CFP- Level-1-IP (Global) Chapter 1-6 (India Specific)

Investment Planning & Asset Management CFP Level 1 | Module 2 | India Specific India’s 1st & Largest CFP Education Provider Authorised by FPSB USA

India Specific –Investment Planning and Asset Management • Chapter-1 • Indian Financial Markets Investment Planning & Asset Management

Indian Financial Markets • Indians are considered to be savers. They plan to save money before they spend. • With increased savings there are opportunities to save and invest. • Indian capital markets are developing more opportunities for individuals and families to increasingly invest in the traditional asset classes of stocks, bonds, cash and Real Estate • The World Bank provides data on the market capitalization of listed domestic companies in India. In current USD, the market capitalization at the end of 2018 was 2.083 Trillion USD. • In 2003, the market capitalization of listed domestic companies in India was 279.092 billion USD. Since 2003, the compounded annual average growth rate in the market capitalization of listed domestic companies in India has grown by 14%. • Number of listed domestic companies was 5,644 in 2003, peaked at 5,835 in 2015 and dropped to 5,065 in 2018. Investment Planning & Asset Management

Indian Financial Markets • The Certified Financial Planner (CFP) Certification administered by the Financial Planning Standards Board Ltd. (FPSB Ltd.) is listed as an Accredited Certification Examination for Investment Advisers by the National Institute of Securities Markets, an educational initiative of the Securities and Exchange Board of India (SEBI). • This chapter will provide an understanding of the Indian economy and structures like SEBI, and the Reserve Bank of India (RBI). • The chapter will also describe the securities market and the key players in both the primary and secondary markets and the types of investors. Investment Planning & Asset Management

The Indian Economy • India is the fastest-growing trillion-dollar economy in the world and the fifth-largest overall, with a nominal GDP of $2.94 trillion. • India has become the fifth-largest economy in 2019, overtaking the United Kingdom and France. • The country ranks third when GDP is compared in terms of purchasing power parity at $11.33 trillion. • When it comes to calculating GDP per capita, India's high population drags its nominal GDP per capita down to $2,170. • The Indian economy was just $189.438 billion in 1980, ranking 13th on the list globally. India's growth rate is expected to rise because of the introduction of the goods and services tax fade, according to the IMF. Investment Planning & Asset Management

The Indian Economy • The framework has been successful in containing inflation. Since April 2015, when the MPC was first convened, the monthly headline inflation has always remained within the band except for one month • India has now emerged as a global player. India is in a period of unparalleled opportunity, challenge and ambition in its development. • Already the world’s third largest economy in purchasing parity terms, India aspires to better the lives of all its citizens and become a high- middle income country by 2030, well before the centenary of its independence. Investment Planning & Asset Management

The Indian Economy • Long-term GDP growth has become more stable, diversified, and robust. Over the next few years, India is expected to grow at well over 7 per cent per year, with progress being buttressed by dynamic reforms in the macroeconomic, fiscal, tax and business environments. • The country has made a significant dip in poverty levels, with extreme poverty dropping from 46 per cent to an estimated 13.4 per cent over the two decades before 2015. • While India is still home to 176 million poor people, it is seeking to achieve better growth, as well as to promote inclusion and sustainability by reshaping policy approaches to human development, social protection, financial inclusion, rural transformation, and infrastructure development. Investment Planning & Asset Management

Reserve Bank of India – The Central Bank • The Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian rupee. • RBI is the regulator of the entire Banking in India. • RBI plays an important part in the Development Strategy of the Government of India. • RBI regulates commercial banks and non-banking finance companies working in India. • It serves as the leader of the banking system and the money market. It regulates money supply and credit in the country. • The RBI carries out India's monetary policy and exercises supervision and control over banks and non-banking finance companies in India. • RBI was set up in 1935 under the Reserve Bank of India Act, 1934. Investment Planning & Asset Management

Reserve Bank of India – The Central Bank • Until the Monetary Policy Committee was established in 2016, it also controlled monetary policy in India. • The central bank is an independent apex monetary authority which regulates banks and provides important financial services like storing of foreign exchange reserves, control of inflation, monetary policy report. • A central bank is known by different names in different countries. The functions of a central bank may vary from country to country and are autonomous or body and perform or through another agency vital monetary functions in the country. • A central bank is a vital financial apex institution of an economy and the key objects of central banks may differ from country to country still they perform activities and functions with the goal of maintaining economic stability and growth of an economy. Investment Planning & Asset Management

