MERCHANT BANKING AND

FINANCIAL SERVICES
DOMS
UNIVERSITY OF MADRAS
 BUSE214 MERCHANT BANKING AND FINANCIAL
SERVICES
UNIT I MERCHANT BANKING
Introduction – An Over view of Indian Financial System – Merchant Banking in India – Recent
Developments and Challenges ahead – Institutional Structure – Functions of Merchant Bank -
Legal and Regulatory Framework – Relevant Provisions of Companies Act- SERA- SEBI
Guidelines - FEMA, etc. - Relation with Stock Exchanges and OTCEI.
UNIT II ISSUE MANAGEMENT
Role of Merchant Banker in Appraisal of Projects, Designing Capital Structure and Instruments
–Issue Pricing – Book Building – Preparation of Prospectus Selection of Bankers, Advertising
Consultants, etc. - Role of Registrars –Bankers to the Issue, Underwriters, and Brokers. – Offer
for Sale – Green Shoe Option – E-IPO, Private Placement – Bought out Deals – Placement with
FIs, MFs, FIIs, etc. Off-Shore Issues. – Issue Marketing – Advertising Strategies – NRI Marketing
–Post Issue Activities.
UNIT III OTHER FEE BASED SERVICES
Mergers and Acquisitions– Portfolio Management Services– Credit Syndication – Credit Rating
– Business Valuation.
 UNIT IV FUND BASED FINANCIAL SERVICES
Leasing and Hire Purchasing – Basics of Leasing and Hire purchasing – Financial Evaluation.
UNIT V OTHER FUND BASED FINANCIAL SERVICES
Consumer Credit – Credit Cards – Real Estate Financing – Bills Discounting – factoring and
Forfeiting – Venture Capital.
 Merchant Banking
The word merchant bank does not have a fixed
definition as this term is used differently in
different countries. In United States these are
called as “Investment Banks” and in UK they
are called as “accepting and issuing houses”.
Merchant banking can be defined as a skill-
oriented professional service provided by
merchant banks to their clients, concerning
their financial needs, for adequate
consideration, in the form of fee.
 Merchant Banking
Merchant Banking is a combination of Banking and
consultancy services. It provides consultancy to its clients
for financial, marketing, managerial and legal matters.
Consultancy means to provide advice, guidance and service
for a fee. It helps a businessman to start a business. It helps
to raise (collect) finance. It helps to expand and modernize
the business. It helps in restructuring of a business. It helps
to revive sick business units. It also helps companies to
register, buy and sell shares at the stock exchange.
• The merchant banker may be in the form of a bank, a
company, firm or even a proprietary concern. Large
brokers, Mutual Funds, Venture capital companies and
Investment Banks offer merchant banking services.
 Merchant Banking
Merchant Banking is a combination of Financing and
Investing activities. It means Merchant Banking involves
both Commercial banking services of lending and
accepting of funds.
Also, Advisory services to a business. Some of the
functions are: Portfolio Management, Loan syndication,
Project Counseling, etc. It underwrites securities, advices
clients on mergers and helps in management as well.
A merchant bank is a company that conducts underwriting,
loan services, financial advising, and fundraising services
for large corporations and high net worth individuals.
 Functions of Merchant Banking
Functions of Merchant Banking
1. Raising Finance for Clients
2. Broker in Stock Exchange
3. Project Management
4. Advice on Expansion and Modernization
5. Managing Public Issue of Companies
6. Handling Government Consent for Industrial Projects 
7. Special Assistance to Small Companies and Entrepreneurs
8. Services to Public Sector Units
9. Revival of Sick Industrial Units
10. Portfolio Management
11. Corporate Restructuring 
12. Money Market Operation
13. Leasing Services
14. Management of Interest and Dividend
 Functions of Merchant Banking
Raising Finance for Clients
Merchant Banking helps its clients to raise finance through
issue of shares, debentures, bank loans, etc. It helps its clients
to raise finance from the domestic and international market.
This finance is used for starting a new business or project or
for modernization or expansion of the business.

