Investment management is a generic term that most commonly refers to the buying and selling of investments within a portfolio. Investment management can also include banking and budgeting duties, as well as taxes. The term most often refers to portfolio management and the trading of securities to achieve a specific investment objective. Investment management – also referred to as money management, portfolio management or private banking – covers the professional management of different securities and assets, such as bonds, shares, real estate and other securities. Proper investment management aims to meet particular investment goals for the benefit of the investors. These investors may be individual investors – referred to as private investors – who have built investment contracts with fund managers, or institutional investors who may be pension fund corporations, governments, educational establishments or insurance companies. Investment management services provide asset allocation, financial statement analysis, stock selection, monitoring of existing investments and plan implementation.

1. Vishnu raj C.R
T4 MBA
RBS
INVESTMENT MANAGEMENT

2. UNIT – 1
Investment: Investment may be defined as an activity that commits funds in any financial/physical
form in the present with an expectation of receiving additional return in the future. The expectation
brings with it a probability that the quantum of return may vary from a minimum to a maximum. This
possibility of variation in the actual return is known as investment risk. Thus every investment involves
a return and risk.
Investment is an activity that is undertaken by those who have savings. Savings can be defined as the
excess of income over expenditure. However, all savers need not be investors. For example, an
individual who sets aside some money in a box for a birthday present is a saver, but cannot be
considered an investor. On the other hand, an individual who opens a savings bank account and
deposits some money regularly for a birthday present would be called an investor. The motive of
savings does not make a saver an investor. However, expectations distinguish the investor from a saver.
The saver who puts aside money in a box does not expect excess returns from the savings. However,
the saver who opens a savings bank account expects a return from the bank and hence is differentiated
as an investor. The expectation of return is hence an essential characteristic of investment.
Objectives of investment
a) Maximization of profit
b) Minimization of risk
Characteristics of investment
• Return
• Risk
• Safety
• Liquidity
INVESTMENT AVENUES
Different avenues and alternatives of investment include share market, debentures or bonds, money
market instruments, mutual funds, life insurance, real estate, precious objects, derivatives, non-
marketable securities. All are differentiated based on their different features in terms of risk, return,
term etc.
Equity share - Equity investments represent ownership in a running company. By ownership, we
mean share in the profits and assets of the company but generally, there are no fixed returns. It is
considered as a risky investment but at the same time, they are most liquid investments due to the
presence of stock markets.

3. Debentures or bonds - Debentures or bonds are long term investment optionswith a fixed stream of
cash flows depending on the quoted rate of interest. They are considered relatively less risky. An
amount of risk involved in debentures or bonds is dependent upon who the issuer is. For example, if
the issuer is government, the risk is assumed to be zero. Following alternatives are available under
debentures or bonds:
• Government securities
• Savings bonds
• Public Sector Units bonds
• Debentures of private sector companies
• Preference shares
Money market instruments - Money market instruments are just like the debentures but the time
period is very less. It is generally less than 1 year. Corporate entities can utilize their idle working
capital by investing in money market instruments. Some of the money market instruments are
• Treasury Bills
• Commercial Paper
• Certificate of Deposits
Mutual funds - Mutual funds are an easy and tension free way of investment and it automatically
diversifies the investments. A mutual fund is an investment mix of debts and equity and ratio
depending on the scheme. They provide with benefits such as professional approach, benefits of scale
and convenience. In mutual funds also, we can select among the following types of portfolios:
• Equity Schemes
• Debt Schemes
• Balanced Schemes
• Sector Specific Schemes etc.
LIC - They are one of the important parts of good investment portfolios. Life insurance is an
investment for the security of life. The main objective of other investment avenues is to earn a return
but the primary objective of life insurance is to secure our families against unfortunate event of our
death. It is popular in individuals. Other kinds of general insurances are useful for corporates. There
are different types of insurances which are as follows:
• Endowment Insurance Policy

4. • Money Back Policy
• Whole Life Policy
• Term Insurance Policy
• General Insurance for any kind of assets.
Real estate - Every investor has some part of their portfolio invested in real assets. Almost every individual
and corporate investor invest in residential and office buildings respectively. Apart from these, others include:
• Agricultural Land
• Semi-Urban Land
• Commercial Property
• Raw House
• Farm House etc
Precious objects - Precious objects include gold, silver and other precious stones like the diamond.
Some artistic people invest in art objects like paintings, ancient coins etc.
Derivatives - Derivatives means indirect investments in the assets. The derivatives market is growing
at a tremendous speed. The important benefit of investing in derivatives is that it leverages the
investment, manages the risk and helps in doing speculation. Derivatives include:
• Forwards
• Futures
• Options
• Swaps etc.
Non-marketable securities - Non-marketable securities are those securities which cannot be
liquidated in the financial markets. Such securities include:
• Bank Deposits
• Post Office Deposits
• Company Deposits
• Provident Fund Deposits
Types of financial assets
Financial assets are assets which are needed by firm to carry on its business. These Assets may be
tangible or intangible. All assets need finance through any where either by lenders or by companies
own savings. Most of assets are financed through selling pieces of paper called financial assets,

5. instrument and securities. These papers have a value in exchange because they are claims on the
assets of the firm's assets and to its future cash flow. Offers the future cash flow is called 'issuer' and
who invest in that is called 'investor'.
CLASSIFICATION: - companies issue different type of instrument/securities for collecting funds.
Depending upon the different types of investor companies issue different types of
instrument/securities and it deepened on the nature of return or claim.
Financial assets may be classified as:
a) Equity share/instrument/MF/insurance /gold/commodities.
b) Debt instrument like debenture, bonds or term loan.
c) Preference share
On the basis of financial issuer, financial assets /securities are classified as,
1) Primary securities or direct securities.
2) Secondary securities or indirect securities.
3) Derivatives
1) PRIMARY SECURITIES: - this type of securities is called 'direct securities'. As the name suggest
these types of securities are issued directly by the ultimate borrower to the ultimate sever or
investors. Equity Shares, preference shares, debenture, bounds under this, such types of securities
comes.
2) SECONDARY SECURITIES :-As the name suggest, secondary securities are the securities which
are not issued directly by ultimate borrower, these securities are issued by financial intermediaries to
the ultimate saver or investor like insurance policy, unit of mutual funds, bank deposit etc. that's
why secondary securities is called 'indirect securities'.
3) DERIVATIVES: - Derivatives are the financial instruments whose value is derived from the value
of an underlying finance instrument such as a treasury bill, a bond or a note an individual equity. The
financial derivatives include forwards, futures operation, swaps, warrants or a mix of these. The
important types of financial assets such as shares, debentures, hybrid securities.
SHARES: - The term share means "ownership of particular limited area". In other words a share is a
share in the share of a company. If someone buys ordinary shares of any company he will become
owner of that much share. He will have right to influence decision in the company's annual general
meeting. Equal part of capital is called share.

