses in the year in which they arise, except for loansdenominated in foreign currencies utilized for acquisition of fixedassets where the exchange gains/losses are adjusted to the cost ofsuch assets.

(iv) Forward Exchange Contracts not intended for trading orspeculation purposes

The premium or discount arising at the inception of forwardexchange contracts is amortized as expense or income over the lifeof the contract. Exchange differences on such contracts arerecognized in the profit and loss in the year in which the exchangerates change. Any profit or loss arising on cancellation or renewalof forward exchange contract is recognized as income or asexpense for the year.

Representative offices

In translating the financial statements of representative offices forincorporation in financial statements, the monetary assets andliabilities are translated at the closing rate; non monetary assets andliabilities are translated at exchange rates prevailing at the dates ofthe transactions and income and expense items are converted at therespective monthly average rate.

[m] Retirement benefits

Contributions in respect of provided fund, superannuation andgratuity are made to Trust set up by the Company for the purposeand charged to profit and loss account.


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Provisions for liabilities in respect of gratuity pension and leaveencashment benefits are made based on actuarial valuation made

by an independent actuary as at the balance sheet date.

[n] Income taxes

Tax expenses comprise both current and deferred taxes.

The provision for current income tax is the aggregate of thebalance provision for tax for three months ended March 31, 2004and the estimated provision based on the taxable profit ofremaining nine months up to December 31, 2004, the actual taxliability, for which, will be determined on the basis of the results

for the period April 1, 2004 to March 31, 2005.

Deferred income taxes reflects the impact of current year timingdifferences between taxable income and accounting income for theyear and reversal of timing differences of earlier years. Deferredtax is measured based on the tax rates and the tax laws enacted orsubstantively enacted at the balance sheet date. Deferred tax assetsare recognized only to the extent that there is reasonable certainty

that sufficient future taxable income will be available againstwhich such deferred tax assets can be realized.

[o] Export benefits/incentives

Export entitlements under the Duty Entitlement Pass Book("DEPB") Scheme are recognized in the profit and loss accountwhen the right to receive credit as per the terms of the scheme isestablished in respect of the exports made.

Obligation/entitlements on account of Advance License Schemefor import of raw materials are accounted for on purchase of rawmaterials and/or export sales.

[p] Contingent liabilities


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Depending on facts of each case and after due evaluation ofrelevant legal aspects, claims against the Company notacknowledged as debts are disclosed as contingent liabilities. Inrespect of statutory matters, contingent liabilities are disclosed

only for those demand(s) that are contested by the Company.

[q] Use of estimates

In preparing Company's financial statements in conformity withaccounting principles generally accepted in India, management isrequired to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingentliabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period;actual results could differ from those estimates.

[r] Earnings per share

Basic earnings per share are calculated by dividing the net profit orloss for the period attributable to equity shareholders by theweighted average number of equity shares outstanding during the

period. The weighted average numbers of equity sharesoutstanding during the period are adjusted for events of bonusissue.

For the purpose of calculating diluted earnings per share, the netprofit or loss for the period attributable to equity shareholders andthe weighted average number of shares outstanding during the

period are adjusted for the effects of all dilutive potential equityshares.


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HR POLICY

In my book, we have no greater asset than the quality of our

intellectual capital, and no greater priority than the growth andretention of our vast pool of talent Anil Dhirubhai Ambani

At Reliance - Anil Dhirubhai Amabani Group, we recognise thecritical role that our people play in the success and growth of eachof our businesses. It is the skill and initiative of our workforce thatsets us apart from our peers in todays knowledge-driven economy.It is their commitment and dedication that lends us the competitiveedge, and helps us stay ahead of the curve.

Our strong team of professionals is among the youngest in thecountry, and consists of some of the most dynamic, motivated andqualified individuals to be found anywhere in the world. First-ratemanagement graduates, highly trained engineers, top-notchfinancial analysts and razor sharp accountantswe have on ourrolls some of the brightest minds in the business.

Mission

Our transparent HR policies and robust processes are driven by asingle overarching objective: To attract, nurture, grow and retainthe best leadership talent in every sector and industry is which weoperate.

