MGT- 205: FINANCIAL MARKETS AND INSTITUTIONS

Module – I: Financial Market and Financial Institutions

Topic -1: Meaning and Structure of Financial MarketFinancial market refers to those centers and arrangements which facilitate buying & selling of financial assets / instruments. Whenever a financial transaction takes place, it is deemed to have taken place in financial market. There is no specific place or location to indicate a financial market. Financial market is a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands & requirements interact to set a price for such claims. The main organized financial markets in India are the money market & capital market. The first is a market for short-term securities.

Structure of Financial Market

Topic -2: Money Market

Money Market is the market for short term funds i.e. for a period up to one year. The money market is divided

into two: Unorganized and Organized Money Market.

1. Unorganized Market: Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc.

Money Lenders: Money Lenders lend money to individuals at a high rate of interest. Indigenous Bankers: They operate like money lenders. They also accept deposits from public. Chit Funds: These collect funds from members and provide loans to members and others.

2. Organized Money Market: Organized Markets work as per the rules and regulations of the RBI. RBI keeps a strict control over the Organized Financial Market in India. Organized Market consists of: Treasury Bills, Commercial Paper (CP), Certificate Of Deposit (CD), Call Money Market, and Commercial Bill Market.

Treasury Bills: To raise short term funds treasury bills are issued by Government. It is purchased by Commercial Banks. At present, Government issues 91 days and 364 days treasury bills.

Commercial Paper (CP): Commercial paper is issued by companies who are listed on Stock Exchange. CP is issued at discount and repaid at face value. The maturity period ranges from 7 days to one year. CP's are issued in multiple of 5 lakh. The company issuing CP must have tangible net worth of at least 4 crore.

Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial Institutions to raise finance from the market. The maturity period for CD's is between 7 days to 1 year. CD's is issued at a discount and repaid at face value. CD's is issued for a minimum of 25 lakhs.

Call Money Market: A loan which is taken or given for a very short period, that is for one day is called Call Money Market. It involves lending and borrowing of money on a daily basis. No security is required for these very short-term loans.

Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawer of the bill can get the bills discounted with Commercial Banks. The Commercial Banks can get the bills rediscounted with Financial Institutions.

Topic -3: Capital Market

A capital market is an organized market. It provides long term finance for business. “Capital Market refers to the facilities and institutional arrangements for borrowing and lending long-term funds”. Capital Market is divided into three groups:

1. Industrial / Corporate Securities Market: It is a market for industrial securities. Corporate securities are equity and preference shares, debentures and bonds of companies. Industrial security's market is very Sensitive and Active Financial Market. It can be divided into two groups: Primary and Secondary Market.

Primary Market: It is a market for new issue of securities, which are issued to the public for first time. It is also called as New Issue Market.

Secondary Market: In the secondary market, there is a sale of secondary securities. It is also called as Stock Market. It facilitates buying and selling of securities.

2. Government Securities Market: In this market, government securities are bought and sold. It is also called as Gilt-Edged Securities Market. The securities are issued in the form of bonds and credit notes. The buyers of such securities are Banks, Insurance Companies, Provident funds, RBI and Individuals. These securities may be of short-term or long term.

3. Long-Term Loans Market: Banks and Financial institutions provide long-term loans to firms, for modernization, expansion and diversification of business. Long-Term Loan Market can be divided into:

Term Loans Market: Banks and Financial Institutions provide term loans to companies for a period of one year. The financial institutions help in recognizing investment opportunities to motivate emerging businessmen. They also give encouragement to modernization.

Mortgages Market: It provides loans against securities of immovable assets like land and buildings. Financial Guarantees Market: Financial Institutions (FIS) and banks provide financial guarantees on

behalf of their clients to third parties.

Topic -4: FOREIGN EXCHANGE MARKET

The term foreign exchange refers to the process of converting the home currencies into foreign

currencies and vice versa. According to Dr. Paul Einzing “Foreign exchange is the system or process of

converting one national currency into account, and of transferring money from one country to another”. The

market where foreign exchange transitions take place is called a foreign exchange market. It does not refer to

a market place in the physical sense of the term. In fact, it consists of a number of dealers, banks and brokers

engaged in the business of buying and selling foreign exchange. It also includes the central bank of each

country and the treasury authorities who enter into this market as controlling authorities. Those engaged in the

foreign exchange business are controlled by the foreign exchange maintenance act (FEMA).

FUNCTIONS:

The most important functions of this market are:

1. To most important necessary arrangements to transfer purchasing power from one country to another.

2. To provide adequate credit facilities for the promotion of foreign trade.

3. To cover foreign exchange risks by providing hedging facilities.

In India, the foreign exchange business has a three- tired structure consisting of:

1. Trading between banks and their commercial customers.

2. Trading between banks through authorized brokers.

3. Trading with banks abroad.

Brokers play an important role in the foreign exchange market in India. Apart from authorized dealers, the

RBI has permitted licensed hotels and individuals (known as authorized money changers) to deal in

foreign exchange business. The FEMA helps to smoothen the flow of foreign currency and to prevent any

misuse of foreign exchange which is a scarce commodity.

CHARACTERISTICS: Some of the important features of foreign exchange market are:

1) Electronic market: Foreign exchange market does not have a physical place. It is a market where

trading in foreign currencies takes place through the electronically linked network banks , foreign

exchange brokers and dealers whose function is to bring together buyers and sellers of foreign

exchange.

2) Geographical dispersal: A redeeming feature of the foreign exchange market is that it is not to be

found in one place. The market is vastly dispersed throughout the leading financial centers of the

world such as London, New York, Paris, Zurich, Amsterdam, Tokyo, Hong Kong, Toronto, Frankfurt,

Milan, and other cities.

3) Transfer of purchasing power: Foreign exchange market aims at permitting the transfer of purchasing

power denominated in one currency to another whereby one currency to another whereby one currency

is traded for another currency. For example, an Indian exporter sells software to a U.S firm for dollars

and a U.S firm sells super computers to an Indian company for rupees. In these transactions, firms of

respective countries would like to have the payment settled in their currencies, i.e. Indian firm in

rupees and U.S dollars. It is the foreign exchange market, which facilitates such a settlement between

countries in their respective currency units.

4) Intermediary: Foreign exchange markets provide a convenient way of converting the currencies

earned into currencies wanted of their respective countries. For this purpose, the market acts as an

intermediary between buyers and sellers of foreign exchange.

5) Volume: A special feature of the FEM is that out of the total trading transactions that take place in the

FEM, around 95% takes the form of cross border purchase and sales of assets, that is, international

capital flows. Only around 5% relates to the export and import activities.

6) Provision of credit: A foreign exchange market provider’s credit through specialized instruments such

as banker’s acceptance and letters of credit. The credit thus provided is of much help to the traders and

businessmen in the international market.

7) Minimizing risks: The FEM helps the importer and exporter in the foreign trade to minimize their risks

of trade. This is being done through the provision of ‘Hedging’ facility. This enables traders to transact

business in the international market with a view to earning a normal business profit without exposure

to an expected change in anticipated profit. This is because exchange rates suddenly change.

CONSTITUENTS: The activities of the foreign exchange market are carried out predominantly through the

world wide bank interbank market. The trading is generally done by telephone, telex or the swift (Society for

Worldwide Interbank Financial Telecommunications) system. In addition, there are a number of players who

assist in trading of foreign currencies. Several of the foreign exchange markets are discussed briefly.

The Interbank market: It is an important segment of the foreign exchange market. It is the wholesale

market through which most currency transactions are channeled. It is used for trading amongst bankers. It is a

typical foreign exchange market through which around 95 percent of the foreign exchange transactions are

carried out. 20 major banks dominate the market.

There are three constituents of interbank market. They are spot market, forward market and swap

market. The spot market, currencies are traded for immediate delivery extending for a period not exceeding

two business days after the completion of the transaction. Spot transactions account for a share of 60 percent

of the foreign exchange market. In the case of forward market, delivery of currencies takes place at a future

date and contracts for buying and selling take place at the current date. Its transactions account for 10 percent

of the foreign exchange market. Swap market comprises around 30 percent of the transactions of the foreign

exchange market.

The Society for Worldwide Interbank Financial Telecommunications: The swift is an important

mode of trading in a foreign exchange market. It is an international bank communications network that links

electronically all brokers and traders in foreign exchange.

PARTICIPANTS:

The categories of participants take part in the operations of the foreign exchange market. They are bank and

non-bank foreign exchange dealers, individuals and firms conducting commercial and investment

transactions, speculators and arbitragers, central banks, and treasuries and foreign exchange brokers.

Foreign Exchange Dealers: Banks and non-bank agencies take part in the activities of the foreign exchange

dealers. Their role comprise, in actual market making. They are the actual market makers in the foreign

exchange market. They actively deal in foreign exchange for their own accounts. These banks buy and sell

major foreign currencies on a continuous basis. They trade with other banks in their own monetary centers

and in other centers of the world in order to maintain the inventory of foreign currencies within the trading

limits. Their profit comes from buying foreign exchange at a bid price and reselling it at a slightly higher

offer/ask price. Competition among dealers worldwide makes the foreign exchange market efficient and

vibrant.

Individuals and Firms: These are the exporters and importers, international portfolio investors, MNCs,

tourists and others who use foreign exchange market to facilitate the execution of commercial or investment

transactions. Firms that operate internationally must pay suppliers and workers in the local currency of each

country in which they operate and may receive payments from customers in many different countries. They

will eventually convert their foreign currency earnings into their home currency. In fact, for ages, supporting

international trade and travel has been the main aim of currency trading. It is interesting to note that some of

these participants use the foreign exchange market for hedging foreign exchange risks.

The activities of FDI require the investor to obtain the currency of the foreign country. Large sums of money

are committed to international portfolio investments, the purchase of bonds, shares or other securities

denominated in a foreign currency. For this purpose, the investor needs to enter the foreign exchange markets

to obtain the currency to make a purchase, to convert the earnings from its foreign investments into home

currency and repatriate the capital when the investment is terminated.

Speculators and Arbitragers: Speculators buy and sell currencies solely to profit from anticipated changes

in exchange rates, without engaging in other sorts of business dealings for which foreign exchange is

essential. Currency speculation is often combined with speculation in short-term financial instruments, such as

treasury bills. The biggest speculators include leading banks and investment banks. Speculators and

arbitragers trade in the foreign exchange market in their own way trying to make profit through normal and

speculative operations. Main source of profit for dealers is the spread between the bid price and offer price

whereas speculators profit from exchange rate changes. It is interesting to note that a large portion of the

speculation and arbitrage takes place on behalf of major banks.

Central Banks and Treasuries: National treasuries or central banks may trade currencies for the purpose of

affecting exchange rates. A government’s deliberate attempt to alter the exchange rate between two currencies

by buying one and selling the other is called ‘intervention’. The amount of currency intervention varies

greatly from country to country and time to time, and depends mainly on how the government has decided to

manage its foreign exchange arrangements.

Central banks and treasuries use the foreign exchange market for the purposes of buying and selling country’s

foreign exchange reserves. They also aim at influencing the value of their own currencies in accordance with

the priorities of the national economic planning. They also use the foreign exchange market to work in unison

with the commitment entered into with the international trade agreements such as European Monetary System

etc. This is often done by the central bank in order to ensure stability and orderliness in the matters of foreign

currency transactions.

Foreign Exchange Brokers: These are the commission agents who bring together suppliers and buyers of

foreign currency. They specialize in certain currency although they deal in all major foreign currencies such

as American Dollar, British Pound, Sterling, and Deutsche Mark, etc. Some of the services rendered by the

brokers include provision of information on the prevailing and future rates of exchange; maintaining

confidentiality of participants in the foreign exchange market and helping banks to keep at minimum the

contacts with other traders.

TRANSACTIONS:

Several types of transactions are carried out in a foreign exchange market among the various players. They

are: Spot transactions, Forward transactions and Swap transactions.

Spot Transaction: An inter-bank transaction whereby the purchase of foreign exchange, and delivery and

payment for the same take place between banks usually on the following second business day is referred to as

‘spot transaction’. The rate quoted in such transactions is called ‘spot rate’. The date of settlement is known as

‘value date’.

Forward Transaction: Where a specified amount of one currency is exchanged for a specified amount of

another currency at a future value date, it is a case of a ‘forward transaction’. Under this transaction, only the

delivery and payment take place at a future date, the exchange rate being determined at the time of agreement.

The rate quoted in such transactions is called ‘forward rate’. Forward exchange rates are normally quoted for

value dates of one, two, three, six and twelve months.

Swap Transaction: The simultaneous purchase and sale of a given amount of foreign exchange for different

value dates is referred to as ‘swap transactions’. Both the purchase and sale are with the same counter party.

There are two types of swap transactions. They are spot-against-forward swaps and forward-forward swaps.

In the case of spot-against-forward swaps, the dealer buys a currency in the spot market and simultaneously

sells the same amount back to the same bank in the forward market. The dealer incurs no unexpected foreign

exchange risk since the transaction is executed within a single counter party.

Topic -5: The Nature of the unorganized sector of the Indian Money Market

UNORGANISED SECTOR: The segment of money market which is not under control of RBI is known

as the unorganized segment of Indian money market. It consists of:

1. Moneylenders: money lenders are of three types:

Professional moneylenders

Itinerant moneylenders

Non-professional moneylenders.

Professional money lenders are those whose main activity is money lending. Pathans and kabulls are

itinerant money lenders charge very high rate of interest; they do not receive deposits from people. Their

lending activities are based on their own funds and interest receipts. Mainly economically weaker section

of people goes to these moneylenders for consumption and production loans.

2. Indigenous bankers: since commercial banks do not provide unsecured loans, the credit needs of a

large section of small traders remain unfulfilled. Indigenous bankers to some extent bridge this gap, since

their operation and establishment costs are lower. Although they do some important activity, they do not

care about the end use of these loans and they are not regulated by RBI. There are mainly four types of

indigenous bankers, viz., Guajarati shroffs, multani or shikarpuri shroffs, south Indian chettiars and

Marwari kayas. Indigenous bankers accept deposits and provide loans to individuals or organizations.

3. Unregulated non-bank financial intermediaries: most notable unregulated non-bank financial

intermediaries are chit funds and Nidhis. Chit funds have regular members making periodical

subscriptions to the funds. Some members of the funds, selected by some previously agreed criteria are

then allotted the fund. Nidhis are also like chit funds, as their principal source of capital base is provided

by its members and some of its members receive the loan. Both chit funds and Nidhis operate mainly in

south India and RBI has no control on them.

Topic -6: Various constituents of the organized sector of the Indian Money Market

The segment of money market which is under the control of RBI is known as organized market. It includes:

1. Reserve bank of India: the reserve bank of India is the highest institution of the Indian money market. This is the central bank of the country. The reserve bank of India plays a dominant role in controlling the money market.

2. Public sector banks: the public sector banks are those banks whose ownership lies with the government. The government controls them. In India, in 1969, 14th and in 1980, 6 banks were nationalized all these banks are in the public sector. Their chief aim is social service. After the merger of the new bank of India with the Punjab national bank in 1993, their number now stands at 19. In addition to this the state bank of India and its subsidiaries are also included in the same category. Their number is 8. In this way, a total number of 27 banks are working in the public sector.

3. Private sector banks: private sector banks are those banks which are owned by private individuals. They run them. Such banks include the Jammu and Kashmir bank ltd. The Punjab bank ltd., etc. an individual has control over the bank to the extent of the shares he holds in it. Their main aim is to earn profit.

4. Co-operative banks: co-operative banks are organized collectively by some individuals. These people alone run these banks. The aim of these banks is to help their own members. They include the state co-operative bank, the central district co-operative bank and primary loan committees.

Topic -7: Classification of Financial Institutions in India:

1. Regulatory institutions Reserve Bank of India (RBI) Securities and Exchange Board of India (SEBI) Central Board of Direct Taxes (CBDT) Central Board of Excise& Customs

2. Intermediaries. Securities Trading Corporation of India (STCI) Unit Trust of India (UTI) Industrial Development Bank of India (IDBI) Ltd. Reconstruction Bank of India (IRBI), now (Industrial Investment Bank of India) Export - Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) Life Insurance Corporation of India (LIC) General Insurance Corporation of India (GIC)

Housing and Urban Development Corporation Ltd. (HUDCO) Shipping Credit and Investment Company of India Ltd. (SCICI) National Housing Bank (NHB)

3. Banking Institutions and Non Banking Institutions Banking institutions: A bank is an institution that accepts deposits of money from the public, which are repayable on demand and withdraw able by cheques. The banking institutions of India play a major role in the economy of the country. The banking institutions are the providers of depository and transaction services. These activities are the major sources of creating money. The banking institutions are the major sources of providing loans and other credit facilities to the clients.Non Banking Financial Institutions (NBFC): An Institution which carried on as its business or part of its business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund - mutual benefit company But does not include Institutions which carries on as its principal business: - agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase, sale and construction of immovable property.

All India Institutions IFCI IDBI ICICI SIDBI LIC

State level Institutions State Financial Institutions State Industrial Development Corporations

Topic -8: All India Developmental Financial institutions:A wide variety of financial institutions have been set up at the national level. They cater to the diverse

financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc.

All-India Development Banks (AIDBs):- Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units.

1. Industrial Development Bank of India (IDBI):- was established in July 1964 as an apex financial institution for industrial development in the country. It caters to the diversified needs of medium and large scale industries in the form of financial assistance, both direct and indirect. Direct assistance is provided by way of project loans, underwriting of and direct subscription to industrial securities, soft loans, technical refund loans, etc. While, indirect assistance is in the form of refinance facilities to industrial concerns.

2. Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development finance institution set up in 1948 under the IFCI Act in order to pioneer long-term institutional credit to medium and large industries. It aims to provide financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has also diversified its activities in the field of merchant banking, syndication of loans, formulation of rehabilitation programmes, assignments relating to amalgamations and mergers, etc.

3. Small Industries Development Bank of India (SIDBI):- was set up by the Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for promotion, financing and development of small scale industries in the economy. It aims to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.

4. Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the Industrial reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units. It was converted into IIBI on March 17, 1997, as a full-fledged development financial institution. It assists industry mainly in medium and large sector through wide ranging products and services. Besides project finance, IIBI also provides short duration non-project asset-backed financing in the form of underwriting/direct subscription, deferred payment guarantees and working capital/other short-term loans to companies to meet their fund requirements.

Topic -9: Investment Institutions: - Investment Institutions are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities.