6. Every company has a statutory right to issue its shares except a company limited by guarantee. It is
more easy and universal form of raising long term fund from the market.
Sec. 2(46) of the companies Act, 1956 defines it as "a share in the share capital of a company, and
includes stock except where distinction between stock and shares is expressed".
Kinds of ownership securities are:
a) Equity share
b) Preference share
c) Debenture or bond
d) Mutual fund
Investment vs. Speculation
Investment and speculation both involve the purchase of assets such as shares and securities, with an
expectation of return. However, investment can be distinguished from speculation by risk bearing
capacity, return expectations, and duration of trade.
Investment is long term in nature. An investor commits funds for a longer period in the expectation
of holding period gains. However, a speculator trades frequently; hence, the holding period of
securities is very short.
In any stock exchange, there are two main categories of speculators called the bulls and bears. A bull
buys shares in the expectation of selling them at a higher price. When there is a bullish tendency in
the market, share prices tend to go up since the demand for the shares is high. A bear sells shares in
the expectation of a fall in price with the intention of buying the shares at a lower price at a future
date. These bearish tendencies result in a fall in the price of shares.
Investment Vs Gambling
Investment can also to be distinguished from gambling. Examples of gambling are horse race, card
games, lotteries, and so on. Gambling involves high risk not only for high returns but also for the
associated excitement. Gambling is unplanned and unscientific, without the knowledge of the nature
of the risk involved. It is surrounded by uncertainty and a gambling decision is taken on unfounded
market tips and rumours. In gambling, artificial and unnecessary risks are created for increasing the
returns.
Investment is an attempt to carefully plan, evaluate, and allocate funds to various investment outlets
that offer safety of principal and expected returns over a long period of time. Hence, gambling is
quite the opposite of investment even though the stock market has been euphemistically referred to
as a “gambling den”
Types of Investors

7. There are plenty of stories about people "bootstrapping" startups with their own money. That's not
always possible. Many startups come to the point where they have to depend on investors.
When doing so, it's important to know the different types of investors. The most common types are:
• Banks
• Angel investors
• Peer-to-peer lenders
• Venture capitalists
• Personal investors
The major factors affecting investment
1) Element of Uncertainty
2) Existing Stock of Capital Goods
3) Level of Income
4) Consumer Demand
5) Liquid Assets
6) Inventions and Innovations
7) New Products
8) Growth of Population
9) State Policy
10) Political Climate.
INVESTMENT PROCESS
Client
profile
Objective & risk
analysis
Economic &
market analysis
Investment
selection
Asset
allocation
Implementation
& riview

8. RISK
There is always a risk incorporated in every investment like shares or debentures. The two major
components of risk systematic risk and unsystematic risk, which when combined results in total risk.
The systematic risk is a result of external and uncontrollable variables, which are not industry or
security specific and affects the entire market leading to the fluctuation in prices of all the securities.
On the other hand, unsystematic risk refers to the risk which emerges out of controlled and known
variables, that are industry or security specific.
Comparison Chart
Basis comparison systematic risk unsystematic risk
Meaning Systematic risk refers to the hazard
which is associated with the market or
market segment as a whole.
Unsystematic risk refers to the risk
associated with a particular
security, company or industry.
Nature Uncontrollable Controllable
Factors External factors Internal factors
Affects Large number of securities in the
market.
Only particular company.
Types Interest risk, market risk and
purchasing power risk.
Business risk and financial risk
Protection Asset allocation Portfolio diversification
By the term ‘systematic risk’, we mean the variation in the returns on securities, arising due to
macroeconomic factors of business such as social, political or economic factors. Such fluctuations are
related to the changes in the return of the entire market. Systematic risk is caused by the changes in
government policy, the act of nature such as natural disaster, changes in the nation’s economy,
international economic components, etc. The risk may result in the fall of the value of investments
over a period. It is divided into three categories, that are explained as under:
• Interest risk: Risk caused by the fluctuation in the rate or interest from time to time and affects
interest-bearing securities like bonds and debentures.
• Inflation risk: Alternatively known as purchasing power risk as it adversely affects the
purchasing power of an individual. Such risk arises due to a rise in the cost of production, the
rise in wages, etc.

9. • Market risk: The risk influences the prices of a share, i.e. the prices will rise or fall consistently
over a period along with other shares of the market.
Unsystematic Risk
The risk arising due to the fluctuations in returns of a company’s security due to the micro-economic
factors, i.e. factors existing in the organization, is known as unsystematic risk. The factors that cause
such risk relates to a particular security of a company or industry so influences a particular organization
only. The risk can be avoided by the organization if necessary actions are taken in this regard. It has
been divided into two category business risk and financial risk, explained as under:
• Business risk: Risk inherent to the securities, is the company may or may not perform well.
The risk when a company performs below average is known as a business risk. There are some
factors that cause business risks like changes in government policies, the rise in competition,
change in consumer taste and preferences, development of substitute products, technological
changes, etc.
• Financial risk: Alternatively known as leveraged risk. When there is a change in the capital
structure of the company, it amounts to a financial risk. The debt – equity ratio is the expression
of such risk.
Other Risks
Besides the above described risks, there are many more risks, which can be listed, but in actual
practice, they may vary in form, size and effect.
Some of such identifiable risks are the Political Risks, Management Risks and Liquidity Risks etc.
Political risk may occur due to the changes in the government, or its policy shown in fiscal or budgetary
aspects, changes in tax rates, imposition of controls or administrative regulations etc. Management
risks arise due to errors or inefficiencies of management, causing losses to the company. Marketability
liquidity risks involve loss of liquidity or loss of value in conversions from one asset to another say,
from stocks to bonds, or vice versa. Such risks may arise due to some features of securities, such as
callability; or lack of sinking fund or Debenture Redemption Reserve fund, for repayment of principal
or due to conversion terms, attached to the security, which may go adverse to the investor.
Unit - 2
Money market
A money market is a center for dealing mainly of short term monetary assets. "Money market is the
network of those financial instruments and institutions that are dealing with short term funds. Short
term funds are the finds with maturity period not exceeding one year.