Our aim is to create a team of world beaters that is: Committed to excellence in quality, Focused on creation and enhancement of stakeholder value Responsive to evolving business needs and challenges Dedicated to uphold the core values of the Group


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Promise

In order to achieve our objective, we offer our people...

Growth opportunities to expand leadership capabilities True meritocracy and freedom to choose career paths Opportunities to develop and hone leadership and functional

capabilities An entrepreneurial environment where people can pursue

their dreams Competitive compensation

In addition, we follow a well-defined Rewards & Recognitionsprogramme that periodically identifies exceptional individual andteam achievers among the various business functions and verticalsin the Group.

Expectations

At Reliance - Anil Dhirubhai Ambani Group, we encourage ourcolleagues to take leadership, at all levels of the organisation, and

participate in accelerating growth of our businesses to build aformidable enterprise.

Leaders in Reliance - Anil Dhirubhai Ambani Group are expectedto

Always keep the customers needs in mind and constantlyinnovate

Execute flawlessly and with speed Sustain and strengthen the groups spirit of entrepreneurship

taking ownership and accountability for their actions


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Introduction To Capital Market

Primary Market

Secondary Market

Functions Of Secondary Market

Role Of Secondary Market

Relationship Between The Primary And Secondary

Market


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Functions Of Stock Exchange

CAPITAL MARKET

Introduction

The market for long-term securities like bonds, equity stocks and

preferred stocks is divided into primary market and secondary

market. The primary market deals with the new issues of securities.

Outstanding securities are traded in the secondary market, which is

commonly known as stock market or stock exchange. In the

secondary market, the investors can sell and buy securities. Stock

markets predominantly deal in the equity shares. Debt instruments

like bonds and debentures are also traded in the stock market.

Well-regulated and active stock market promotes capital

formation. Growth of the primary market depends on the

secondary market. The health of the economy is reflected by the

growth of the stock market.

Companies raise funds to finance their projects through various

methods. The promoters can bring their own money or borrow

from the financial institutions or mobilize capital by issuing

securities. The funds may be raised through issue of fresh shares at

par or premium, preference shares, debentures or global depository

receipts. The main objectives of a capital issue are given below:

To promote a new company


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To expand an existing company

To diversify the production

To meet the regular working capital requirements

To capitalize the reverses

Securities markets provide a channel for allocation of savings to

those who have a productive need for them. As a result, the savers

and investors are not constrained by their individual abilities, but

by the economys abilities to invest and save respectively, which

inevitably enhances savings and investment in the economy.

Market Segments

The securities market has two interdependent and inseparable

segments: the primary and the secondary market. The primary

market provides the channel for creation of new securities through

issuance of financial instruments by public companies as well as

Governments and Government agencies and bodies whereas the

secondary market helps the holders of these financial instruments

to sale for exiting from the investment. The price signals, whichsubsume all information about the issuer and his business

including associated risk, generated in the secondary market, help

the primary market in allocation of funds. The primary market


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issuance is done either through public issues or private placement.

A public issue does not limit any entity in investing while in

private placement, the issuance is done to select people. In terms of

the Companies Act, 1956, an issue becomes public if it results in

allotment to more than 50 persons. This means an issue resulting in

allotment to less than 50 persons is private placement.

There are two major types of issuers who issue securities. The

corporate entities issue mainly debt and equity instruments (shares,debentures, etc.), while the governments (central and state

governments) issue debt securities (dated securities, treasury

bills). The secondary market enables participants who hold

securities to adjust their holdings in response to changes in their

assessment of risk and return. They also sell securities for cash to

meet their liquidity needs. The exchanges do not provide facility

for spot trades in a strict sense. Closest to spot market is the cash

market in exchanges where settlement takes place after some time.

Trades taking place over a trading cycle (one day under rolling

settlement) are settled together after a certain time. All the 23 stock

exchanges in the country provide facilities for trading of corporatesecurities. Trades executed on NSE only are cleared and settled by

a clearing corporation which provides notation and settlement

guarantee. Nearly 100% of the trades in capital market segment are


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Options on benchmark indices as well as stocks

Futures on interest rate products like Notional 91-day T-Bills, 10

year notional zero coupon bond and 6% notional 10 year bond.

