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Insider Trading:

Insider trading had become an extremely sensitive and controversial subject in the stock market in India.

Any person in power whether an officer or director who had access to information of private matters of the company relating to expansion programs of the company, changes in policies, amalgamations, joint contracts, collaboration or any information about its financial results was making full use of his position to give an advantage to relatives, friends or known persons by leaking out information leading to frauds and rigging of price relating to securities.

SEBI has laid down guidelines by prescribing norms handling information which may be considered sensitive. Price forecasts, changes in investment plans, knowledge of mergers and acquisitions, information about contracts are not to be disclosed. The staff and officers who have such sensitive information are to be identified in each company. Controls are to be made on the handling of sensitive information.

Insider Trading Regulations in 1992 notified by SEBI prohibited insider trading, as it is unfair upon investors. Persons who possess price sensitive information because they have connections with a company take advantage of the situation to ‘peg up’ or ‘down’ prices of securities to their advantage.

Depository or Paperless Trading:

The Depository Act was passed in 1996 allowing dematerializing of securities and transfer of security through electronic book entry to help in reducing settlement risks and infrastructure bottlenecks. The dematerialized securities will not have any identification numbers or distinctive numbers.

The National Securities Depository Ltd., was set up in Nov. 1996. Trading of new Initial (NSDC) public offers was to be in dematerialized form upon listing. An exclusive feature of the Indian Capital Market is that multiple depository system has been encouraged.

Hence, there are two Depository Services. The other depository system is also registered. It is called Central Depository Service Ltd. (CDSL). Debt instruments however, are not transferable by endorsement delivery.

Dematerialization of securities is one of the major steps for improving and modernizing market and enhancing the level of investor protection through elimination of bad deliveries and forgery of shares and expediting the transfer of shares. Long-term benefits were expected to accrue to the market through the removal of physical securities.

Usefulness of a Depository System:

A depository system was required in India to eliminate physical certificates.

A depository system has the following advantages:

• Paperless:

It eliminates risks, as this system does not have physical certificates. There are no problems regarding bad deliveries or fake certificates.

• Electronic:

It is an electronic form and provides transfer of securities immediately without any delay.

• Demat Account:

A depository provides a demat account with a client identification number and a depository identification number. Therefore, there is a special identity of a member. He also has a trading account, which enables him with identity and immediate transfer.

• Electronic Transfer:

There is no stamp duty on transfer of securities because there is no physical transfer. It is transfer through a pass book similar to a bank.

• Expenses:

The DP charges a yearly charge for maintaining the member account, hence there is a reduction of paper work and transaction cost of a frequent transfers of securities.

• Eliminates Problems:

Investors had the problem of selling shares in Odd Lots but with the depository system even one share can be sold.

• Nomination:

Since a depository allows a nomination facility, hence shares can be easily transferred at the time of death of a participant.

• Address Changed:

Change in address recorded with DP gets registered with all companies in which investor holds securities electronically, eliminating the need to correspond with each of them separately.

• Elimination of Correspondence:

Transmission of securities is done by DP eliminating correspondence with companies.

• Automatic Credit:

There is an automatic credit into demat account of shares, arising out of bonus, split, consolidation, merger etc.

Conversion of Shares into Dematerialized Form:

In order to dematerialize physical securities, an investor has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates DRF has to be filled for each ISIN no. The investor has to surrender certificates for dematerialization to the DP (depository participant). Depository participant intimates Depository of the request through the system.

He then submits the certificates to the registrar. The Registrar confirms the dematerialization request from depository. After dematerializing certificates, Registrar updates accounts and informs depository of the completion of dematerializations. Depository updates its accounts and informs the depository participant. Depository participant updates the account and informs the investor.

Re-materialization:

If an investor is interested in getting back his securities in the physical form he has to fill in the Remat Request Form (RRF) and request his DP for re-materialization of the balances in his securities account. He has to make a request for re-materialization.

Then the DP intimates the depository of the request through the system. The Depository confirms re-materialization request to the registrar. Registrar updates accounts and prints certificates. Depository updates accounts and downloads details to depository participant. Registrar dispatches certificates to the investor.

Surveillance on Price Manipulation:

SEBI introduced surveillance and enforcement measures against intermediaries’ violation of laws especially in price manipulations. All exchanges have surveillance departments which co-ordinate with SEBI. SEBI has enforced information to be submitted by exchanges on daily settlement and monitoring reports. SEBI has also created a database for trading on National and Bombay Stock Exchanges.

If price manipulation is detected, auction proceeds may be impounded or frozen so that the manipulator cannot use it. SEBI has introduced ‘Stock Watch’ an advances software for surveillance of market activities programmed to show movements from historical patterns through follow ups by analyst and trained investigators to act as a deterrent to trading and price rigging.

Regulation of Stock Brokers:

Stock Broker and Sub-brokers Regulation Act, was passed in 1992. Brokers had to have a dual registration both with SEBI and with Stock Exchange. Penal action would be taken against any broker for violation of laws. Capital adequacy norms were introduced and they were 3% for individual brokers and 6% for corporate brokers.

