Introduction to Financial Planning

a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independant i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independant. All mutual funds are required to be registered with SEBI before they launch any scheme. Net Asset Value (NAV) of a Scheme The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme. Different Types of Mutual Fund Schemes Schemes According to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close- ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. 301

Schemes According to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth/Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income/Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter- bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. 302

Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Sector Specific Funds/Schemes? These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependant on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme. Fund of Funds (FoF) Scheme A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe. Load or no-load Fund A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of 303

imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments. Sales or Repurchase/Redemption Price The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unit holders. It may include exit load, if applicable. Assured Return Scheme? Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year. Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unit holders and giving them option to exit the scheme at prevailing NAV without any load. How to Invest in a scheme of a Mutual Fund? Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions. 304

Can non-resident Indians (NRIs) Invest in Mutual Funds? Yes, non-resident Indians can also invest in mutual funds. Necessary details in this respect are given in the offer documents of the schemes. How much should one Invest in Debt or Equity Oriented Schemes? An investor should take into account his risk taking capacity, age factor, financial position, etc. As already mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. Investors may also consult financial experts before taking decisions. Agents and distributors may also help in this regard. How to Fill up the Application Form of a Mutual Fund Scheme? An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc. at a later date should be informed to the mutual fund immediately. What should an Investor Look into an offer Document? An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor’s track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc. Mutual funds are required to dispatch certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors would get either a Demat account statement or unit certificates as these are traded in the stock exchanges. In case of open- ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document. According to SEBI Regulations, transfer of units is required to be done within thirty days from the date of lodgment of certificates with the mutual fund. A mutual fund is required to dispatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unit holder. In case of failures to dispatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present). Can a Mutual Fund Change the Nature of the Scheme From the one Specified in the offer Document? 305

Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g. Structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit holder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unit holders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor. How will an Investor come to know about the Changes, if any, which may Occur in the Mutual Fund? There may be changes from time to time in a mutual fund. The mutual funds are required to inform any material changes to their unit holders. Apart from it, many mutual funds send quarterly newsletters to their investors. At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted. How to know the Performance of a Mutual Fund Scheme? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open -ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half- yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an effect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme. 306

How to know where the Mutual Fund Scheme has Invested Money Mobilized from the Investors? The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unit holders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets (NPAs), etc. Some of the mutual funds send newsletters to the unit holders on quarterly basis which also contain portfolios of the schemes. Is there any Difference between Investing in a Mutual Fund and in an Initial Public Offering (IPO) of a Company? Yes, there is a difference. IPOs of companies may open at lower or higher price than the issue price depending on market sentiment and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. A mutual fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed. If schemes in the same category of different mutual funds are available, should one choose a scheme with lower NAV? Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below. Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally well and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt- oriented schemes. 307

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently. How to Choose a Scheme for Investment from a Number of Schemes Available? As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts. Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. Investors can log on to the web site of SEBI www.sebi.gov.in and go to “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard. The Indian mutual fund industry witnessed robust growth and stricter regulation from SEBI since 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Safeguarding the interests of investors is one of the duties of SEBI. Consequently, SEBI (Mutual Funds) Regulations, 1996 and certain other guidelines have been issued by SEBI that sets uniform standards for all mutual funds in India. Credit Rating Agency A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer ’s credit worthiness 308