1. Life Insurance Corporation of India (LIC):- was established in 1956 as a wholly-owned corporation of the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom . Besides the branch operations, the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain, Nepal and Sri Lanka.

2. Unit Trust of India (UTI):- was set up as a body corporate under the UTI Act, 1963, with a view to encourage savings and investment. It mobilizes savings of small investors through sale of units and channelises them into corporate investments mainly by way of secondary capital market operations. Thus, its primary objective is to stimulate and pool the savings of the middle and low income groups and enable them to share the benefits of the rapidly growing industrialization in the country. In December 2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from 1st February 2003.

3. General Insurance Corporation of India (GIC):- was formed in pursuance of the General Insurance Business (Nationalization) Act, 1972(GIBNA), for the purpose of superintending, controlling and carrying on the business of general insurance or non-life insurance. Initially, GIC had four subsidiary branches, namely, National Insurance Company Ltd , The New India Assurance Company Ltd , The Oriental Insurance Company Ltd and United India Insurance Company Ltd . But these branches were delinked from GIC in 2000 to form an association known as 'GIPSA' (General Insurance Public Sector Association).

Topic -10: Specialized Financial Institutions (SFIs):- Specialized Financial Institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.

1. IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme’. Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialization of indigenous

technology for new processes, products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects.

2. ICICI Venture Funds Ltd: - formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc.

3. Tourism Finance Corporation of India Ltd. (TFCI):- is a specialized financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries for inland water transport, etc.

Topic -11: State level financial institutions: Several financial institutions have been set up at the State level, which supplement the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consist of 'State financial corporations' and 'State industrial development corporations'. 1. State Financial Corporations (SFCs):- are the State-level financial institutions which play a crucial

role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalyzing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country:-

Andhra Pradesh State Financial Corporation (APSFC) Himachal Pradesh Financial Corporation (HPFC) Madhya Pradesh Financial Corporation (MPFC) North Eastern Development Finance Corporation (NEDFI) Rajasthan Finance Corporation (RFC) Tamil Nadu Industrial Investment Corporation Limited Uttar Pradesh Financial Corporation (UPFC) Delhi Financial Corporation (DFC) Gujarat State Financial Corporation (GSFC) The Economic Development Corporation of Goa ( EDC) Haryana Financial Corporation (  HFC ) Jammu & Kashmir State Financial Corporation ( JKSFC) Karnataka State Financial Corporation (KSFC) Kerala Financial Corporation ( KFC ) Maharashtra State Financial Corporation (MSFC ) Odisha State Financial Corporation (OSFC) Punjab Financial Corporation (PFC) West Bengal Financial Corporation (WBFC)

2. State Industrial Development Corporations (SIDCs):- have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in the respective States and providing financial assistance to small entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estates. The State Industrial Development Corporations in the country are:-

1. Assam Industrial Development Corporation Ltd (AIDC)2. Andaman & Nicobar Islands Integrated Development Corporation Ltd (ANIIDCO) 3. Andhra Pradesh Industrial Development Corporation Ltd (APIDC)4. Bihar State Credit and Investment Corporation Ltd. (BICICO) 5. Chhattisgarh State Industrial Development Corporation Limited (CSIDC)6. Goa Industrial Development Corporation 7. Gujarat Industrial Development Corporation (GIDC) 8. Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIIDC) 9. Himachal Pradesh State Industrial Development Corporation Ltd. (HPSIDC) 10. Jammu and Kashmir State Industrial Development Corporation Ltd. 11. Karnataka State Industrial Investment & Development Corporation Ltd. (KSIIDC) 12. State Infrastructure & Industrial Development Corporation of Uttaranchal Ltd. (SIDCUL)13. Tripura Industrial Development Corporation Ltd. (TIDC)14. Kerala State Industrial Development Corporation Ltd. (KSIDC) 15. Maharashtra Industrial Development Corporation (MIDC)16. Manipur Industrial Development Corporation Ltd. (MANIDCO)17. Nagaland Industrial Development Corporation Ltd. (NIDC) 18. Odisha Industrial Infrastructure Development Corporation 19. Omnibus Industrial Development Corporation (OIDC), Daman & Diu and Dadra & Nagar Haveli.20. Pondicherry Industrial Promotion Development and Investment Corporation Ltd. (PIPDIC)21. Uttar Pradesh State Industrial Development Corporation 22. Punjab State Industrial Development Corporation Ltd. (PSIDC) 23. Rajasthan State Industrial Development & Investment Corporation Ltd. (RIICO) 24. Sikkim Industrial Development & Investment Corporation Ltd. (SIDICO) 25. Tamilnadu Industrial Development Corporation Ltd. (TIDCO)

Module-II Capital Market

Topic -1: Introduction to Capital Market: Capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities having a maturity period of above one year. Capital market may be further divided into three parts i.e. (i) Industrial security market (ii) Govt. securities market (iii) Long term loan market Capital market serves as a important source for the productive use of economy’s savings and investment. These savings and investments facilitate capital formation and through this facilitate increase in production and productivity in the economy. A capital market thus serves as an important link between those who saves and those who aspire to invest their savings.

Capital markets – Types (i) Industrial Security Market – It is market where industrial concerns raise their capital or debt by issuing instruments like equity hares or ordinary shares, preference shares, debentures or bonds. This market can be sub divided into: (a) Primary Market or new issue market (b) Secondary Market or stock Exchange

Primary Market is a market for new issues and hence it is called new issue market. It deals with securities which are issued to the public for the first time. There are three ways through which capital is raised in primary market. These are: - Public issue - Right Issue - Private placement

Secondary market is a market for secondary sale of securities i.e. securities which already passed through the new issue market are traded in this secondary market. Generally, such securities are quoted in stock exchange and it provides a continuous; and regular market for buying and selling of securities.

(ii) Govt. Security Market – It is a market where Long term Govt securities are traded which are issued by central Govt, State Govt, Semi Govt authorities like City Corporations, Port Trusts, Improvement Trusts, State Electricity Boards, All India and State level financial institutions and public sector organizations/enterprises are dealt in this market. Govt. Securities are in many forms such as: - Stock Certificates or inscribed stock - Promissory Notes - Bearer bonds. Govt securities are sold through public debt office of RBI. Interest on these securities influences price and yield in market.

(iii) Long Term loan market – Commercial banks and development banks play a significant role in this market by supplying long term loans to corporate customers. Long term loan market may further be classified into: - Term loan market - Mortgage Market - Financial guarantee Market.

Term Loan Market – In India many industrial finance institutions have been created by Central and State Govts. which provide medium and long term loans to corporate customers. Institutions like IDBI, IFCI, ICICI and other state financial corporations come in this category.

Mortgage Market – Refers to those centres which supply mortgage loan mainly to individual customers against security of immovable property like real estate.

Financial guarantee Market – Refers to centres where finance is provided against the guarantee of reputed person in financial circle. This guarantee may be in the form of (i) Performance guarantee or (ii) Financial guarantee. Performance guarantee covers the payment of earnest money retention money, advance payments and non compilation of contracts etc. The financial guarantee covers only financial contracts. Topic -2: Primary Market, Role of the Primary market

A primary market issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets, also known as "new issue markets," are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors.

The primary markets are where investors have their first chance to participate in a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business.

The key role of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations. It provides a channel for the government to raise funds from the public to finance public sector projects.

“Going public” marks a milestone in a company's growth. The primary market is the first place where the company's securities are sold. The major players of the primary market are large institutional investors, and the market requirements are stringent. Therefore, the company as an investment potential is evaluated on multiple levels. The primary issue is traded in the secondary market by individual investors. Failure to generate interest in the primary market is translated as poor investment potential.Role of the Primary market

Capital Generation Liquidity Diversification Cost Reduction

2. Need for Companies to issue shares to the public: Most companies are usually started privately by their promoter(s). However, the promoters' capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a 'Public Issue'. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.

Topic -3: Different kinds of Issues: Capital instruments, namely, shares and debentures can be issued to the market by adopting any pf the four modes: Public issues, Private placement, Rights issues and Bonus issues. Let us briefly explain these different modes of issues.A. Public Issue

Only public limited companies can adopt this issue when it wants to raise capital from the general

public. The company has to issue a prospectus as per requirements of the corporate laws in force inviting the

public to subscribe to the securities issued, may be equity shares, preference shares ;or debentures/bonds. A

private company cannot adopt this route to raise capital. The prospectus shall give an account of the prospects

of investment in the company. Convinced public apply to the company for specified number of

shares/debentures paying the application money, i.e., money payable at the time of application for the

shares/debentures usually 20 to 30% of the issue price of the shares/debentures.

Public issues enable broad-based share-holding. General public's savings directed into corporate

investment. Economy, company and individual investors benefit. The company management does not face the

challenge of dilution of control over the affairs of the company. And good price for the share and competitive

interest rate on debentures are quite possible.

B. Private Placement

Private placement involves the company issuing security places the same at the disposal of financial

institutions like mutual funds, investment funds >r banks the entire issue for subscription at the mutually

agreed upon pro-rata of interest.

This mode is preferred when the capital market is dull, shy and] depressed During the late 1990s and

early 2010s, Indian companies preferred private placement, even the debt issues, as the general public totally

deserted the} capital market since their hopes in the capital market were totally shattered, Private placement

is inexpensive as no promotion is issued. It is a wholesale} deal.

C. Right Shares

Whenever an existing company wants to issue new equity shares, the existing shareholders will be

potential buyers of these shares. Generally the Articles or Memorandum of Association of the Company gives

the right to existing shareholders to participate in the new equity issues of the company. This right is known

as 'pre-emptive right" and such offered shares are called ‘Right shares' or 'Right issue.

A right issue involves selling securities in the primary market by issuing rights to the existing

shareholders. When a company issues additional share capital, it has to be offered in the first instance to the

existing shareholders on a pro rata basis. This is required in India under section 81 of the Companies' Act,

1956. However, the shareholders may by a special resolution forfeit this right, partially or fully, to enable the

company to issue additional capital to public.

Significance of rights issue

i) The number of rights that a shareholder gets is equal to the number of shares held by him.

ii) The number rights required to subscribe to an additional share is determined by the issuing

company.

iii) Rights are negotiable. The holder of rights can' sell them fully or partially.

iv) Rights can be exercised only during a fixed period which is usually less than thirty days.

v) The price of rights issues is generally quite lower than market price and that a capital gain is quite

certain for the share holders.

vi) Rights issue gives the existing shareholders an opportunity for the protection of their pro-rata share

in the earning and surplus of the company.

vii) There is more certainty of the shares being sold to the existing shareholders. If a rights issue is

successful it is equal to favourable image and evaluation of the company's goodwill in the minds of

the existing shareholders.

D. Bonus Issues

Bonus issues are capital issues by companies to existing shareholders whereby no fresh capital is

raised but capitalization of accumulated earnings is done. The shares capital increases, but accumulated

earnings fall. A company shall, while issuing bonus shares must ensure the following:

i) The bonus issue is made out of free reserves built out of the genuine profits and shares premium

collected in cash only.

ii) Reserves created by revaluation of fixed assets are not capitalized.

iii) The development rebate reserves or the investment allowance reserve is considered as free reserve

for the purpose of calculation of residual reserves only.

iv) All contingent liabilities disclosed in the audited accounts which have, bearing on the net profits,

shall be taken into account in the calculation; of the residual reserve.

v) The residual reserves after the proposed capitalization shall be at k 40 per cent of the increased

paid up capital.

vi) 30 per cent of the average profits before tax of the company for previous three years should yield a

rate of dividend on the net capital base of the company at 10 per cent.

vii) The capital reserves appearing in the balance sheet of the company as a result of revaluation of

assets or without accrual of cash resources are capitalized nor taken into account in the

computation of the residual reserves of 40 percent for the purpose of bonus issues.

viii) The declaration of bonus issue, in lieu of dividend is not made.

ix) The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid-up.

x) The company - a) has not defaulted in payment of interest or principal in respect of fixed deposits

and interest on existing debentures or principal on redemption thereof and (b) has sufficient reason

to believe that it has not defaulted in respect of the payment of statutory dues of the employees

such as contribution to provident fund, gratuity on bonus.

xi) A company which announces its bonus issue after the approval of the board of directors must

implement the proposals within a period of six months from the date of such approval and shall not

have the option of changing the decision.

xii) There should be a provision in the Articles of Association of the Company for capitalization of

reserves, etc. and if not, the company shall pass a resolution at its general body meeting making

decisions in the Articles of Association for capitalization.

xiii) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the

authorized share capital, a resolution shall be passed by the company at its general body meeting

for increasing the authorized capital.

xiv) The company shall get a resolution passed at its generating for bonus issue and in the said

resolution the management's intention regarding the rate of dividend to be declared in the year

immediately after the bonus issue should be indicated.

xv) No bonus shall be made which will dilute the value or rights of the holders of debentures,

convertible folly or partly.

SEBI General Guidelines for public issues

i) Subscription list for public issues should be kept open for at least 3 working days and disclosed

in the prospectus.

ii) Rights issues shall not be kept open for more than 60 days.

iii) The quantum of issue, whether through a right or public issue, shall not exceed the amount

specified in the prospectus/letter of offer. No retention of over subscription is permissible under

any circumstances, except the special case of exercise of green-shoe option.

iv) Within 45 days of the closures of an issue a report in a prescribed form with certificate from the

chartered accounts should be forwarded to SEBI to the lead managers.

v) The gap between the closure dates of various issue e.g. Rights and Indian public should not

exceed 30 days.

vi) SEBI will have right to prescribe further guidelines for modifying the existing norms to bring

about adequate investor protection, enhance the quality of disclosures and to bring about

transparency in the primary market.

vii) SEBI shall have right to issue necessary clarification to these guidelines to remove any difficulty

in its implementation.

viii) Any violation of the guidelines by the issuers/intermediaries will be punishable by prosecution

by SEBI under the SEBI Act.

ix) The provisions in the Companies Act, 1956 and other applicable lai shall be complied with the

connection with the issue of shares debentures.

Topic -4: Prospectus: A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of 'Prospectus' which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.

Topic -5: Pricing an issue: The pricing of issues is done by companies in consultation with Merchant bankers. An existing company with 5 years track record of profitability can freely price the issue. The premium has to be decided after taking into account net asset value, profit earning capacity and market price. The justification for price has to be stated and included in the prospectus.

Topic -6: Price discovery through Book building process:Book Building: - Is a method of issuing / offering shares to investors in which the price at which share are issued is discovered through bidding process. In this, bidder’s (potential investors) have the flexibility to bid for shares at a price they are willing to pay. Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.Book Building Process Book Building process is price discovery mechanism in an IPO. This process is helpful to discover a better offer prices based on the price and demand discovery .under this process bids are collected from the investors using the network of BSE/ NSE, which are above , below or equal to the floor price. Floor price is a minimum bid price it is decided at beginning of the bidding process. Offer price is determined after the bid closing date. The process Bidding shall be permitted only if electronic linked facility is used. Issuing company appoint a lead merchant banker called book runner. Issuing company should disclose the following information:

Price band

Nominated lead merchant banker

Syndicated members with who orders can be placed by the investors. Investor can quota the price with the help of syndicate members. Bid price should always be more than the floor price and it can be revised before closure of the issue. After closing the issue book runner analysis the bids and evaluated the bid prices. This evaluation is based on many factors example Price Aggression, investor quality or earliness of bids. Company and the book runner finalized the price. Finally Securities allocated to the success.

Topic -7: Registrar to an Issue:The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed.Topic -8: Listing of securities: Listing of securities means that the securities are admitted for trading on a recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis on stock exchange operations. It is the green signal given to selected securities to get the trading privileges of the stock exchange concerned. Securities become eligible for trading only through listing. Listing means admission of the securities

for trading on the stock exchange through a formal agreement between the stock exchange and the company. Securities are buy and sell in the recognized through members who are known as brokers. The price at which the securities are buy and sales are known as official Quotation.

Listing is compulsory for those companies which intend to offer shares/debentures to the public for subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a new issue by a public limited company. Again, financial institutions do insist on listing for underwriting new issues. Thus, listing becomes an unavoidable one today.

The companies which have got their shares/debentures listed in one or more recognized stock exchanges must submit themselves to the various regulatory measures of the stock exchange concerned as well as the SEBI. They must maintain necessary books; documents etc. and disclose any information which the stock exchange may call for.

Types of listing A. Initial listing

Listing public issue of shares and debentures

Listing of right issue of shares and debentures

Listing of Bonus issue of shares

Listing share issued on Amalgamation, mergers etc.

Advantage of listing

To The Company: The company enjoys concession under direct tax laws.

The company goodwill increase at the international & national Level.

Term loan facilities/extend by the financial institution / bankers the form of Rupee currency and the foreign currency.

Avoiding the fear of easy takeovers of the organization by others because of wide distribution.

To the investors Maintain liquidity and safety in securities.

Listed securities are preferred by the bankers for extending term facility.

Rule of the stock exchange protect the interest of the investor.

Official quotation of the securities on the stock exchange corroborate the valuation taken by the investor for the purpose of tax assessments under income tax act , wealth tax act.

Minimum Listing Requirements for new companiesThe following revised eligibility criteria for listing of companies on the Exchange, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs), effective August 1, 2006.

ELIGIBILITY CRITERIA FOR IPOs/FPOs a. Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of Rs. 10 crores and market capitalization of not less than Rs. 25 crores. A small cap company is a company other than a large cap company.

I. In respect of Large Cap Companies i. The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crores; and ii. The minimum issue size shall be Rs. 10 crores; and iii. The minimum market capitalization of the Company shall be Rs. 25 crores (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).

II. In respect of Small Cap Companies i. The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and ii. The minimum issue size shall be Rs. 3 crores; and iii. The minimum market capitalization of the Company shall be Rs. 5 crores (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and iv. The minimum income/turnover of the Company should be Rs. 3 crores in each of the preceding three 12-months period; and v. The minimum number of public shareholders after the issue shall be 1000. vi. A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers appointed by the Exchange, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project in the preceding 12 months.

III. For all companies: I. In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that in the event of the market capitalization (product of issue price and the post issue number of shares) requirement of the Exchange not being met, the securities of the issuer would not be listed on the Exchange. II. The applicant, promoters and/or group companies, should not be in default in compliance of the listing agreement. III. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000.