The past decade in many ways has been remarkable for securities

market in Indian It has grown exponentially as measured in terms

of amount raised from the market,number of stock exchanges and

other intermediaries, the number of listed stocks,market

capitalisation, trading volumes and turnover on stock exchanges,

and investor population. Along with this growth, the profiles of the

investors, issuers and intermediaries have changed significantly.

The market has witnessed several institutional changes resulting in

drastic reduction in transaction costs and significant improvements

in efficiency, transparency, liquidity and safety. In a short span of

time, Indian derivatives market has got a place in list of top global

exchanges. In single stock futures category, the Futures Industry

Association (FIA) placed NSE in second position in the year 2000.

Reforms in the securities market, particularly the establishment

and empowerment of SEBI, market determined allocation of

resources, screen based nation-wide trading, dematerialization and

electronic transfer of securities, rolling settlement and ban on

deferral products, sophisticated risk management and derivatives

trading, have greatly improved the regulatory framework and


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direct relationship between the savers and the users of funds. The

market does not work in a vacuum; it requires services of a large

variety of intermediaries. The disintermediation in the securities

market is in fact an intermediation with a difference, it is a risk-

less intermediation, where the ultimate risks are borne by the

savers and not the intermediaries. A large variety and number of

intermediaries provide intermediation services in the Indian

securities market. The securities market has essentially three

categories of participants, namely the issuers of securities,investors in securities and the intermediaries and products include

equities, bonds and derivatives. The issuers and investors are the

consumers of services rendered by the intermediaries while the

investors are consumers (they subscribe for and trade in securities)

of securities issued by issuers.

In pursuit of providing a product to meet the needs of each investor

and issuer, the intermediaries churn out more and more

complicated products. They educate and guide them in their

dealings and bring them together. Those who receive funds in

exchange for securities and those who receive securities inexchange for funds often need the reassurance that it is safe to do

so. This reassurance is provided by the law and by custom, often

enforced by the regulator. The regulator develops fair market


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practices and regulates the conduct of issuers of securities and the

intermediaries so as to protect the interests of suppliers of funds.

The regulator ensures a high standard of service from

intermediaries and supply of quality securities and non-

manipulated demand for them in the market.

The past decade in many ways has been remarkable for securities

market in India. It has grown exponentially as measured in terms

of amount raised from the market, number of stock exchanges andother intermediaries, the number of listed stocks, market

capitalisation, trading volumes and turnover on stock exchanges,

and investor population. Along with this growth, the profiles of the

investors, issuers and intermediaries have changed significantly.

The market has witnessed fundamental institutional changes

resulting in drastic reduction in transaction costs and significant

improvements in efficiency, transparency and safety.


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DEPENDENCE ON SECURITIES MARKET

Three main sets of entities depend on securities market. While the

corporates and governments raise resources from the securities

market to meet their obligations, the households invest their

savings in the securities.

Corporate Sector

The 1990s witnessed emergence of the securities market as a

major source of finance for trade and industry. A growing number

of companies are accessing the securities market rather than

depending on loans from FIs/banks. The corporate sector is

increasingly depending on external sources for meeting its funding

requirements. There appears to be growing preference for direct

financing (equity and debt) to indirect financing (bank loan) within

the external sources. According to CMIE data, the share of capital

market based instruments in resources raised externally increased

to 53% in 1993-94, but declined thereafter to 33% by 1999-00 and

further to 21% in 2001-02. In the sector-wise shareholding pattern

of companies listed on NSE, it is observed that on an average the

promoters hold more than 55% of total shares. Though the non-


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The Society for Capital Market Research and Development carries

out periodical surveys of household investors to estimate the

number of investors. Their first survey carried out in 1990 placed

the total number of share owners at 90-100 lakh. Their second

survey estimated the number of share owners at around 140-150

lakh as of mid-1993. Their latest survey estimates the number of

shareowners at around 2 crore at 1997 end, after which it remained

stagnant up to the end of 1990s. The bulk of increase in number of

investors took place during 1991-94 and tapered off thereafter.49% of the share owners at the end of 2000 had, for the first time,

entered the market before the end of 1990, 44% entered during

1991-94, 6.3% during 1995-96 and 0.8% since 1997. The survey

attributes such tapering off to persistent depression in the share

market and investors bad experience with many unscrupulous

company promoters and managements.