Broker in Stock Exchange

Merchant bankers act as brokers in the stock exchange. They
buy and sell shares on behalf of their clients. They conduct
research on equity shares. They also advise their clients about
which shares to buy, when to buy, how much to buy and when
to sell.
 Functions of Merchant Banking
Project Management
  Merchant bankers help their clients in the many ways. For e.g.
Advising about location of a project, preparing a project
report, conducting feasibility studies, making a plan for
financing the project, finding out sources of finance, advising
about concessions and incentives from the government.
Advice on Expansion and Modernization
Merchant bankers give advice for expansion and
modernization of the business units. They give expert advice
on mergers and amalgamations, acquisition and takeovers,
diversification of business, foreign collaborations and joint-
ventures, technology up-gradation, etc.
 Functions of Merchant Banking
Managing Public Issue of Companies
Merchant bank advice and manage the public issue of
companies. They provide following services :
Advice on the timing of the public issue. Advise on the size and
price of the issue. Acting as manager to the issue, and helping
in accepting applications and allotment of securities. Help in
appointing underwriters and brokers to the issue, listing of
shares on the stock exchange, etc.
Handling Government Consent for Industrial Projects
A businessman has to get government permission for starting
of the project. Similarly, a company requires permission for
expansion or modernization activities. For this, many
formalities have to be completed. Merchant banks do all this
work for their clients.
 Functions of Merchant Banking
Special Assistance to Small Companies and Entrepreneurs
Merchant banks advise small companies about business
opportunities, government policies, incentives and
concessions available. It also helps them to take
advantage of these opportunities, concessions, etc.
Services to Public Sector Units
Merchant banks offer many services to public sector
units and public utilities. They help in raising long-term
capital, marketing of securities, foreign collaborations
and arranging long-term finance from term lending
institutions.
 Functions of Merchant Banking
Revival of Sick Industrial Units
Merchant banks help to revive (cure) sick industrial
units. It negotiates with different agencies like banks,
term lending institutions, and BIFR (Board for
Industrial and Financial Reconstruction). It also plans
and executes the full revival package.
Portfolio Management 
A merchant bank manages the portfolios
(investments) of its clients. This makes investments
safe, liquid and profitable for the client. It offers expert
guidance to its clients for taking investment decisions.
 Functions of Merchant Banking
Corporate Restructuring
It includes mergers or acquisitions of existing business units,
sale of existing unit or disinvestment. This requires proper
negotiations, preparation of documents and completion of
legal formalities. (Obtaining approval from shareholders,
depositors, creditors, Government and other authorities.)
Money Market Operation
Merchant bankers deal with and underwrite short-
term money market instruments, such as : Government
Bonds. Certificate of deposit issued by banks and financial
institutions. Commercial paper issued by large corporate
firms, Treasury bills issued by the Government (Here in India
by RBI).
 Functions of Merchant Banking
Leasing Services
Merchant bankers also help in leasing services. Lease
is a contract between the lessor and lessee, whereby
the lessor allows the use of his specific asset such as
equipment by the lessee for a certain period. The
lessor charges a fee called rentals.
Management of Interest and Dividend
Merchant bankers help their clients in the
management of interest on debentures / loans, and
dividend on shares. They also advise their client about
the timing (interim / yearly) and rate of dividend.
 History of Merchant Banking in India
The history of merchant bank can be dated back to 17th & 18th
centuries when it first started in Italy & France. This was
started by the Italian grain merchants. It comprised of
merchant bankers who intermediated or assisted in financing
the transactions of other traders and their own trade too.
IN INDIA
Merchant banking activity was officially commenced into the
Indian capital Markets when Grindlays bank received the
license from Reserve Bank in 1967. Grindlays started its
operations with management of capital issues, recognized the
requirements of upcoming class of Entrepreneurs for diverse
financial services ranging from production planning and system
design to market research. Apart from this it also provides
management consulting services to meet the requirements of
small and medium sector rather than large sector.
History of Merchant Banking in India
• Citibank Setup its merchant banking division in Indian in 1970.
• Indian banks Started banking Services from 1972.
• SBI was first Indian bank to set up merchant banking division
in 1972.
• Later, the ICICI set up its merchant banking division in 1973.
After that there were many banks which set up the merchant
bank division such as,
• Bank of India
• Bank of Baroda
• Canara Bank
• Punjab National Bank
• UCO Bank
History of Merchant Banking in India
Merchant Bankers in India
Merchant bankers include Public Sector, Private Sector and foreign
players.