Minimum Listing Requirements for companies listed on other stock exchanges The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended the direct listing norms for companies listed on other Stock Exchange(s) and seeking listing at BSE. These norms are applicable with immediate effect. 1. The company should have minimum issued and paid up equity capital of Rs. 3 crores. 2. The Company should have profit making track record for last three years. The revenues/profits arising out of extra ordinary items or income from any source of non-recurring nature should be excluded while calculating distributable profits.3. Minimum net worth of Rs. 20 crores (net worth includes Equity capital and free reserves excluding revaluation reserves). 4. Minimum market capitalization of the listed capital should be at least two times of the paid up capital. 5. The company should have a dividend paying track record for the last 3 consecutive years and the minimum dividend should be at least 10%. 6. Minimum 25% of the company's issued capital should be with Non-Promoters shareholders as per Clause 35 of the Listing Agreement. Out of above Non Promoter holding no single shareholder should hold more than 0.5% of the paid-up capital of the company individually or jointly with others except in case of Banks/Financial

Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-Resident Indians. 7. The company should have at least two years listing record with any of the Regional Stock Exchange. 8. The company should sign an agreement with CDSL & NSDL for demat trading.

Topic -9: Regulations Governing Primary capital markets in India: The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach. Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI's observation letter is three months only i.e. the company has to open its issue within three months period.

Topic -10: Public issue in foreign capital markets: Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as 'Euro' issues and b) issue of ordinary shares through depository receipts namely 'Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)' to foreign investors i.e. to the institutional investors or individual investors.

Topic -11: The Secondary Market/ Stock Exchanges:

The market where existing securities are traded is referred to as the secondary market or stock

market. In a stock market, purchases and sales of securities whether of Government or Semi-

Government bodies or other public bodies and also shares and debentures issued by joint stock

companies are affected. The securities of government are traded in the stock market as a separate

component, called guilt edged market. Government securities are traded outside the trading wing

in the form of over the counter sales or purchases. Another component of the stock market deals

with trading in shares and debentures of limited companies.

Control over Secondary Market

For the effective functioning of secondary market, proper control must be exercised. At present, control is exercised through the following three important processes: a) Recognition of Stock Exchangesb) Listing of Securitiesc) Registration of Brokers.

a) Recognition of Stock Exchanges : Stock exchanges are the important ingredient of the capital

market. They are the citadel of capital and fortress of finance. They are the theatres of trading in

securities and as such they assist and control the buying and selling of securities. Thus, according

to Husband and Dockeray “securities or stock exchanges are privately organized markets which

are used to facilities trading in securities.” However, at present stock exchanges need not

necessarily be privately organized once.

As per the securities Contacts Regulation Act, 1956 a stock exchange has been defined as follows:

“It is an association, organization or body of individuals whether incorporated or not, established

for the purpose of assisting, regulating and controlling business in buying, selling and dealing in

securities.” In brief, stocks exchanges constitute a market where securities issued by the central

and state governments, public bodies and joint stock companies are traded.

b. Listing of securities: Listing of securities means that the securities are admitted for trading

on a recognized stock exchange. Transactions in the securities of any company cannot be

conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis on

stock exchange operations. It is the green signal given to selected securities to get the trading

privileges of the stock exchange concerned. Securities become eligible for trading only through

listing.

Listing is compulsory for those companies which intend to offer shares/debentures to the public for

subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting

permission to a new issue by a public limited company. Again, financial institutions do insist on

listing for underwriting new issues. Thus, listing becomes an unavoidable one today.

The companies which have got their shares/debentures listed in one or more recognized stock

exchanges must submit themselves to the various regulatory measures of the stock exchange

concerned as well as the SEBI. They must maintain necessary books; documents etc. and disclose

any information which the stock exchange may call for.

C. Registration of Brokers: A broker is none other than a commission agent who transacts

business in securities on behalf of his clients who are non-members of a stock exchange. Thus, a

non-member can purchase and sell securities only through a broker who is the member of the stock

exchange. To deal in securities on recognized stock exchanges, the broker should register his name

as a broker with the SEBI. A stock broker must possess the following qualification to register as a

broker:

(a) He must be an Indian citizen with 21 years of age.

(b) He should neither be a bankrupt nor compounded with creditors.

(c) He should not have been convicted for any offence, fraud etc.

(d) He should not have engaged in any other business other than that of a broker in securities.

(e) He should not be a defaulter of any stock exchange.

(f) He should have completed 12th std examinations.

Functions of stock exchange: Stock market performs pivotal position in the financial system. It performs several economic functions and renders invaluable service to the investors, and to the economy as a whole

1. Liquidity and marketability of securities: Stock exchanges provide liquidity to securities since

securities can be converted to 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 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 securities traded in the stock market are negotiable and

transferable in character and as such they can be transferred with minimum of formalities from one

hand to another. So, when a security is transacted, one investor is substituted by another, but

company is assured of long term availability of funds

4. Flow of capital to profitable ventures: The profitable 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 these 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

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. Costs of

underwriting such issues would be less. 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 way for capital

formation. It guides the investors in choosing securities by supplying the 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.

FEATURES OF SECONDARY MARKET: The market where securities are traded after

they are initially offered in the primary market. Most trading is done in the secondary market.

In Secondary market share are traded between two investors.

In secondary market there is no issuing of the fresh securities but trading of the already issued

securities

In secondary market both buying and selling can take place

It has a special and fixed place known as stock exchange. However, it must be noted that it is not

essential that all the buying and selling of securities will be done only through stock exchange. Two

individuals can buy or sell them manually. This will also be called a transaction of the secondary

market. Generally, most of the transactions are made through the medium of stock exchange.

Example are the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National

Stock Exchange NSE, bond markets, over-the-counter markets, residential mortgage loans, governmental

guaranteed loans etc.

The prices of securities in secondary market are determined by demand and supply.

Only investors do the trading among themselves in secondary market.

The trading of securities does not take place first. A security can be traded in the secondary market

only if issued in the primary market.

Secondary market creates liquidity, hence, indirectly promotes capital formation.

It creates liquidity in securities. Liquidity means immediate conversion of securities into cash. This

job is performed by the secondary market.

Secondary market comes after primary market. New securities are first sold in the primary market and

thereafter it is the turn of the secondary market.

Topic -12: Trading Mechanisms:Trading at Indian stock exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is

order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system.

Topic -13: Dematerialization of shares: In order to mitigate the risks associated with share trading in paper format, dematerialization concept was introduced in Indian Financial Market. Dematerialisation or Demat in short is the process through which an investor’s physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant. India adopted the demat System successfully and there are plans to facilitate trading of almost all financial assets in demat format in future. Through this article, we will try to understand the demat process and its benefits from common investor’s perspective. What is it?Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialize his shares needs to open a demat account with Depository Participant. Investor surrenders his physical shares and in turn gets electronic shares in his demat account. Storage of Dematerialized Shares – DepositoryDepository is the body which is responsible for storing and maintaining investor's securities in demat or electronic format. In India there are two depositories i.e. NSDL and CDSL.

Who is a Depository Participant?Depository Participant (DP) is the market intermediary through which investors can avail the depository services. Depository Participant provides financial services and includes organizations like banks, brokers, custodians and financial institutions. Advantages of DematDealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from investor’s perspective. It’s beneficial for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation.

From share issuing company’s perspective, issuance in demat format reduces the cost of new issue as papers are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in demat format.

There are a lot of other benefits, but let’s focus on benefits with respect to common investor and the same are listed below. •    Demat format reduces the risk of bad deliveries•    Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate•    Liquidity is very high in case of demat format as whole process in automated.•    All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses•    Interest on loan against demat shares are less as compared to physical shares•    Investors save stamp duty while transferring shares in demat format.•    One needs to pay less brokerage in case of demat shares

 Demat ConversionMost of the trading in shares are done in demat format now a day, but there are few investors who still hold shares in paper format. You cannot deal in paper shares now, so you need to dematerialize them first. In order to dematerialize physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the same along with physical shares. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP. Their representative will come and get the DRF form signed.  So the complete process of dematerialization involves:1.     Investor surrenders the physical certificates for dematerialization to the DP along with DRF.2.     DP updates the account of the investor and shares are allocated in investor demat holding.

Topic -14: Settlement cycle: Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty.

Topic -15: Clearing corporations: An organization associated with an exchange to handle the confirmation, settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses". In order to make certain that transactions run smoothly, clearing corporations become the buyer to every seller and the seller to every buyer. In other words, they take the offsetting position with a client in every transaction.

Topic -16: Price bands: The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the relevant website and the terminals of the trading members participating in the book building process. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding ten days. It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.

Topic -17: Risk management: The risk management system in case of Indian stock exchanges is based on two pillars. While margins calculated on open positions and collateral deposited against it forms the first line of defence, deposit based capital (base minimum capital, liquid net worth) given by trading member (TM)/clearing member (CM) becomes the second line of defence against failure of any market participant.

As against net positions serving as the basis for levying margins on brokers for positions taken by them and their clients as implemented in other jurisdictions, in India VaR (Value at Risk) based margins are imposed at a client level i.e. net for a client and gross across all clients for the broker, thereby ignoring any netting-off that may occur between client-client and client proprietary positions. VaR based margins are updated 5 times per day to keep the margin requirements in sync with the current level of market volatility. In addition to VaR based initial margins there are additional requirements specified, as a second level of defence, in the form of an exposure margin/extreme loss margins which provides extra cushion in case of tail risk events and finally mark-to-market losses are collected and paid in cash on a daily basis.

Indian stock exchanges have a deposit based capital requirement over and above entry level and continuing net worth criteria for market participants undertaking the trading/clearing activity. Such net worth requirements vary based on the nature of the business activity, trading or clearing or both, of the participant. Further in addition to the minimum capital requirements, Stock Exchanges/Clearing Corporations have been

empowered to collect additional deposits in order to satisfy itself on the parameter of credit risk. This is as against a balance sheet based capital adequacy requirement prevalent in many other jurisdictions.

A sound risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets. Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached, etc.

Topic -18: Trading Rules:

A Stock exchange is a corporation or organization that provides trading facilities for stockbrokers and traders. Instruments traded on stock exchanges include stocks, investment trusts, commodities, options, mutual funds, unit trusts and bonds. Only members can trade on an exchange.

Specialists: A stock specialist is a member of a stock exchange who provides several services. They make a market in stocks by providing the best bid and best ask during trading hours. Specialists also maintain a fair and orderly market.

Floor Brokers: Floor brokers trade on the floor on the major exchanges. Floor brokers buy and sell securities in their own account. Floor brokers are required to take and pass written tests in order to trade. They must abide by exchange rules, and they must be a member of the exchange on which they trade.

Stock brokers/Financial Advisers: Stock brokers, financial advisers, certified financial planners and registered representatives buy and sell stocks on behalf of their clients and customers. They must pass certain written exams in order to carry out trades and adhere to ethical standards.

Day Traders: Day traders are individuals who buy and sell securities for their own accounts. Day traders will trade quickly--making purchases and sales on the same day.

Casual Traders: A casual trader is a person who tries to build up a portfolio by buying and selling securities for his own account over a period of time. Technology has simplified the process and given the casual trader much of the same information and tools available to professional traders.

Online Trading: Online trading is available to any person that has an account at an online trading firm. A person can enter trades from a personal computer and set price limits and targets. Commissions are often much less than at a full-service brokerage firm.

How to do Buying and Selling of Stocks

Now a days, there is no any physical trading, means going physical to stock exchange and do buying and selling of shares. Now everything is done online in electronic format .No need to go to any stock exchange. Stock transaction takes place in 3 major steps.

1. You place order (buy or sell) online - 2. The order goes to your broker (broker like indiabulls, 5paisa etc)3. From broker the order goes to stock exchange (either BSE or NSE)

And finally based on your price your order gets executed. Your role is to place only buy or sell order. No need to worry about broker part and stock exchange part. You just need to place your order. There are two methods for placing orders; Online trading and Offline trading.

Online Stock Trading - The online stock trading is done by self. If you want to do trading yourself then you can go for

online trading.For online trading you need computer, Internet connection, demat and trading account. You can even make use of internet café, if you do not want buy computer and internet connection at the beginning.  But demat account and trading accounts are must for trading in stock market.

Offline stock trading - In this method the orders will be placed by the broker on your behalf. Means you have to tell your broker which stocks to buy and sell and based on your instruction he carries out transaction.  In this method you don’t need any computer and internet connection.

Topic -19: Regulatory Framework: Capital issue (control) act ,1947 Securities contract (regulation) act, 1956 SEBI act, 1992 Depositories Act, 1996 Companies Act, 1956

Capital issue (control) act ,1947 Any firm, issuing shares needed central government permission Also determine the amount and price of the issue The act was repealed in 1992, Market determined allocation started

Securities contract (regulation) act, 1956 It provided for control on: all aspect of securities trading and running of stock exchange to prevent undesirable transaction It give central government regulatory jurisdiction over:

Stock exchanges: recognition and supervision Contracts in securities Listing of securities

Stock exchanges: recognition and supervision processing application of recognition of stock exchanges grant of recognition to stock exchange, procedure of corporatisation and demutualization of stock exchanges, withdrawal of recognition to stock exchange.

Demutualization and BSE: BSE has completed the process of Demutualization in terms of The BSE (Corporatisation and Demutualization) Scheme, 2005. The Bombay Stock Exchange Limited has succeeded 'The Stock Exchange, Mumbai' in accordance with the Scheme The Securities and Exchange Board of India (SEBI) had approved and published the Scheme of 'The Stock Exchange, Mumbai' . This act also empowers the Central government to call for periodical returns and make direct enquiries to direct rules to be made and powers of SEBI to make or amend bye-laws of recognized stock exchanges have been laid down. to supersede governing body of recognized stock exchange and vests with the Central Government the power to suspend business of recognized stock exchanges

Contracts in Securities: If the Central Government is not satisfied regarding the nature or the volume of transactions in securities it may, by notification in the Official gazette, declare contracts in notified areas illegal

Listing of Securities: The act also provides conditions of listing, delisting of securities, right of appeal against refusal of stock exchanges to list securities of public companies, right of appeal to SAT against refusal of stock exchange to list securities of public companies, procedures and powers of SAT, Right to legal representation.

Penalties and Procedures: The act also provides various cases when a person is liable for penalties such as when there is failure to: Furnish information, return, etc. Enter into agreements with clients Redress investor's grievances Segregate securities or moneys of client or clients Comply with provision of listing and delisting conditions etc.

SEBI Act, 1992 The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for protecting the interests of investors in securities, promoting the development of the securities market and regulating the securities market by measures it thinks fit.

The measure provide for: Regulating the business in stock exchanges and other securities markets. Registering and regulating the working of: stock brokers, sub-brokers, share transfer agents bankers to an issue, trustee of trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and other intermediaries

Registering and regulating the working of the depositories, participants, foreign institutional investors, credit rating agencies and such other Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds.

Prohibiting fraudulent and unfair trade practices relating to securities markets. Promoting investors education and training of intermediaries of securities markets. Prohibiting insider trading in securities. Regulating substantial acquisition in shares and takeover of companies. Undertaking inspection, conducting inquires and audits of the stock exchanges, mutual funds, other

persons associated with the securities market,

Companies Act, 1956 It deals with issue, allotment and transfer of securities and various aspects relating to company management Provide for standard disclosure in public issues Company management. Management perception of the risk factors information about other listed companies under the same management Company ‘s other projects

Depositories Act, 1996 Depository Act, 1996 Provides for the

Establishment of depositories in securities Ensure free transferability of securities with speed and accuracy By making securities freely transferable Dematerializing the securities On line transfer

The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. The act provides the rights and obligations of depositories, participants, issuers and beneficial owners.

A depository is required to enter into an agreement with one or more participants as its agents. Any person through a participant can enter into an agreement for availing its services. Any person who enters into an agreement with depository should surrender the certificate of security for which he requires the services of a depository to the issuer

After the issuer receives the certificate of security, he should cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security the depository should enter the name of the person who has entered into agreement, as the beneficial owner in its records.

After receiving intimation from the participant, every depository should register the transfer of security in the name of the transferee. All securities held by a depository should be dematerialized and be in a fungible form. The depositories should be deemed to be the registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner. The depository as a registered owner should not have any voting rights or other rights in the securities held by it.

A Beneficial owner, with the prior approval of the depository creates a pledge or hypothecation of securities owned by him through a depository. The depository is required to maintain a register and an index of beneficial owners. The depositories are required to furnish information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws.

Topic -20: Current Status of the Market (status is shown in the internet and news papers on daily basis).

Topic -21: Corporate Action: A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders. Corporate actions are typically agreed upon by a company's board of directors and authorized by the shareholders. Some examples are stock splits, dividends, mergers and acquisitions, rights issues and spin- offs.

Reasons: The primary reasons for companies to use corporate actions are:

Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus is another case where the shareholder is rewarded. In a stricter sense the Bonus issue should not impact the share price but in reality, in rare cases, it does and results in an overall increase in value.

Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed. Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price.

Corporate Restructuring: Corporations re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that is competitive or complementary come together to increase profitability. Spin-offs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies.

TYPES: Corporate actions are classified as voluntary, mandatory and mandatory with choice corporate actions.

Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spin-offs. Strictly speaking the word mandatory is not appropriate because the share holder person doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action.

Voluntary Corporate Action: A voluntary corporate action is an action where the shareholders elect to participate in the action. A response is required by the corporation to process the action. An example of a voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a

pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporation's agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate.

Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash or stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. (These are commonly known as Mandatory Events with Options, as a dividend is mandatory but a shareholder has the option to elect for the cash or to re-invest their cash dividend into the shares) Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc.

Mandatory with Choice Corporate Action: This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash or stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.

Topic -22: Buyback of shares: The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. A buyback allows companies to invest in them-selves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.2. Companies buy back shares on the open market over an extended period of time.

Topic -23: Index: Security market Index measures the behaviour of the security prices and the stock market. Indicators represent the entire stock market and its segments which measure the movement of the stock market. The most popular index in India are the Bombay stock exchange sensitivity Index (BSE Sensex or BSE – 100) and the National Stock Exchange Nifty. The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onwards. Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward.

Purpose of Index Security Index is helpful to show the economic health and analyzing the movement of price of various securities listed into the stock exchange.

Helpful to evaluate the Risk – return portfolio analysis.

Helpful to measure the growth of the secondary market.

Index can be used to compare a given share prices behaviour with its movement.

It is helpful to the investor to make their Investment decision.

Funds can be allocated more rationally between stocks with knowledge of the relationship of price of individual with the movements in the market.

Market indices act as sensitive barometer of the changes in trading pattern in the stock market.