10. Gottery Crowther defines money market as "the collective name given to the various firms and
institutions that deal in the various grades of near money. " Near money refers to bank deposits, money
at call and short notices, treasury bills etc. They can be converted into money either immediately or at
a future date.
Features of money market
i. A developed commercial banking system
ii. Presence of a central bank
iii. Sub-market
iv. Near money assets
v. Integrated interest rate structure
Function of money market
i. Economic development
ii. Profitable investment
iii. Borrowing by the government
iv. Importance of central bank
v. Mobilization of funds
vi. Self-sufficiency of commercial banks
vii. Saving and investment
Money market instruments
Call Money Market: The call money market is a market for extremely short period loans say one
day to fourteen days. So, it is highly liquid. The loans are repayable on demand at the option of either
the lender or the borrower. In India, call money markets are associated with the presence of stock
exchanges and hence, they are located in major industrial towns like Bombay, Calcutta, Madras,
Delhi, Ahmedabad etc. The special feature of this market is that the interest rate varies from day to
day and even from hour to hour and centre to centre. It is very sensitive to changes in demand and
supply of call loans.
Participants
i. Commercial bank
ii. Stock brokers & speculation
iii. Bill market
LIBOR
• Libor is a reference /bench mark rate used to borrow or lend funds in the London wholesale
money market or inter-bank lending market.

11. • Most widely used bench mark interest rate, world over.
• Calculated every day, Intercontinental Exchange and published by Reuters around 11.30 am.
• Obtaining quotes from 18 global banks with high credit rating for the rate at which they are
willing to borrow.
• Calculated for 7 maturities (1 day-1yr).
• Five currencies (US
• $,pound,Euro,Yen,Swiss,French).
LIBID (LONDON INTER BANK BID RATE)
• Libid is the average interest rate which major London banks borrow Eurocurrency deposits
from other banks.
• It is the rate at which banks borrow money.
• Deposits bid for a period of 3M-6M.
MIBOR(Mumbai Interbank Offer Rate)
• Launched on June 15,1998 by the committee for the development of the debt market as an
overnight rate.
• Calculated by the NSEIL as weighted average of lending rates of group of banks, on funds
lent to first-class borrowers.
• MIBOR rates have been used as benchmark rates for the majority of money market deals
made in India.
• MIBOR is the rate at which banks are willing to lend bank.
• Indian version of LIBOR.
• Offer is the price at which the market would sell.
• MIBOR is fixed for overnight 3-month long funds and these rates are published every day at
a designated time.
MIBID(Mumbai Inter Bank Bid Rate)
• It is the rate at which the banks would like to borrow from other banks.
• It is calculated by NSE.
• “Bid” is the price at which bank would buy.
• These are initially launched for the overnight money market(9am-10am).
• 33 banks with primary dealers are polled at 9.30am

12. Treasury Bills Market : It is a market for treasury bills which have ‘short-term’ maturity. A
treasury bill is a promissory note or a finance bill issued by the Government. It is highly
liquid because its repayment is guaranteed by the Government. It is an important instrument
for short term borrowing of the Government. There are two types of treasury bills namely (i)
ordinary or regular and (ii) adhoc treasury bills popularly known as ‘adhocs’.
Ordinary treasury bills are issued to the public, banks and other financial institutions
with a view to raising resources for the Central Government to meet its short term financial
needs. Adhoc treasury bills are issued in favour of the RBI only. They are not sold through
tender or auction. They can be purchased by the RBI only. Adhocs are not marketable in
India but holders of these bills can sell them back to 364 days only. Financial intermediaries
can park their temporary surpluses in these instruments and earn income.
Repo Instruments: 'Repo' stands for repurchase under Repo transaction, the borrower
parts with securities to the lender with an agreement to repurchase them at the end of the fixed period
at a specific price. At the end of the period, the borrower will repurchase the securities at the
predetermined price. The difference between the purchase price and original price is the cost for the
borrower. This cost of borrowing is called 'Repo rate’ It is little cheaper than pure borrowing
From the viewpoint of the seller a transaction is Repo, but to the supplier of funds it is a
'Reverse Repo An agreement is termed as ‘Repo’ or ‘Reverse Repo' depends on the party initiates the
transaction. In India Repos are normally conducted for a period of 3 days. The eligible securities are
decided by RBI.
Opening
Sell 100 worth of stock
Pay 100 cash for stock
closing
pay 100 cash + repo interest
sells 100 worth of stock
Commercial Papers (CPs): A commercial paper is an unsecured promissory note issued with a
fixed maturity by a company approved by RBI. It is negotiable by endorsement and delivery issued
in bearer form and at a discount determined by the issuing company. Commercial paper was
originated as a short-term paper issued by a
companies to the public for raising working capital. It is issued by well rated companies for a
minimum period of three months and maximum six months.
Bank A Bank B
Bank A Bank B

13. Certificate of Deposits (CDs): Certificate of Deposits are money market instruments issued by
scheduled commercial banks excluding Regional Rural Banks. Certificate of Deposits can be issued
to individuals, corporation, trusts, funds etc. The maturity period of Certificate of Deposits should be
not less than three months and not more than one year.
Certificate of Deposits are short term deposit instruments issued by banks and financial institutions
to raise large sum of money.
Certificate of Deposits are short term deposits by way of usance promissory notes payable on a fixed
date. They are issued in multiples of Rs.5 lakhs subject to a minimum of Rs.25 lakhs.
Collateralized Borrowing and Lending Obligation (CBLO)
CBLO was conceived and developed by CCIL for facilitating deployment in a collateralized
environment. It is a tripartite Repo transaction involving CCIL as third party and as central
counterparty to borrower and lender. CBLO is an RBI approved money market instrument which can
be issued for a maximum tenor of one year.• Is an instrument backed by Gilts as Collaterals• Creates
an Obligation on the borrower to repay the money borrowed along with interest on a predetermined
future date;• A Right and Authority to the lender to receive money lent along with interest on a
predetermined future date or has the privilege to transfer the authority to another person• Creates a
charge on the Collaterals deposited by the Borrower with CCIL for the purpose.
Why CBLO
• To address the concerns of entities phased out of call money market or are subjected to
borrowing/ lending restrictions
• To address the tenor ‘lock-in’ issues related to Repo
• To bring in better transparency
• To bring in better level playing field
• To have better price discovery in money market
How does CBLO operate?
• A member deposits a set of eligible securities as collateral with CCIL
• Borrowing limit: based on mark-to-market value and hair-cut applicable on securities
deposited
• Based on borrowing limit, CBLOs are issued to a member.
• CBLO is an instrument that can be bought and sold.
Tool for managing liquidity in the money market
• Repo and reverse repo rate
Repo is a transaction wherein securities are sold by the RBI and simultaneously repurchased at a fixed
price. This fixed price is determined in context to an interest rate called the repo rate. The transaction