Distribution of Investors

The Society for Capital Market Research & Development

estimates that 15% of urban households and only 0.5-1.0% of

semi-urban and rural households own shares. It is estimated that4% of all households own shares.


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An indirect, but very authentic source of information about

distribution of investors is the data base of beneficial accounts with

the depositories. By February 2003, there were 3 million beneficial

accounts with the National Securities Depository Limited (NSDL).

The state-wise distribution of beneficial accounts with NSDL

expected Maharashtra and Gujarat account for nearly 45% of total

beneficial accounts.

PRIMARY MARKET

Stocks available for the first time are offered through new issue

market. The issuer may be a new company. These issues may be of

new type or the security used in the past. In the new issue market

the issuer can be considered as a manufacturer. The issuing houses,

investment bankers and brokers act as the channel of distribution

for the new issues. They take the responsibility of selling the

stocks to the public.

A total of Rs. 2,520,179 million were raised by the government

and corporate sector during 2002-03 as against Rs. 2,269,110

million during the preceding year. Government raised about two

third of the total resources, with central government alone raisingnearly Rs. 1,511,260 million.


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Corporate Securities

Average annual capital mobilisation from the primary market,

which used to be about Rs.70 crore in the 1960s and about Rs.90

crore in the 1970s, increased manifold during the 1980s, with the

amount raised in 1990-91 being Rs. 4,312 crore. It received a

further boost during the 1990s with the capital raised by

nongovernment public companies rising sharply to Rs. 26,417crore in 1994-95. The capital raised which used to be less than 1%

of gross domestic saving (GDS) in the 1970s increased to about

13% in 1992-93. In real terms, the capital raised increased 4 times

between 1990-91 and 1994-95. During 1994-95, the amount raised

through new issues of securities from the securities market

accounted for about four-fifth of the disbursements by FIs. Issuers

have shifted focus to other avenues for raising resources like

private placement.

There is a preference for raising resources in the primary market

through private placement of debt instruments. Private placementsaccounted for about 93% of total resources mobilised through

domestic issues by the corporate sector during 2002-03. Rapid

dismantling of shackles on institutional investments and


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preference of investors for passive investing. The net collections

by MFs picked up during this decade and increased to Rs. 199,530

million during 1999-00. This declined to Rs. 111,350 million

during 2000-01 which may be attributed to increase in rate of tax

on income distributed by debt oriented mutual funds and lacklustre

secondary market.

The total collection of mutual funds for 2002-03 has been Rs.

105,378 million. Starting with an asset base of Rs. 250 million in

1964, the total assets under management at the end of March 2003was Rs. 794,640 million. The number of households owning units

of MFs exceeds the number of households owning equity and

debentures. At the end of financial year March 2003, according to

a SEBI press release 23 million unit holders had invested in units

of MFs, while 16 million individual investors invested in equity

and or debentures.

Government Securities

The primary issues of the Central Government have increased

many-fold during the decade of 1990s from Rs. 89,890 million in

1990-91 to Rs. 1,511,260 million in 2002-03. The issues by stategovernments increased by about twelve times from Rs. 25,690

million to Rs. 308,530 million during the same period. The Central

Government mobilised Rs. 1,250,000 million through issue of


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dated securities and Rs. 261,260 million through issue of T-bills.

After meeting repayment liabilities of Rs. 274,200 million for

dated securities, and redemption of T-bills of Rs. 195,880 million,

net market borrowing of Central Government amounted to Rs.

1,041,180 million for the year 2002-03. The state governments

collectively raised Rs. 305,830 million during 2002-03 as against

Rs. 187,070 million in the preceding year. The net borrowings of

State Governments in 2002-03 amounted to Rs. 290,640 million.