Factors that influence the construction of Index numbers Selecting the shares for inclusion in the index making.

Determine the relative importance of each share included in the sample weighting

Average the included share into single share measure.

Sample List of Indices BSE- SENSEX

BSE100 Index

BSE200 Dollex

BSE 500 and Sectoral Indices

INDO text

S&P CNX 50 CNX Nifty Junior

OTCEI – Composite Index

Module-III: Banking Basics and New Age Banking

Topic -1: Historical Perspective of Banking, An Overview of development of Banking in India Banking in India originated in the last decades of the 18th century. The first banks were The General Bank

of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The

oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June

1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the

other two being the Bank of Bombay and the Bank of Madras, all three of which were established under

charters from the British East India Company. For many years the Presidency banks acted as quasi-central

banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which,

upon India's independence, became the State Bank of India in 1955.

A bank is a financial institution and a financial intermediary that accepts deposits and channels

those deposits into lending activities, either directly or through capital markets. A bank connects customers

with capital deficits to customers with capital surpluses.

Topic -2: Banking Structure

Banking RegulatorThe Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

Scheduled Banks in IndiaScheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country. Our focus in this module will be only on the scheduled commercial banks.

Public Sector BanksPublic sector banks are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system. There are currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd. Public sector banks have taken the lead role in branch expansion, particularly in the rural areas.

Regional Rural BanksRegional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the Government has introduced a number of measures of improve viability and profitability of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a State. This process of consolidation has resulted in a steep decline in the total number of RRBs to 82 as on March 31, 2009, as compared to 196 at the end of March 2005.

Private Sector BanksIn this type of banks, the majority of share capital is held by private individuals and corporates. Not all private sector banks were nationalized in 1969, and 1980. The private banks which were not nationalized are collectively known as the old private sector banks and include banks such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector banks was however prohibited during the post-nationalization period. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted the private sector to enter into the banking system. This resulted in the creation of a new set of private sector banks, which are collectively known as the new private sector banks. As at end March, 2009 there were 7 new private sector banks and 14 old private sector banks operating in India.

Foreign BanksForeign banks have their registered and head offices in a foreign country but operate their branches in India. The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries. The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have also made consumer financing a significant part of their portfolios. These banks offer products such as automobile finance, home loans, credit cards, household consumer finance etc. Foreign banks in India are required to adhere to all banking regulations, including priority-sector lending norms as applicable to domestic banks. In addition to the entry of the new private banks in the mid-90s, the increased presence of foreign banks in India has also contributed to boosting competition in the banking sector.

Co-operative BanksCo-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-operative credit structure in India is its heterogeneity.

The structure differs across urban and rural areas, across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are either limited to one state or stretch across states. The rural co-operative banks comprise State co-operative banks, district central cooperative banks.

The co-operative banking sector is the oldest segment of the Indian banking system. The network of UCBs in India consisted of 1721 banks as at end-March 2009, while the number of rural co-operative banks was 1119 as at end-March 2008. Owing to their widespread geographical penetration, cooperative banks have the potential to become an important instrument for large-scale financial inclusion, provided they are financially strengthened. The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a number of measures in recent years to improve financial soundness of co-operative banks.

Topic -3: The Banking Sector: In the banking sector RBI act as a central bank of the country and bankers bank. Under RBI , the whole structure of bank in India can be broadly classified in two parts i.e. I. Commercial Banks II. Cooperative Banks Commercial banks can be further classified in to three i.e. I. Public Sector Banks II. Private Sector Banks III. Foreign Banks

I. Public Sector Banks are those where ownership of Govt. is more than 50%. They are also known as Govt. Banks. These banks can also be divided into following three categories.

i. Nationalized Banks- 14 banks were nationalized in 1969 and 6 more banks were nationalized subsequently. In all these banks Govt. ownership is more than 51% and hence they are known as Govt. of India undertakings. ii. SBI Group i.e. State Bank of India and its subsidiaries – State Bank of India was nationalized in 1955 which was earlier known as imperial Bank of India. Six more subsidiaries of SBI were formed subsequently like State Bank of Indore, State Bank of Bikaner & Jaipur, State Bank of Travankore & Kochin etc. iii. Regional Rural Banks- These banks were created after passing RRB Act, 1974 to supplement the efforts of cooperative credit institutions to meet the demand of credit in rural areas and to provide them banking facilities.

III. Private Sector Banks- In India we have large number of Private Sector Banks. Prominent banks in this sector are ICICI Bank , HDFC Bank, Kotak Mahindra Bank etc. IV. Foreign Banks- We have many foreign banks like ABN Amro, American Express, Standard Chartered Bank etc.

Topic -4: Emergence and Importance of Commercial banking:

The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843). In 1921, the three residency banks were amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank, a bankers' bank and a banker to the Government. The Imperial Bank of India was established with mainly European shareholders. It was only with the establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India came to an end.

In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment of joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders. Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

After independence, the Government of India started taking steps to encourage the spread of banking in India. In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state-associate banks. Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959, the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries.

To better align the banking system to the needs of planning and economic policy, it was considered necessary to have social control over banks. In 1969, 14 of the major private sector banks were nationalized. This was an important milestone in the history of Indian banking. This was followed by the nationalization of another six private banks in 1980. With the nationalization of these banks, the major segment of the banking sector came under the control of the Government. The nationalization of banks imparted major impetus to branch expansion in un-banked rural and semi-urban areas, which in turn resulted in huge deposit mobilization, thereby giving boost to the overall savings rate of the economy. It also resulted in scaling up of lending to agriculture and its allied sectors. However, this arrangement also saw some weaknesses like reduced bank profitability, weak capital bases, and banks getting burdened with large non-performing assets.

To create a strong and competitive banking system, a number of reform measures were initiated in early 1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision over banks, creating competitive conditions and developing technological and institutional infrastructure. These measures led to the improvement in the financial health, soundness and efficiency of the banking system. One important feature of the reforms of the 1990s was that the entry of new private sector banks was permitted. Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank were set up.

Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. However, given the increasing sophistication and diversification of the Indian economy, the range of services extended by commercial banks has increased significantly, leading to an overlap with the functions performed by other financial institutions. Further, the share of long-term financing (in total bank financing) to meet capital goods and project-financing needs of industry has also increased over the years.

Functions of Commercial BanksThe main functions of a commercial bank can be segregated into three main areas: (i) Payment System (ii) Financial Intermediation (iii) Financial Services.

(i) Payment SystemBanks are at the core of the payments system in an economy. A payment refers to the means by which financial transactions are settled. A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role.

(ii) Financial IntermediationThe second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits represent the banks' liabilities, while loans disbursed, and investments made by banks are their assets. Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as

returns in the form of interest. On the other hand, bank loans and investments made by banks play an important function in channeling funds into profitable as well as socially productive uses.

(iii) Financial ServicesIn addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank's profitability.

Topic -5: Banker & Customer relationship-General and Special;

A banker is the one who gets into debts and creates debts. H.L. HART – the banker is one who receives money, collects cheques and drafts, for customers, with an obligation to honour the cheques drawn by customers from time to time subject to availability of amounts in the account.

Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT 1882 states that the term banker includes person or corporation or a company acting as banker. Under Section 5 (1) of Banking Regulations of 1949, a banking company is defined as any company which transacts banking business. Under Section 5 (1) B , banking business means accepting for the purpose of landing or investment, deposits of money from the public, repayable on demand or otherwise with drawable by cheque , draft or otherwise.

CUSTOMER: A person who buys goods or services from a shop or a business entity. A person you deal with as a business entity. There is no statutory definition. A person/ company/entity who has an account with a bank is a customer. There is no unanimity as regards to the time period of the dealings. A casual transaction like encashment of a cheque does not entail a person to be customer. The duration of association of the customer with the bank is of no essence. A customer is one who has an account with the bank and to whom the banks undertakes to extend business of banking.

RELATIONSHIP CREDITOR-DEBTOR: Relationship between the customer having a deposit account and the banker. Depositor is the lender and the banker is the borrower. Depositor is the creditor and the banker is the debtor. The money handed over to the bank is a debt. The money once deposited in the bank becomes the money of the bank and it is prerogative of the bank to use that money as it deems fit. The depositor remains a creditor that too an unsecured creditor

RELATIONSHIP DEBTOR-CREDITOR: When the customer avails a loan or an advance then his relationship with the banker undergoes a change to what it is when he is a deposit holder. Since the funds are lent to the customer, he becomes the borrower and the banker becomes the lender. The relation is the debtor- creditor relation, the customer being a debtor and the banker a creditor.

RELATIONSHIP BENEFICIARY-TRUSTEE: If a customer keeps certain valuables or securities with the bank for safe-keeping or deposits a certain amount of money for a specific purpose, the banker, besides becoming a bailee, is also a trustee. The money or the securities so kept are not at the disposal of the bank. The banker cannot utilize those moneys or securities as he desires since the money does not belong to him. Here there is delivery of goods or securities from one person to the other which amounts to the bailment. As per section 148 of Indian Contract Act 1872, the delivery of goods from one person to the other for some purpose upon the contract that the goods will be returned when the purpose is accomplished. The customer is the bailer and the banker is the bailee.

RELATIONSHIP PRINCIPAL-AGENT: Banks provide ancillary services such as collection of cheques, bills etc. They also undertake to pay regularly the electricity bills, phone bills etc. The relationship arising out of these ancillary services is of principal-agent between the customer and the bank. The relationship

seizes once the customer dies, becomes insane or becomes insolvent. The proceeds of the cheques sent for collection, which are in transit, not created to the customer account are not the moneys of the banker till such time as they are credited into the customer account.

RELATIONSHIP LESSEE-LESSOR: The banks provide safe deposit lockers to the customers who hire them on lease basis. The relationship therefore, is that of lessee and lessor. In certain banks, this relationship is termed as licensee and licensor. The bank leases out the space for the use of clients. The bank is not responsible for any loss that arises to the lessee in this form of transaction except due to negligence of that bank.

RELATIONSHIP INDEMNIFIER- INDEMNIFIED: The customer is indemnifier and the bank is indemnified. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any other person is called a contract of indemnity – section 124 ( Indian Contract Act, 1872). In the case of banking, this relationship happens in transactions of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that either party will compensate the other of any loss arising from the wrong/excess payment.

Topic -6: Special types of customers

The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an account in a bank is considered its customer. There is no statutory definition of “customer”, and so one has to refer the decisions of the courts in order to discover the principle which determines whether or not a person is a customer. In the United States, customer means, ‘any person having an account with a banker or from whom a bank has agreed to collect items and includes a bank carrying an account with another bank’. The statutory protection under section 131 and 131A of the Negotiable Instruments Act, 1881, is available to a collecting banker only if the banker inter alia receives payment of a cheque or a draft for a customer. Though a customer is a very important person for a bank, he appears only once in law of Negotiable Instrument (i.e., in section 131 of the Negotiable Instruments Act) and even there only casually; he is neither defined nor explained. A customer of a banker need not necessarily be a person. A firm, joint stock Company, a society or any separate legal entity may be a customer. According to section 45-Z of the Banking Regulation Act, 1949, “Customer” includes a government department and a corporation incorporated by or under any law. The following are some examples of special types of customers: 

Married women Lunatics Minors Illiterate Persons Joint Hindu Family Co-operative Societies Partnership Trustees

1. MINOR:  A person under the age of 18 years is years is a minor; if a guardian of his person or property or both has been appointed by a court or if the superintendence of his property or both has been assumed the age of 18 years, he remains minor till he completes the age of 21 years. According to the Indian Contract Act, 1872, a minor is not capable of entering into by a minor is void. The banker should, therefore, be very careful in dealing with a minor and take the following precautions:

 OPENING THE ACCOUNT:  The banker may open a savings bank account, not a current account in the name of a minor since; in case of an overdraft the minor does not have any personal liability. The savings bank account may be opened in any of the following ways: 

In the name of the minor himself.

In the joint names of the minor and his/her guardian. In the name of guardian in the following way “ABC, natural guardian of XYZ”.

 Section 26 of Negotiable Instruments Act provides that a minor may draw, endorse, deliver and negotiate a negotiable instrument. In case of the minor can operate the account only jointly with his or her guardian while in case of the account is to be operated by the guardian on behalf of the minor. In cases the minor must have at least attained the age of 12 years and should be in a position to read or write English, Hindi or Regional language.

 DATE OF BIRTH: At the time of opening of the account of minor, the bank should record the date of birth of the minor as disclosed by his or her guardian.

 DEATH OF THE MINOR GUARDIAN: In the event of death of a minor the money will be payable to the guardian. In case the guardian dies before the minor attains majority and the account is a joint account or to be operated by the guardian only, the money should be paid by the bank to the minor or attaining majority or to some person appointed by the court as his guardian.

PROVISIONS REGARDING LGAL GUARDIANSHIP OF A MINOR:

Natural guardian Testamentary guardian Guardian appointed by the Court

 The first two types of guardians are governed by the provisions of the Hindu Minority and Guardianship Act, 1956, whereas a guardian is appointed by a court under the Guardians and Wards Act, 1890.

 RESERVE BANK’S DIRECTIVES: Reserve bank of India has advised the banks to allow opening of minors accounts with mother as guardian. Thus, banks are now permitted to open account of minor in the guardianship of the mother, even if the father of the minor is alive.

 2. MARRIED WOMAN: A married woman is competent to enter into a valid contract. The banker may, therefore, open an account in the name of a married woman. In case of a debt taken by a married woman, her husband shall not be liable except in the following circumstances: 

If the loan is taken with his consent or authority; and If the debt is taken for the supply of necessaries of life to the wife, n case the husband defaults in supplying the

same to her. 

The husband shall not be liable for the debts taken by his wife in any other circumstances. The creditor may in that case recover his debt out of the personal assets of the married woman. While granting a loan to a married woman, the banker should, therefore, examine her own assets and ensure that the same are sufficient to cover the amount of the loan.

 3. PARADANASHIN WOMAN: A paradanashin woman observes complete seclusion in accordance with the custom of her own community. She does not deal with the people, other than the members of her own family. As she remains completely secluded, a presumption in law exists that: 

Any contract entered into by her might have been made with her free will and with full understanding of what the contract actually means.

The same might not have been made with her free will and with full understanding of what the contract actually means. 

The banker should, therefore take due precaution in opening an account in the name of a paradanashin woman. As the identity of such a woman cannot be ascertained, the banker generally refuses to open an account in her name.

 4. ILLITERATE PERSONS: Illiterate persons cannot sign their names and hence the bankers taken their thumb impressions as a substitute for signature, and also a copy of their recent photograph. The application from and the photograph should be attested by an approved witness. For withdrawing money, he must attend personally and affix his thumb impression in the presence of an official of the bank, for the purpose of identification.

 5. LUNATICS: The banker should, therefore, not open an account in the name of a person who is of unsound mind. But if a banker has discounted a bill duly written, accepted or endorsed by a lunatic he can realize the money due on the same from such person except in the circumstances where it is proved that the banker was aware of the lunacy of the person concerned at the time he discounted the bill. The banker should suspend all operations on the account of a customer as soon as he receives the news of his lunacy till he gets the proof of his sanity or is served with an order of the court. 

6. JOINT HINDU FAMILIES:  The concept of joint Hindu Family is recognized by law. A business, according to law is a distinct heritable asset. Where a Hindu dies, leaving a business it passes on the heirs. If he leaves male issues it descends to them and the property becomes joint Hindu Family property. The members of the family are called co- parceners and the eldest male member is the manager or the karta. When an account in the name of the JHF is opened all the adult co- parceners are to sign the account opening form, even though the karta would operate on the account. In addition, the bankers also obtain a letter of undertaking signed by all the adult co- parceners stating that the business carried on by the family through births and deaths will be advised to the banker. If the business is ancestral, the co- parceners are liable to the extent of their share in the family property, whereas if the business is not ancestral, co- parceners will be personally liable for the family from the bank.

 The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by mithakshara law, all the members acquires a right in the property by birth and this right starts from the date of conception in the womb and so there is always the danger of a loan being repudiated by a  member who was not even born on the date of the transactions. The burden of proving this necessity lies on the banker and the banker has to not only prove the legal necessity, but also prove that he made reasonable inquiries and was satisfied as to the existence of the legal necessity.

 To avoid these and several other difficulties, some banks requires a Hindu customer opening an account, to furnish a statement to this effect that the money deposited is his self acquired property and not that of JHF.

The account should clearly indicate that it is a JHF. The JHF letter should be signed by all the co- parceners. The letter should clearly indicates the powers of the karta. All co- perceners should sign the documents for loans. Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition of property.

 7. TRUSTEES: According to the Indian Trusts Act, 1882, a ‘trust’ is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner Section 3. The person who reposes the confidence is called the author of the trust. A trustee is the person in whom the confidence is reposed. The person for whose benefit the trust is formed is called beneficiary.

8. PARTNERSHIP: A bank should take the following precautions in the course of having business dealing with the firm: 

The banker should open an account in the name of partnership firm only when one or more partners make an application to the effect.

The bank should ask for a copy of the partnership agreement and thoroughly acquaint itself with its clauses. The banker should take a letter signed by all the partners containing the following: The name and address of all partners The nature of the firms business The names of the partners authorized to operate the account in the name of the firm.

The banker should not credit a cheque in the firms name to the personal account of a partner without enquiring from other partners. 

In the absence of any contract to the contrary, a partnership firm stands dissolved on the death of a partner. In case the firm continues to carry on the business, the estate of the deceased is not liable for any act of the firms after his death.

 9. ACCOUNTS IN THE NAME OF LIQUIDATORS: A liquidator is a person appointed by the court to wind up the affairs of a company. His business is to realize the company’s assets and apply funds thus collected in repayment of debts and distribute the balance among shareholders. He has power to borrow money on the security of the company’s assets and to draw, endorse and accept instruments on behalf of the company. While exercising such powers, the liquidator is free personal liability. Every official liquidator is required to maintain a personal ledger account with RBI or SBI or any Nationalized Bank in terms of the court order.

 10. CO – OPERATIVE SOCIETIES: These are established under Co – operative societies act in force in various states. They are governed by their respective rules and by – laws. Before opening the accounts, these have to be scrutinized to see if there are any restrictions on opening bank accounts. In some states, the co- operative societies cannot open accounts with commercial banks without permission from the registrar of co- operative societies and the registrar may also impose certain conditions like maximum balances. All such conditions should be observed while opening and operating the accounts.