For investor protection measures, brokers have been disciplined by introducing the system of maintaining accounts for clients and brokers own account and disclosure of transaction price and brokerage separately in contract note.

Audit has been made compulsory of the brokers’ books and filing of auditor’s report with the SEBI has been made mandatory. SEBI has also extended regulations to sub-brokers. Sub-brokers have to be registered by entering into an agreement with the stock brokers from whom he seeks affiliation.

Sub-brokers can transact business only through stock broker with whom he is registered. If he wants to do business through more than one stock broker, he has to be registered separately with each one of them.

Options and Derivatives:

Options can be classified as call options or put options. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have launched derivatives. They will offer derivatives for three tenures one in the first instance each for subsequent three months.

So, in July, Nifty call and put options can be purchased for July end, August end and September end. The last day of the contract would be the expiration date. In an options contract, a premium has to be paid to enter a contract.

Buyer’s losses are limited to the extent of premium paid but his gains are unlimited. Seller’s profits are limited to premiums received but losses are unlimited.

These derivatives have been started by SEBI to bring about investor confidence to establish the market and to reduce risk. Initially, options trading will be allowed only in 14 stocks. Option will not allow a person to defer settlement of sale/purchase but they will enable placing of bets on Stock Markets.

Regulation of Mutual Funds:

SEBI regulates the Mutual Funds to provide portfolio disclosure and standardization of accounting procedures. It is a requirement of SEBI that Mutual Funds should have a trustee company which is separate from the asset Management Company and the securities of the various schemes should be kept with a custodian independent of the Mutual Fund.

All Mutual Funds should be regulated with the SEBI. All schemes of UTI after 1994 have also been brought under the control of SEBI. SEBI created certain procedures of valuation norms and asset value and pricing for the Mutual Funds. The primary interest of SEBI to control Mutual Fund schemes was to protect investors from fraudulent deals.

To bring transparency in operations, SEBI directed mutual fund investors to mention their permanent account number (PAN) for investments over Rs. 50000. In case where neither the PAN nor the GIR number has been allotted, the fact of non-allotment is to be mentioned in the application form. Mutual fund was prohibited from accepting any application without these details.

All mutual funds were also told to obtain a unique client code from the Bombay Stock Exchange or the National Stock Exchange for each of their existing schemes and plans.

Following the collapse of Global Trust Bank (GTB), SEBI asked all mutual funds to provide details of their investments in fixed deposits of banks. In particular, SEBI called for specifying FD investments exceeding 25% of the total portfolio of a scheme.

To prevent mutual fund schemes from turning into portfolio management schemes, each has directed mutual funds scheme and individual plan under the schemes should have a minimum of 20 investors and no single investor should account for more than 25% of the corpus of such scheme/plan. In case of non-compliance, the schemes/plans will be wound up and investor’s money redeemed at applicable Net Asset Value.

SEBI issued a new format for Mutual Funds to file information details of investment objective of the scheme, asset allocation pattern of the scheme, risk profile of the scheme, plans and options, name of the fund manager, name of the trustee company, performance of the scheme, expenses of the scheme, i.e.,

(i) Load structure

(ii) Recurring expenses, tax treatment for the investors/unit holders and daily net asset value (NAV).

Regulation of Foreign Institutional Investors (FIIs):

FIIs had a large volume of funds. By the nature of their trading volumes, FIIs can retain Control over the stock market. SEBI had to keep these FIIs under its control for protecting the investors. Hence, all FIIs had to be registered with SEBI.

FIIs having a capital of 100 crores could register themselves as depositories and their procedures were to be evaluated by an independent agency. FIIs are also allowed to invest in debt securities but investment in equity and debt securities should be in the ratio of 70:30. The FIIs under SEBI include Pension Funds, Mutual Funds, Asset Management Companies, Investment Trust and Charitable Institutions.

Buy back of Shares:

Buy Back of shares is another development of Indian Corporate practice. It was permitted by SEBI in 1998, following the companies (amendment) ordinance by the Central Government. Buy back of shares is a method whereby a company is allowed to purchase its own shares out of its free reserves, securities premium account, or the proceeds of other specified securities like preference shares.

However, it cannot be made out of earlier issue of equity shares. Buy back of shares may be done from existing shareholders on a proportionate basis, through open market purchases and through company employees where securities are issued under stock option or sweat equity.

It is a strategy used for restructuring a company’s share capital and increasing the value of its shares. It can also have the effect of a greater control of the company by the management and promoters through the use of excess funds available with the company.