14. is relevant for banks; when they need funds from the RBI, the central bank repurchases the securities.
The higher the repo rate, more costly are the funds for banks and hence, higher will be the rate that
banks pass on to customers. A high rate signals that access to money is expensive for banks; lesser
credit will flow into the system and that helps bring down liquidity in the economy. The reverse is the
reverse repo rate, which banks use to park excess money with RBI. At present, repo rate is 6.0% and
reverse repo is 5.75%.
• Cash reserve ratio (CRR)
This is the percentage of a bank’s total deposit that need to be kept as cash with the RBI. The central
bank can change the ratio to a limit. A high percentage means banks have less to lend, which curbs
liquidity; a low CRR does the opposite. The RBI can reduce or raise CRR to tighten or ease liquidity
as the situation demands. At present, CRR is at 4%.
• Open market operation
This refers to buying and selling of government securities by RBI to regulate short-term money supply.
If RBI wants to induce liquidity or more funds into the system, it will buy government securities and
inject funds, and if it wants to curb the amount of money out there, it will sell these to banks, thereby
reducing the amount of cash that banks have. RBI uses this tool actively even outside of its monetary
policy review to manage liquidity on a regular basis.
• Statutory liquidity ratio (SLR)
This is the percentage of banks’ total deposits that they are needed to invest in government approved
securities. The lesser the amount of SLR, the more banks have to lend outside. In India require to
maintain in the form of gold, government approval securities before providing credit to the customers.
The SLR is determined by percentage of total demand and time liability. The current SLR is 19.50%.
This will be reduced to 20% with effect from 24th June 2017 in line with the changes in RBI Credit
Policy.
• Bank Rate Policy
The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing
funds or loans to the banking system. This banking system involves commercial and co-operative
banks, Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial
institutes. Funds are provided either through lending directly or discounting or buying money market
instruments like commercial bills and treasury bills. Increase in Bank Rate increases the cost of
borrowing by commercial banks which results in the reduction in credit volume to the banks and hence

15. declines the supply of money. Increase in the bank rate is the symbol of tightening of RBI monetary
policy. As on 9th Aug 2017 bank rate is 6.00 percent.
UNIT - 3
Debentures or Bonds
Loans can be raised from public by issuing debentures or funds by public limited companies.
Debentures are normally issued in different denominations ranging from 100 to 1,000 and carry
different rates of interest. By issuing debentures, a company can raise long-term loans from public.
Normally, debentures are issued on the basis of a debenture trust deed, which list the terms and
conditions on which the debentures are floated. Debentures are normally secured against the assets of
the company. As compared with preference shares, debentures provide a more convenient mode of
long-term funds. The cost of capital raised through debentures is quite low since the interest payable
on debentures can be charged as an expense before tax. From the investors’ point of view, debentures
offer a more attractive prospect than the preference shares since interest on debentures is payable
whether or not the company makes profits. Debentures are, thus, instruments for raising long-term debt
capital. Secured debentures are protected by a charge on the assets of the company. While the secured
debentures of a well established company may be attractive to investors, secured debentures of a new
company do not normally evoke same interest in the investing public.
Advantages of raising finance by issue of debentures are:
• The cost of debentures is much lower than the cost of preference or equity capital as the interest
is tax deductible. Also, investors consider debenture investment safer than equity or preferred
investment and, hence, may require a lower return on debenture investment.
• Debenture financing does not result in dilution of control.
• In a period of rising prices, debenture issue is advantageous. The fixed monetary outgo
decreases in real terms as the price level increases.
Features of debentures
• Maturity: Debenture provide long term fund to the company, they mature after a specific
period.
• Claims on income: A fixed rate of interest is payable to the debenture holder
• Claims on assets: Debenture holders have the priority of claim on assets of the company. They
have to be paid first before making any payment to the preference or equity share holders in
the event of the liquidation of the company.
• Control: Debenture holders are the creditor’s of the company and not its owners, they do not
have any control over the management of the company.They do not have any voting rights.

16. Types of debentures
1. Simple or unsecured debenture
These debentures are not given any security on assets.
2. Secured or Mortgaged debenture
These debentures are given the security on asses of the company. N case default of payment of interest
and principal amount debenture holder can sell their asset in order to satisfy the assets.
3. Bearer debenture
These dentures are easily transferable. They are just like a negotiable instrument. The debentures are
handed over to the purchaser without any registration deed.
4. Registered debenture
Registered debenture required a procedure to be followed for their transfer. In registered denture the
name of purchaser is entered in the register.
5. Redeemable debenture
These debentures are to redeemable on the expiry of a certain period.
6. Irredeemable debenture
Such debenture is not being debentured during the life time of the company
7. Convertible debenture
In convertible debenture, debenture holders are given an option to exchange the debenture in to equity
share after a specified period.
8. Zero coupon Bond
Zero coupon bond does not carry any interest but is sold by the issuing company at a deep discount. The
difference between issue price and and maturity value represents the gain of the investors.
Bond Yield and Return
Yield is a general term that relates to the return on the capital investor invest in a bond.
There are several definitions that are important to understand when talking about yield as it relates to
bonds: coupon yield, current yield, yield-to-maturity, yield-to-call and yield-to-worst.
Coupon rate: it is a nominal rate of interest fixed and printed on a bond certificate. It is calculated on
the basis of face value of the bond. It is the rate at which interest is payable by issuing company to the
bond holder. This is called as coupon rate.
Current yield: current yield relates the annual interest receivable on abond to its current market price.
It can be calculated by, { I / P0 * 100 }
Yield to maturity (YTM) is the overall interest rate earned by an investor who buys a bond at the
market price and holds it until maturity. Mathematically, it is the discount rate at which the sum of all
future cash flows (from coupons and principal repayment) equals the price of the bond. YTM is often