Key Functions of the RBI Monetary Authority • Formulates, implements and monitors the monetary policy • Objective: maintaining price stability while keeping in mind the objective of growth Regulator and supervisor of the financial system • Prescribes broad parameters of banking operations within which the country's banking and financial system functions • Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public Manager of Foreign Exchange • Manages the Foreign Exchange Management Act, 1999 • Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India Investment Planning & Asset Management

Key Functions of the RBI Issuer of currency • Issues and exchanges or destroys currency and coins not fit for circulation • Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality Developmental role • Performs a wide range of promotional functions to support national objectives Regulator and Supervisor of Payment and Settlement Systems • Introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large • Objective: maintain public confidence in payment and settlement system Related Functions • Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker • Banker to banks: maintains banking accounts of all scheduled banks Investment Planning & Asset Management

Securities and Exchange Board of India • The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. • The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as \"...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto\" Investment Planning & Asset Management

Key Functions of SEBI • To regulate the business in stock exchanges and any other securities markets • To register and regulate the working of Stockbrokers, Registrars, Depositories, Credit Rating Agencies, Foreign Institutional Investors, Mutual Funds, Underwriters, Advisers etc. and intermediaries who may be associated with securities markets in any manner • Promoting and regulating self-regulatory organisations, investors’ education, and training of intermediaries of securities markets • Prohibiting fraudulent and unfair trade practices relating to securities markets and insider trading in securities • Regulating substantial acquisition of shares and takeover of companies • Calling for information from, undertaking inspection, conducting inquiries and audits of stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market Investment Planning & Asset Management

Key Functions of SEBI • Calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities • Calling for information from, or furnishing information to, other authorities, whether in India or outside India, having functions similar to those of the Board, in the matters relating to the prevention or detection of violations in respect of securities laws • Undertake inspection of any book, or register, or other document or record of any listed public company or a public company, which intends to get its securities listed on any recognised stock exchange Investment Planning & Asset Management

Structure of Financial Market in India Investment Planning & Asset Management

Some common money market instruments are Treasury Bill – This short-term debt instrument is auctioned by the Reserve Bank of India on behalf of the Central Government. Evidently, it is one of the safest instruments meaning, they bear no risk at all. Treasury bills are issued for varying maturities of 91 days, 182 days and 364 days. They are zero-coupon in nature i.e. they do not bear interest. Instead, they are issued at a discount to the face value and redeemed at par, on maturity. Certificate of Deposit – It is issued by banks generally to meet their liquidity and lending requirements. They provide a fixed interest rate to the investor and have a specific maturity period. Though they are usually short- term in nature, they can be issued for up to five years, in any denomination. Compared to treasury bills, they bear higher risk and hence they offer higher interest rate. Commercial Paper – Similar to certificate of deposit, CP is also comparable to a promissory note issued by large financial institutions, corporates and primary dealers, subject to the eligibility conditions specified by the central bank. They are issued for periods of less than one year. Compared to CDs, they return higher interest as they are not secured by collaterals and exposed to default risk. Repurchase Agreement – Unlike T-bill, CD and CP, this is a secured, collateralised short-term borrowing agreement between two parties. Under this agreement, the borrower sells securities to the lender with an agreement and obligation to repurchase them at a specific rate and date in the future. The term reverse repo is same but from lender’s view. This must not be mistaken to RBI’s Repo and Reverse Repo rates. Reverse Repo is the rate at which RBI borrows from banks and Repo is the rate at which it lends to banks. Investment Planning & Asset Management

Key Players in Financial Markets: Roles Issuers • There are two broad categories of issuers in financial markets; government (including municipal bodies and governmental agencies) and corporates. Investors • Retail and Institutional Investors Financial Intermediaries • Banks • Brokers • Dealers • Mutual Funds • Investment Banks • Underwriters • Market Makers Investment Planning & Asset Management

Infrastructure Providers • Stock Exchanges BSE NSE • Depositories NSDL CDSL • Clearing House Investment Planning & Asset Management