Buy back its shares as per SEBI’s regulations only when the following conditions are fulfilled:

1. The Articles of Association of a company authorize buy back of shares.
2. A special resolution is passed by the general body to authorize the repurchase of shares. The resolution should have an attached document giving details of all material facts like: need for buy back, amount to be invested, type of securities intended for repurchase and time limit for completion of buy back.
3. The debt equity ratio after buy back should not be more than 2:1 of secured and unsecured debt except with prior permission of Central Government.
4. The other specified securities of the company are fully paid up and (both listed and unlisted securities) are in accordance with SEBI regulations.
5. The buyback of shares is less than 25% of paid up capital and free reserves of the company as shown in the latest balance sheet of the company.
6. The buyback should be completed within twelve months from the date of passing the special resolution.
7. The shares/other specified securities would be extinguished within seven days of completion of buy back procedure of the company.
8. The company will not be permitted to issue the same type of shares/securities which have been bought back for a period of twenty-four months. The exception to such an issue would be the issue of bonus shares of stock-option schemes, conversion of preference shares/debentures into equity issues.
9. In addition, a company has to file a declaration of solvency verified by an affidavit in a prescribed form with the Registrar of companies within 30 days after completion of buy back. This has been amended in October 2001 to bring in relaxation to companies to buy back shares. The amendments are:
10. There can be only one buy back in 365 days.
11. Companies can buy back less than 10% of equity with the approval of the Board of directors meeting.
12. If a company issues less than 10% equity it does not require shareholders’ approval.

The Initial Public Offering IPO Process is where a previously unlisted company sells new or existing securities and offers them to the public for the first time.

Prior to an IPO, a company is considered to be private with a smaller number of shareholders, limited to accredited investors (like angel investors/venture capitalists and high net worth individuals) and/or early investors (for instance, the founder, family, and friends).

After an IPO, the issuing company becomes a publicly listed company on a recognized stock exchange. Thus, an IPO is also commonly known as “going public”.

The steps an investor needs to follow are:

Decision

The primary step for an investor would be to decide the IPO he wants to apply for. Though the existing investors may have the expertise, it could be an intimidating one for the new ones. The investors can form a choice by going through the prospectus of the companies initiating IPO.

The prospectus helps the investors to form an informed idea about the company’s business plan and its purpose for raising stocks in the market. Once the decision has been made, the investor needs to look forward to the next step.

Funding

When an investor has formed the decision regarding the IPO he would like to invest in, the very next step would be to arrange the funds. An investor can use his savings to buy a company’s share.

In case the investor does not have enough savings, he can avail a loan from certain banks and Non-Banking Financial Organisations (NBFCs) at a definite rate of interest.

Opening a Demat-cum-trading account

Any investor without a Demat account cannot apply for an IPO. The function of a Demat account is to provide the investors with the provision to store shares and other financial securities electronically. One can open a Demat account by submitting his Aadhaar card, PAN card, address and identity proofs.

The application process

An investor can apply for an IPO through his bank account or trading account. Some financial organisations will offer you the provision to bunch your Demat, trading and bank accounts.

After an investor has created the demat-cum-trading account, he needs to be familiar with the Application Supported by Blocked Account (ASBA) facility. It is mandatory for every IPO applicant. The ASBA is an application that enables the banks to arrest funds in the applicant’s bank account.

The ASBA application forms are made available to the IPO applicants in both demat and physical form. However, the use of cheques and demand drafts cannot be made to avail the facility. An investor needs to specify his demat account number, PAN, bidding details and bank account number in the application.

Bidding

An investor needs to bid while applying for the shares in an IPO. It is done according to the lot size quoted in the company’s prospectus. Lot size can be referred to as the minimum number of shares that an investor has to apply for in an IPO.

A price range is decided and the investors require to bid within the price range. Though an investor can make a revision in his biddings during an IPO, it should be noted that he needs to block the required funds while bidding. In the meantime, the arrested amount in the banks earns interest until the process of allotment is initiated.

Allotment

In many cases, the demand for the shares can exceed the actual number of stocks released in the secondary market. One can also face situations where he can get a fewer number of shares than what he had demanded. In these cases, the banks unlock the arrested funds either entirely or partially.

But, if an investor is lucky enough to get a full allotment, he would receive a CAN (Confirmatory Allotment Note) within six working days after the IPO process is done. After the shares have been allotted, they are credited to the investor’s demat account.

Once the above-mentioned steps are carried on successfully, the investor will have to wait for the listings of the stocks in the share market. It is generally done within seven days after the shares are finalised.

Securities are financial instruments that represent a creditor relationship with a corporation or government. Generally, they represent agreements to receive a certain amount depending on the terms contained within the agreement.

Fixed-income securities are investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule.

Fixed Income securities offer a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument. The debt securities are issued by the eligible entities against the moneys borrowed by them from the investors in these instruments. Therefore, most debt securities carry a fixed charge on the assets of the entity and generally enjoy a reasonable degree of safety by way of the security of the fixed and/or movable assets of the company.

The Debt Market is the market where fixed income securities of various types and features are issued and traded. Debt Markets are therefore, markets for fixed income securities issued by Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.

Debt Markets in India and all around the world are dominated by Government securities, which account for between 50 – 75% of the trading volumes and the market capitalization in all markets. Government securities (G-Secs) account for 70 – 75% of the outstanding value of issued securities and 90-95% of the trading volumes in the Indian Debt Markets.

Government Securities

G-Secs in India currently have a face value of ` 100/- and are issued by the RBI on behalf of the Government of India. All G-Secs are normally coupon (Interest rate) bearing and have semi-annual coupon or interest payments with tenure of between5to30years.This may change according to the structure of the Instrument.