17. quoted in terms of an annual rate and may differ from the bond’s coupon rate. It assumes that coupon
and principal payments are made on time. It does not require dividends to be reinvested, but
computations of YTM generally make that assumption. Further, it does not consider taxes paid by the
investor or brokerage costs associated with the purchase.
Yield to call (YTC) is figured the same way as YTM, except instead of plugging in the number of
months until a bond matures, you use a call date and the bond's call price. This calculation takes into
account the impact on a bond's yield if it is called prior to maturity and should be performed using the
first date on which the issuer could call the bond.
Bond management strategies
1.Passive strategy
• Less role expectation
• Key inputs are known at the time of investment analysis
• Key inputs such as objective of the investors, risk taking ability
Type of passive strategy
a) Buy & hold strategy
b) Indexing strategy
2.Active management strategies
• Take advantage of market scenario
• Requires major time to time adjustment or changes in portfolio
• The goal is to maximize total return but at increased risk
• Requires continuous analysis and observation on the part of portfolio manage
Types of active management strategies
a) Interest rate anticipation
b) Valuation analysis
c) Credit analysis
d) Yield spread analysis
3.Matched-funding techniques
• Mixture of passive buy & hold strategy and active management strategy
• Objective is to get higher return at minimum risk
• Require constant monitoring
• Could give more return than buy & hold but not higher than active management strategy

18. UNIT -4
Equity shares
Equity shares were earlier known as ordinary shares. The holders of these shares are the real owners
of the company. They have a voting right in the meetings of holders of the company. They have a
control over the working of the company. Equity shareholders are paid dividend after paying it to the
preference shareholders.
The rate of dividend on these shares depends upon the profits of the company. They may be paid a
higher rate of dividend or they may not get anything. These shareholders take more risk as compared
to preference shareholders.
Characteristics of Equity shares
1 .Maturity:- equity shares provide permanent capital to the company and cannot be redeemed during
the life of the company. Equity shareholders demand refund of their capital only at the time of
liquidating the company.
2. Claims/Right to income:- equity shareholders have a right to claim on the income of a company.
They have a claim on income left after paying dividend to preference share holders. The rate of
dividend on these shares is not fixed.
3. Claim on asset:- Equity share holder have a right to claim the ownership’s company's assets.
4. Voting rights:- Equity share holders are the real owners of the company. They have the meeting
rights in the meeting of the company and have control over the working of the company. Board of
directors are elected by the equity share holders, directors are appointed in the annual general meeting
by majority of votes.
5. Pre-emptive right:- Section 81 of the companies Act 1956 provides when ever a public limited
company proposes to increases their capital through the issue of shares, such share must be offered to
the existing equity share on the basis of there holding.
6. Limited liability:- The liability of equity share is limited to the value of share they have purchased.
Advantages of raising funds by issue of equity shares are:
1. It is a permanent source of finance.
2. The issue of new equity shares increases flexibility of the company.
3. The company can make further issue of share capital by making a right issue.

19. 4. There are no mandatory payments to shareholders of equity shares.
Preference shares
Preference shares are those shares which carry certain special or priority rights. Firstly, dividend at a
fixed rate is payable on these shares before any dividend is paid on equity shares.
Secondly, at the time of winding up of the company, capital is repaid to preference shareholders prior
to the return of equity capital. Preference shares do not carry voting rights. However, holders of
preference shares may claim voting rights if the dividends are not paid for two years or more on
cumulative preference shares and three years or more on non-cumulative preference shares.
Features of preference shares
1. Maturity: - the preference share can be repayable only at the time of liquidation after meeting the
claims of creditors and before the payment of equity shares.
2. Claims on income: - a fixed rate of dividend is payable on preference shares. Preference share
holder have a prior claim on income (dividend) over equity shareholders. whenever the company as
distributable profit, the dividend is first paid on preference shares.
3. Claims on assets: - preference share have the preference in the repayment of capital at the time of
liquidation of the company. Their claims on assets are superior to those on equity shareholders.
4. Control: - preference share holder has no voting rights
The advantages of taking the preference share capital route are:
1. No dilution in EPS on enlarged capital base – if equity is issued it reduces EPS, thus affecting the
market perception about the company.
2. There is leveraging advantage as it bears a fixed charge.
3. There is no risk of takeover.
4. There is no dilution of managerial control.
5. Preference capital can be redeemed after a specified period
Types of preference shares
1. Cumulative preference share
These shares have a right to claim dividend for those years also for which there are no profits.
Whenever there are divisible profits, cumulative preference shares are paid dividend for all the
previous year n which dividend could not be declared.

20. 2. Non-cumulative preference share
The holders of these shares have no claim for the arrears of dividend. They are paid dividend if they
are sufficient profits.
3. Redeemable preference shares
The company can issue redeemable preference share if the article of association allow such an issue.
The company has a right to redeemable preference share capital after a certain period.
4. Irredeemable preference share:-
Those share which cannot be redeemable unless the company is liquidated are known as irredeemable
preference share.
5. Participating preference share
The holders of these shares participate the surplus profit of the company. They are firstly paid fixed a
rate of dividend and then reasonable rate of dividend is paid on equity share holders, if some profits
remain, then preference share holder participate in the surplus profit.
6. Non participating preference share
These share do not carry additional right of sharing of profit of the company.
7.Convertible preference share
The holder of these share may be iven a right to conver their holding into equity share after a specific
period.
8. Non-convertible preference share
These share which cannot be converted in to equity share is known as non-convertible preference
share.
Capital market
Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
capital markets help channelize surplus funds from savers to institutions which then invest them into
productive use. Generally, this market trades mostly in long-term securities.
Capital market consists of primary markets and secondary markets. Primary markets deal with trade
of new issues of stocks and other securities, whereas secondary market deals with the exchange of

21. existing or previously-issued securities. Another important division in the capital market is made on
the basis of the nature of security traded, i.e. stock market and bond market.
Various functions and significance of capital market
• Link between Savers and Investors
• Capital formation
• Encouragement to Saving
• Encouragement to Investment
• Promotes Economic Growth
• Stability in Security Prices
• Benefits to Investors
Primary Capital Market
The primary capital markets is also called the New Issue Market or NIM. The securities which are
introduced in the market are sold for first time to the general public in this market. This market is also
known as the long-term debt market as the fund raised from this market provides long-term capital.
The act of selling new issues in the primary capital market follows a particular process. This process
requires the involvement of a syndicate of the securities dealers. The dealers who are running the
process get a certain amount for as commission. The price of the security offered in the primary capital
market includes the dealer, commission also. Again, if the issue is a primary issue, the investors get
the issue directly from the company and no intermediary is needed in the process. For the purpose, the
investor needs to send the exact amount of money to the respective company and after receiving the
money, the particular company provides the security certificates to the investors. The primary issues
which are offered in the primary capital market provide the essential funds to the companies. These
primary issues are used by the companies for the purpose of setting new businesses or to expanding
the existing business. At the same time, the funds collected through the primary capital market, are
also used for the modernization of the business. At the same time, the primary capital market is also
involved in the process of creating capital for the respective economy.
Participants in primary market
1.Managers to the issue
2.Registrar to the issue
3.Underwriters
4.Bankers
5.Advertising agencies