Topic -7: Banking- A Business of Trust: Most of the loans provided by banks to individuals, business community and companies are given for productive purposes with a view to increase business turn over, improve profitability and thereby improve their overall image in market and finally improve their credit worthiness and turn them with people of means. Some of the loans are also provided to improve their efficiency and living standard. For example loan for housing and two/four wheelers, consumer durables are provided to improve the image of borrower in the society. A person with his own house is seen with prestige, dignity in the society. Education loan is given by the banks to students for perusing higher education in the field of engineering, medical, management etc. to enable the students to acquire special knowledge which would help them in seeking good employment. They repay this loan out of their earnings when they get employed or start their own business. Hence all bank loans aims at making the borrower more credit worthy and make him capable of acquiring means of earning. There are four basis principle of lending which a banker keeps in mind while lending. These four principles are:

Safety : The first and foremost aspect seen a before loaning is safety of funds in the hands of borrower. In also depends upon the type of security offered for loan. For example loan granted against mortgage of house is safe as security for loan is house it self which has been mortgaged with the bank. However at the time of analyzing credit worthy ness of the borrower, five C‟s are normally seen by the bank. These 5 C’s are:

Character Capital Capacity to repay Collateral Conditions

Liquidity : It means that loan is likely to come back after the specified period for which loan has been granted. Profitability : Loan granted will provide reasonable earning to the bank which would help the bank in improving its profit. Yield : Return on the loan in the form of interest income would provide reasonable yield on investment in loans. Here, it may be mentioned that banks are required to invest funds in

govt. and govt. approved securities but yield on such investment is not attractive. This investment under statutory liquid ratio is Statutory / mandatory as per Banking Regulation Act and hence banks are required to compromise on yield. However in case of loans, banks would like to increase their yield by charging higher interest rates.

Topic -8: Banking Services and the products there-under:Various products offered by banks can be classified as retail banking product and corporate banking products.

Retail Banking Products- can be further classified as- 1. Liability products- Such as Savings, Current, Recurring Fixed Deposit Account and no-frill account

2. Asset Products- loan like Housing, Personal, Education, Gold loan, Mortgage loan, Vehicle loan, Agricultural loans etc.

3. Credit & Debit Cards-

4. Investment Products-Such as insurance plans, pension plans, mutual fund etc.

Corporate Banking Products - 1. Liability Products- Such as salary accounts of employees, current account, fixed deposit account, payment cards etc.

2. Asset Products-Such as trade finance in the form of cash credit (clear, pledge, hypothecation) short term loans, capital loans, letter of credit, guarantee, corporate finance, project finance etc

Various services provided by banks- Trusteeship services- Such as safe deposit, locker facilities

Money transfer facilities like Demand Draft EFT, RTGS, etc.

ATM facilities (debit card)

Project Guidance through project preparation and project finance

De mat account facilities

On-line banking

Consultancy & advisory services such as portfolio management etc.

E-banking/E-Commerce

Tele Banking

Foreign exchange services by authorized banks

Topic -9: Banking Regulations:

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force w.e.f 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 w.e.f 01.03.66. Summary of some important sections is provided hereunder. The section no. is given at the end of each item.

Banking means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise (5 (i) (b)).

Banking company means any company which transacts the business of banking (5(i)(c) Transact banking business in India (5 (i) (e). Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are

not demand liabilities (5(i)(f) Secured loan or advances means a loan or advance made on the security of asset the market value of which is

not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan or advance not secured (5(i)(h).

Defines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveller cheques, mortgages etc (6(1).

States that no company shall engage in any form of business other than those referred in Section 6(1) (6(2). For banking companies carrying on banking business in India to use at least one word bank, banking, banking

company in its name (7). Restrictions on business of certain kinds such as trading of goods etc. (8) Prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use

for a period exceeding 7 years from acquisition of the property. RBI may extend this period by five years (9) Prohibitions on employments like Chairman, Directors etc (10) Paid up capital, reserves and rules relating to these (11 & 12) Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up value of one share (13) Prohibits a banking company from creating a charge upon any unpaid capital of the company. (14) Section

14(A) prohibits a banking company from creating a floating charge on the undertaking or any property of the company without the RBI permission.

Prohibits payment of dividend by any bank until all of its capitalized expenses have been completely written off (15)

To create reserve fund and 20% of the profits should be transferred to this fund before any dividend is declared (17 (1))

Cash reserve - Non-scheduled banks to maintain 3% of the demand and time liabilities by way of cash reserves with itself or by way of balance in a current account with RBI (18)

Permits banks to form subsidiary company for certain purposes (19) No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owners of

any amount exceeding 30% of its own paid up share capital + reserves or 30% of the paid up share capital of that company whichever is less. (19(2).

Restrictions on banks to grant loan to person interested in management of the bank (20) Power to Reserve Bank to issue directive to banks to determine policy for advances (21) Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold, unencumbered

securities 25%-40% as on last Friday of 2nd preceding fortnight (24). Return of unclaimed deposits (10 years and above) (26) Every bank has to publish its balance sheet as on March 31st (29). Balance sheet is to be got audited from qualified auditors (30 (i)) Publish balance sheet and auditors report within 3 months from the end of period to which they refer. RBI may

extend the period by further three month (31) Prevents banks from producing any confidential information to any authority under Indian Disputes Act. (34A) RBI authorized to undertake inspection of banks (35). Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for

which a bank shall preserve its books (45-y), nomination facilities (45ZA to ZF) and return a paid instrument to a customer by keeping a true copy (45Z).

Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets and liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed deposits i.e. 10 years and above (26) and monthly return of assets and liabilities (27-1).

Topic -10: Retail credit-An overview: It a financing method which provides loan services to retail consumers for goods and services. Retail credit facilities lend funds to consumers wishing to purchase high ticket items but are short on capital. Thus, retail credit facilities may enable a greater number of consumers access to a retailer's goods. Retail credit facilities can take the form of point of sale finance options in retail outlets. For example a Rs. 70,000 motorcycle might be a lot for a consumer to pay up front. Retail credit facilities will loan the Rs. 70,000 to the consumer, who will then pay it back with interest in monthly installments over several years. Some offer low or even no payments over an initial time period, but then charge above average interest. Retail credit facilities give the option of consuming now or consuming in the future. Higher interest rates may be acceptable to some consumers, depending on the consumers' unique consumption utilities. The risk of default is a factor that determines the interest rate that retail credit facilities charge.

Retail credit products: Housing & Furnishing Loan: For construction/ purchase/ repair of house / flat etc. Dream Car Loan: For purchase of new / old vehicle for personal / official use. Commercial Vehicle Finance Scheme: For purchase of vehicle for commercial use.

Trade Loan: Working Capital Requirement & Term Loan facility for Traders. Property Loan: Loan against property for business / personal need. Rent Loan: Loan against future Rental receivable for business / personal need. Home Appliances Finance Scheme: For purchase of consumer household items. Education Loan: The Educational Loan Scheme outlined below aims at providing financial support. Saral Loan: For personal need of employees of Govt / PSU/ Reputed Organization. Mobike Loan: For purchasing new two-wheeler. Personal Loan to Pensioners: For personal need of Pensioners. Personal Loan to Doctors: For personal / business need of Doctors. OD facility in Savings Bank Account: For corporate clients having Salary Accounts. Loans Against NSC/KVP: Loan against NSC/KVP for personal / business need. Gold Loan: Loan against Gold Jewellery for personal/ business/agriculture purpose. Reverse Mortgage Scheme: For personal needs of Senior Citizens owning self occupied residential

property.

Topic -11: Micro Finance:Micro-Finance has been defined by RBI “as provision of thrift and credit and other financial services of very small amount to the poor in rural, semi urban and urban areas to improve their income and living standard”. Micro-credit institutions are those which are engaged in providing credit and other facilities to these poor strata of the society. RBI has asked banks and financial institutions to formulate their own schemes, models, prescribe suitable criterions, choose suitable branches, credit norms and interest rates etc for this purpose. Accordingly, banks have to prepare micro-credit plans for blocks, districts and the whole state for this purpose and these plans are reviewed at State and National level. The non-governmental organizations (NGOs), voluntary organization and self help groups are playing critical role in providing micro-finance facilities. Even NABARD is playing active role in supporting these organizations and even arranging financial assistance to them. Many states have also launched various schemes of micro-finance for increasing income of poorest of the poor in rural, semi urban and urban areas.

Micro-Finance products: 1. Micro credit : Allowing small amount loans and advances to poor people.2. Micro savings : creating habit to save and use this saving for future contingencies as wells using the savings for small business activities.

3. Micro insurance : various types of insurance products like life insurance, property insurance, health insurance etc. at nominal rates/premiums to poor people.

4. Micro leasing : Allowing poor entrepreneurs to take on lease equipments, machinery which they can afford.

5. Micro Money transfer : A service of transferring money from one place to other by poor families to their friends, relatives in India & abroad.

Participants in Micro finance are- - Financial institutions - Donors - Private equity - Micro-finance institutions - Self help groups - Non-Government organizations (NGO‟s)

In India SHG‟s are playing key role in the field of Micro-finance with key objective like-

- To create habit of savings - To secure financial technical and moral strength

- To avail loan from financial institutions - To gain economic prosperity through loan/credit - To save them from exploitation by money lenders.

Millennium Development Goals of Micro-finance are- - Eradiate extreme poverty and hunger - Universal primary education - Women empowerment - Reduce child mortality - Control HIV/AIDS, Malaria etc.

Module-IV Basics of Insurance and Risk Management

Topic -1: INSURANCE: MEANING AND NATURE The term insurance can be defined in financial as well as in legal terms. The financial definition deals with the funding or financial arrangement of the losses whereas the legal definition deals with provisions relating to legally enforceable contract.

DEFINITION IN FINANCIAL SENSEInsurance is a financial arrangement, which redistributes the costs of unexpected losses among the members of the pool. The pool is a collection of people facing common risks. All members contribute a fixed amount towards a pool called premium. In exchange for the premium payment, the person gets an assurance that a certain sum of money is to be paid to him on the happening of the event insured against. The assurance is that his loss will be made good. Thus, insurance involves the transfer of loss exposures to an insurance pool and the redistribution of losses among the members of the pool.

DEFINITION IN LEGAL SENSEInsurance can be defined as a contract between two parties by which one party undertakes to make good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on the happening of a specified event e.g. fire, accident or death. We call the party agreeing to pay for the losses the insurer. We call the party whose loss makes the ‘insurer’ pay the claim the insured. We call the payment insured pays to the insurer the premium. We call the insurance contract a policy. In the end we can sum up that insurance is a transfer of risk from the individual to the group and there is a sharing (pooling) of losses on some equitable basis such that fortuitous losses can be indemnified (paid).

NATURE OF INSURANCEThe insurance has the following characteristics, which are observed in case of life, marine, fire and general insurance.Sharing of risk - Insurance is a device to share the financial losses which might befall on an individual or his family on the happening of a specified event. The event may be death in case of life insurance, fire in fire insurance etc. If insured the loss arising from these events will be shared by all insured in the form of premium.(1) Co-operative device - The most important feature of every insurance plan is the cooperation of large number of persons who, in effect, agree to share the financial loss arising due to a particular risk which is insured. An insurer would be unable to compensate all losses from his capital. So, by insuring a large number of persons, he is able to pay the amount of loss.(2) Value of risk - The risk is evaluated before insuring to charge the amount of share of an insured, premium. There are several methods of evaluation of risks. If there is expectation of more risk, higher premium may be charged. So, the probability of loss is calculated at the time of insurance.(3) Payment at contingency - The payment is made at a certain contingency insured. If the contingency occurs, payment is made. Since the life insurance contract is a contract of certainty, because the contingency, the death or the expiry of term, will certainly occur, the payment is certain. In other insurance contracts, the contingency is the fire or the marine perils etc., may or may not occur. So, if the contingency occurs, payment is made, otherwise no amount is given to the policy-holder.(4) Amount of payment - The amount of payment depends upon the value of loss occurred due to the particular insured risk provided insurance is there up to that amount. In life insurance, the purpose

is not to make good the financial loss suffered. The insurer promises to pay a fixed sum on the happening of an event. If the event or the contingency takes place, the payment falls due if the policy is valid and in force at the time of the event.(5) Large number of insured persons - To spread the loss immediately, smoothly and cheaply, large number of persons should be insured. Large number of persons or property is insured to lower the cost of insurance and the amount of premium.(6) Insurance is not a gambling - The insurance serves indirectly to increase the productivity of the community by eliminating worry and increasing initiative. The uncertainty is changed into certainty by insuring property and life because the insurer promises to pay a definite sum at damage or death. From the company’s point of view, the life insurance is essentially non-speculative; in fact, no other business operates with greater certainties. From the insured point of view, too, insurance is also the antithesis of gambling. Nothing is more uncertain than life and life insurance offers the only sure method of changing that uncertainty into certainty.(7) Insurance is not charity - Charity is given without consideration but insurance is not possible without premium. It provides security and safety to an individual and to the security although it is a kind of business because in consideration of premium it guarantees the payment of loss. It is a profession because it provides adequate sources at the time of disasters only by charging a nominal premium for the service.

PURPOSE AND NEEDBeside things mentioned by you, let’s discuss in detail the purpose and need of insurance. As we all know life is full of uncertainties and insurance is based on uncertainties and if there are no uncertainties about the occurrence of a disaster, the concept of insurance will cease to exist. If we all are able to predict the future dangers correctly then we can take a safeguard action to move out of the danger but problem is that we cannot predict death, disaster and danger. All individuals as well as their tangible and intangible assets are exposed to all types of unforeseen risks. Thus insurance is done against such possible contingencies to save the owner and his family from all sorts of sufferings by making good the losses of the unfortunate few, through the help of the fortunate many, who were exposed to the same risk, but saved from the misfortune.

As insurance is a system of sharing risk that seems to be too great to be borne by one individual we can list out the benefits derived by individual and society from the insurance.(1) Indemnifies loss - Insurance restores people to their former financial position as if no loss had occurred. It helps them to remain financially secure without running into debt after a loss. It also helps business firms to carry on their normal business operations without interruption even after the loss occurs.(2) Reduces worry and fear - Insurance helps in reducing anxiety and fear before and after the loss occurs, as it is known that the insurance company will compensate the loss.(3) Makes available funds for investment - Investments are the base of an economic development and mostly these investments are the result of savings. An insurance company is a major instrument for the mobilization of the savings of people, which are thereafter canalized into investment for economic growth. Insurance provides the continuity in trade and commerce, by covering the risks that could retard the economy and thereby indirectly helps the economy to grow.(4) Provides employment to a large number of people – Insurance industry offers regular full time employment to a large number of people in the country. Besides them a number of agents, professionals etc. are also engaged by the industry to render professional services.

(5) Educates people about loss prevention - Insurance companies also engage themselves in educating people about loss prevention. In our country the GIC has created the loss prevention association of India to promote and propagate loss prevention.(6) Insurance enhances credit worthiness - Insurance policies are often offered as collateral security for credit as well.(7) Social benefits - Above all we derive social benefits when people with peaceful minds carry on their operations properly and in a better way. Thus insurance’s contribution to the economy as a whole is valuable as it avoids economic hardships to people.

Topic -2: Historical perspectives ( HISTORICAL BACKGROUND OF INSURANCE)

Life Insurance Corporation of India -The insurance sector in India dates back to 1818 when first insurance company, The Oriental Life Insurance Company, was established, at Calcutta. Thereafter, Bombay Life Assurance Company in 1823 and Madras Equitable Life Assurance Society in 1829, were established. In 1912, the Indian Life Assurance Companies Act was enacted as the first statute to regulate the life insurance business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life insurance businesses. The Insurance Act was subsequently reviewed and a comprehensive legislation was enacted called the Insurance Act, 1938. The nationalization of life insurance business took place in 1956 when 245 Indian and foreign insurance and provident societies were first amalgamated and then nationalized. The Life Insurance Corporation of India (LIC) came into existence by an Act of Parliament, viz. LIC act, 1956, with a capital contribution of Rs.5 Crores from the Government of India

General Insurance Corporation Of India- The General insurance business in India started with the establishment of Triton Insurance Company Limited in 1850 at Calcutta .In 1907, the first company, The Mercantile Insurance Ltd. Was set up to transact all classes of general insurance business. General Insurance Council, a wing of the Insurance Association of India in 1957, framed a code of conduct for ensuring fair conduct and sound business practices. In 1968 the Insurance Act was amended to regulate investments and to set minimum solvency margins. In the same year the Tariff Advisory Committee was also set up. In 1972, The General Insurance Business (Nationalization) Act was passed to nationalize the general insurance business in India with effect from 1st January 1973. For these 107 insurers was amalgamated and grouped into four company’s viz., the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. And the United India Insurance Company Ltd. General Insurance Corporation of India was incorporated as a company.

CURRENT SCENARIOIn new economic policies formulated since 1991, globalization, privatization and liberalization have become new buzzwords. Under new economic policies, many economic and financial reforms took place. Like liberalizing licensing policy, attracting FDI, allowing foreign equity in public sector undertakings. The financial reforms restructured banking sector by allowing entry of new private and foreign banks. They also allowed private sector and commercial banks in mutual funds investment business, rationalizing the EXIM policy and so on.

Topic -3: Types of insurance Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as "perils". An insurance policy will set out in details which perils are covered by

the policy and which are not. Below are (non-exhaustive) lists of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, auto insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident).A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property.Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverage that a homeowner needs.1. Life insuranceLife insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. In the United States, the predominant form simply specifies a lump sum to be paid on the insured's demise.

As with most insurance policies, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered by the policy. The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the Life Assured. To be a life policy the insured event must be based upon the lives of the people named in the policy. Insured events that may be covered include: Serious illness. Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

Life-based contracts tend to fall into two major categories:Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment. A common form of this design is term insurance.Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the US anyway) are whole life, universal life and variable life policies.Types of life insuranceLife insurance may be divided into two basic classes – temporary and permanent or following subclasses - term, universal, whole life and endowment life insurance.Term InsuranceTerm assurance provides life insurance coverage for a specified term of years in exchange for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else.There are three key factors to be considered in term insurance:

Face amount (protection or death benefit), Premium to be paid (cost to the insured), and Length of coverage (term).

Permanent Life InsurancePermanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. This means that a policy with a million dollar face value can be relatively expensive to a 70 year old. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value. The four basic types of permanent insurance are whole life, universal life, limited pay and endowment.

Whole life coverageWhole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits; guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Also, the cash values are generally kept by the insurance company at the time of death, the death benefit only to the beneficiaries. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.