The Zero Default Risk is the greatest attraction for investments in G-secs so that it enjoys the

greatest amount of security possible. The other advantages of investing in G- Secs are:

• Greater safety and lower volatility as compared to other financial instruments.
• Variations possible in the structure of instruments like Index linked Bonds, STRIPS
• Higher leverage available in case of borrowings against G-Secs.
• No TDS on interest payments.
• Tax exemption for interest earned on G-Secs. up to Rs.3000/- over and above the limit of Rs.9000/- under Section 80L.
• Greater diversification opportunities.

PSU Bonds

Public Sector Undertaking Bonds (PSU Bonds): These are Medium or long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes bonds issued by the central PSUs (ie PSUs funded by and under the administrative control of the Government of India). Most of the PSU Bonds are sold on Private Placement Basis to the targeted investors at Market Determined Interest Rates. Often investment bankers are roped in as arrangers to this issue. Most of the PSU Bonds are transferable and endorsement at delivery and are issued in the form of Usance Promissory Note.

Corporate Bonds

Corporate bonds are issued by corporations and usually mature within 1 to 30 years. These bonds usually offer a higher yield than government bonds but carry more risk. Corporate bonds can be categorized into groups, depending on the market sector the company operates in. They can also be differentiated based on the security backing the bond or the lack of security.

A corporate bond is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or “reaches maturity,” the payments cease and the original investment is returned.

The backing for the bond is generally the ability of the company to repay, which depends on its prospects for future revenues and profitability. In some cases, the company’s physical assets may be used as collateral.

Corporate bonds sometimes have call provisions to allow for early prepayment if prevailing interest rates change so dramatically that the company deems it can do better by issuing a new bond.

Investors may also opt to sell bonds before they mature. If a bond is sold, the owner gets less than face value. The amount it is worth is determined primarily by the number of payments that still are due before the bond matures.

Investors may also gain access to corporate bonds by investing in any number of bond-focused mutual funds or ETFs.

Benefits of corporate bond funds

• Components of corporate bonds

Corporate bond funds invest predominantly in debt papers. Companies issue debt papers, which include bonds, debentures, commercial papers, and structured obligations. All of these components carry a unique risk profile, and the maturity date also varies.

• Price of the bond

Every bond has a price, and it is dynamic. You can buy the same bond at different prices, based on the time you choose to buy. Investors should check how it varies from the par value it will give information about the market movement.

• Par Value of the bond

This is the amount the company (bond issuer) pays you when the bond matures. It is the loan principal. In India, a corporate bond’s par value is usually Rs 1,000.

• Coupon (interest)

When you buy a bond, the company will payout interest regularly until you exit the corporate bond or the bond matures. This interest is called the coupon, which is a certain percentage of the par value.

• Current Yield

The annual returns you make from the bond is called the current yield. For example, if the coupon rate of a bond with Rs 1,000 par value is 20%, then the issuer pays Rs 200 as the interest per year.

• Yield to Maturity (YTM)

This is the in-house rate of returns of all the cash-flows in the bond, the current bond price, the coupon payments until maturity and the principal. Greater the YTM, higher will be your returns and vice versa.

• Tax-efficiency

If you are holding your corporate bond fund for less than three years, then you must pay short-term capital gains tax (STCG) based on your tax slab. On the other hand, Section 112 of the Indian Income Tax mandates 20% tax on long-term capital gains. This applies to those who hold the bond for more than three years.

• Exposure & allocation

Corporate bond funds, sometimes, do take small exposures to government securities as well. But they do so only when no suitable opportunities in the credit space are available. On average, corporate bond funds will have approximately 5.22% allocation to sovereign fixed income.

Types of corporate bonds

Convertible bonds: You can convert these bonds into predefined stocks at your disposal. So, if at any point in time, you feel that stocks are likely to give you better returns than bonds, you can convert them into shares.

Non-convertible: As the name suggests, these bonds cannot be converted into stocks. These will be plain bonds purchased from a corporation for some time.

Types of corporate bond funds.

Type One: Type one corporate bonds invest in high-rated companies; public sector unit (PSU) companies and banks.

Type Two: Type two corporate bonds invest in slightly lower rated companies such as ‘AA- ‘and below.

Bond ratings are representations of the creditworthiness of corporate or government bonds. The ratings are published by credit rating agencies and provide evaluations of a bond issuer’s financial strength and capacity to repay the bond’s principal and interest according to the contract.

Investment grade	Moody’s	Standard & Poor’s	Fitch
Strongest	Aaa	AAA	AAA
	Aa1	AA+	AA+
	Aa2	AA	AA
	Aa3	AA-	AA-
	A1	A+	A+
	A2	A	A
	A3	A-	A-
	Baa1	BBB+	BBB+
	Baa2	BBB	BBB
	Baa3	BBB-	BBB-

Non-investment-grade	Moody’s	Standard & Poor’s	Fitch
	Ba1	BB+	BB+
	Ba2	BB	BB
	Ba3	BB-	BB-
	B1	B+	B+
	B2	B	B
	B3	B-	B-
	Caa1	CCC+	CCC+
	Caa2	CCC	CCC
	Caa3	CCC-	CCC-
	Ca	CC	CC

Weakest	Moody’s	Standard & Poor’s	Fitch
	C	C	C
		D	D

Investment grade and high yield bonds

Investors typically group bond ratings into 2 major categories:

• Investment-grade refers to bonds rated Baa3/BBB- or better.
• High-yield (also referred to as “non-investment-grade” or “junk” bonds) pertains to bonds rated Ba1/BB+ and lower.