22. 6.Financial institutions
7.Government / statutory agencies
1. Managers to the issue
• Managers to the issue otherwise known as Merchant Bankers.
• All public issue should be managed by issue managers registered with SEBI
• They have a big role to play especially, in placing equity in the primary markets, through the
Initial Public Offers route.
• Themerchantbanksplayacrucialroleinhelpingthecorporatesraisemoneyfromtheremarkets.
2. Registrar to the issue
• Registrar to the issue is compulsory in all public issue
• Registrar to the issue is otherwise known as ISSUE HOUSE
Registrar's scope of works are:
• Designing of share application
• Help in holding meetings
• Finalizing forms, scrutinizing
• Prepare allotment registe
• Register of members etc.
Registrar of Coal India Pvt Ltd is Link Intime India Private Ltd
3. Underwriters
• Underwriters have to see that the shares or debentures are subscribed.
• If any portion of the securities is not taken up by the public, the underwriters will have to buy
them.
• Financial Institutions, stock brokers, banks etc. acts as underwriters.
• They do not buy & sell securities
4. Bankers
• They were having the responsibility of collecting the application money along with the
application form
• They were charging commission
• Depending upon the size of the public issue more than one banker to the issue is appointed
5. Advertising agencies

23. • The advertising agencies take the responsibility of giving publicity to the issue on the suitable
media
• They were selected in consultation with the lead managers to the issue.
• The media may be newspapers/magazines/hoardings/press release or a combination of all.
6. Financial institutions
• Financialinstitutionsgenerallyunderwritetheissueandlendtermloanstothecompanies
• Normally they go through the draft of prospectus, study the proposed program for public issue
and approve them.
• IDBI, IFCI, ICICI, LIC, GIC and UTI are the some of the financial institution that underwrite
and give financial assistance.
7. Government or Statutory Agencies
• SEBI
• Registrar of Companies
• RBI
• Stock Exchanges where the issue is going to be listed
• Industrial Licensing Authorities
• Pollution Controlling Authorities
Methods of primary issues
1. Initial public offer
2. Private placement
3. Offer for sale
4. Bought out deals
5. Right issue
6. Bonus issue
7. Book-building
Initial Public Issue (IPO)
When a company makes public issue of shares for the first time, it is called Initial Public Offer. The
securities are sold through the issue of prospectus to successful applicants on the basis of their demand.
The company has to appoint underwriters in order to guarantee the minimum subscription.
An underwriter is generally an investment banking company. They agree to pay the company a certain
price and buy a minimum number of shares, if they are not subscribed by the public. The underwriter

24. charges some commission for this work. He can sell these shares in the market afterwards and make
profit. There may be two or more underwriters in case of large issue.
Private Placement
It involves sale of securities to a limited number of sophisticated investors such as financial
institutions, mutual funds, banks and so on. It refers to sale of equity or equity related instruments of
an unlisted company.
A company makes to offer of sale to individuals and institutions privately without the issue of
prospectus.
Offer of Sale
It consists in outright sale of securities through the intermediary of issue houses or share brokers.
It consists of two stages; the first stage is a direct sale by the issuing company to the issue house and
brokers at an agreed price. In the second stage, the intermediaries resell the above securities to ultimate
investors. The issue house purchases the securities at negotiated price and resell at a higher price.
Bought out deals.
In case of Bought out Deals any company who wants to bring shares to the market makes the sale of
all the equity shares to a single sponsor or the lead sponsor. This is an agreement between the company
and the sponsors for a particular quantity of equity shares. The sale price is finalized through
negotiations as similar to that of offer for sale.
Right issue
When a listed company proposes to issue securities to its existing share holders, whose name appear
in the register of members on record date, in the proportion to their existing holding, through an offer
document, such issues are called Right Issue. This mode of raising capital is best suited when the
dilution of controlling interest is not intended.
Bonus issue
Bonus shares are usually issued when a company earns extra profit or have extra reserves and they
want to convert the same into share capital. These shares are issued in proportion to the number of
shares held by the shareholders. Rules regarding issue of bonus shares are given in the SEBI. Issue of
bonus shares reduces the market price of the company's shares and keeps it within the reach of ordinary
investors. Issue of bonus shares is generally indicates future growth.
Book Building:

25. Every business organisation needs funds for its business activities. It can raise funds either externally
or through internal sources. When the companies want to go for the external sources, they use various
means for the same. Two of the most popular means to raise money are Initial Public Offer (IPO) and
Follow on Public Offer (FPO).
During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a
price range, so that the investors can decide on the right price. The method of offering shares by
providing a price range is called book building method. This method provides an opportunity to the
market to discover price for the securities which are on offer.
Book Building may be defined as a process used by companies raising capital through Public
Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and
demand discovery. It is a mechanism where, during the period for which the book for the offer is open,
the bids are collected from investors at various prices, which are within the price band specified by the
issuer. The process is directed towards both the institutional investors as well as the retail investors.
The issue price is determined after the bid closure based on the demand generated in the process.
The following are the important points in book building process:
1. The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’.
2. The Issuer specifies the number of securities to be issued and the price band for the bids.
3. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.
4. The syndicate members put the orders into an ‘electronic book’. This process is called ‘bidding’ and
is similar to open auction.
5. The book normally remains open for a period of 5 days.
6. Bids have to be entered within the specified price band.
7. Bids can be revised by the bidders before the book closes.
8. On the close of the book building period, the book runners evaluate the bids on the basis of the
demand at various price levels.
9. The book runners and the Issuer decide the final price at which the securities shall be issued.
10. Generally, the number of shares is fixed; the issue size gets frozen based on the final price per
share.