The Merchant Bank got more importance in the year 1983 when
there was a huge boom in the primary market where the
companies were going for new issue.

The buoyancy in the capital market in 1980s created a lot of scope

for merchant banking activities in our country. The year 1985 was
an epoch-making year in the history of merchant banking when a
large number of issues were oversubscribed by several times and
the importance of merchant banking activities was made evident in
managing issues and their underwriting.
 History of Merchant Banking in India
Since August 1990, merchant bankers engaged in issue
management, corporate advisory services,
underwriting and portfolio management have to
obtain authorisation from the Securities and
Exchange Board of India (SEBI) after meeting the
requirements of capital adequacy norms.
 
As the liberalisation policy continues and the financial
market is expanding rapidly, the future for the
country’s merchant bankers seems to be buoyant. But
their roles are changing with the change in the needs
of the customers.
 Merchant Banking Regulations
Merchant Banking Regulations
• At present no organisation can act as a ‘merchant
banker’ without obtaining a certificate of
registration from the SEBI.
• However, It must be noted that a person/
organisation has to get himself registered under
these regulations if he wants to carry on or
undertake any of the authorised activities, i.e., issue
management assignment as manager, consultant,
advisor, underwriter, portfolio manager.
Merchant Banking Regulations
To obtain the certificate of registration, one
had to apply in the prescribed form and fulfill
two sets of norms
(i) Operational capabilities and
(ii) Capital adequacy norms.
 Merchant Banking Regulations
Classification of Merchant Bankers
The SEBI has classified ‘merchant bankers’ under four categories for the purpose
of registration:
1. Category I Merchant Bankers
These merchant bankers can act as issue manager, advisor, consultant,
underwriter and portfolio manager.
2. Category II Merchant Bankers
Such merchant bankers can act as advisor, consultant, underwriter and portfolio
manager. They cannot act as issue manager of their own but can act co-manager.
3. Category III Merchant Bankers
They are allowed to act as underwriter, advisor and consultant only. They can
neither undertake issue management of their own nor they act as co-manager.
They cannot undertake the activities of portfolio management also.
4. Category IV Merchant Bankers
A category IV merchant banker can merely act as consultant or advisor to an
issue of capital.
 Merchant Banking Regulations
Capital Adequacy Norms
SEBI has prescribed capital adequacy norms
for registration of the various categories of
merchant bankers. The capital adequacy is
expressed in terms of minimum net worth,
i.e., capital contributed to the business plus
free reserves.
The following are the capital adequacy norms as laid down by SEBI
 Categories of Merchant Bankers
Category Activities (Operational Minimum net worth
Capabilities) requirement
Category 1 Act as Issue Manager, Rs.5 crore
underwriter, advisor,
consultant or portfolio
manager
Category 2 Act as co-manager, Rs.50 lakhs
underwriter, advisor,
consultant or portfolio
manager
Category 3 Act as co-managers Rs.20 lakhs
without undertaking
portfolio management
Category 4 Only act as an advisor or Nil
consultant for the issue
 Merchant Banking Regulations
Fees
According to the SEBI (Merchant Bankers) Amendment Regulations, 1999, w.e.f.
30.9.1999, every merchant banker shall pay a sum of Rs. 5 lakhs as registration
fees at the time of grant of certificate by the Board. The fee shall be paid by the
merchant banker within 15 days of receipt of intimation from the Board.
Further, a merchant banker to keep registration in force shall pay renewal fee of Rs.
2.5 lakhs every three years from the fourth year from the date of initial
registration.
Government Policy for Merchant Banking
• The Government issued policy guidelines for merchant bankers to ensure
sufficient physical infrastructure, necessary expertise, good financial standing,
professional integrity and fairness in their transactions. The merchant bankers
have to be competent to serve the investors also.
• On 1st March, 1993 new policy guidelines have been issued by SEBI for the
merchant bankers to ensure greater transparency in their operations and to make
them accountable so as to protect the investor’s interest. The guidelines relate to
pre-issue obligations, underwriting, advertisements and post-issue obligations of
the merchant bankers.
Scope for Merchant Banking in India
 Scope for Merchant Banking in India
Scope for Merchant Banking in India
• Growth of New Issues Market
• Entry of Foreign Investors
• Changing Policy of Financial Institutions
• Development of Debt Market
• Corporate Restructuring
• Disinvestment
Growth of New Issues Market
The growth of new issue market is unprecedented since 1990-1991. Merchant banking
can help with the further sophistication and penetration of the new issues market.
Entry of Foreign Investors
Foreign institutional investors were allowed to invest in the primary and secondary
market in 1992 and also, Indian companies were allowed to directly tap foreign capital
through euro issues.
Further, foreign direct investment by NRIs has risen considerably due to number of
incentives offered to them. They need the services of merchant bankers to advise them
for their investment in India. The increasing number of joint ventures abroad by Indian
companies also requires expert services of merchant bankers.
 Scope for Merchant Banking in India
Changing Policy of Financial Institutions
The policy of decentralization, increase in demand for technical and financial services and
encouragement of small and medium industries, requires the services of merchant bankers.
Development of Debt Market
The development of the debt market will offer a tremendous opportunity to Merchant Bankers.
Innovations in Financial Instruments: The Indian capital market has witnessed innovations in
the introduction of financial instruments. This has further extended the role of merchant
bankers as market makers for these instruments.
Corporate Restructuring
Due to liberalization and globalization, competition in the corporate sector is becoming intense.
To survive and thrive, companies need new strategies, structures and methods of functioning.
This has led to corporate restructuring including mergers, acquisitions, etc. These
developments offer a good opportunity to merchant bankers to extend their area of operations.
Disinvestment
The government of India has raised funds in crores through disinvestment of equity shares of
selected public sector undertakings. Merchant Bankers can help in the disinvestment process.
Merchant Bank Vs Commercial Bank
 Merchant Bank Vs Commercial Bank
Definition of Commercial Bank
A commercial bank may be described as the financial intermediary, that
offers a number of monetary services to the general public and corporations
as well.
The primary function of a commercial bank is taking deposits and granting
loans.
but it also serves the customers by providing services like:
• Disbursement of payments
• Collection of funds
• Providing working capital finance
• Safeguarding valuables
• Purchasing and selling securities
• Bank overdraft
• Cash credit
• Discounting bill of exchange
 Merchant Bank Vs Commercial Bank