Along with growth of the market, the investor base has becomevery wide. In addition to banks and insurance companies,

corporates and individual investors are investing in government

securities. With dismantling of control regime, and gradual

lowering of the SLR and CRR, Government is borrowing at near

market rates. The coupons across maturities went down recently

signifying lower interest rates. The weighted average cost of its

borrowing at one stage increased to 13.75% in 1995- 96, which

declined to 7.34% in 2002-03. The maturity structure of

government debt is also changing. In view of bunching of

redemption liabilities in the medium term, securities with higher

maturities were issued during 2002-03. About 64% of primaryissues were raised through securities with maturities above 5 years

and up to 10 years. As a result the weighted average maturity of


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dated securities increased to 13.83 years from 6.6 years in 1997-

98.

Relationship between the Primary and Secondary Market

1. The new issues market cannot function without the

secondary market. The secondary market or the stock

market provides liquidity for the issued securities. The

issued securities are traded in the secondary market

offering liquidity to the stocks at a fair price.

2. The stock exchanges through their listing requirements,exercise control over the primary market. The company

seeking for listing on the respective stock exchange has to

comply with all the rules and regulations given by the

stock exchange.

3. The primary market provides a direct link between the

prospective investors and the company. By providing

liquidity and safety, the stock markets encourage the

public to subscribe to the new issues. The marketability

and the capital appreciation provided in the stock market

are the major factors that attract the investing public

towards the stock market. Thus, it provides an indirect linkbetween the savers and the company.

4. Even though they are complementary to each other, their

functions and the organizational set up are different from


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each other. The health of the primary market depends on

the secondary market and vice versa.

Functions of Primary Market

The main service functions of the primary market are organization,

underwriting and distribution. Origination deals with the origin of

the new issue. The proposal is analyzed in terms of the nature of

the security, the size of the issue, and timing of the issue and

floatation method of the issue. Underwriting contract makes the

share predictable and removes the element of uncertainty in thesubscription. Distribution refers to the lead managers and brokers

to the issue.

In the new issue market stocks are offered for the first time. The

functions and the organization of the new issue market are

different from the secondary market. In the new issue the lead

mangers manage the issue, the underwriters assure to take up the

unsubscribed portion according to his commitment for a

commission and the bankers take up the responsibility of the

collecting the application form and the money. Advertising

agencies promote the new issue through advertising. Financial

institutions and underwriter lend term loans to the company.Government agencies regulate the issue. The new issues are

offered through prospectus. The prospectus is drafted according to

SEBI guidelines disclosing the needed information to the investing


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formation. Growth of the primary market depends on the

secondary market. The health of the economy is reflected by the

growth of the stock market.

Corporate Securities

The number of stock exchanges increased from 11 in 1990 to 23

now. All the exchanges are fully computerised and offer 100% on-

line trading. 9,413 companies were available for trading on stock

exchanges at the end of March 2003. The trading platform of thestock exchanges was accessible to 9,519 members from over 358

cities on the same date.

The market capitalisation grew ten fold between 1990-91 and

1999-00. It increased by 221% during 1991-92 and by 107%

during 1999-00. All India market capitalisation is estimated at Rs.

6,319,212 million at the end of March 2003. The market

capitalisation ratio, which indicates the size of the market,

increased sharply to 57.4% in 1991-92 following spurt in share

prices. The ratio further increased to 85% by March 2000. It,

however, declined to 55% at the end of March 2001 and to 29% by

end March 2003.

The trading volumes on exchanges have been witnessing

phenomenal growth during the 1990s. The average daily turnover


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grew from about Rs.1500 million in 1990 to Rs. 120,000 million in

2000, peaking at over Rs. 200,000 million. One-sided turnover on

all stock exchanges exceeded Rs. 10,000,000 million during 1998-

99, Rs. 20,000,000 million during 1999-00 and approached Rs.

30,000,000 million during 2000-01. However, the trading volume

substantially depleted to Rs.9,689,541 million in 2002-03. The

turnover ratio, which reflects the volume of trading in relation to

the size of the market, has been increasing by leaps and bounds

after the advent of screen based trading system by the NSE. Theturnover ratio for the year 2002-03 increased to 375 but fell

substantially due to bad market conditions to 119 during 2001-02

regaining its position accounted 153.3% in 2002-03.