(i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. The value of such security ratings has been widely questioned after the 2007-09 financial crisis. In 2003, the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.[1] More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries. Credit ratings are used by investors, issuers, investment banks, broker- dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independant, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals, and universities. Issuers rely on credit ratings as an independant verification of their own credit-worthiness and the resultant value of the instruments they issue. In most cases, a significant bond issuance must have at least one rating from a respected CRA for the issuance to be successful (without such a rating, the issuance may be undersubscribed or the price offered by investors too low for the issuer ’s purposes). Studies by the Bond Market Association note that many institutional investors now prefer that a debt issuance have at least three ratings. Issuers also use credit ratings in certain structured finance transactions. For example, a company with a very high credit rating wishing to undertake a particularly risky research project could create a legally separate entity with certain assets that would own and conduct the research work. This “special purpose entity” would then assume all of the research risk and issue its own debt securities to finance the research. The SPE’s credit rating likely would be very low, and the issuer would have to pay a high rate of return on the bonds issued. However, this risk would not lower the parent company’s overall credit rating because the SPE would be a legally separate entity. Conversely, a company with a low credit rating might be able to borrow on better terms if it were to form an SPE and transfer significant assets to that subsidiary and issue secured debt securities. That way, if the venture were to fail, the lenders would have recourse to the assets owned by the SPE. This would lower the interest rate the SPE would need to pay as part of the debt offering. The same issuer also may have different credit ratings for different bonds. This difference results from the bond’s structure, how it is secured, and the degree to which the bond is subordinated to other debt. Many larger CRAs offer “credit rating advisory services” that essentially advise an issuer on how to structure its bond offerings and SPEs so as to achieve a given credit rating for a certain debt tranche. This creates a potential conflict of interest; of course, as the CRA may feel obligated to provide the issuer with that given rating if the issuer followed its advice on structuring the offering. Some CRAs avoid this conflict by refusing to rate debt offerings for which its advisory services were sought. Regulators use credit ratings as well, or permit ratings to be used for regulatory purposes. For example, under the Basel II agreement of the Basel Committee on Banking Supervision, banking regulators can allow banks to use credit ratings from certain approved CRAs (called “ECAIs”, or “External Credit Assessment Institutions”) when calculating their net capital reserve requirements. In the United States, the Securities 309

and Exchange Commission (SEC) permits investment banks and broker-dealers to use credit ratings from “Nationally Recognized Statistical Rating Organizations” (NRSRO) for similar purposes. The idea is that banks and other financial institutions should not need keep in reserve the same amount of capital to protect the institution against (for example) a run on the bank, if the financial institution is heavily invested in highly liquid and very “safe” securities (such as U.S. government bonds or short-term commercial paper from very stable companies). Non-Banking Financial Company (NBFC) A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bond -purchase, insurance business, or chit business: but does not include any institution whose principal business is that includes agriculture or industrial activity; or the sale, purchase or construction of immovable property. Non-Banking Financial Companies or NBFC in India are registered companies conducting business activities similar to regular banks. Their banking operations include making loans and advances available to consumers and businesses, acquisition of marketable securities, leasing of hard assets like automobiles, hire-purchase and insurance business. Though they are similar to banks, they differ in a couple of ways. NBFC’s cannot accept demand deposits (deposits that can be withdrawn at immediate notice), they cannot issue checks to customers and the deposits with them are not insured by the DICGC (the India equivalent of FDIC in the US system). Either the RBI (Reserve Bank of India) or the SEBI (Securities and Exchange Board of India) or both regulate NBFC’s. Though the NBFC’s have been around for a long time, they have recently gained popularity amongst institutional investors, since they facilitate access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor. NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships. Usually the loan officers in such NBFC’s know the end customer or have a strong ‘informal’ understanding of the credibility of the borrower and are able to structure their loans appropriately. 5.3 Other Relevant Regulation Indian Companies Act-1956 The Companies Act 1956 is an Act of the Parliament of India, enacted in 1956, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries.[1] The Companies Act 1956 is administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) handles incorporation of new companies and the administration of running companies. Since it’s commencement, it has been amended many times, in which amendment of 198, 1990, 1996, 2000 and 2011 are notable. 310

Like most of Indian acts, it is also extends to the whole India except State of Jammu and Kashmir (S. 3). Notwithstanding anything contained in the Act every company, international or indigenous will work under the provisions of the Act. The Act is 657 sections long. It contains provisions about Companies, directors of the companies, memorandum and articles of associations, etc. This act states and discusses every single provision requires or may need to govern a company. In India, the Companies Act, 1956, is the most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organisational, financial, managerial and all the relevant aspects of a company. It empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under provisions of the Companies Act or the same is referred to the Central Bureau of Investigation. The Companies Act is administered by the Central Government through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) controls the task of incorporation of new companies and the administration of running companies. Under the Companies Act, 1956, the term ‘company’ means “ a company formed and registered under the Act or an existing company i.e. a company formed or registered under any of the previous company laws”. The basic objectives underlying the law are :  A minimum standard of good behaviour and business honesty in company promotion and management.  Due recognition of the legitimate interest of shareholders and creditors and of the duty of managements not to prejudice to jeopardise those interests.  Provision for greater and effective control over and voice in the management for shareholders.  A fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts.  Proper standard of accounting and auditing.  Recognition of the rights of shareholders to receive reasonable information and facilities for exercising an intelligent judgment with reference to the management.  A ceiling on the share of profits payable to managements as remuneration for services rendered.  A check on their transactions where there was a possibility of conflict of duty and interest.  A provision for investigation into the affairs of any company managed in a manner oppressive to minority of the shareholders or prejudicial to the interest of the company as a whole.  Enforcement of the performance of their duties by those engaged in the management of public companies or of private companies which are subsidiaries of public companies by providing sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of law applicable to public companies. 311