Government securities market in India is narrow and unlike other countries inactive. The general investors do not buy these securities. The Reserve Bank of India and financial institutions are the main investors of government securities.

The government securities market in India supports the capital market and has no negative effect on it. The funds that it collects are mainly for minimizing the cost of servicing and for the planned priorities of the economy.

Government securities have been employed by the Reserve Bank of India in such a way that it is able to maintain some clear pattern of yield and a proper maturity distribution policy. It has also been considered safe by Reserve Bank to purchase securities before maturity in order to maintain stability.

The Reserve Bank of India has used open market operations to provide inexpensive finance for government and has tried to maintain funds with the view of achieving stability in the future.

The Reserve Bank of India has also used the techniques of maintaining the reserve ratio and the statutory liquid ratio and the technique of moral suasion. This it has done for controlling bank liquidity and for achieving the objectives of debt management.

Prices and Yields on Government Securities:

The prices of government securities remain stable, although the bank rate has been increasing. In India usually the bank rate influences the security prices inversely and in opposite direction.

But the Reserve Bank of India has tried to stabilize the prices of government securities. Thus, it has been able to do by refraining from making any change in the purchasing and selling rates of the different loans which are placed on its list.

It has also tried to manipulate the selling rate of Treasury Bills of government. The Reserve Bank of India has many a times mopped up the surplus funds by lowering the rate of sale of Treasury Bills. This is an indication that the Reserve Bank of India was concerned with the rate of term loans and wanted to continue with its stability.

The yields on securities can be studied if the investor holds the security continuously. An investor can then observe year to year changes in the coupon rate, running yield and redemption yield.

It is common practice in India that the government securities are sold far below the face value. This itself shows that the redemption yield is higher than the bond rate because the redemption yield is equal to the face value when the bond is purchased at the face value or par value.

In India, government securities have continuously increased the rate of return. Also, there has been no ceiling rate on government securities.

However, government securities show that even with the continuous increase in interest over the years, coupled with price stability, the rates given by government are far below than what the investor would hope to gain if he invested his funds in industrial securities. The government securities, therefore, are not an attractive form of investment.

In India, government securities have been an important or useful part of the monetary management and fiscal policy. The Reserve Bank of India has executed the interest rate of government selling, borrowing, purchasing and lending and has also influenced the prices and yields. It has also played an important role in maintaining a statutory liquidity ratio with the commercial banks in the country.

This has the effect of reducing or improving the liquidity position of the bank. As has been pointed earlier, government securities have not made a market for themselves. They have generally been issued for the reason of monetary, fiscal and debt management and for using the funds for the planned priorities of the country.

Government securities in India are invested by financial institutions and commercial banks. Although it comprises a larger segment than the industrial securities market in India, very little knowledge is presently available about its operation to the common man.

Dealer

A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behaviour and number of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well. Governments that use primary dealers include Australia, Belgium, Brazil, Canada, China, France, Hong Kong, India, Italy, Japan, Singapore, Spain, the United Kingdom, and the United States.

A Primary Dealer will be required to have a standing arrangement with RBI based on the execution of an undertaking and the authorisation letter issued by RBI covering inter-alia the following aspects:

(i) A Primary Dealer will have to commit to aggregative bid for Government of India dated securities on an annual basis of not less than a specified amount and auction Treasury Bills for specified percentage for each auction. The agreed minimum amount/ percentage of bids would be separately indicated for dated securities and Treasury Bills.

(ii) A Primary Dealer would be required to achieve a minimum success ratio of 40 per cent for dated securities and 40 per cent for Treasury Bills.

(iii) Underwriting of Dated Government Securities: Primary Dealers will be collectively offered to underwrite up to 100% of the notified amount in respect of all issues where the amounts are notified.

(iv) Treasury bill issues are not underwritten. Instead, Primary Dealers are required to commit to submit minimum bids at each auction. The commitment of Primary Dealer’s participation in treasury bills subscription works out as follows:

(a) Each Primary Dealer individually commits, at the beginning of the year, to submit minimum bids as a fixed percentage of the notified amount of treasury bills, in each auction.

(b) The minimum percentage of the bids for each Primary Dealer is determined by the Reserve Bank through negotiation with the Primary Dealer so that the entire issue of treasury bills is collectively apportioned among all Primary Dealers.

(c) The percentage of minimum bidding commitment determined by the Reserve Bank remains unchanged for the entire financial year or till furnishing of undertaking on bidding commitments for the next financial year, whichever is later. In determining the minimum bidding commitment, the Reserve Bank takes into account the offer made by the Primary Dealer, its net owned funds and its track record.