Definition of Merchant Bank

A merchant bank refers to the banking company that provides both
financial and consultancy services to the clients. It is also engaged in
activities associated with the promotion and development of industrial
projects such as:
• Loan syndication
• Portfolio management
• Underwriting of capital issues
• Project counselling
• Issue management
• Advisory services on mergers, acquisitions and takeovers.
• Corporate restructuring
• Acceptance of bills
 Merchant Bank Vs Commercial Bank
BASIS FOR COMPARISON COMMERCIAL BANK MERCHANT BANK
Meaning Commercial bank is a banking Merchant bank refers to the
company established by a financial institution, that
number of people for providing specializes in international
the basic banking functions i.e. trade and provide and array of
accepting deposits and lending services including consultancy
money to general public. to its clients.

Governing Act/body Regulated by Banking Rules and regulations designed

Regulation Act, 1949. by SEBI.

Needs Needs of Common Man Needs of Corporate Firms

Engaged in General banking business Consultancy type business

Nature of loan extended Debt-related Equity-related

Exposure to risk Less Comparatively more

Role Financier Financial Advisor

Importance Management Oriented Asset Oriented

OVERVIEW OF INDIAN FINANCIAL
SYSTEM
Overview of Indian Financial System
The financial system of a country is an important tool for
economic development of the country as it helps in the
creation of wealth by linking savings with investments. It
facilitates the flow of funds from the households (savers) to
business firms (investors) to aid in wealth creation and
development of both the parties. 
The institutional arrangements include all condition and
mechanism governing the production, distribution, exchange
and holding of financial assets or instruments of all kinds. There
are four main constituents of the financial system as follows
• Financial Services
• Financial Markets 
• Financial Assets/Instruments 
• Financial Intermediaries
Overview of Indian Financial System
(a) Financial Services
Financial Services is concerned with the design and delivery of financial
instruments, advisory services to individuals and businesses within the
area of banking and related institutions, personal financial planning,
leasing, investment, assets, insurance etc.