Information Providers • Information providers provide live and historical quotes for all exchanges, newsroom information, technical charts, financial analyses, etc. • Reuters and Bloomberg are major information providers across the world for financial data. • Live information on prices and market movements helps to make the markets more transparent by providing reliable information to investors, on the basis of which they can take decisions. Investment Planning & Asset Management

Regulators • A regulator is an official or body that monitors the behaviour of companies and the level of competition in particular markets. • Financial regulations are a form of regulation or supervision, which subjects market participants to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. • Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and Exchange Board of India and The Reserve Bank of India. • The Ministry of Finance regulates through the Department of Economic Affairs - Capital Markets Division. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In particular, it is responsible for – Investment Planning & Asset Management

Responsibilities of SEBI • Institutional reforms in the securities markets • Building regulatory and market institutions • Strengthening investor protection mechanism, and • Providing efficient legislative framework for securities markets • The Division administers legislations and rules made under the Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Securities and Exchange Board of India Act, 1992 Investment Planning & Asset Management

Primary Market • The primary market is a place for the new companies to raise capital from investors. • Even existing companies can tap the stock markets with rights to their shareholders or follow-on offers to even new investors. • Once these new securities are listed for trading, the trading happens as part of the secondary market along with other listed securities Investment Planning & Asset Management

Functions of Primary Market • Offer of New Issue • Underwriting Services • Distribution of a New Issue Investment Planning & Asset Management

Origination • The term origination refers to the work of investigation and analysis and processing of new proposals. • Specialist agencies perform these functions which act as sponsors of the issue. • This is to ensure that it warrants the backing of the issue houses in the sense of lending their name to the company, thus giving the issue the stamp of respectability. • It shows that the company is strong, has good market prospects, and is worthy of stock exchange quotation. Investment Planning & Asset Management

Intermediaries in Primary Market • Investment Banks • Investment Banks play the role of a financial advisor in assessing the market demand of a company’s issue, and in making all preliminary arrangements for the sale of shares through initial public offering (IPO). • They ensure all regulatory formalities are satisfied, estimate the demand for the issue and fix the share offer price, and undertake to sell all the shares offered through the IPO. Investment Planning & Asset Management

Intermediaries in Primary Market • Lead Managers: • Lead Managers play a crucial role in the issue process. They design and finalise the offer document, prospectus, advertising and fulfil all formalities required by the regulator, registrar of companies, stock exchanges, etc. • They are also called Book Running Lead Managers. Depending on the size of the IPO, more than one lead manager may be appointed. Investment Planning & Asset Management

Intermediaries in Primary Market • Registrars • Registrars specialise in processing the bids of investors in the IPO, as per the guidelines and regulations of SEBI, process applications, collect funds from investors whose bids are accepted and shares have been allotted and make refunds to the bank accounts of the investors who are not allotted any shares or made partial allotment. (Now Investment through ASBA) • They constantly coordinate with the appointed banks and lead managers and apprise the latter on the application demand, subscription amount collected and other information to assess the demand, progress and success of the issue Investment Planning & Asset Management

Types of Issues – Public and Preferential • Public Issue through the Prospectus • Follow-on Public Offer (FPO). • Preferential Issue • Rights Issue • Bonus Issue Investment Planning & Asset Management

Types of Placement • Equity and Debt Private Placement of Shares • Private placement of shares is the issuance of securities of a Company to a selected individual, group of individuals, corporate, or group of corporate. • The securities during this placement are not publicly offered. A private placement is also made by bargaining with financial institutions for the share of the contribution offered. • Private placements have several advantages: • • Cost-effective method of raising funds • • Time efficient as the requirements to be fulfilled is less, about 2 to 3 months • • Structured effectively to meet the needs of entrepreneurs as well as the financial intermediaries who are buying it. Investment Planning & Asset Management

Types of Placement • Qualified Institutional Placements (QIPs) • Qualified institutional placements (QIPS) are a way to issue shares to the public without going through standard regulatory compliance. • QIPs instead follow a lighter set of regulations but where allottees are more highly regulated. • The practice is mostly used in India and other Southeast Asian countries. QIPs were created to avoid dependency on foreign resources for raising capital. • Qualified institutional buyers (QIBs) are the only entities allowed to purchase QIPs. Investment Planning & Asset Management