(v) A Primary Dealer shall offer firm two-way quotes either through the Negotiated Dealing System or over the counter telephone market or through a recognised Stock Exchange of India and deal in the secondary market for Government securities and take principal positions.

(vi) A Primary Dealer shall maintain the minimum capital standards at all points of time.

(vii) A Primary Dealer shall achieve a sizeable portfolio in government securities before the end of the first year of operations after authorisation.

(viii) The annual turnover of a Primary Dealer in a financial year shall not be less than 5 times of average month end stocks in government dated securities and 10 times of average month end stocks in Treasury Bills.

Of the total, turnover in respect of outright transactions shall not be less than 3 times in respect of government dated securities and 6 times in respect of Treasury Bills. The target should be achieved by the end of the first year of operations after authorisation by RBI.

(ix) A Primary Dealer shall maintain physical infrastructure in terms of office, computing equipment, communication facilities like Telex/Fax, Telephone, etc. and skilled manpower for efficient participation in primary issues, trading in the secondary market, and to advise and educate the investors.

(x) A Primary Dealer shall have an efficient internal control system for fair conduct of business and settlement of trades and maintenance of accounts.

(xi) A Primary Dealer will provide access to RBI to all records, books, information and documents as may be required,

(xii) A Primary Dealer shall subject itself to all prudential and regulatory guidelines issued by RBI.

(xiii) A Primary Dealer shall submit periodic returns as prescribed by RBI.

(xiii) A Primary Dealer’s investment in G-Secs and Treasury Bills on a daily basis should be at least equal to its net call borrowing plus net RBI borrowing plus net owned funds of Rs 50 crore.

STCI Finance Ltd (formerly Securities Trading Corporation of India Limited), is a Systemically Important Non-Deposit taking NBFC registered with Reserve Bank of India (RBI). Presently STCI Finance Ltd is classified as a loan NBFC.

In May 1994, STCI Finance Limited was promoted by RBI with the main objective of fostering an active secondary market in Government of India Securities and Public Sector bonds. RBI owned a majority stake of 50.18% in the paid-up share capital of the company. In 1996, the Company was accredited as the first Primary Dealer in the India. As one of the leading Primary Dealers in the country, the Company was a market maker in government securities, corporate bonds and money market instruments. Its other lines of activities included trading in interest rate swaps and trading in equity – cash & derivatives segment. The Company enjoyed a successful track record of achieving profits during consecutive years spanning nearly a decade. RBI divested its entire shareholding in STCI in two stages- first in 1997 to bring it down from 50.18% to 14.41% and the balance in 2002 to the existing shareholders. Bank of India became the largest shareholder in the company with 29.96% stake.

In order to diversify into new activities, the Company hived off its Primary Dealership business to its separate 100% subsidiary, STCI Primary Dealer Limited (STCI-PD) in June 2007. Since year 2007, the Company has been undertaking lending and investment activities with its main focus on lending/ financing activities. With growth in the size of the Look Book, the lending activity became the core business of the Company and STCI Finance Limited was classified as a Loan NBFC . With a view to reflecting the lending/ financing business of the Company, the name of the Company was changed from Securities Trading Corporation of India to ‘STCI Finance Limited’ with effect from October 24, 2011.

STCI Finance Limited is a diversified mid-market B2B NBFC offering its product and services across multiple locations in the areas of Capital Markets, Real Estate, Corporate Finance and Structured Finance.

Subsidiaries:

STCI Primary Dealer Limited (STCI PD)

This company is a wholly owned subsidiary of STCI Finance Limited established consequent to the hiving off of the Company’s primary dealership business in line with the Reserve Bank of India guidelines on diversification of business activities by primary dealers. The Company undertakes trading in government securities, corporate bonds, money market instruments, interest rate swaps and trading in equity.

STCI Commodities Limited

This company is a wholly owned subsidiary of STCI Finance Limited. The Company has discontinued its commodity broking operations with effect from September 20, 2011 and has also surrendered its membership with Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX).

Money market is the market for short-term loanable funds, as distinct from the capital mar­ket which deals in long-term funds.

Money mar­ket is also defined as a mechanism through which short-term funds are loaned and borrowed and through which a large part of the financial transac­tions of a particular country are cleared.

The money market is divided into direct, negotiated, or customers’ money market and the open or impersonal money market. In the former, banks and financial firms supply funds to local customers and also to larger centres such as London for direct lending. In the open money market, idle funds drawn from all-over the country are transferred through intermediaries to the New York City market or the London market.

These intermediaries comprise the Federal Reserve Banks in the USA or the Bank of England in England, commercial banks, insurance companies, business corporations, brokerage houses, finance companies, state and local government securities’ dealers. The money market is a dynamic market in which new money market instruments are evolved and traded and more participants are permitted to deal in the money market.

Use of Surplus Funds:

It provides and opportunity to banks and other institutions to use their surplus funds profitably for a short period. These institutions include not only commercial banks and other financial institutions but also large non-financial business corporations, states and local governments.

Provides Funds:

It provides short-term funds to the public and private institutions needing such financing for their working capital requirements. It is done by discounting trade bills through commercial banks, discount houses, brokers and acceptance houses. Thus the money market helps the development of commerce, industry and trade within and outside the country.