These services include

Banking Services: Includes all the operations provided by the banks
including to the simple deposit and withdrawal of money to the issue of
loans, credit cards etc. 
Foreign Exchange services: Includes the currency exchange, foreign
exchange banking or the wire transfer. 
Investment Services: It generally includes the asset management, hedge
fund management and the custody services. 
Insurance Services: It deals with the selling of insurance policies,
brokerages, insurance underwriting or the reinsurance. 
• Some of the other services include advisory services, venture capital,
angel investment etc. 
 Overview of Indian Financial System
(b) Financial Markets
The financial markets are classified into two groups:
(i) Capital Market
(ii) Money Market
(i) Capital Market
A capital market is an organised market which provides long-term finance for
business. Capital Market also refers to the facilities and institutional arrangements
for borrowing and lending long-term funds.
Capital Market is divided into three groups:
• Corporate Securities Market
• Government Securities Market
• Long-Term Loans Market
(ii) Money Market
Money Market is the market for short-term funds. The money market is divided into
two types: Unorganised and Organised Money Market.
Organized Money Market: It consists of Treasury Bills, Commercial Paper, Certificate
Of Deposit, Call Money Market and Commercial Bill Market. Organised Markets work
as per the rules and regulations of RBI. RBI controls the Organized Financial Market in
India.
Unorganized Market: It consists of Moneylenders, Indigenous Bankers, Chit Funds,
etc. 
Overview of Indian Financial System
(c) Financial Instruments/Assets
Financial Instruments can be defined as a market for
short-term money and financial assets that is a
substitute for money. The term short-term means
generally a period of one year. Substitutes for money is
used to denote any financial asset which can be quickly
converted into money.
Important Instruments
Call /Notice-Money
Term Money
Treasury Bills
Certificate of Deposits
Commercial Paper
Overview of Indian Financial System
Some of the important instruments are as follows:
Call /Notice-Money
Call/Notice money is the money borrowed on demand for a very short
period. When money is lent for a day it is known as Call Money.
Intervening holidays and Sunday are excluded for this purpose. Thus money
borrowed on a day and repaid on the next working day is Call Money.
When the money is borrowed or lent for more than a day up to 14 days it is
called Notice Money. No collateral security is required to cover these
transactions.
Term Money
Deposits with maturity period beyond 14 days are referred to as the term
money. The entry restrictions are the same as that of Call/Notice Money. 
Treasury Bills
Treasury Bills are short-term (up to one year) borrowing instruments of the
Union Government. It’s a promise by the Government to pay the stated sum
after the expiry of the stated period from the date of issue (less than one
year). They are issued at a discount off the face value and on maturity, the
face value is paid to the holder. 
Overview of Indian Financial System
Certificate of Deposits
Certificates of Deposits is a money market
instrument issued in dematerialised form or as a
Promissory Note for funds deposited at a bank, other
eligible financial institution for a specified period. 
Commercial Paper
CP is a note in evidence of the debt obligation of the
issuer. On issuing commercial paper the debt is
transformed into an instrument. CP is an unsecured
promissory note privately placed with investors at a
discount rate of face value determined by market
forces. 
 Overview of Indian Financial System
(d) Financial Intermediaries 
A financial intermediary is an institution
which connects the deficit and surplus
money. The best example of an intermediary
is a bank which transforms the bank deposits
to bank loans. The role of the financial
intermediary is to distribute funds from
people who have an extra inflow of money to
those who don’t have enough money to fulfil
the needs. 
Provisions and Regulations of Companies
Act, 1956
The various provisions and regulations of Companies Act,
1956 which govern the merchant bankers:
• Prospectus (Sec. 55 to 68A)
• Allotment (Sec. 55 to 75)
• Commissions (Sec. 76)
• Issue of shares at premium and at discount (Sec. 78 & 79)
• Issue of preference shares (Sec. 80 & 80A)
• Further issues of capital (Sec. 81)
• Nature, numbering and certificate of shares (Sec. 82 to 84)
• Kinds of share capital and prohibition on issue of any other
kind of shares (Sec. 85 & 86)
 SEBI GUIDELINES
• Merchant banking in India is governed by SEBI (Merchant
Bankers) Regulations 1992. It provides for registration of
merchant bankers, general obligations and responsibilities of
merchant bankers, procedures for inspection and procedures for
action in case of defaults. Besides these, the code of conduct for
merchant bankers is also specified.