Universal life coverage:Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. There are several types of universal life insurance policies which include "interest sensitive" (also known as "traditional fixed universal life insurance"), variable universal life insurance, and equity indexed universal life insurance.

Limited-payAnother type of permanent insurance is Limited-pay life insurance, in which all the premiums are paid over a specified period after which no additional premiums are due to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.

EndowmentsEndowments are policies in which the cash value built up inside the policy, equals the death benefit (face amount) at a certain age. The age this commences is known as the endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier. In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters (creating modified endowments). These follow tax rules as annuities and IRAs do. Endowment

Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a specific age (e.g. 65).

Accidental DeathAccidental death is a limited life insurance that is designed to cover the insured when they pass away due to an accident. Accidents include anything from an injury, but do not typically cover any deaths resulting from health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurances. It is also very commonly offered as "accidental death and dismemberment insurance", also known as an AD&D policy. In an AD&D policy, benefits are available not only for accidental death, but also for loss of limbs or bodily functions such as sight and hearing, etc.

Related Life Insurance ProductsRiders are modifications to the insurance policy added at the same time the policy is issued. These riders change the basic policy to provide some feature desired by the policy owner. A common rider is accidental death, which used to be commonly referred to as "double indemnity", which pays twice the amount of the policy face value if death results from accidental causes, as if both a full coverage policy and an accidental death policy were in effect on the insured. Another common rider is premium waiver, which waives future premiums if the insured becomes disabled.

1. Joint life insurance is either a term or permanent policy insuring two or more lives with the proceeds payable on the first death or second death.

2. Survivorship life: is a whole life policy insuring two lives with the proceeds payable on the second (later) death.

3. Single premium whole life: is a policy with only one premium which is payable at the time the policy is issued.

4. Modified whole life: is a whole life policy that charges smaller premiums for a specified period of time after which the premiums increase for the remainder of the policy.

5. Group life insurance: is term insurance covering a group of people, usually employees of a company or members of a union or association. Individual proof of insurability is not normally a consideration in the underwriting. Rather, the underwriter considers the size and turnover of the group, and the financial strength of the group. Contract provisions will attempt to exclude the possibility of adverse selection. Group life insurance often has a provision that a member exiting the group has the right to buy individual insurance coverage.

6. Senior and pre-need products: Insurance companies have in recent years developed products to offer to niche markets, most notably targeting the senior market to address needs of an aging population. Many companies offer policies tailored to the needs of senior applicants. These are often low to moderate face value whole life insurance policies, to allow a senior citizen purchasing insurance at an older issue age an opportunity to buy affordable insurance. This may also be marketed as final expense insurance, and an agent or company may suggest (but not require) that the policy proceeds could be used for end-of-life expenses.

7. Pre-need (or prepaid) insurance policies: are whole life policies that, although available at any age, are usually offered to older applicants as well. This type of insurance is designed specifically to cover funeral expenses when the insured person dies. In many cases, the applicant signs a pre-funded funeral arrangement with a funeral home at the time the policy is applied for. The death proceeds are then guaranteed to be directed first to the funeral services provider for payment of services rendered. Most contracts dictate that any excess proceeds will go either to the insured's estate or a designated beneficiary.

2. General insuranceGeneral insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance. It is called property and casualty insurance in the U.S. and Non-Life Insurance in Continental Europe.

3. Health and medical insuranceHealth insurance, like other forms of insurance, is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is usually publicly owned or else is organized on a non-profit basis for the members of the pool, though in some countries health insurance pools may also be managed by for-profit companies. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by an individual. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from unexpected healthcare expenses. Similar benefits paying for medical expenses may also be provided through social welfare programs funded by the government.

4. Critical illness or Dread disease insuranceCritical illness insurance is an insurance product, where the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy. The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation.

5. Property related insuranceProperty insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance or boiler insurance. Property is insured in two main ways - open perils and named perils. Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage-causing events as fire, lightning, explosion and theft.

6. Liability insuranceLiability insurance is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy. Originally, individuals or companies that faced a common peril formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit; to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability is not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured.

The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.

7. ReinsuranceReinsurance is insurance that is purchased by an insurance company (insurer) from a reinsurer as a means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and the insurer issues thousands of policies.

Topic -4: Rural and social sector obligations

These regulations may be called the Insurance Regulatory and Development Authority (Obligations of Insurers to Rural or Social Sectors) Regulations, 2002. They shall come into force from the date of their publication in the Official Gazette.

Definitions. — In these regulations, unless the context otherwise requires -“Act” means the Insurance Act, 1938 (4 of 1938);

“Authority” means the Insurance Regulatory and Development Authority established under the provisions of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);

“Rural sector” shall mean any place as per the latest census which meets the following criteria-- a population of less than five thousand;a density of population of less than four hundred per square kilometer; andmore than twenty five per cent of the male working population is engaged in agricultural pursuits.

Explanation :- The categories of workers falling under agricultural pursuits are as under:(i) Cultivators;(ii) Agricultural labourers(iii) Workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities.

“Social sector” includes unorganised sector, informal sector, economically vulnerable or backward classes and other categories of persons, both in rural and urban areas;

“Unorganised sector” includes self-employed workers such as agricultural labourers, bidi workers, brick kiln workers, carpenters, cobblers, construction workers, fishermen, hamals, handicraft artisans, handloom and khadi workers, lady tailors, leather and tannery workers, papad makers, powerloom workers, physically handicapped self-employed persons, primary milk producers, rickshaw pullers, safai karmacharis, salt growers, seri culture workers, sugarcane cutters, tendu leaf collectors, toddy tappers, vegetable vendors, washerwomen, working women in hills, or such other categories of persons.,

“economically vulnerable or backward classes” means persons who live below the poverty line;

“other categories of persons” includes persons with disability as defined in the Persons with Disabilities (Equal Opportunities, Protection of Rights, and Full Participation) Act, 1995 and who may not be gainfully employed; and also includes guardians who need insurance to protect spastic persons or persons with disability;

(h) “informal sector” includes small scale, self-employed workers typically at a low level of organisation and technology, with the primary objective of generating employment and income, with heterogeneous activities like retail trade, transport, repair and maintenance, construction, personal and domestic services and manufacturing, with the work mostly labour intensive, having often unwritten and informal employer-employee relationship;

(i) All words and expressions used herein and not defined herein but defined in the Insurance Act, 1938 (4 of 1938), or in the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), shall have the meanings respectively assigned to them in those Acts.

Obligations.--- Every insurer, who begins to carry on insurance business after the commencement of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), shall, for the purposes of sections 32B and 32C of the Act, ensure that he undertakes the following obligations, during the first five financial years, pertaining to the persons in---

(a) Rural sector:(i) in respect of a life insurer, --

seven per cent in the first financial year; nine per cent in the second financial year; Twelve per cent in the third financial year; Fourteen per cent in the fourth financial year; Sixteen per cent in the fifth year; of total policies written direct in that year;

(ii) in respect of a general insurer,--(I) two per cent in the first financial year;(II) three per cent in the second financial year;(III) five per cent there after, of total gross premium income written direct in that year.

(b) Social sector, in respect of all insurers, -- five thousand lives in the first financial year; seven thousand five hundred lives in the second financial year; ten thousand lives in the third financial year; fifteen thousand lives in the fourth financial year; twenty thousand lives in the fifth year;

Provided that in the first financial year, where the period of operation is less than twelve months, proportionate percentage or number of lives, as the case may be, shall be undertaken.

Provided further that, in case of a general insurer, the obligations specified shall include insurance for crops.

Provided further that the Authority may normally, once in every five years, prescribe or revise the obligations as specified in this Regulation.

Obligations of existing insurers: (1) The obligations of existing insurers as on the date of commencement of IRDA Act shall be decided by the Authority after consultation with them and the quantum of insurance business to be done shall not be less than what has been recorded by them for the accounting year ended 31st March, 2002. (2) The Authority shall review such quantum of insurance business periodically and give directions to the insurers for achieving the specified targets. Topic -5: Policy conditions

This section will guide you through the various intricacies of a life insurance contract and the facts that you must know to make the best out of your life insurance policy. Please read our guidelines immediately.

Payment of Premiums: A grace period of one month but not less than 30 days is allowed where the mode of payment is yearly, half-yearly or quarterly and 15 days for monthly payments. If death occurs within this period, the life assured is covered for full sum assured.

Non-forfeiture regulations: If the policy has run for at least 3 full years and subsequent premiums have not been paid the policy shall not be void but the sum assured will be reduced to a sum which will bear the same ratio as to the number of premiums paid bear to the total number of premiums payable. The concessions regarding claim in the above case is explained in the appropriate section.

Forfeiture in certain events: In case of untrue or incorrect statement contained in the proposal, personal statement, declaration and connected documents or any material information with held, subject to the provision of Section 45 of the Insurance Act 1938, wherever applicable, the policy shall be declared void and all claims to any benefits in virtue thereof shall cease.

Suicide: The policy shall be void, if the Life Assured commits suicide (whether sane or insane at the time) at any time or after the date on which the risk under the policy has commenced but before the expiry of one year from the date of commencement of the policy.

Guaranteed Surrender Value: After payment of premiums for at least three years, the Surrender Value allowed under the policy is equal to 30% of the total premiums paid excluding premiums for the 1st year and all extra premiums.

Salary Saving Scheme: The rate of installment premium shown in the schedule of the policy will remain constant as long as the employee continues with the employer given in the proposal. On leaving the employment of said employer the policyholder should intimate the Corporation. In case of the Salary Saving Scheme being withdrawn by the said employer, the Corporation will intimate the same to the policyholder. Thereafter the 5% rebate given under Salary Saving Scheme will be withdrawn.

Alterations: After the policy is issued, the policyholder in a number of cases finds the terms not suitable to him and desires to change them. LIC allows certain types of alterations during the lifetime of the policy. However, no alteration is permitted within one year of the commencement of the policy with some exceptions. The following alterations are allowed.

Alteration in class or term. Reduction in the Sum Assured

Alteration in the mode of payment of premiums Removal of an extra premium Alteration from without profit plan to with profit plan Alternation in name Correction in policies Settlement option of payment of sum assured by installments Grant of accident benefit Grant of premium waiver benefit under CDA policies Alteration in currency and place of payment of policy monies

A fee for the change or alteration in the policy is charged by the Corporation called quotation fee and no additional fee is charged for giving effect to the alteration.

Duplicate Policy: A duplicate policy confers on its owner the same rights and privileges as the original policy. The following are the requirements for issuing a duplicate policy: 1. Insertion of an advertisement at the policyholder’s cost in one English daily newspaper having wide circulation in the State where the loss is reported to have occurred. A copy of the Newspaper in which the advertisement appeared should be sent to the servicing office one month after its appearance. If no objection has been lodged with LIC regarding the policy in question, a duplicate policy will be issued after complying further requirements, i.e., Indemnity Bond and payment of charges for preparing duplicate policy and stamp fee. 2. However, the requirement of advertisement and Indemnity Bond may be dispensed with or modified in certain circumstances as given below:

loss of policy by theft destruction of policy by fire loss of policy while in custody of an office of government mutilated or damaged policy policy in torn and a part of it is missing policy partially destroyed by white ants

Age Proof accepted by LIC: The Proofs of age, which are generally acceptable to the Corporation, are as under:

Certified extract from Municipal or other records made at the time of birth. Certificate of Baptism or certified extract from family Bible if it contains age or date of birth. Certified extract from School or College if age or date of birth is stated therein. Certified extract from Service Register in case of Govt. employees and employees of Quasi-

Govt. institutions including Public Limited Companies and Pass port issued by the Pass port Authorities in India.

Alternative Age Proofs which are accepted: Marriage certificate in the case of Roman Catholics issued by Roman Catholic Church. Certified extracts from the Service Registers of Commercial Institutions or Industrial

Undertakings provided it is specifically mentioned in such extracts that conclusive evidence of age was produced at the time of recruitment of the employee.

Certificate of Birth Identity Cards issued by Defence Department. A true copy of the University Certificate or of Matriculation/Higher Secondary Education,

S.S.L. Certificate issued by a Board set up by a State/Central Government. Non- standard age proof like Horoscope, Service Record where age is not verified at the time

of entry, E.S.I.S. Card, Marriage Certificate in case of Muslim Proposer, Elder’s Declaration, Self-declaration and Certificate by Village Panchayats are accepted subject to certain rules.

Nomination: The nominee is statutorily recognized as a payee who can give a valid discharge to the Corporation for the payment of policy monies.

Nomination will be incorporated in the text of the policy at the time of its issue. After the policy is prepared and issued and if no Nomination has been incorporated the assured can ordinarily affect the nomination only by an endorsement on the policy itself. A nomination made in this manner is required to be notified to the Corporation and registered by it in its records. A nomination is not required to be stamped. Any change or cancellation of nomination should be given in writing only by the Life Assured.

Nomination under Joint Life Policy can only be a joint nomination. Nomination in favour of a stranger cannot be made as there is no insurable interest and moral hazard may be involved. Nomination in favour of wife and children as a class is not valid. Specific names of the existing wife and children should be mentioned. Where nomination is made in favour of successive nominees, i.e., nominee “A” failing him to nominee “B” failing whom nominee “C”, the nomination in favour of one individual in the order mentioned will be considered. Where the nominee is a minor, an appointee has to be appointed to receive the monies in the event of the assured’s death during the minority of the nominee. No nomination can be made under a policy financed from HUF funds.

In the case of first endorsement of nomination the date of registration of nomination will be the date of receipt of the policy by the servicing office and in case of any other nomination or cancellation or change thereof, the date of receipt of the policy and/or of notice whichever is later, will be the date of registration.

Assignment: An assignment has an effect of directly transferring the rights of the transferor in respect of the property transferred. Immediately on execution of an assignment of the Policy of life assurance the assignor forgoes all his rights, title and interest in the Policy to the assignee. The premium/loan interest notices etc. in such cases will be sent to the assignee. In case the assignment is made in favor of public bodies, institutions, trust etc., premium notices/receipts will be addressed to the official who has been designated by the institutions as a person to receive such notice. An assignment of a life insurance policy once validly executed, cannot be cancelled or rendered in effectual by the assignor. Scoring of such assignments or super scribing words like 'cancelled' on such assignment does not annul the assignment. And the only way to cancel such assignment would be to get it re-assigned by the assignee in favor of the assignor.

There are two types of assignments:

1. Conditional Assignment whereby the assignor and the assignee may agree that on the happening of a specified event which does not depend on the will of the assignor, the assignment will be suspended or revoked wholly or in part.

2. Absolute Assignment whereby all the rights, title and interest which the assignor has in the policy passes on to the assignee without reversion to the assignor or his estate in any event.

Re-assignment: Status of your policy indicates if your policy is in force or has lapsed due to non-payment of premium. It also provides other important information with respect to your policy, for your reference.

Concessions for claims during the lapsed period: 1. If the policyholder has paid premiums for at least 3 full years and subsequently discontinued paying premiums, and in the event of death of the life assured within six months from the due date of the first unpaid premium, the policy money will be paid in full after deduction of the unpaid premiums, with interest upto date of the death.

2. If the policyholder has paid premiums for at least 5 full years and subsequently discontinued paying premiums and in the event of death of the life assured within 12 months from the due date of first unpaid premium, the policy money will be paid in full after deducting the unpaid premiums, with interest upto date of the death.

Revivals: If the premium under a policy is not paid within the days of grace the policy lapses. Revival is a fresh contract wherein the insurer can impose fresh terms and conditions. A policy can be revived under the following types of revival:

1. Ordinary Revival: If a revival of the policy is effected within 6 months from the due of first unpaid premium no personal statement regarding health is required and the policy is revived on collection of delayed premium plus interest. The rate of interest to be charged for such delayed premium will depend on the date of commencement of the policy.

2. Revival on non-medical basis: For revival of the policy on non-medical basis the amount to be revived should not exceed the prescribed limit for non-medical assurance taken by the life assured.

3. Revival on medical basis: If a policy cannot be revived under ordinary revival or revival on non-medical basis it can be revived with medical requirements. The medical requirements will depend upon the amount to be revived.

4. The other schemes for revival are:

A. Special Revival SchemeB. Revival by installmentC. Loan- cum- revivalD. Survival Benefit- cum- revival

Policy Loans: The Corporation can grant a loan to the policyholder against his policy as per the terms and conditions applicable to the policy. The requirements for granting a loan are as under :a) Application for loan with an endorsement of terms and conditions of the loan being placed on the policy. b) Policy to be assigned absolutely in favour of the Corporation c) A receipt for the loan amount.The maximum loan amount available under the policy is 90% of the Surrender Value of the policy (85% in case of paid up policies) including cash value of bonus. The rate of interest charged on loans is at 9% to be paid half-yearly. The minimum period for which a loan can be granted is six months from the date of its payment. If repayment of loan is desired within this period the interest for the minimum period of six months will have to be paid. In case the policy becomes a claim either by maturity or death within six months from the date of loan interest will be charged only upto the date of maturity/death.

Claims settlement procedure: The settlement of claims is a very important aspect of service to the policyholders. Hence, the Corporation has laid great emphasis on expeditious settlement of Maturity as well as Death Claims.

The procedure for settlement of maturity and death claims is detailed below:

Maturity Claims:1) In case of Endowment type of Policies, amount is payable at the end of the policy period. The Branch Office which services the policy sends out a letter informing the date on which the policy monies are payable to the policyholder at least two months before the due date of payment. The policyholder is requested to return the Discharge Form duly completed along with the Policy Document. On receipt of these two documents post dated cheque is sent by post so as to reach the policyholder before the due date.

2) Some Plans like Money Back Policies provide for periodical payments to the policyholders provided premium due under the policies are paid up to the anniversary due for Survival Benefit. In these cases where amount payable is less than up to Rs.60,000/-, cheques are released without calling for the Discharge Receipt or Policy Document. However, in case of higher amounts these two requirements are insisted upon.