The Companies Act, 1956 has been amended from time to time in response to the changing business environment. These amendments include:-  The Companies (Amendment) Act, 2000  The Companies (Amendment) Act, 2001  The Companies (Amendment) Act, 2002  The Companies (Amendment) Act, 2006 Indian Partnership Act 1932 The Indian Partnership Act was passed in 1932 to define and amend the law relating to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the special types of Contract. Initially, this was part of Indian Contract Act itself (Chapter IX - sections 239 to 266), but later converted into separate Act in 1932. The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract; free consent, lawful object, consideration etc. apply to partnership contract also. Partnership Contract is a ‘concurrent subject’ - ‘Contract, including partnership contract’ is a ‘concurrent subject, covered in Entry 7 of List III (Seventh Schedule to Constitution). Indian Partnership Act is a Central Act, but State Government can also pass legislation on this issue. Though Partnership Act is a Central Act, it is administered by State Governments, i.e. work of registration of firms and related matters are looked after by each State Government. The Act is not applicable to Jammu and Kashmir. Unlimited liability is major disadvantage - The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm. Partnership Firm is not a legal entity - It may be surprising but true that a Partnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per section 4 of Indian Partnership Act, 1932, ‘partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. - - Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it - Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 = 2 Taxman 409 (SC). Oral or written agreement - As per normal provision of contract, a ‘partnership’ agreement can be either oral or written. - - Agreement in writing is necessary to get the firm registered. Similarly, written agreement is required, if the firm wants to be assessed as ‘partnership firm’ under Income Tax Act. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. - - However, written agreement is not essential under Indian Partnership Act. 312

Sharing of profit necessary - The partners must come together to share profits. Thus, if one member gets only fixed remuneration (irrespective of profits) or one who gets only interest and no profit share at all, is not a ‘partner ’. - - Similarly, sharing of receipts or collections (without any relation to profits earned) is not ‘sharing of profit’ and the association is not ‘partnership’. For example, agreement to share rents collected or percentage of tickets sold is not ‘partnership’, as sharing of profits is not involved. - - The share need not be in proportion to funds contributed by each partner. - - Interestingly, though sharing of profit is essential, sharing of losses is not an essential condition for partnership. - - Similarly, contribution of capital is not essential to become partner of a firm. Number of partners - Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, unless it is registered as a company or formed in pursuance of some other law. Mode of determining existence of partnership - In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. [section 6]. Mutual agency is the real test - The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners. Partnership at will - Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership at will”. *Section 7]. - Partnership ‘at will’ means any partner can dissolve a firm by giving notice to other partners (or he may express his intention to retire from partnership) - - Partnership deed may provide about duration of partnership (say 10 years) or how partnership will be brought to end. In absence of any such term, the partnership is ‘at will’. - - In case of ‘particular partnership’, the partnership comes to end when the venture for which it was formed comes to end. Determination of rights and duties of partners by contract be-tween the partners - Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by con-tract between the partners, and such contract may be express or may be implied by a course of dealing. - - Such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing. [section 11(1)]. - - Thus, partners are free to determine the mutual rights and duties by contract. Such contract may be in writing or it may be implied by their actions. Duties and mutual rights of partners - Subject to contract to contrary, partners have duties and mutual rights as specified in Partnership Act- Every partner has right to take part in business - Subject to contract between partners (to the contrary), every partner has right to take part in the conduct of the business. [section 12(a)]. - - Thus, every partner has equal right to take active part in business, unless there is specific contract to the contrary. Even if authority of a partner is restricted by contract, outside party is not likely to be aware of such restriction. In such case, if such partner acts within the apparent authority, the firm will be liable for his acts. 313