To become a merchant banker the following are the pre-requisites:

• He should have the necessary infrastructure in terms of office
space and experienced man-power.
• The applicant should not have been involved in security scams.
• The minimum net worth must be maintained.
 SEBI GUIDELINES
• All public issues shall be managed by a merchant banker who acts as
the lead merchant banker or the lead manager to the issue. The
number of such lead managers is linked to the size of the public issue.
The regulations of SEBI specify certain responsibilities of the lead
merchant banker. In a public issue, the responsibilities relate to the
disclosure of information in the offer documents, allotment of
securities and refund of application money.

Size of Public Issue and Number of Lead Managers

Issue Size No. of Lead Managers
Less than Rs.50 Crores 2
Rs.50 – 100 Crores 3
Rs.100 – 200 Crores 4
Rs.200 – 400 Crores 5
Above 400 Crores 5 or more
Code of Conduct for Merchant Bankers

Code of conduct for merchant bankers

The code of conduct for merchant bankers states that a
merchant banker must:
• Protect the interest of the investors to the best of his
capabilities.
• Conduct business with a high level of dignity, integrity, and
fairness.
• Professionally and ethically fulfil all obligations.
• Refrain from discriminating against clients.
• Make sure that all necessary documents like letter of offer,
prospectus, etc. are available at the time of issue to all
investors.
 Code of Conduct for Merchant Bankers
• Advise clients in the most efficient way possible.
• Inform clients about any penal action taken against them by
the Securities Exchange Board of India.
• Inform SEBI regarding any legal proceedings that have been
initiated against him or her.
• Develop an internal code of conduct to govern internal
operations.
• Make sure that all the employees working under them are
capacitated to be merchant bankers.
• Be responsible for all the acts of its agents and employees.
• Not to create false markets.
• Abide strictly by the rules and guideline laid down in Securities
Exchange Board of India (Merchant Bankers) Regulations, 1992.
Recent Developments and Challenges
The recent developments in Merchant banking are due
to certain contributory factors in India. They are the
Merchant Banking was at its best during 1985-1992
being when there were many new issues. It is
expected that currently it is going to be party time for
merchant banks, as many new issue are coming up.
The foreign investors both in the form of portfolio
investment and through foreign direct investments
are venturing in Indian Economy. It is increasing the
scope of merchant bankers in many ways.
 Recent Developments and Challenges