26. 11. Allocation of securities is made to the successful bidders. The rest bidders get refund orders.
secondary market
The secondary capital market deals with those securities that are already issued in an initial public
offering in the primary market. Typically, the secondary markets are those where previously issued
securities are purchased and sold. In the secondary capital market, the securities are generally sold by
and transferred from one investor to another. Hence, the secondary capital market needs to be highly
liquid in nature. A high transparency for the secondary market trading is also required. With the
advancement of the technology, the trading concept in secondary market has changed substantially. In
the earlier days, the investors needed to meet at fixed place in order to carry out the transactions. But
now trading in secondary capital market has become much easier for the investors.
Participants in secondary market
1.Stock Brokers
2.Ultimate Borrowers
3.Financial Intermediaries
4.Ultimate Lenders
5.Fund Managers
6.Speculators and Arbitrageurs
7.Depositories
1.Stock Brokers
• Investment Advisor
• Professional individual associated with brokerage firm
• Buys and sells stocks and other securities
• Return as commission or Fee
2.Ultimate Borrowers
• The only issuers of equity are corporate entities that have a share capital.
• The corporate entities that have listed their shares on the exchange also have a role in the
secondary market
• In most countries the law allows companies repurchase their shares under certain conditions.
These shares are held as "treasury shares/stock" and may be sold (i.e. Issued) again.
3.Financial Intermediaries

27. • A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment banks, mutual funds and
pension funds
• In certain areas, such as investing, advances in technology threaten to eliminate the financial
intermediary.
• Many intermediaries take part in securities exchanges and utilize long term plans for
managing and growing their funds.
• Financialintermediariesmovefundsfrompartieswithexcesscapitaltopartiesneedingfunds
4.Ultimate Lenders
The ultimate lenders are made up of the four broad sectors of the economy
a) Foreign
b) Corporate
c) Government
d) House hold
5.Fund Managers
• A fund manager is responsible for implementing a fund's investing strategy and managing its
portfolio trading activities.
• Fund managers are paid a fee for their work,
• Most fund manager soften pursue a Chartered Financial Analyst (CFA) designation as a first
step in becoming the headstock – picker for a portfolio.
• One of the most iconic fund managers in history piloted Fidelity Investments’ Magellan Fund.
6.Speculators and Arbitrageurs
• speculators and arbitrageurs do not constitute a separate group of participants
• Arbitrage is usually defined as the seeking and taking advantage of price anomalies in the
same security in different markets.
• An arbitrageur may also find an anomaly between the price of a share quoted on both the
local market and London Stock Exchange, buy the share on the other, and profit from the
different in price.
• Speculators actively seek capital gain opportunities and undervaluation / overvalued
opportunities, and take advantage of these by taking “positions" in equities.
7.Depositories
• Integral institutions in the Indian Capital Market.

28. • National Securities Depository Limited(NSDL)
• Central Depository Services (India) Limited (CDSL)
• It facilitates dematerialization of shares
• Facilitates Transfer of ownership of securities
• Provides services through depository participants.
• Financial Institutions and Trading members registered with SEBI–Depository Participants.
• Nomination Facility as a function
• Change in address can be done through Depository Participants.
• Facilitates holding of different securities
Process of Buying Secondary Market Instrument
1. Finding a broker
The first step in trading shares is select a broker for transacting on behalf of the investor.
➢ Make sure that broker is registered with SEBI and the Exchanges.
➢ Broker registration number begins with the letter ‘INB’
➢ A sub broker with the letter ‘INS’
2. Opening an Account
There are three types of account to its clients:
Trading Account Demat Account Commodity Account
Procedures for opening an Account
Step 1: To open a demat account, you have to approach a depository participant (DP), an agent of
depository, and fill up an account opening form.
Step 2: Along with the account opening form, you must enclose photocopies of some documents for
proof of identity and proof of address.
Step 3: You will have to sign an agreement with DP in the depository prescribed standard format.
Step 4: The DP will then open an account and give you the demat account number.
You can have multiple demat accounts if you so wish. You can choose your DP as per your
convenience and there is no compulsion to open DP account with your stock broker.

29. 3. Best priced order matched
• Priority
• Precedence
• Parity
4. Executing the Order
As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the
securities.
5. Trade confirmation
Trade confirmation slip issued to the investor/trader by the broker
6. Settlement.
within 24hrs of trade execution contract not issued to the investor/ trader by the broker. Two
types of settlement.
On the spot settlement: settlement is done immediately and on spot settlement follows. T + 2
rolling settlement. This means any trade taking place on Monday gets settled by Wednesday.
Forward settlement: settlement will take place on some future date. It can be T + 5 or T + 7,
etc.
All trading in stock exchanges takes place between 9.55 am and 3.30 pm. Monday to Friday.
Bombay Stock Exchange (BSE)
The Bombay Stock Exchange (BSE) is Asia's oldest stock exchange. Based in Mumbai, India, BSE
was established in 1875 as the Native Share & Stock Brokers' Association. Prior to that brokers and
traders would gather under banyan trees to conduct transactions.
BSE functions as the first-level regulator in the securities market, providing monitoring and
surveillance mechanisms that are able to detect irregularities and manipulations in stock prices. The
Exchange also provides counter-party risk management in all transactions that take place on its trading
platform through its clearing and settlement services. Shares of more than 5,000 companies are traded
on BSE. In addition to equity and debt, the Exchange allows for trading of mutual fund units and
derivatives.
The National Stock Exchange (NSE) is a stock exchange in India.

30. Set up in November 1992, NSE was India's first fully automated electronic exchange with a nationwide
presence. The exchange, unlike Bombay Stock Exchange (BSE), was the result of the
recommendations of a high-powered group set up to study the establishment of new stock exchanges,
which would operate on a pan-India basis. Its shareholders consist of 20 financial institutions including
state-owned banks and insurance companies.
Headquartered in Mumbai, NSE offers capital raising abilities for corporations and a trading platform
for equities, debt, and derivatives -- including currencies and mutual fund units. It allows for new
listings, initial public offers (IPOs), debt issuances and Indian Depository Receipts (IDRs) by overseas
companies raising capital in India.
S&P CNX Nifty is the benchmark index introduced by NSE. Some of its other indices are CNX Nifty
Junior, India VX, S&P CNX Defty, S&P CNX 500, etc. The exchange offers clearing and settlement
services through its wholly-owned unit, the National Securities Clearing Corporation set up in 1995.
The other main subsidiaries/ associate companies of NSE include the National Commodity Clearing,
National Securities Depository (which is the repository of all securities in electronic form), and
National Commodity and Derivatives Exchange.
Bombay Stock Exchange was recognized as an exchange under the Securities Contracts (Regulation)
Act in 1957. Its benchmark index, the Sensitive Index (Sensex) was launched in 1986. In 1995, the
BSE launched its fully automated trading platform called BSE On-Line Trading system (BOLT) which
fully replaced the open outcry system.
In 2005, the Exchange changed from being simply an association of brokers to became a corporate
entity. The administrative structure of the Exchange is headed by a board of directors, below which is
a governing council and management that presides over its day-to-day functioning.
Online stock trading
Online stock trading is a model where you can enter your trades directly into your broker's system and
let their computers buy and sell for you. There may not be another human involved. Log on to your
broker's web site or use their mobile app and you're off and running.
The use of online trading increased dramatically in the mid-to late-'90s with the introduction of
affordable high-speed computers and internet connections.
Offline trading
Offline trading is when you don't buy/sell shares online. That is when you place your order to a broker
who then buys or sells them for you