The property of the firm - Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. - - Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm [section 14]. Partner’s jointly and severally liable acts of the firm - Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a part-ner. *section 25+. ‘An act of a firm’ means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm *section 2(a)+. ‘Joint and several’ means each partner is liable for all acts. Thus, if amount due cannot be recovered from other partners, any one partner will be liable for payment of entire dues of the firm. Dissolution of partnership and dissolution of firm - The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. [Section 39]. As per section 4, Partnership is the relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. - - Thus, if some partner is changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’. However, complete breakage between relations of all partners is termed as ‘dissolution of firm’. After such dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different from ‘dissolution of firm’. ‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution of firm’ means the firm no more exists after dissolution. Limited Liability Partnership Act, 2008 An Act to make provision for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto. A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations.[1] In an LLP, one partner is not responsible or liable for another partner ’s misconduct or negligence. This is an important difference from that of an unlimited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.[2] In some countries, an LLP must also have at least one “general partner” with unlimited liability. Unlike corporate shareholders, the partners have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as “corporate” individuals the legal responsibility to manage the corporation in the corporation’s best interest. An LLP also contains a different level of tax liability from that of a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries, the LLP is more suited for businesses where all investors wish to take an active role in management. 314

There is considerable confusion between LLPs as constituted in the U.S. and that introduced in the UK in 2001 and adopted elsewhere — see below — since the UK LLP is, despite the name, specifically legislated as a Corporate body rather than a Partnership. Foreign Exchange Management Act-1999 The Foreign Exchange Management Act (FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India. FEMA, which replaced Foreign Exchange Regulation Act (FERA), had become the need of the hour since FERA had become incompatible with the proliberalisation policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organization (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005. Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent. The introduction of Foreign Exchange Regulation Act was done in 1974, a period when India’s foreign exchange reserve position wasn’t at its best. A new control in place to improve this position was the need of the hour. FERA did not succeed in restricting activities, especially the expansion of TNCs (Transnational Corporations). The concessions made to FERA in 1991-1993 showed that FERA was on the verge of becoming redundant.[1] After the amendment of FERA in 1993, it was decided that the act would become the FEMA. This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalization. FEMA served to make transactions for external trade (exports and imports) easier – transactions involving current account for external trade no longer required RBI’s permission. The deals in Foreign Exchange were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part of the government in terms of foreign capital. Need for its Management The buying and selling of foreign currency and other debt instruments by businesses, individuals and governments happens in the foreign exchange market. Apart from being very competitive, this market is also the largest and most liquid market in the world as well as in India. [3] . It constantly undergoes changes and innovations, which can either be beneficial to a country or expose them to greater risks. The management of foreign exchange market becomes necessary in order to mitigate and avoid the risks. Central banks would work towards an orderly functioning of the transactions which can also develop their foreign exchange market. Whether under FERA or FEMA’s control, the need for the management of foreign exchange is important. It is necessary to keep adequate amount of foreign exchange reserves, especially when India has to go in for imports of certain goods. By maintaining sufficient reserves, India’s foreign exchange policy marked a shift from Import Substitution to Export Promotion. 315

Main Features - Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central government the power to impose the restrictions. - Restrictions are imposed on people living in India who carry out transactions in foreign exchange, foreign security or who own or hold immovable property abroad. - Without general or specific permission of the Reserve Bank of India, FEMA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India – the transactions should be made only through an authorized person. - Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest. - Although selling or drawing of foreign exchange is done through an authorized person, the RBI is empowered by this Act to subject the capital account transactions to a number of restrictions. - People living in India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad if the currency, security or property was owned or acquired when he/she was living outside India, or when it was inherited to him/her by someone living outside India. - Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply to its necessary requirements. Disclosure and Investor Protection Guideline- 2000 issued by SEBI (DIP Guidelines) The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is compilation of all circulars organized in chapter forms. These guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances buy the companies. Securities and Exchange Board of India (SEBI) has amended the SEBI (Disclosure and Investor Protection) Guidelines, 2000 vide circular dated November 29, 2007. The highlights of the amendments are: 1. Fast Track Issues (FTIs) : Listed companies satisfying specified requirements can make Fast Track Issues through Follow-on Public Offerings and Rights Issues. The eligibility criteria for the purpose, inter alia, include minimum market capitalization of public holding, trading turnover, track record of compliance with listing requirements and investor grievance redressal, etc. 2. Issue of Indian Depository Receipts (IDRs): The guidelines have been amended to enable all categories of investors to apply for IDR issues subject to at least 50% of the issue being subscribed by Qualified Institutional Buyers (QIBs). The minimum application value in IDR issues has been reduced to Rs.20,000/- from Rs.2,00,000/-. Presently, only QIBs can apply in an issue of IDRs. 3. Quoting of PAN mandatory: 316