The relative importance of various stock exchanges in the market

has undergone dramatic change during this decade. The increase in

turnover took place mostly at the large big exchanges and it was

partly at the cost of small exchanges that failed to keep pace with

the changes. NSE is the market leader with more 85% of total

turnover (volumes on all segments) in 2002-03. Top 5 stock

exchanges accounted for 99.88% of turnover, while the rest 18

exchange for less than 0.12% during 2002-03. About tenexchanges reported nil turnover during the year.


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agency and information problems, by functioning as an effective

conduit for monitoring and controlling management's sub optimal

behavior. Market-based governance may take different forms.

However, generally speaking, such governance takes the form of

facilitating the monitoring of management by outsiders, and

aggregating informationin the form of equilibrium prices (or

price discovery)to help guide management decisions within the

firm.

A. Monitoring and Control.

As noted, secondary equity markets serve as a conduit for

monitoring and controlling management by outsiders. First,

markets generate information that helps outside investors

Evaluate the quality of past management decisions. Second, the

threat of a takeover may mitigate management inefficiencies.

Third, information on stock-market prices provides for effective

incentives for management. And fourth, the rich menu of contracts

provided in the market allows private workouts of financial

distress, easing the transfer of control.

For purposes of our analysis below, we have divided monitoringinto two categories

Market-based monitoring

Non market-based monitoring


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II. Non Market-Based Monitoring

II. 1 Board of Directors:

A board of directors is the primary method of non market-based

monitoring. Management reports directly to the board, and the

board has a fiduciary obligation to stay informed of management's

major activities. The board has the power to terminate management

that does not act in the best interests of the company's

shareholders. The key to a board's being an effective monitoringmechanism is its independence. In this regard, the composition of

the board, especially the presence of outside board members, is

critical to its effectiveness as a monitor.

II. 2 Financial intermediaries as delegated monitors:

Banks closely monitor their business borrowers, and collect

information and scrutinize major investment and financing

decisions. In doing so, they can threaten to withhold financing

should management act in a manner contrary to the banks'

interests. Monitoring via business groups. In some countries, such

as Japan and Korea, corporate actions are coordinated within a

family of interrelated firms, with a main bank at the center. Firmsin the group are interconnected through intricate vertical and

horizontal business relationships and cross-ownership. Members of


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the business group, with the lead participation of the main bank,

closely monitor the actions of a member firm's management.

The Legal System:

The four main legislations governing the securities market are: (a)

the SEBI Act, 1992 which establishes SEBI to protect investors

and develop and regulate securities market; (b) the Companies Act,

1956, which sets out the code of conduct for the corporate sector in

relation to issue, allotment and transfer of securities, and

disclosures to be made in public issues; (c) the Securities Contracts(Regulation) Act, 1956, which provides for regulation of

transactions in securities through control over stock exchanges;

and (d) the Depositories Act, 1996 which provides for electronic

maintenance and transfer of ownership of demat securities.

Government has framed rules under the SCRA, SEBI Act and the

Depositories Act. SEBI has framed regulations under the SEBI Act

and the Depositories Act for registration and regulation of all

market intermediaries, and for prevention of unfair trade practices,

insider trading, etc. Under these Acts, Government and SEBI issue

notifications, guidelines, and circulars which need to be complied

with by market participants. The SROs like stock exchanges havealso laid down their rules of

game.


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The responsibility for regulating the securities market is shared by

Department of Economic Affairs (DEA), Department of Company

Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The

activities of these agencies are co-ordinated by the High Level

Committee on Capital Markets. Most of the powers under the

SCRA are exercisable by DEA while a few others by SEBI. The

powers of the DEA under the SCRA are also con-currently

exercised by SEBI. The powers in respect of the contracts for sale

and purchase of securities, gold related securities, money marketsecurities and securities derived from these securities and ready

forward contracts in debt securities are exercised concurrently by

RBI. The SEBI Act and the Depositories Act are mostly

administered by SEBI. The rules and regulations under the

securities laws are administered by SEBI. The powers under the

Companies Act relating to issue and transfer of securities and non-

payment of dividend are administered by SEBI in case of listed

public companies and public companies proposing to get their

securities listed. The SROs ensure compliance with their own

rules as well as with the rules.