The following is a comparison of Initial Public Offer (IPO), Follow-on Public Offer (FPO), Offer for Sale (OFS) and Right Issue (RI): Investment Planning & Asset Management

Public Issue of Debt Securities • The debt market is an avenue for Indian Corporates where they can do a public issue of debt securities which include the issuance of Non- Convertible Bonds / Debentures. • These may be issued by Corporates, Financial Institution, and Public Sector Unit. SEBI regulations prescribe that all public issues of Debt Securities are required to be listed on one or more recognized Stock Exchanges. • SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and amendments thereon govern the public issue of debt securities Investment Planning & Asset Management

Modes of Public Issue of Debt Securities • • Self – Certified Syndicate Banks • • Intermediaries (RTA’s, Depositories etc.) • • Stock Exchange (App, Web interface or UPI Investment Planning & Asset Management

Pricing of a Public Issues of shares • Fixed Price method • Book Building method Investment Planning & Asset Management

Secondary Market • In the functioning of the modern economic landscape, Exchanges play a vital role. • After the issuing of securities such as shares and bonds in the primary market, exchange being the secondary market is where the subsequent action happens. • Also called a ‘bourse’, a stock exchange is a platform for trading in securities. As they are a common platform that attracts a large number of investors Investment Planning & Asset Management

Functions of Secondary Market • Protects Investors • Facilitates Borrowing (Pubic) • Healthy Speculation • Facilitates Liquidity • Evaluation of Securities • Encourages Capital Formation • Serves as an Economic Barometer • Mobilizes Savings Investment Planning & Asset Management

Exchange Infrastructure • Clearing and Settlement • Clearing Corporation • Custodians • Depository and Depository Participants • Stockbrokers and Authorized Persons • Traders • Credit Rating Agencies • Registrar and Transfer Agents • KRA (KYC Registration Agencies Investment Planning & Asset Management

Major Stock Exchanges • Bombay Stock Exchange • Index Methodology • Most of the indices employ a float-adjusted market capitalization-weighting scheme, using the divisor methodology used in S&P Dow Jones Indices’ equity indices. S&P BSE SENSEX is derived from the constituents of the S&P BSE 100 • National Stock Exchange The NIFTY 50 is owned and managed by NSE Indices Limited (formerly known as India Index Services & Products Limited-IISL), India’s first specialized company focused on an index as a core product. The Index tracks the behaviour of a portfolio of blue-chip companies, the largest and most liquid Indian securities. • It includes 50 of the approximately 1600 companies traded (listed & traded and not listed but permitted to trade) on NSE, captures approximately 65% of its float-adjusted market capitalization and is a true reflection of the Indian stock market. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds Investment Planning & Asset Management

Market information - Capitalization, Turnover and Total Return Index • The market capitalization of a company is in other words the market value of the company’s equity. It is important information that is utilized to decide the company’s segmentation and its relative positioning in the market with respect to its peers. It is used to calculate various financial ratios. • Mathematically, it is computed as product of a company’s market price and the number of outstanding shares. • Free Float Market Capitalization = Shares outstanding * Price * IWF • Index Value = (Current Market Value / Base Market Capital) * Base Index Value (1000) Investment Planning & Asset Management

Investible Weight Factors (IWFs) • Free float methodology is globally regarded as an ideal methodology for calculation of equity indices. • As per this methodology, free-float market capitalization of all index constituents is considered for calculation of the index. • Free-float market capitalization of the index constituents is derived by applying IWFs on full market capitalization of respective companies in the index. This approach aims to limits the influence of a particular company in the index to the extent of its actual free float and reduces influence of large promoter/ strategic holding (which generally is not available for trading) on the index, thus making it truly investable. • Free float methodology in index calculation aids both active and passive investment strategies. Active managers are able to compare their portfolio return vis-à-vis the investable index and at the same time passive fund managers are able to offer low tracking error by introducing passive funds such as index funds, exchange traded funds linked to investable indices calculated based on free-float methodology. • IWF as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company. • The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis. The following categories are excluded from the free float factor where identifiable separately:

Investible Weight Factors (IWFs) • Investible weight factor is the unit that shows how much portion of a company’s total shares is available to the investors for trading freely on the stock exchange. It is mainly used in computing the market capitalization of a company under free float methodology. • While computing IWF, stocks held by the entities having strategic interest in a company are eliminated from the total number of shares issued. This is because those stocks are generally not freely available for trading on the exchange as the purpose of holding them is not as same as that of a normal investor. • The IWFs for each company in the index are computed based on the public shareholding of the companies as disclosed in the shareholding pattern submitted by the companies to the stock exchanges on quarterly basis from March, June, September and December Investment Planning & Asset Management

Investible Weight Factors (IWFs) • Following shareholdings are generally excluded from total issued capital to arrive at the Investible weight factor. • Shareholding of promoter and promoter group • Shares held by promoters through American depositary receipts (ADR) and Global depositary receipts (GDRs) • Equity held by associate/group companies (cross-holdings) • Government holding in the capacity of strategic investor • Strategic stakes held by corporate bodies • Shares held by Employee Welfare Trusts • Shares held as Investments under FDI category • Shares under lock-in category • Example: Investment Planning & Asset Management

Investible Weight Factors (IWFs) • PVR ltd has a total share capital of Rs 100 lakhs denominated as 1, 00,000 shares of RS. 100 each. And the shareholding pattern of PVR ltd is as follows: Shareholder details Holding (no of shares) Holding (%) Equity held by state government 10,000 10 as a strategic investor Equity held by associate company 15,000 15 EMR ltd Shares held by Employee Welfare 2500 2.5 Trusts Shares held under FDI category 5,000 5 Promoters holding 10,000 10 Investment Planning & Asset Management

Investible Weight Factors (IWFs) • Investible Weight Factor (IWF) = Total free holding available for investors/Total number of shares • = [1, 00, 000 – (10,000 + 15,000 + 2500 + 5000 +10,000] / 1, 00, 00 = 0.575 • A Higher IWF indicates that greater number of shares is held by the investors. Thus greater number of shares is readily available for trading on the exchange. • It is an important factor used in determining the free float market capitalization of a company. • Free Float Market Capitalization = Shares outstanding * Price * IWF. Thus, it is major component in calculation of equity indices under free float methodology. Investment Planning & Asset Management

Total Return Index • The NIFTY 50 reflects the return one would get if an investment is made in the index portfolio. • As the NIFTY 50 is computed in real-time, it takes into account only the stock price movements. However, the price indices do not consider the return from dividend payments of index constituent stocks. • Only the capital gains and losses due to price movement are measured by the price index. In order to get a true picture of returns, the dividends received from the index constituent stocks also need to be included in the index movement. Such an index, which includes the dividends received, is called the total return index. Investment Planning & Asset Management

• Chapter 1 –India Specific ends here • Thanks and all the very best Investment Planning & Asset Management

Chapter-2 • Investment Landscape Investment Planning & Asset Management

Introduction • This chapter will provide an understanding of the investment landscape in India by further explaining the various markets such as the equity, debt, commodities, foreign exchange, real estate, gold and collectibles markets. • The traditional asset classes are considered to be equities, bonds and cash or cash-like securities. • It is important for an Investment Advisor to have a strong understanding of the two major stock exchanges in India, the National Stock Exchange and the Bombay Stock Exchange. • This chapter will also compare and contrast the differences between promoting and public shareholders. Friday, 15 July 2022 Investment Planning & Asset Management

Equity Markets • An equity market, also known as the stock market, is a platform for trading in company shares. It is the place where buyers and sellers meet to trade in listed companies. Listed companies are those entities that have offered some part of their equity to public investors. • In the Indian stock market, equities are available for trading at the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). • Equity consists of funds that shareholders invest in a company plus a certain amount of profit earned by them that is retained by the company for further growth and expansion. • Two Major Stock Exchanges are BSE and NSE Friday, 15 July 2022 Investment Planning & Asset Management

Index Methodology • The S&P BSE SENSEX is India’s most tracked bellwether index. It is designed to measure the performance of the 30 largest, most liquid, and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd. • Most of the indices employ a float-adjusted market capitalization • S&P BSE SENSEX consists of 30 companies. • NSE Nifty 50 consists of 50 companies Friday, 15 July 2022 Investment Planning & Asset Management