Quoting of PAN in application forms for public/ rights issues has been made mandatory, irrespective of the value of application. Presently, applicants in public and rights issues are required to disclose their PAN/GIR in the application form only if they are making an application for a value exceeding Rs.50,000/-. 4. Discount in issue price: Companies making public issues are permitted to issue securities to retail individual investors / retail individual shareholders at a discounted price, provided that such discount does not exceed 10% of the price at which securities are issued to other categories of public. For the purpose, ?retail individual shareholder? has been defined to mean a shareholder (i) whose shareholding is of value not exceeding Rs. 1,00,000/- as on the day immediately preceding the record date, and (ii) who makes application or bids in a public issue for value not exceeding Rs 1,00,000/-. Presently, the Guidelines do not provide for issuance of shares at differential price to investors within the net public offer category. 5. Reservation for shareholders in listed companies: Application by shareholders of listed companies under the reserved quota has been restricted to retail individual shareholders. Presently, listed companies making public issues can make reservation on competitive basis for its existing shareholders who, as on the record date, are holding shares worth up to Rs. 50,000/-. Further, there is no limit on the value of the application made by such shareholders. 6. Deletion of the chapter on Guidelines for Issue of Capital by Designated Financial Institutions (DFIs): The special dispensations given to DFIs have been removed by deleting the chapter on Guidelines for Issue of Capital by DFIs from SEBI (DIP) Guidelines. SEBI had introduced separate guidelines in 1992 for primary issuances by DFIs, to place companies/ corporations/institutions engaged mainly in financing of developmental activities and playing a catalytic role in the infrastructure development of the country on a different footing. Presently, DFIs operationally compete on equal footing with private entities and DFIs, as a concept, may have outlived its utility. 7. Apart from the above, SEBI has also made certain miscellaneous amendments either to delete certain provisions, which have become redundant or in respect of which, there have been requests for exemption on regular basis. Prevention of Money Laundering Act-2002 (PMLA) The Prevention of Money Laundering Act, 2002 (PMLA 2002) (Act No. 15 of 2003) of India was enacted on 15 January 2003 and forms the core of the legal framework put in place by India to combat money laundering. PMLA 2002 and the Rules notified there under came into force with effect from 1 July 2005. The PMLA 2002 and rules notified thereunder impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to the Financial Intelligence Unit - India (FIU-IND). PMLA 2002 defines money laundering offence and provides for the freezing, seizure and confiscation of the proceeds of crime. 317

Proposed References: Professionally Based Books (Compulsory-Any one book) S. No. Title Author Publisher Rs. 345 1 Financial Planning A-Ready Tata Mcgraw- Hill 2 Reckoner Madhu Sinha 101.50 U$ 3 Financial Planning Practice CFP Board 69.95 U$ 4 Standards CFP Board Financial Planning 93.00 U$ 5 Association of Introduction to Financial Financial Planning Australia Ltd. 6 Planning DFP1 Association of Australia American College Ltd. Mittra Kirkman & Fundamentals of Financial Associates Planning David M. (Ed.) M. Cordell Practicing Financial Planning Dalton Publishing, for Professionals #2 Sid Mittra, Jeffrey LLC Kirkman, George Seifert Personal Financial Planning: Michael A. Dalton, Insurance Theory and Practice Randal Cangelosi, achievement, Randall Guttery, Incorporated Scott A. Wasserman, James F. Dalton 7 Introduction to Financial R. Robert Rackley Planning (for CFP 1) Primarily Consumer Based Books (Optional) S. No. Title Author Publisher 114.95 1 Lawrence J. J. 2 Personal Financial Gitman, Michael D. South-Western 114.00 3 Planning #3 Joehnk 36.00 Jeff Madura Addison Wesley 4 Personal Finance Arthur Keown Pearson Personal Finance - Workbook Ernst and Young’s Personal Ernist & lYoung, Wiley, John & Sons, Financial Planning Guide: Robert J. Gamer, Incorporated Take Control of Your Barbara Robert B. Coplan, Future and Unlock the Door J. Raasch, Ratner to Financial Security #4 Additional Reading/s (Optional) S. No. Journal / s 1 Journal of Financial Planning 2 Journal of Financial Services Professionals 3 Journal of Financial Counseling and Planning S. No. Magazine/s 1 Financial Planning 2 Financial Services Review 318