The legal system governs both the rights of management and the

rights of investors. The legal system also specifies the recourse

available to investors. Recent research indicates that countries vary


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in the level of protection afforded to minority shareholders

(LaPorta et al, 1996). Generally, countries with common-law

traditions afford the highest protection, while civil-law countries,

particularly the French civil-law systems, provide the least amount

of protection.

For purposes of this paper, the main focus and emphasis are on

market-based governance services.

B. Information Production.

Markets serve to aggregate the diverse opinions held by investorsregarding the financial prospects of a company, thereby providing

management with an important guide when it

comes to its investment decisions. This price discovery role of

secondary equity markets is well recognized. Prices aggregate the

diverse opinions and convey that collective wisdom to

management. This flow of information from the market to the firm

might be especially relevant in today's economy, since consensus

on the optimal management actions is so difficult to achieve due to

rapid technological change and constantly changing market

conditions.

Functions of Stock Exchange Maintains active trading: shares are traded on the stock

exchanges, enabling the investors to buy and sell securities.

The prices may vary from transactions to transaction. A


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continuous trading increases the liquidity or marketability of

the shares traded on the stock exchanges.

Fixation of prices: Price is determined by the transactions that

flow from investors demand and suppliers preferences.

Usually the traded prices are made known to the public. This

helps the investors to make better decisions.

Ensures safe and fair dealing: The rules, regulations and by-

laws of the stock exchanges provide a measure of safety to

the investors. Transactions are conducted under competitive

conditions enabling the investors to get a fair deal.

Aids in financing the industry: A continuous market for shares

provides a favourable climate for raising capital. The

negotiability and transferability of the securities helps the

companies to raise long-term funds. When it is easy to trade

the securities, investors are willing to subscribe to the initial

public offerings. This stimulates the capital formation.

Dissemination of information: Stock exchanges provide

information through their various publications. They publish

the share prices traded on daily basis along with the volume

traded. Directory of Corporate Information is useful for the

investors assessment regarding the corporate. Handouts,

handbooks and pamphlets provide information regarding the

functioning of the stock exchanges.


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Performance inducer: The prices of stocks reflect the

performance of the traded companies. This makes the

corporate more concerned with its public image and tries to

maintain good performance.

Self-regulating organization: The stock exchanges monitor the

integrity of the members, brokers, listed companies and

clients. Continuous internal audit safeguards the investors

against unfair trade practices. It settles the dispute between

member brokers, investors and brokers.

Research in Securities Market

In order to deepen the understanding and knowledge about Indian

capital market, and to assist in policy-making, SEBI has been

promoting high quality research in capital market. It has set up anin-house research department, which brings out working papers on

a regular basis. In collaboration with NCAER, SEBI brought out a

Survey of Indian Investors, which estimates investor population

in India and their investment preferences. SEBI has also tied up

with reputed national and international academic and research

institutions for conducting research studies/projects on various

issues related to the capital market. In order to improve market

efficiency further and to set international benchmarks in the

securities industry, NSE administers a scheme called the NSE


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Market Design

Primary Market

1. Corporate Securities: The Disclosure and Investor Protection

(DIP) guidelines prescribe a substantial body of requirements for

issuers/intermediaries, the broad intention being to ensure that all

concerned observe high standards of integrity and fair dealing,

comply with all the requirements with due skill, diligence and care,

and disclose the truth, whole truth and nothing but truth. The

guidelines aim to secure fuller disclosure of relevant information

about the issuer and the nature of the securities to be issued so that

investors can take informed decisions. For example, issuers arerequired to disclose any material risk factors and give

justification for pricing in their prospectus. An unlisted company

can access the market up to 5 times its pre-issue net worth only if it

has track record of distributable profits and net worth of Rs. 1

crore in 3 out of last five years. A listed company can access up to

5 times of its pre-issue net worth. In case a company does not have

track record or wishes to raise beyond 5 times of its pre-issue net

worth, it can access the market only through book building with

minimum offer of 60% to qualified institutional buyers.


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any security for Rs. 10 crore or more is required to do so only in

dematerialised form.