Helps Government:

The money market helps the government in borrowing short-term funds at low interest rates on the basis of treasury bills. On the other hand, if the government were to issue paper money or borrow from the central bank. It would lead to inflationary pressures in the economy.

No Need to Borrow from Banks:

The existence of a developed money market removes the necessity of borrowing by the commercial banks from the central bank. If the former find their reserves short of cash requirements they can call in some of their loans from the money market. The commercial banks prefer to recall their loans rather than borrow from the central banks at a higher rate of interests.

Helps in Financial Mobility:

By facilitating the transfer for funds from one sector to another, the money market helps in financial mobility. Mobility in the flow of funds is essential for the development of commerce and industry in an economy.

Helps in Monetary Policy:

A well-developed money market helps in the successful implementation of the monetary policies of the central bank. It is through the money market that the central banks is in a position to control the banking system and thereby influence commerce and industry.

Equilibrium between Demand and Supply of Funds:

The money market brings equilibrium between the demand and supply of loanable funds. This it does by allocating saving into investment channels. In this way, it also helps in rational allocation of resources.

Promotes Liquidity and Safety:

One of the important functions of the money market is that it promotes liquidity and safety of financial assets. It thus encourages savings and investments.

Economy in Use of Cash:

As the money market deals in near-money assets and not money proper, it helps in economising the use of cash. It thus provides a convenient and safe way of transferring funds from one place to another, thereby immensely helping commerce and industry.

The monetary policy takes care of promotional aspects such as:

(i) Monetary integration of the country,

(ii) Directing credit flow according to policy priorities,

(iii) Assisting in mobilisation of the savings of the community,

(iv) Promotion of capital formation and

(v) Maintain an appropriate structure of relative prices and demand containment.

A liquidity adjustment facility (LAF) is a tool used in monetary policy, mainly by the Reserve Bank of India (RBI), which enables banks to borrow money through repurchase agreements (reposals) or banks to lend to the RBI using reverse repo contracts.

This arrangement manages liquidity pressures and ensures basic financial-market stability. The Reserve Bank of India transacts repositories and reverse repos within its open market operations in India.

The Liquidity Adjustment Facility or LAF is the principal operating monetary policy tool that allows banks to borrow money through repurchase agreements. This means, in order to meet short-term cash needs, bank, borrow money against government approved securities with an agreement to repurchase the same at a predetermined rate and date.

The liquidity adjustment facility is used to aide banks in the emergency arising out of severe cash shortage or acute liquidity crisis. It is used for modulating the short-term liquidity and transmitting the interest rate into the market.

Basic of a Liquidity Adjustment Facility

Facilities for liquidity adjustment are used to help banks overcome any short-term cash shortages during periods of economic uncertainty or any other stress caused by circumstances beyond their control. Different banks use eligible securities as collateral through a repo agreement and utilize the funds to ease their short-term requirements, thus remaining constant.

The facilities are introduced on a daily basis as banks and other financial institutions make sure they have sufficient capital on the overnight market.

The transaction of liquidity adjustment facilities takes place at a set time of the day, through an auction. A company that wants to raise capital to accomplish a shortfall is engaged in repo agreements, while one with excess capital is doing the opposite executing a reverse repo agreement.

Liquidity Adjustment Facility and the Economy

The RBI may use the facility for adjusting liquidity to manage high levels of inflation. It does this by raising the repo rate, which increases the cost of debt servicing. This, in turn, reduces the supply of investment and money within the economy of India.

Alternatively, if the RBI tries to boost the economy after a period of slow economic growth, the repo rate can be lowered to encourage businesses to borrow, thus increasing the supply of money.

For instance, analysts predict RBI to cut the repo rate in April 2019 by 25 basis points due to weak economic activity, low inflation, and slower global growth. However, as growth accelerates and inflation picks up, analysts expect repo rates to resume rising by 2020.

Repo Rate

Repo or repurchase option allows the scheduled commercial banks to borrow funds from the Reserve Bank of India against any government approved securities with an agreement to repurchase them in the near future at a predefined rate of interest. The rate at which RBI charges from the banks against such lending is called the Repo rate. Through these operations, the liquidity is injected into the economy or the financial system.

Banking is the first sector to get affected by any change in monetary policies. A cut in repo rate can allow banks to borrow from the Reserve Bank of India at a cheaper rate and infuse higher liquidity in the banking system. This can lead banks to reduce their lending rates for customer leading to cheaper loans in the long term. As bank loans get cheaper, consumers can borrow and spend more which boosts consumption and can eventually lead to economic growth. However, this is depending on the decision by the bank whether to pass on the RBI repo rate cut benefits to their customers through cheaper loan offers.

Components

Preventing Economy “squeezes”: The Central bank increases or decreases the Repo rate depending on the inflation. Thus, it aims at controlling the economy by keeping inflation in the limit.

Hedging & Leveraging: RBI aims to hedge and leverage by buying securities and bonds from the banks and provide cash to them in return for the collateral deposited.