Death Claims:The death claim amount is payable in case of policies where premiums are paid up-to-date or where the death occurs within the days of grace. On receipt of intimation of death of the Life Assured the Branch Office calls for the following requirements: a) Claim form A – Claimant’s Statement giving details of the deceased and the claimant.b) Certified extract from Death Register c) Documentary proof of age, if age is not admitted d) Evidence of title to the deceased’s estate if the policy is not nominated, assigned or issued under M.W.P. Act. e) Original Policy Document

The following additional forms are called for if death occurs within three years from the date of risk or from date of revival/reinstatement.

a) Claim Form B – Medical Attendant’s Certificate to be completed by the Medical Attendant of the deceased during his/her last illness

b) Claim Form B1 – if the life assured received treatment in a hospitalc) Claim form B2 – to be completed by the Medical Attendant who treated the deceased life

assured prior to his last illness. d) Claim Form C – Certificate of Identity and burial or cremation to be completed and signed by

a person of known character and responsibility e) Claim form E – Certificate by Employer if the assured was employed person. f) Certified copies of the First Information Report, the Post-mortem report and Police

Investigation Report if death was due to accident or unnatural cause. These additional forms are required to satisfy ourselves on the genuineness of the claim, i.e., no material information that would have affected our acceptance of proposal has been withheld by the deceased at the time of proposal. Further, these forms also help us at the time of investigation by the officials of the Corporation.

Double Accident Benefit Claims: Double Accident Benefit is provided as an inject to the life insurance cover. For this purpose an extra premium of Rs.1/- per Rs.1000/- S.A is charged. For claiming the benefits under the Accident Benefit the claimant has to produce the proof to the satisfaction of the Corporation that the accident is defined as per the policy conditions. Normally for claiming this benefit documents like FIR, Post-mortem Report are insisted upon.

Disability Benefit Claims: Disability benefit claims consist of waiver of future premiums under the policy and extended disability benefit consisting in addition of a monthly benefit payment as per policy conditions. The essential condition for claiming this benefit is that the disability is total and permanent so as to preclude him from earning any wage/compensation or profit as a result of the accident

Claims Review Committees: The Corporation settles a large number of Death Claims every year. Only in case of fraudulent suppression of material information is the liability repudiated. This is to ensure that claims are not paid to fraudulent persons at the cost of honest policyholders. The number of Death Claims repudiated is, however, very small. Even in these cases, an opportunity is given to the claimant to make a representation for consideration by the Review Committees of the Zonal office and the Central Office. As a result of such review, depending on the merits of each case, appropriate decisions are taken. The Claims Review Committees of the Central and Zonal Offices have among their Members, a retired High Court/District Court Judge. This has helped providing transparency and confidence in our operations and has resulted in greater satisfaction among claimants, policyholders and public.

Insurance Ombudsman: The Grievance Redressal Machinery has been further expanded with the appointment of Insurance Ombudsman at different centers by the Government of India. At present there are 12 centres operating all over the country. Following type of complaints fall within the purview of the Ombdusman

a) any partial or total repudiation of claims by an insurer;b) any dispute in regard to premiums paid if payable in terms of the policy;c) any dispute on the legal construction of the policies in so far as such disputes relate to claims;d) delay in settlement of claims;e) non-issue of any insurance document to customers after receipt of premium.

Policyholder can approach the Insurance Ombudsman for the redressal of their complaints free of cost.

Topic -6: PRINCIPLES GOVERNING INSURANCE BUSINESS

Corporate Governance is understood as a system of financial and other controls in a corporate entity and broadly defines the relationship between the Board of Directors, senior management and shareholders. In case of the financial sector, where the entities accept public liabilities for fulfillment of certain contracts, the relationship is fiduciary with enhanced responsibility to protect the interests of all stakeholders. The Corporate Governance framework should clearly define the roles and responsibilities and accountability within an organization with built-in checks and balances. The importance of Corporate Governance has received emphasis in recent times since poor governance and weak internal controls have been associated with major corporate failures. It has also been appreciated that the financial sector needs to have a more intensive governance structure in view of

its role in the economic development and since the safety and financial strength of the institutions are critical for the overall strength of the financial sector on which the economic growth is built upon.

As regards the insurance sector, the regulatory responsibility to protect the interests of the policyholders demands that the insurers have in place, good governance practices for maintenance of solvency, sound long term investment policy and assumption of underwriting risks on a prudential basis. The emergence of insurance companies as a part of financial conglomerates has added a further dimension to sound Corporate Governance in the insurance sector with emphasis on overall risk management across the structure and to prevent any contagion.

The Insurance Regulatory and Development Authority (IRDA) has outlined in general terms, governance responsibilities of the Board in the management of the insurance functions under various Regulations notified by it covering different operational areas. It has now been decided to put them together and to issue the following comprehensive guidelines for adoption by Indian insurance companies. These guidelines are in addition to provisions of the Companies Act, 1956, Insurance Act, 1938 and requirement of any other laws or regulations framed there under. Where any provisions of these guidelines appear to be in conflict with the provisions contained in any law or regulations, the legal provisions will prevail. However, where the requirements of these guidelines are more rigorous than the provisions of any law, these guidelines shall be followed.

Objectives The objective of the guidelines is to ensure that the structure, responsibilities and functions of Board of Directors and the senior management of the company fully recognize the expectations of all stakeholders as well as those of the regulator. The structure should take steps required to adopt sound and prudent principles and practices for the governance of the company and should have the ability to quickly address issues of non-compliance or weak oversight and controls. These guidelines therefore amplify on certain issues which are covered in the Insurance Act, 1938 and the regulations framed there under and include measures which are additionally considered essential by IRDA for adoption by insurance companies. The guidelines accordingly address the various requirements broadly covering the following major structural elements of Corporate Governance in insurance companies:- • Governance structure • Board of Directors • Control functions • Control functions • Senior management: • Disclosures • Outsourcing • Relationship with stakeholders • Interaction with the Supervisor • Whistle blowing policy

In these guidelines, the reference to the “Board” would apply to the “Board of Directors” and “Senior Management” to the team of personnel of the company with core management functions. Normally, this would include officials at one level below Executive Director including Functional Heads. In regards to insurers, the Appointed Actuary has a special executive and statutory role.

Control Functions

Given the risks that an insurer takes in carrying out its operations, and the potential impact it has on its business, it is important that the Board has in place: • robust and efficient mechanisms for the identification, assessment, quantification, control, mitigation and monitoring of the risks; • appropriate processes for ensuring compliance with the Board approved policy, and applicable laws and regulations; • appropriate internal controls to ensure that the risk management and compliance policies are observed; • an internal audit function capable of reviewing and assessing the adequacy and effectiveness of, and the insurer’s adherence to its internal controls as well as reporting on its strategies, policies and procedures; and • Independence of the control functions, including the risk management function, from business operations demonstrated by a credible reporting arrangement.

The responsibility for the oversight of control functions of an insurer should be entrusted to Directors possessing the appropriate integrity, competence, experience and qualifications, and they should meet the fit and proper criteria initially and on an on-going basis.

For insurers within a group, appropriate and effective group-wide risk control systems should be in place in addition to the control systems at the level of the insurer. It is essential to manage risks appropriately on a group-wide basis as well as at the level of the insurer.

Topic -7: Insurance Agency:

Insurance agency is a contract between the insurance company and an individual to procure business for the insurance company, for a predefined compensation and incentives. An insurance agent, also called an insurance broker in some instances, is the local representative of any number of insurance companies. A legitimate insurance agency must be licensed by a state board before he or she can legally sell insurance policies to customers. Generally, an agent works as the local face of a single insurance company, but occasionally an independent agent may work with different companies depending on their areas of expertise and coverage.

Most consumers interested in purchasing insurance coverage will only deal with a local insurance agent directly. He or she is authorized to present all of the coverage options available through the larger insurance company. Since part of an agent's salary is based on commissioned sales, he or she will often offer one stop shopping for all of the customer's insurance needs. He or she may sell individual policies for car, home, life and medical insurance, or offer a package plan which incorporates a combination of these needs.

Insurance customers are required to make regular payments called premiums to the insurance company, so part of an insurance agent's job is to ensure compliance. He or she may send out reminders of an impending premium payment, or notify customers of any proposed rate changes.

Licensing of Insurance Agents All persons who desire to act as an insurance agent for any insurer would have to be registered as such under the provisions of the Insurance Act and the IRDA (Licensing of Agents) Regulations, 2000. A license issued under the provisions of the Insurance Act entitles the holder to act as an insurance agent for any insurer.

Eligibility criteria for an insurance agent

Any person (“applicant”), desirous of being an insurance agent or a composite insurance agent, may make an application for a license to act as an insurance agent to the Authority. The applicant should possess the minimum qualifications of twelfth standard or equivalent examination conducted by any recognized Board or institution, in cases w here the applicant resides in a place with a population of five thousand or more as per the last census; and passed the tenth standard or equivalent examination from a recognized Board or institution if the applicant resides in any other place. Such an applicant should also not suffer from any of the following disqualifications:

that the person is a minor; that he is found to be of unsound mind by a Court of competent jurisdiction; that he is found guilty of criminal misappropriation or criminal breach of trust or cheating or forgery

or an abetment of or attempt to commit any such offence by a Court of competent jurisdiction. Provided that where at least five years have elapsed since the completion of the sentence imposed on any person in respect of such person that his conviction shall cease to operate as a disqualification;

that in the course of any judicial proceeding relating t o any policy of insurance or the winding up of an insurance company or in the course of an investigation of the affairs of an insurer it has been found that he has been guilty of or has knowingly participated in or connived at any fraud, dishonesty or misrepresentation against an insurer or an insured;

that he does not possess the requisite qualifications and practical training for a period not exceeding twelve months;

that he has not passed the examination; that he violates the code of conduct.

However, any license that had been issued prior to the commencement of the IRDA Act, 1999 shall be deemed to have been issued in accordance with the IRDA (Licensing of Agents) Regulations, 2000 and the provisions of the regulation in relation to the practical training, qualifications and examination shall not be applicable to such existing insurance agents.

Payment of commission:No insurance agent can be paid by way of commission or as remuneration, in any form, an amount

exceeding, -In case of life insurance business, fort y per cent of the first year's premium payable on any policy or

policies effected through him and five per cent of a renewal premium payable on such a policy. However, the insurer may, during the first ten years of their business, pay fifty-five per cent of the first years' premium payable on any policy or policies affected through them and six per cent of the renewal premiums payable on such policies. In case of business of any other class; fifteen per cent of the premium.

Topic -8: Extension of Insurance to Niche Areas:-

8.1. Health Insurance: (Health and medical insurance) Health insurance, like other forms of insurance, is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is usually publicly owned or else is organized on a non-profit basis for the members of the pool, though in some countries health insurance pools may also be managed by for-profit companies. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by an individual. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from unexpected healthcare expenses. Similar benefits

paying for medical expenses may also be provided through social welfare programs funded by the government.

Critical illness insurance or critical illness cover is an insurance product, where the insurer is contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy. The policy may also be structured to pay out regular income and the payout may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation.

8.2. Third Part y Administrators

Under the provisions of the IRDA (Third Party Administrators Health services) Regulations, 2001, (“TPA Regulations”), the Third Party Administrator (“TPA”) means a third part y administrator, who has obtained a license from the Authority, and is engaged for a fee or remuneration, as specified in the 24 agreement with the insurance company, for the provision of health services. An insurance company may engage more than one TPA and similarly, one TPA may serve more than one insurance company. The TPA is required to maintain professional confidentiality of records, books, evidence etc. of all transactions that it carries out. In addition, the TPA is required to furnish t o the insurance company and the Authority, an annual report and any other return as may be required by the Authority. The TPA is prohibited from charging the policyholders with any separate fees.

Conditions for grant of LicenseOnly a company, with a share capital and registered under the Companies Act, 1956, can function

as a TPA. In addition, the company is also required to fulfill the following conditions to be eligible t o act as a TPA:

The main or primary object of the company should be to carry on business in India as a TPA in the health services, and on being licensed by the Authority.

The minimum paid up capital of the company shall be in equity shares amounting to rupees ten million.

The TPA should, at no point of time, have a working capital of less than rupees ten million. At least one of the directors of the TPA should be qualified medical doctor registered with the

Medical Council of India; The aggregate holdings of equity shares by a foreign company shall not at any time exceed

twenty-six per cent of the paid-up capital of a third party administrator. Any transfer of shares exceeding five per cent of the paid up capital shall be intimated by the

TPA to the Authority within 15 days of the transfer indicating the names and particulars of the transferor and transferee.

Every license granted by the Authority shall remain in force for three years.

Revocation or cancellation of a LicenseThe Authority may revoke or cancel a license granted to a TPA for any of the following reasons:

The TPA is functioning improperly and or against the interests of the policyholders or insurance company.

The financial condition of the TPA has deteriorated and that the TPA cannot function effectively or that the TPA has breached any of the conditions of the TPA Regulation.

The character and ownership of the TPA has changed significantly since the grant of license. The grant or renewal of license was on the basis of fraud or misrepresentation of facts and that

there is a breach on the par t of the TPA in following the procedure or acquiring the qualifications under the TPA Regulation.

The TPA is subject to winding up proceedings under the Companies Act, 1956. There is a breach of code of conduct. There is violation of any direct ions issued by the Authority under the Insurance Act or the

TPA Regulations.

8.3. ULIP and Pension plans:A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan. The first ULIP was launched in India in 1971 by Unit Trust of India (UTI). With the Government of India opening up the insurance sector to foreign investors in 2001 and the subsequent issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA) in 2005, several insurance companies forayed into the ULIP business leading to an over abundance of ULIP schemes being launched to serve the investment needs of those looking to invest in an investment cum insurance product.

A ULIP is basically a combination of insurance as well as investment. A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mutual funds. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite. Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.

There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon. Some ULIPs play it safe by allocating a larger portion of the invested capital in debt instruments while others purely invest in equity. Again, all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.

Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are deducted from the payable premium. The notable ones include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge. Some Insurer also charge "Guarantee Charge" as a percentage of Fund Value for built in minimum guarantee under the policy.

Since ULIP returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policy holder, one need to thoroughly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.

There are several public and private sector insurance providers that either operate solo or have partnered with foreign insurance companies to sell unit linked insurance plans in India. The public insurance providers include LIC of India, SBI Life and Canara while and some of the private insurance providers include Reliance Life, ICICI Prudential, HDFC Life, Bajaj Allianz, Aviva Life Insurance and the excellent Kotak Mahindra Life.

Pension plans: A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is then invested on the employee's behalf, allowing the employee to receive benefits upon retirement. In many ways, a pension plan is a method in which an employee transfers part of his or her current income stream toward retirement income. There are two main types of pension plans: defined-benefit plans and defined-contribution plans. In a defined-benefit plan, the employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool. In a defined-contribution plan the employer makes predefined contributions for the employee, but the final amount of benefit received by the employee depends on the investment's performance.

Topic -9: Bancassurance Bancassurance simply means selling of insurance products by banks. In this arrangement, insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products to its customers. This is a system in which a bank has a corporate agency with one insurance company to sell its products. By selling insurance policies bank earns a revenue stream apart from interest. It is called as fee-based income. This income is purely risk free for the bank since the bank simply plays the role of an intermediary for sourcing business to the insurance company. The Bank Insurance Model ('BIM'), also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.

BIM allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff.Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training.Both the bank and insurance company share the commission. Insurance policies are processed and administered by the insurance company.

BIM differs from 'Classic' or Traditional Insurance Model (TIM) in that TIM insurance companies tend to have larger insurance sales teams and generally work with brokers and third party agents such as MAIC.

An additional approach, the Hybrid Insurance Model (HIM), is a mix between BIM and TIM. HIM insurance companies may have a sales force, may use brokers and agents and may have a partnership with a bank.

The motives behind Bancassurance For a Bank are: - product diversification - generating additional income

For Insurance Company are: - Increasing their market penetration - Increasing premium turnover - Reducing initial costs of selling - Making use of wide network of banks for selling their products.

For a Customer: - Product at a reduced price - Product of high quality - Product at a single point/doorstep.

Some challenges/Problems 1. The Rules of IRDA requires a mandatory 4 weeks training for selling insurance products which the bank employees find it difficult to undergo. 2. Most of the bank branches particularly in rural areas are not fully computerized and there are problems when work of insurance is handled manually. 3. There is a cultural conflict between the products of banks and insurance. While the bank products are “demand” products and insurance products are “push” products. The selling of insurance products, cause lot of pressure for the person selling/bank employee. 4. At times performance recognition becomes problem as to whom the commission on selling insurance product in a bank is to be given.

Inspite of these problems, insurance companies are collaborating with banks for selling their products through banks and generating additional income.

Topic -10: Underwriting Underwriting is the process of choosing who and what the insurance company decides to insure. This is based on a risk assessment. It is pretty much the "behind the scenes" work in an insurance company where they determine who is insured and how much in insurance premiums they will charge the insured person. Insurance underwriting also involves choosing who the insurance company will not insure.

UnderwriterAn underwriter determines the acceptability of insurance risks, based on the insurance company’s guidelines and marketing strategy. The Underwriter reviews an agent’s application submitted on behalf of a client, evaluates the information given, asks for additional information if necessary, and determines a price. In addition, the Underwriter determines that the risk is properly classified and evaluates the company’s risk portfolio to determine that it is performing correctly. Underwriters determine the cost of insurance (the insurance premium) by analyzing the claims experience of the policyholder and the “book rates” as computed by an insurance actuary.

Underwriting is moving away from assessment of individual risk toward portfolio analysis, or looking at the entire book of business in a given town or geographic area and determining what works and what needs to be fixed to bring actual experience in line with company guidelines. This in turn has an impact on insurance rates and pricing of individual insurance policies. Underwriting is ultimately responsible for the growth and profitability of the insurance company.

Their duties include: reviewing applications for insurance and comparing applications to loss experience and

actuarial studies to determine if the applicant is an acceptable risk evaluating future loss potential, e.g., catastrophic loss insuring adequate pricing of insurable risks preparing insurance quotation for insurance agents assisting agents in responding to questions about the proposed coverage and rates recommending declining an application if the proposed insurance cannot be underwritten as an

acceptable rate or does not meet underwriting guidelinesThere are many different types of underwriters:

A corporate underwriter works from the insurer’s home office and evaluates a portfolio of business based on known probabilities and statistics, and an evaluation of the human element.

A field underwriter accepts, declines, or modifies applications for personal lines coverage submitted by insurance agents or brokers.

A commercial lines underwriter does the same for commercial lines coverage. A specialist commercial lines Underwriter has a job outside the normal underwriter career path, and must have extensive experience in certain technical fields.

A fidelity and surety bond underwriter analyzes situations that could lead to accidental loss and the obligations to be guaranteed by fidelity or surety bonds.

Topic -11: Understanding Risk & Risk Management in Insurance:-

11.1. DEFINITION OF RISK:Different people have defined risks, differently. However, in most of the definitions the term

risk includes exposure to adverse situations.

Macmillan dictionary: it defines risk as: the possibility that something unpleasant or dangerous might happen.