2. Government Securities: The government securities market has

witnessed significant transformation in the 1990s. With giving up

of the responsibility of allocating resources from securities market,

government stopped expropriating seigniorage and started

borrowing at near - market rates. Government securities are now

sold at market related coupon rates through a system of auctionsinstead of earlier practice of issue of securities at very low rates

just to reduce the cost of borrowing of the government. Major

reforms initiated in the primary market for government securities

include auction system (uniform

price and multiple price method) for primary issuance of T-bills

and central government dated securities, a system of primary

dealers and non-competitive bids to widen investor base and

promote retail participation, issuance of securities across maturities

to develop a yield curve from short to long end and provide

benchmarks for rest of the debt market, innovative instruments

like, zero coupon bonds, floating rate bonds, bonds with embeddedderivatives, availability of full range ( 91-day and 382-day) of T-

bills, etc.


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Secondary Market

(a) Corporate Securities:The stock exchanges are the exclusive

centres for trading of securities. Though the area of

operation/jurisdiction of an exchange is specified at the time of its

recognition, they have been allowed recently to set up trading

terminals anywhere in the country. The three newly set up

exchanges (OTCEI, NSE and ICSE) were permitted since their

inception to have nation wide trading. The trading platforms of a

few exchanges are now accessible from many locations. Further,with extensive use of information technology, the trading

platforms of a few exchanges are also accessible from anywhere

through the Internet and mobile devices. This made a huge

difference in a

geographically vast country like India.

(b) Exchange Management: Most of the stock exchanges in the

country are organized as mutual which was considered beneficial

in terms of tax benefits and matters of compliance. The trading

members, who provide brokering services, also own, control and

manage the exchanges. This is not an effective model for self-

regulatory organisations as the regulatory and public interest of theexchange conflicts with private interests. Efforts are on to

demutualise the exchanges whereby ownership, management and

trading membership would be segregated from one another. Two


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exchanges viz. OTCEI and NSE are demutualised from inception,

where ownership, management and trading are in the hands of

three different sets of people. This model eliminates conflict of

interest and helps the exchange to pursue market efficiency and

investor interest aggressively.

(c) Membership: The trading platform of an exchange is

accessible only to brokers. The broker enters into trades in

exchanges either on his own account or on behalf of clients. Nostock broker or sub-broker is allowed to buy, sell or deal in

securities, unless he or she holds a certificate of registration

granted by SEBI. A broker/sub-broker complies with the code of

conduct prescribed by SEBI. Over time, a number of brokers -

proprietor firms and partnership firms have converted themselves

into corporates. The standards for admission of members stress on

factors, such as corporate structure, capital adequacy, track record,

education, experience, etc. and reflect a conscious endeavor to

ensure quality broking services.

(d) Listing:A company seeking listing satisfies the exchange thatat least 10% of the securities, subject to a minimum of 20 lakh

securities, were offered to public for subscription, and the size of

the net offer to the public (i.e. the offer price multiplied by the


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number of securities offered to the public, excluding reservations,

firm allotment and promoters contribution) was not less than

Rs.100 crore, and the issue is made only through book building

method with allocation of 60% of the issue size to the qualified

institutional buyers. In the alternative, it is required to offer at least

25% of the securities to public. The company is also required to

maintain the minimum level of non-promoter

holding on a continuous basis. In order to provide an opportunity

to investors to invest/trade in the securities of local companies, it ismandatory for the companies, wishing to list their securities, to list

on the regional stock exchange nearest to their registered office. If

they so wish, they can seek listing on other exchanges as well.

Monopoly of the exchanges within their allocated area, regional

aspirations of the people and mandatory listing on the regional

stock exchange resulted in multiplicity of exchanges. The basic

norms for listing of securities on the stock exchanges are uniform

for all the exchanges. These norms are specified in the listing

agreement entered into between the company and the concerned

exchange. The listing agreement prescribes a number of

requirements to be continuously complied with by the issuers forcontinued listing and such compliance is monitored by the

exchanges. It also stipulates the disclosures to be made by the

companies and the corporate governance practices to be followed


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by them. SEBI has been issuing guidelines/circulars prescribing

certain norms to be included in the listing agreement and to be

complied with by the companies. A listed security is available for

trading on the exchange. The stock exchanges levy listing fees -

initial fees and annual f

study of mutual funds an offshore investment

Documents