PREVIEW: #1 Personal Finance (Jack R. Kapoor, Les R. Dlabay, Robert J. Hughes): - provides comprehensive cov- erage of personal financial planning in the areas of money management, career planning, taxes, consumer credit, housing and other consumer decisions, legal protection, insurance, investments, retirement planning, and estate planning. CONTENTS 1. Introduction 2. Personal Career Strategies 3. Money Mgt. Strategies 4. Tax 5. Banking Services 6. Intro to Consumer Credit 7. Choosing… Credit 8. Consumer Strategies & Transportation Costs 9. Housing 10. Home and Auto Insurance 11. Health Care & Disability 12. Life Insurance 13. Fundamentals Of Investing 14. Stocks 15. Bonds 16. Mutual Funds 17. Real Estate & others 18. Retirement 19. Estate #2 Practicing Financial Planning for Professionals (Sid Mittra) :- Discusses the impact of retirement, and how to successfully prepare for it, Devotes an entire chapter to tax planning and sophisticated tax strategies, Explores key concepts and strategies of investment planning, including asset allocation, Covers risk management strategies of insurance planning, including life, disability, health, and long term care, Explains principles of estate planning and examines advanced estate planning strategies, Explores the key aspects associated with divorce and death, Underscores time value of money and creative use of calculators in financial planning, Presents universally acclaimed methods of practice management, Discusses the impact of September 11 (2001) disaster on the investment. #3 Personal Financial Planning (Lawrence J. J. Gitman, Michael D. Joehnk) :- New edition of a time- tested text first published in 1978, for use in a first college course on the subject as well as by individuals developing their own financial plans. Addresses the basics of planning and of managing assets, and includes coverage of credit, insurance, investments, and retirement and estate planning. 319

CONTENTS 1. Foundations of Financial Planning 2. Understanding the Financial Planning Process 3. Measuring Your Financial Standing 4. Planning Your Financial Future 5. Managing Your Taxes 6. Managing Basic Assets 7. Managing Your Savings and Other Liquid Assets 8. Making Housing and Other Major Acquisitions 9. Managing Credit 10. Borrowing on Open Account 11. Using Consumer Loans 12. Managing Insurance Needs 13. Insuring Your Life 14. Insuring Your Health 15. Protecting Your Property 16. Managing Investments 17. Investing in Stocks and Bonds 18. Making Securities Investments 19. Investing in Mutual Funds, Real Estate, and Derivative Securities 20. Retirement and Estate Planning 21. Meeting Retirement Goals 22. Preserving Your Estate #4 Ernst & Young’s Personal Financial Planning Guide: This practical and comprehensive book covers all the basics of financial planning: setting goals, building wealth, protecting finances, and passing it all to one’s family. It also approaches financial planning from a unique “life event” perspective, offering easy-to- implement tactics especially designed to meet financial goals associated with such events as getting married, raising a family, starting a business, and divorcing. 70 charts, tables, worksheets. As is common with financial planners, this one, written by staff at one of the Big Six accounting firms, covers such things as determining net worth, setting up and following a budget, accumulating assets (most importantly by developing the savings habit), and stocks, bonds, mutual funds, and cash equivalents. It explains investment risk and return; home buying and selling; the various types of insurance (life, home, health, car, and disability); the financial consequences of marriage, prenuptial agreements, and divorce; paying for college; and estate planning. The work is unique in a couple of areas: it covers starting a business especially thoroughly and bases planning on a “life event” perspective-gearing the planning to the goal. Unfortunately, in common with other financial planners, it virtually ignores singles. 320