Short-Term Borrowing: RBI lends money for a short period of time, maximum being an overnight post which the banks buy back their securities deposited at a predetermined price.

Collaterals & Securities: RBI accepts collateral in the form of gold, bonds etc.

Cash Reserve (or) Liquidity: Banks borrow money from RBI to maintain liquidity or cash reserve as a precautionary measure.

Repo Rate Affect on Economy

Repo rate is a powerful arm of the Indian monetary policy that can regulate the country’s money supply, inflation levels, and liquidity. Additionally, the levels of repo have a direct impact on the cost of borrowing for banks. Higher the repo rate, higher will be the cost of borrowing for banks and vice-versa.

• Rise in inflation

During high levels of inflation, RBI makes strong attempts to bring down the flow of money in the economy. One way to do this is by increasing the repo rate. This makes borrowing a costly affair for businesses and industries, which in turn slows down investment and money supply in the market. As a result, it negatively impacts the growth of the economy, which helps in controlling inflation.

• Increasing Liquidity in the Market

On the other hand, when the RBI needs to pump funds into the system, it lowers the repo rate. Consequently, businesses and industries find it cheaper to borrow money for different investment purposes. It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy.

Reverse Repo Rate

This is just opposite to the Repo rate, here the RBI borrows money from the commercial banks against government approved securities. The rate at which RBI pays interest to the commercial bank is called a reverse repo rate. Through reverse repo operations, the liquidity is absorbed from the economy or the financial system.

Whenever RBI decides to reduce the reverse repo rate, banks earn less on their excess money deposited with the Reserve Bank of India. This leads the banks to invest more money in more lucrative avenues such as money markets which increases the overall liquidity available in the economy. While this can also lead to lower interest rate on loans for the bank’s customers, the decision will depend on multiple factors including the bank’s internal liquidity situation and the availability of other potentially less risky and equally lucrative investment opportunities.

Repo Rate	Reverse Repo Rate
It is the rate at which RBI lends money to banks	It is the rate at which RBI borrows money from banks
It is higher than the reverse repo rate	It is lower than the repo rate
It is used to control inflation and deficiency of funds	It is used to manage cash-flow
It involves the sale of securities which would be repurchased in future.	It involves the transfer of money from one account to another.

The Marginal Standing Facility (MSF) is the rate at which the scheduled commercial banks borrow funds fortnight from the Reserve Bank of India against the government approved securities.

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency when inter-bank liquidity dries up completely. The Marginal standing facility is a scheme launched by RBI while reforming the monetary policy in 2011-12.

Marginal Standing Facility (MSF) is a provision made by the RBI through which scheduled commercial banks can obtain liquidity overnight, in the event that inter-bank liquidity completely dries up. This is a facility for emergencies, through which banks obtain liquidity support at the MSF rate, which is a rate higher than the repo rate.

Banks can avail immediate cash of up to a percentage, now 3%, of their NDTL under MSF, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. It is a penal rate of interest at which the RBI offers banks funds under the Marginal standing facility. If a bank’s liquidity dries up due to, say, a loan-deposit mismatch, it could avail funds from the RBI at the marginal standing facility rate even if it does not have eligible securities beyond the SLR.

MSF is a short-term arrangement as banks generally do not run out of liquidity for a long time, but at a given point they may face a dire shortage of funds.

• Banks borrow from the RBI by pledging government securities at a rate greater than the repo rate under LAF (liquidity adjustment facility).
• The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
• Under MSF, banks can borrow funds up to one percent of their net demand and time liabilities (NDTL).
• The minimum amount for which RBI receives application is Rs.1 Crore, and afterward in multiples of Rs.1 Crore.

Normally, banks pledge eligible securities above the SLR requirement to the RBI to obtain liquidity through loans at the repo rate. Now, if a bank exhausts this means, it can resort to the MSF provision to get quick money for a 1-day period by pledging, within the limits of SLR, government securities.

Objectives of MSF rate

The Marginal Standing Facility was introduced by the RBI in the 2011-2012 monetary policy and it helps both banks and the RBI in a handful of ways.

• There is less volatility in overnight lending rates thanks to MSF
• Banks have a way to plug short-term liquidity shortfalls with MSF
• With MSF, RBI has more control over the money supply in the economy

RBI uses Marginal standing facility to control and manage the money supply in the financial system. With the increase in the rate, the borrowing becomes expensive for the commercial banks and in return the loans become dearer for the individual or corporate borrowers, which will result in less flow of money in the market. Also, the MSF rate is often increased by RBI to curb the excessive availability of rupee and to avoid further rupee depreciation against a dollar.

Rate of Interest

The rate of interest on MSF is above 100 bps above the Repo Rate.  The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility. This means that Difference between Repo Rate and MSF is 200 Basis Points.  So, Repo rate will be in the middle, the Reverse Repo Rate will be 100 basis points below it, and the MSF rate 100 bps above it. Thus, if Repo Rate is X%, reverse repo rate is X-1% and MSF is X+1%.

Borrowing under MSF

• Banks can borrow through MSF on all working days except Saturdays, between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.
• The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore.
• The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.