Disinvestment in the government sector in the

country gives a big scope to the merchant banks
to function as consultants.
New financial instruments are introduced in the
market time and again. This basically provides
more and more opportunity to the merchant
banks.
The Mergers and Corporate Restructuring
are giving immense opportunity to the merchant
bankers for consultancy jobs.
 Recent Developments and Challenges
Future Prospectus in India
The future prospectus of merchant banking in India is as follows:
• Growth of Primary Market.
• Entry of Foreign Investors.
• Changing policy of Financial Institutions.
• Development of Debt Market.
• Setting up of Banks Subsidiaries
SBI Capital Markets Ltd., was incorporated as the first such
subsidiary of SBI on 2nd July, 1986. Then Canbank Financial
Services Ltd. was set up as wholly owned subsidiary of Canara
Bank in 1987. PNB Capital Services Ltd. was promoted by PNB
during mid-1988. 
Recent Developments and Challenges
Establishment of SUA
In order to educate and protect the interest of investors, to
provide information about new issues of capital market, to
evolve a code of conduct for underwriters and to render legal
and other services to members and public, the Stockbroker
Underwriters Association (SUA) was established in 1984. SUA
works in co-ordination with merchant bankers and takes steps
for promoting the activities of capital market.
Establishment of Rating Agencies
Credit Agencies are established to provide help to investors,
merchant bankers, underwriters, brokers, banks and financial
institutions etc. They rate various types of instruments such
as debt, equity and fixed return securities offered to the
public. It helps the investors in taking investment decisions.
 The Challenges for Merchant Bankers in
India
• SEBI guideline has restricted their operations to
Issue Management and Portfolio Management to
some extent. So, the scope of work is limited.
• Inefficiency of the clients are often blamed on to
the merchant banks, so they are into trouble
without any fault of their own.
• The net worth requirement is very high in categories
I and II specially, so many professionally experienced
person/ organizations cannot come into the picture.
• Poor New issues market (at times) in India is drying
up the business of the merchant bankers.
 Foreign Exchange Management Act (FEMA)
• The Foreign Exchange Regulation Act (FERA) of 1973 in India was replaced
on June 2000 by the Foreign Exchange Management Act (FEMA), which was
passed in 1999.
• It had a controversial 27 years stint during which many bosses of the Indian
corporate world found themselves at the mercy of the Enforcement
Directorate. Moreover, any offence under FERA was a criminal offence
liable to imprisonment. But FEMA makes offences relating to foreign civil
offences.
• FEMA had become the need of the hour to support the pro- liberalisation
policies of the Government of India. The objective of the Act is to
consolidate and amend the law relating to foreign exchange with the
objective of facilitating external trade and payments for promoting the
orderly development and maintenance of foreign exchange market in
India.
• FEMA extends to the whole of India. It applies to all branches, offices and
agencies outside India owned or controlled by a person, who is a resident of
India.
 Foreign Exchange Management Act (FEMA)
The Main Features of the FEMA:
i. It is more transparent in its application as it lays down the areas
requiring specific permissions of the Reserve Bank/Government
of India on acquisition/ holding of foreign exchange.
ii. It classified the foreign exchange transactions in two
categories, viz. capital account and current account
transactions.
iii. It is consistent with full current account convertibility and
contains provisions for progressive liberalisation of capital
account transactions.
iv. It provides power to the Reserve Bank for specifying, in,
consultation with the central government, the classes of capital
account transactions and limits to which exchange is
admissible for such transactions.
Foreign Exchange Management Act (FEMA)

v. It gives full freedom to a person resident in India,

who was earlier resident outside India, to hold/
own/ transfer any foreign security/ immovable
property situated outside India and acquired when
s/he was resident.
vi. This act is a civil law and the contraventions of the
Act provide for arrest only in exceptional cases.
vii. FEMA does not apply to Indian citizen’s resident
outside India.
 SCRA (Securities Contracts Regulations Act)

• The Securities Contract (Regulation) Act, 1956 provides for

regulation of securities trading and control of stock
exchanges. Recognition and supervision of stock exchanges
and laying down the criteria for listing of securities are some
of the salient features of the SCRA. The government and the
SEBI are empowered by the SCRA to issue appropriate orders
for ensuring the smooth flow of transactions in stock
exchanges.
• The Securities Contracts (Regulations) Act was passed in 1956
by Parliament and it came into force in February 1957. An act
to prevent undesirable transactions in securities by regulating
the business of dealing therein, by providing for certain other
matters connected therewith.
 OTCEI
The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter
Exchange of India, is based in Mumbai, Maharashtra. It is India's first
exchange for small companies, as well as the first screen-based
Nationwide Stock Exchange in India.
• The Over-The-Counter Exchange of India (OTCEI) is an Indian electronic
stock exchange composed of small- and mid-cap companies.
• The purpose of the OTCEI is for smaller companies to raise capital, which
they cannot do at the national exchanges due to their inability to meet
the exchange requirements.
• The OTCEI implements specific capitalization rules that make it suited for
small- to medium-sized companies while preventing larger companies
from being listed.
The exchange is recognized by India's Securities Contract Regulation
Act, meaning all listed stocks on the OTCEI benefit equally as other
listed securities on other exchanges in India.
 OTCEI
Features of the Over-The-Counter Exchange of India (OTCEI)
The OTCEI has some special features that make it a unique
exchange in India as well as a growth catalyst for small- to medium-
sized companies. The following are some of its unique features:
Stock Restrictions
• Stocks that are listed on other exchanges will not be listed on the
OTCEI and, conversely, stocks listed on the OTCEI will not be listed
on other exchanges.
Minimum Capital Requirements
• The requirement for the minimum issued equity capital is 30 lakh
rupees.
Large Company Restrictions
• Companies with issued equity capital of more than 25 crore rupees
are not allowed to be listed.
 Stock Exchanges
• According to Hastings, Stock exchange or
securities market comprises all the place where
buyers and sellers of stocks and bonds or their
representatives undertake transactions involving
the sale of securities.