E.J. Vaughan: refers to the risk as: a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.

Life Insurance Corporation of India: it defines risk as a condition where is a possibility of an adverse deviation from a desired outcome that is expected or hoped for; there is no requirement that the possibility be immeasurable, only that it must exist.

11.2. Causes of loss: Insurance Services Office, Inc. (ISO), commercial property insurance forms that establish and define the causes of loss (or perils) for which coverage is provided. There causes of loss are of two types namely the basic and broad. The basic and broad causes of loss forms are named perils.

Basic causes of loss are: fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.

Broad causes of loss includes named insured against in the basic causes of loss (fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, volcanic action), plus the following additional perils: falling objects; weight of snow, ice, or sleet; water damage (in the form of leakage from appliances); and collapse from specified causes.

11.3. Categories of RiskThe concept of risk may also be explained as the possibility of unfavorable results following any occurrence. Risks arise due to uncertainties, although many a times, the term uncertainty is confused with risk. Uncertainty refers to a situation where the outcome or result can only be estimated but not predicted with precision. Uncertainty is a subjective phenomenon, a concept based on an individual’s own perception, thereby implying different degrees to different individuals.

Pure risks:A pure risk refers to a chance of loss without any possibility of gain to the individuals. For

example, when a fire breaks out, it can only cause losses and no gain. Similarly, where a car is insured against the contingency of an accident, the insurance company is liable to compensate the loss, if the accident does not occur, the insured obviously does not get any benefit or gain. Pure risks are inherent in business. They cannot be avoided. One can at best try to minimize their adverse impact. Pure risks may or may not cause losses but they never cause gains. Pure risks are generally insured for i.e. can be insured. An entrepreneur may avoid insuring or simply assuming the pure risk.

Classification of pure risks: Pure risks may further be classified into following categories:

Personal Risks: They incur losses like loss of income, additional expenses and devaluation of property. There are 4 risk factors affecting this:

Premature death. This is death of a breadwinner who leaves behind financial responsibilities. Old age / retirement. The risk of being retired is not sufficient savings to support retirement

years. Health crisis. Individual with health problem may face potential loss of income and increase in

medical expenditures. Unemployment. Jobless individual may have to live on their savings. If his savings is depleted,

the bigger crisis is awaiting.

Property Risks: It means the possibility of damage or loss to the property owned due to some causes. There are two types of losses involved.1. Direct loss which means financial loss as a result of property damage. 2. Consequential loss which means financial loss due to the happenings of direct loss of the property. For instance, a shop lot which is burnt down may incur repair costs as the direct loss. The consequential loss is being unable to run the business to generate income.

Liability Risks: A person is legally liable to his wrong doings which cause damages to third party's body, reputation or property. He can be legally sued and the most horrible thing is there is no maximum in the compensation amount if you are found guilty. Knowing how the risks are classified

Liabilityrisks

Property risks

Personal risks

Pure risks

and the types of pure risks an individual is exposed to will surely give you a fundamental on the risk topics and prepare yourself to further acquire the knowledge of how to manage risk.

Topic -12: Burden of Risk on Society

Topic -13: Risk Management and its importance in the field of Insurance RISK MANAGEMENT: RISK MANAGEMENT is a systematic approach to minimizing an organization's exposure to risk. A risk management system includes various policies, procedures and practices that work in unison to identify, analyze, evaluate, address and monitor risk. Risk management information is used along with other corporate information, such as feasibility, to arrive at a risk management decision. Transferring risk to another party, lessening the negative affect of risk and avoiding risk altogether are considered risk management strategies. Examples of risk management practices include purchasing insurance, installing security systems, maintaining cash reserves and diversification. Traditional risk management works to reduce vulnerabilities that are associated with accidents, deaths and lawsuits, among others. Financial risk management focuses on minimizing risks through the use of financial tools and instruments including various trading techniques and financial analysis. Many large corporations employ teams of risk management personnel.

Insurance Risk Management

Risk management is very important for insurance industry. Insurance means that insurance companies take over risks from customers. Insurers consider every available quantifiable factor to develop profiles of high and low insurance risk. Level of risk determines insurance premiums. Generally, insurance policies involving factors with greater risk of claims are charged at a higher rate. With much information at hand, insurers can evaluate risk of insurance policies at much higher accuracy. To this end, insurers collect a vast amount of information about policy holders and insured objects. Statistical methods and tools based on data mining techniques can be used to analyze or to determine insurance policy risk levels.

Rules of Risk Management There is no return without risk; Rewards go to those who take risks. Be transparent; Risk should be fully understood. Seek experience; Risk is measured and managed by people, not mathematical models. Know what you don't know; Question the assumptions you make. Communicate; Risk should be discussed openly. Diversify; multiple risks will produce more consistent rewards. Show discipline, a consistent and rigorous approach will beat a constantly changing strategy. Use common sense; It is better to be approximately right, than to be precisely wrong. Return is only half the equation; Decisions should be made only by considering the risk and

return of the possibilities.

Topic -14: Risk Management objectives Risk management objectives include the following:

To use best practice to manage risks; To create an environment that allows the partnership to anticipate and respond to change; To prevent damage and loss, and reduce the cost of risk to all parties; and

To raise awareness in managing risks throughout the Council and its partners. Additionally, it is suggested that a risk management strategy is agreed, and documented, and

that the document that is regularly reviewed and updated by the partnership. The importance of adopting a risk management approach from the outset of defining the strategic partnering vision is that it:

o Improves the likelihood of success for turning vision into reality as it encourages forward thinking and thus minimizes unwelcome surprises;

o Increases visibility - Involving all stakeholders raises risk awareness and enhances accountability;

o Enhances communication which in turn improves the basis for strategy setting, performance management and decision making;

o Adds realism from the outset, which gives a better basis for the allocation of resources and timetabling of the project.

Risk management involves identifying, analyzing, and responding to risk factors that impact on a project or its objectives. In particular, the system must quantify the risk and predict the impact to the project.The two main objectives of risk management are to:

Focus attention on minimizing threats in order to achieve the project objectives by performing a high-level assessment of risks with all project stakeholders, and

Provide a systematic approach for detail risk analysis and appraisal by:o Identifying and assessing risks.o Determining effective risk reduction actions.o Monitoring and reporting progress in reducing risk.

Topic -15: Risk Management Process: Just as the finance and marketing functions are applications of management processes and techniques to specialized problems and in fact grew out of the general field of management, risk management also involves the application of general management processes and techniques to the specialized problems of risk control and risk finance. There is general agreement that the risk management function involves four interrelated processes: (1) Systematic and continuous investigation of risk loss exposures, (2) Evaluation of their nature, frequency, severity, and the potential impact on the organization, (3) Planning and organizing of appropriate risk control and risk financing techniques to efficiently minimize loss impacts on the organization, (4) Implementation of such techniques both internally at the department and top management levels, and externally with loss control organizations, insurers, and other risk finance specialists. The risk manager is mostly a planner, promoter, and coordinator of the above processes. Responsibility for implementation resides at the departmental level. Accidents, injuries, fires, thefts, defective products, violations of employee rights, and environmental pollution occur at the worksite and can best be prevented or reduced at that level. Such prevention will not occur, however, without guidance by knowledgeable experts like risk managers and loss control specialists.

Risk management should involve five basic steps shown below:

STEP 1 – IDENTIFY THE RISKSBefore being able to plan to mange a risk you need to identify and understand what the risks are.

The identification stage is the activity to find, list and characterize elements of risk. Identifying risks is an ongoing task, and should not be completed only at the beginning of the project, but should be done throughout the life. Identification of risks cannot be undertaken unless a project or partnership’s objectives, strategies and plans are clearly understood, documented and communicated to all relevant stakeholders. Therefore all stakeholders of the Risk Management Group should have this understanding.In order to help clarify this understanding the group will need to review business cases and planning documents that specify the project. As a minimum this is likely to include reviewing:

The vision and business; The specific deliverable and work processes that may be affected by the organizational

change; Any milestones and scheduled dates; The resources impact from a value and sources perspective; and Performance requirements of all.

Once an appropriate group has been formed and objectives, plans and strategies are understood, the group will be in a position to identify risks. When identifying risks there is sometimes a danger of focusing solely on risks those are internal as opposed to threats and opportunities from external sources. It is useful to check that the risks identified relate to internal and external factors.There are a number of techniques that can be used, where possible, to involve stakeholders and generate ideas in risk identification. These are summarized below:_ Brainstorming – Use a facilitator. Involve a good range of stakeholders. Ensure that the forum allows open and honest discussions._ Interviewing – Can be one-to-one with project team members and/or key stakeholders to talk about risks they believe may impact on the project;_ Learning from experience – Compare with similar projects where possible. In order to aid risk identification you can also use a generic prompt list to generate initial thoughts and to act as a stimulus to identify risks.

STEP 2 – ASSESS THE RISKOnce the risks have been identified, it is now important to assess those risks in a consistent way against agreed project and partnership criteria and to systematically: Risk assessment explores the impact risk events have on a project. Cost is the obvious impact, but this is not the only issue. Risk assessment can include both qualitative and quantitative assessments of the probability of identified risks occurring and the impact of these in terms of:

Time; Cost; and Performance.

The decision on which qualitative and/or quantitative risk assessment model is most appropriate for an authority will depend on how sophisticated the risk management skills are within the authority and the nature of the risk. The remainder of this section sets out a framework of both qualitative and quantitative approaches.Qualitative AnalysisQualitative analysis involves describing the risk, why it may happen, and possible ways of controlling it. The analysis of probability and impact is carried out primarily by the Risk Owner, as they should be the person best able to analyze, plan and manage the risk. The analysis should, however, involve any relevant stakeholders, such as subject matter experts that may be able to provide informed views on levels of probability and impact.

Probability of OccurrenceThe first stage of assessing the likelihood of occurrence is to review the long list of risks identified and eliminate the risks, which, on reflection, the Risk Management Group believes will not occur.The remaining risks then need to be classified in terms of their probability of occurrence.To ensure consistent assessment of risks it is necessary to have an agreed set of project criteria.A generic set of criteria has been defined below but these need to be tailored for specific projects. It is recommended that the Risk Management Group define and agree the appropriate criteria:

High Risk: Likely to cause significant disruption to schedule, cost and performance. Probability of occurrence >50%;

Medium Risk: Has the potential to cause some disruption, however, potential problems may be overcome. Probability of occurrence 20-50%;

Low Risk: Has little potential to cause disruption to schedule, cost and performance. Normal effort by the project team members will probably overcome most difficulties. Probability of occurrence <20%. The outcome from this exercise should be recorded on a risk register.

Severity of ImpactThis stage is about evaluating each risk in terms of its possible impact on the project baselines of time, cost and performance. As with the likelihood of occurrence the first stage is to eliminate any risks that the Risk Management Group believes have no or only trivial impact on the baseline requirements.As stated under likelihood of occurrence, to ensure consistent assessment of risks it is necessary to have an agreed set of project criteria.A generic set of criteria has been defined below but these need to be tailored for specific projects and it is again recommended that the Risk Management Group define and agree the appropriate criteria:

Impact RatingLOW MEDIUM HIGH

TIME Effect of risk delaysschedule or partnershipimplementation for:<3 months

Effect of risk delaysschedule or partnershipimplementation for:3-6 months

Effect of risk delaysschedule or partnershipimplementation for:>6 months

COST Effect of risk increasescost by: <10% of total or budgeted cost

Effect of risk increases cost by:10-30% of total orbudgeted cost

Effect of risk increasescost by: >30% of total orbudgeted cost

PERFORMANCE A few shortfalls inperformanceparameters of scoperequirements,acceptance and quality

Some shortfalls in oneor two areas of scoperequirements,acceptance and quality.

Major shortfalls in keyparameters of scoperequirements, acceptance and quality.

As part of the qualitative analysis it is important to consider and balance the negative risks with the potential opportunities an SSP will generate. This part of the risk assessment is a good time to include this by assessing opportunities against the same agreed criteria, although the impact definitions would be beneficial (for example, medium time impact would be a potential saving of 3-6 months rather than a delay).Once the probability of occurrence and the level of impact a risk will have are assessed in this manner the risks need to be grouped into an order of priority for dealing with the risks. An easy way to present this information is on a chart similar to the one shown in figure.

Risk categoriesHigh impact and high probability of occurrence risks clearly need to be the ones that are focused on in more detail (i.e. categories A to E shown on the diagram). Quantitative AnalysisQuantitative analysis involves attempting to describe risk in numerical terms. To do this requires a number of steps to be followed, namely:

_ Defining the consequence; _ Constructing the pathway; and _ Building a model.

Defining the ConsequenceInitially, it is necessary to define the numerical estimate of impact the risk will have.Examples of this will include:_ The number of staff to be affected by the new arrangements; or_ The total cost of failure of the partnership.Within the definition consideration and parameters need to be set for the time frame over which risk is to be measured.Construct a PathwayConstructing a pathway involves consideration of all the sequential events that must occur for the adverse event to occur. This will involve considering “what if” scenarios.Building a ModelGiven the risk pathway, mathematical model then needs to be constructed that allows risk to be estimated. To do this, each step in the pathway and the corresponding variables for those steps need to be considered.Scores can then be assigned to each of the input variables. These are sometimes referred to as point-values. The relationship between the variables is then used to generate a point-value estimate of risk. To test the sensitivity of the model three point values are used that relate to a minimum, maximum and most likely estimate of impact.

The two main limitations of this type of modeling are that only three values are used where in reality a larger number of values may be appropriate and that this model does not make any use of the fact that the most likely estimate will occur more frequently.

A more refined financial model considers probability of occurrence for each of the input variables. Using probability distributions, all possible combinations are accounted for.

A common approach used for this type of modeling is called the Monte-Carlo simulation. This is a computer intensive technique that involves random sampling for each probability distribution within the model to produce a large number of scenarios. Specialist software packages are available to run.

Monte-Carlo simulations.As stated earlier, the decision on which qualitative and/or quantitative risk assessment model is most appropriate for an authority to use as part of their risk management will depend on how sophisticated the risk management skills are within the authority, what the risks are and what software packages they have access to.STEP 3 – PLAN THE RISK RESPONSEThe planning stage is the activity within the risk management process of selecting and implementing the most appropriate way of dealing with the risk.The first stage in the planning phase is to classify the identified and analyzed risks as either:

Accepted risks: Currently acceptable to the project/partnership and therefore no action will be taken to mitigate or prevent these risks at this stage. They should however be regularly reviewed and assessed.Rejected risks: Currently not considered to be a valid or real threat to the project/partnership at this stage. Risks to be handled: These are the risks that require action to reduce or eliminate them. For those that fall into the third classification mitigation plans need to be prepared. These are the risk control options that set in place actions to reduce the probability and or the impact of a risk prior to its occurrence. Within the mitigation plan all actions must be aligned to the single, most appropriate overall mitigation strategy. Mitigation options are:

Eliminate or avoid the risk; Reduce the risk; Transfer the risk; or Accept the risk.

Eliminate or Avoid the RiskThis can be done by:

_ Changing the direction or strategy and revisiting objectives; _ Improving channels of communication; _ Obtaining further information from external sources; _ Acquiring expertise; _ Reducing the scope of the activity; _ Adopting a familiar proven approach.

Reduce the Risk: This is most common option for risk treatment. Risk actions should aim to reduce the probability of occurrence by targeting the cause and/or reduce the level of impact.Transfer the Risk: It may be appropriate to transfer ownership and responsibility for the risk to another party outside the council. However, it may not be possible to transfer all aspects of a risk. For example, where there is a statutory duty of care related to health and safety risk.Methods of risk transfer include:

Financial instruments such as insurance, performance bonds, warranties or guarantees; Renegotiation of contract conditions for the risk to be retained by the other party; Seeking agreement on sharing risk with the other party; Sub-contracting risks to consultants or suppliers.

(Note: For this to be an effective transfer of risk, the sub-contractor must be in a position to own and manage the risk appropriately and have sufficient financial standing to bear the consequences of the risk materializing. Levels of insurance carried for insurable risk should also be checked).Accept the Risk: It will not be possible to remove some risks entirely. Where risks cannot be transferred, reduced or avoided/eliminated the simplest control is to ensure that they are regularly reviewed and monitored.To help stimulate ideas and discussion around selecting the best option the following questions can be posed to the Risk Management Group when considering each of the risks in turn:

Eliminate or avoid the risk: Can action be taken to prevent the risk from occurring? Reduce the risk: Can action be taken to affect the risk’s impact/probability? Transfer the risk: Is another stakeholder or organisation better placed to manage the risk? Accept the risk: Should project/partnership resources be expended on this risk?

When evaluating the most appropriate option it is important to: Consider the cost versus benefit of different options; Assess all possible mitigation strategies;

Take action at the earliest possible point in time.Additionally, to be effective, risk responses must meet a number of important criteria. Use the checklist below to ensure all response are:

Appropriate (i.e. do nothing for small, minor risks) Cost effective Actionable – defining the time within which responses need to be completed Achievable – responses must be realistic Effective – responses must have a high chance of working Agreed upon – by all partnership stakeholders Allocated and accepted – each response should be assigned to ensure the most appropriate

point of contact. It is also suggested that despite choosing an option for how you will handle risk that a fallback/contingency plan is discussed for the cases where a mitigation plan fails to achieve the intended effect.As with the assessment of risks it is important to consider the opportunities the SSP will generate and to apply the same planning approach to them. The difference, however, will be, instead of trying to reduce or eliminate the impact with an opportunity, the options for handing them should attempt to make them more likely to occur or enhance their beneficial impact. As an output from this stage all agreed actions should be recorded within a project/partnership risk register.

STEP 4 – MONITOR THE RISKSThe risk monitoring stage includes implementing, monitoring, reporting and reviewing risk management actions against objectives. Once the risk register has been populated it is important to review the register either at a specific risk review meeting or as an element of other project/partnership meetings. At these meetings it is an opportunity to report new risks as well as reviewing changes to current risks. Sufficient historical information should be kept to provide a good audit trail of reasons for decision. From these meetings it is important to routinely update the risk register or database after each review to reduce duplication of effort in the future.

STEP 5 – DOCUMENT LESSONS LEARNTWhenever possible review the risks identified and assess how the partnerships’ efforts impacted on the outcome. Experience is an excellent teacher in risk identification and risk reduction, so sharing the experience within the authority and the partnership will help improve risk management skills. Lessons learnt should be documented so that future Risk and Project Managers within the authority can learn from past mistakes or issues.