31. Offline is when you place your trades either by calling the broker office or by personal visit to the
office. It is simple. You decide to trade and tell the people handling trading there about your trade
Dematerialization
Dematerialization is the process of converting physical shares into an electronic form. Shares once
converted into dematerialized form are held in a Demat account.
In finance and financial law, dematerialization refers to the substitution of paper-form securities by
book entry securities.
dematerialized securities are often referred as intermediated securities , in particular by the Unidroit
convention on substantive rules for intermediated securities .
UNIT – 5
mutual fund
Mutual fund is a pool of money provided by individual investors, companies, and other organizations.
A fund manager is hired to invest the cash the investors have contributed, and the fund manager's goal
depends on the type of fund; a fixed-income fund manager,
Mutual funds are divided along four lines: closed-end and open-ended funds; the latter is subdivided
into load and no load.
• Benefits of mutual funds
• Simplicity: Mutual Funds Are Easy to Understand
• Accessibility: Mutual Funds Are Easy to Buy
• Diversity: Mutual Funds Have Broad Market Exposure
• Variety: Mutual Funds Come in Many Different Categories and Types
• Affordability: Mutual Funds Have Low Minimums
• Professional Management: Mutual Funds Have a Team of Professionals Researching and
Analyzing Investments So Investor Don't Have To
Types of Mutual Funds based on structure
• Open-Ended Funds
• Close-Ended Funds
• Interval Funds
Types of Mutual Funds based on asset class
• Equity Funds
• Debt Funds
• Money Market Funds
• Balanced or Hybrid Funds
Types of Mutual Funds based on investment objective

32. • Growth funds
• Income fund
• Liquid fund
• Tax-Saving Funds
• Capital Protection Funds
• Fixed Maturity Funds
Types of Mutual Funds based on specialty
• Sector Funds
• Index fund
• Fund of funds
• Emerging market funds
• International funds
Types of Mutual Funds based on risk
• Low risk
• Medium risk
• High risk
Derivative
Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called
exchange-traded derivatives. Or they can be customised as per the needs of the user by negotiating
with the other party involved. Such derivatives are called over-the-counter (OTC) derivatives.
Derivative includes:
(a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
(b) a contract which derives its value from the prices, or index of prices, of underlying securities.
Advantages of Derivatives:
1. They help in transferring risks from risk adverse people to risk oriented people.
2. They help in the discovery of future as well as current prices.
3. They catalyze entrepreneurial activity.
4. They increase the volume traded in markets because of participation of risk adverse people
in greater numbers.
5. They increase savings and investment in the long run.

33. Types of Derivative Instruments:
Derivative contracts are of several types. The most common types are forwards, futures, options and
swap.
Forward Contracts
A forward contract is an agreement between two parties – a buyer and a seller to purchase or sell
something at a later date at a price agreed upon today. Forward contracts, sometimes called forward
commitments, are very common in everyone life. Any type of contractual agreement that calls for the
future purchase of a good or service at a price agreed upon today and without the right of cancellation
is a forward contract.
Future Contracts
A futures contract is an agreement between two parties – a buyer and a seller – to buy or sell something
at a future date. The contact trades on a futures exchange and is subject to a daily settlement procedure.
Future contracts evolved out of forward contracts and possess many of the same characteristics. Unlike
forward contracts, futures contracts trade on organized exchanges, called future markets. Future
contacts also differ from forward contacts in that they are subject to a daily settlement procedure. In
the daily settlement, investors who incur losses pay them every day to investors who make profits.
Options Contracts
Options are of two types – calls and puts. Calls give the buyer the right but not the obligation to buy a
given quantity of the underlying asset, at a given price on or before a given future date. Puts give the
buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price
on or before a given date.
Swaps
Swaps are private agreements between two parties to exchange cash flows in the future according to a
prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used
swaps are interest rate swaps and currency swaps.
1. Interest rate swaps: These involve swapping only the interest related cash flows between
the parties in the same currency.

34. 2. Currency swaps: These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in the opposite
direction.
Securities Exchange Board of India (SEBI)
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities
market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was
not able to exercise complete control over the stock market transactions.
It was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate
having a separate legal existence and perpetual succession.
Reasons for Establishment of SEBI:
With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such
as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules
and regulations of stock exchange and listing requirements. Due to these malpractices the customers
started losing confidence and faith in the stock exchange. So government of India decided to set up an
agency or regulatory body known as Securities Exchange Board of India (SEBI).
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development
of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and
its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Powers of SEBI
The important powers of SEBI (Securities and Exchange Board of India) are:-
• Powers relating to stock exchanges & intermediaries
• Power to impose monetary penalties

35. • Power to initiate actions in functions assigned
• Power to regulate insider trading
• Powers under Securities Contracts Act
• Power to regulate business of stock exchanges
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important
functions. These are:
1. Protective functions
2. Developmental functions
3. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud and
cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc., e.g., the directors
of a company may know that company will issue Bonus shares to its shareholders at the end of year
and they purchase shares from market to make profit with bonus issue. This is known as insider trading.
SEBI keeps a strict check when insiders are buying securities of the company and takes strict action
on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce the sale
or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various
companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:

36. (a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot
change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange and
increase the business in stock exchange. Under developmental categories following functions are
performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in
following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as
merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement has
been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.

37. (vi) SEBI conducts inquiries and audit of stock exchanges.
INVESTOR PROTECTION MEASURES BY SEBI
Investor protection legislation is implemented under the Section 11(2) of the SEBI Act. The measures
are as follows:
• Stock Exchange and other securities market business regulation.
• Registering and regulating the intermediaries of the business like brokers, transfer agents,
bankers, trustees, registrars, portfolio managers, investment consultants, merchant bankers, etc.
• Recording and monitoring the work of custodians, depositors, participants, foreign investors,
credit rating agencies, etc.
• Registering investment schemes like Mutual fund & venture capital funds, and regulating their
functioning.
• Promotion and controlling of self-regulatory companies.
• Keeping a check on frauds and unfair trading methods related to the securities market.
• Observing and regulating major transactions and take-over of the companies.
• Carry out investor awareness and education programme.
• Train the intermediaries of the business.
• Inspecting and auditing the security exchanges (SEs) and intermediaries.
• Assessment of fees and other charges.