• Organized and regulated financial market where

securities (bonds, notes, shares) are bought and
sold at prices governed by the forces of demand
and supply.
 Functions of Stock Exchanges
Functions of Stock Exchanges
1) Liquidity and Marketability of Securities
2) Safety of Funds
3) Supply of Long Term Funds
4) Flow of Capital to Profitable Ventures
5) Motivation for Improved Performance
6) Promotion of Investment
7) Reflection of Business Cycle
8) Marketing of New Issues
9) Miscellaneous Services
 Functions of Stock Exchanges
1. Liquidity and marketability of Securities
Stock exchanges provide liquidity to securities since securities can be converted
into cash at any time according to the discretion of the investor by selling them at
the listed prices. They facilitate buying and selling of securities at listed prices by
providing continuous marketability to the investors in respect of securities they
hold or intend to hold. Thus, they create a ready outlet for dealing in securities.

2. Safety of Funds
Stock exchanges ensure safety of funds invested because they have to function
under strict rules and regulations and the bye laws are meant to ensure safety of
investible funds. Over trading, illegitimate speculation etc., are prevented through
carefully designed set of rules. This would strengthen the investor’s Confidence
and promote larger investment.

3. Supply of Long term funds

The Company is assured of long term availability of funds because the security is
continuously transacted as one investor is substituted by another.
 Functions of Stock Exchanges
4. Flow of Capital to Profitable Ventures
The profitability and popularity of companies are reflected in stock prices.
The prices quoted indicate the relative profitability and performance of
companies. Funds tend to be attracted towards securities of profitable
companies and this facilitates the flow of capital into profitable channels.
5. Motivation for improved performance
The performance of a company is reflected on the prices quoted in the
stock market. These prices are more visible in the eyes of the public. Stock
market provides room for this price quotation for those securities listed by
it. This public exposure makes a company conscious of its status in the
market and it acts as a motivation to improve its performance further.
6. Promotion of Investment
Stock exchanges mobilize the savings of the public and promote
investment through capital formation. But for these stock exchanges,
surplus funds available with individuals and institutions would not have
gone for productive and remunerative ventures.
 Functions of Stock Exchanges
7. Reflection of Business Cycle
The changing business conditions in the economy are immediately reflected on the
stock exchanges. Booms and depressions can be identified through the dealings on the
stock exchanges and suitable monetary and fiscal policies can be taken by the
government. Thus a stock market portrays the prevailing economic situation instantly
to all concerned so that suitable actions can be taken.
8. Marketing of New Issues
If the new issues are listed, they are readily acceptable to the public, since, listing
presupposes their evaluation by concerned stock exchange authorities. Public
response to such new issues would be relatively high. Thus, a stock market helps in
the marketing of new issues also.
9. Miscellaneous Services:
Stock exchange supplies securities of different kinds with different maturities and
yields. It enables the investors to diversify their risks by a wider portfolio of
investment. It also inculcates saving habits among the community and paves the ways
for capital formation. It guides the investors in choosing securities by supplying him
daily quotation of listed securities and by disclosing the trends of dealings on the stock
exchange. It enables companies and the Government to raise resources by providing a
ready market for their securities.