Meaning of Venture Capital 

The term venture capital comprises of two words, namely, ‘venture’ and ‘capital’. The term ‘venture’ literally means a ‘course’ or ‘proceeding’, the outcome of which is uncertain (i.e., involving risk). The term capital refers to the resources to start the enterprise. Thus venture capital refers to capital investment in a new and risky business enterprise. Money is invested in such enterprises because these have high growth potential.

A young hi-tech company that is in the early stage of financing and is not yet ready to make a public issue may seek venture capital. Such high-risk capital is provided by venture capital funds in the form of long-term equity finance with the hope of earning a high rate of return primarily in the form of capital gain. In fact, the venture capitalist acts as a partner with the entrepreneur. 

Venture capital is the money and resources made available to start-up firms and small businesses with exceptional growth potential (e.g., IT, infrastructure, real estate, etc.). It is fundamentally a long-term risk capital in the form of equity finance for the small new ventures which involve risk. But at the same time, it has a strong potential for growth. It thrives on the concept of high-riskhigh return. It is a means of equity financing for rapidly growing private companies.

Venture capital can be visualized as the ‘your ideas and our money’ concept of developing business. It is ‘patient’ capital that seeks a return through long-term capital gain rather than immediate and regular interest payments as in the case of debt financing.

When venture capitalists invest in a business, they typically require a seat on the company’s board of directors. But professional venture capitalists act as mentors and provide support and advice on a number of issues relating to management, sales, technology, etc. They assist the company to develop its full potential. They help the enterprise in the early stage until it reaches the stage of profitability. When the business starts making considerable profits and the market value of the shares go up to a considerable extent, venture capitalists sell their equity holdings at a high value and thereby make capital gains. 

In short, venture capital means the financial investment in a high-risk project with the objective of earning a high rate of return

Characteristics of Venture Capital 

1. It is basically equity finance. 

2. It is a long-term investment in growth-oriented small or medium firms. 

3. Investment is made only in high-risk projects with the objective of earning a high rate of return. 

4. In addition to providing capital, venture capital funds take an active interest in the management of the assisted firm. It is rightly said that “venture capital combines the qualities of banker, stock market investor and entrepreneur in one”. 

5. The venture capital funds have continuous involvement in business after making the investment. 

6. Once the venture has reached its full potential, the venture capitalist sells his holdings at a high premium. Thus his main objective of the investment is not to earn profit but capital gain.

Types of Venture Capitalists

1. Venture capital funds set up by angel investors (angels): They are individuals who invest their personal capital in start-up companies. They are about 50 years old. They have high income and wealth. They are well educated. They have succeeded as entrepreneurs. They are interested in the start-up process. 

2. Venture capital subsidiaries of Corporations: These are established by major corporations, commercial banks, holding companies, and other financial institutions. 

3. Private capital firms/funds: The primary source of venture capital is a venture capital firm. It takes high risks by investing in an early-stage company with high growth potential.

Methods or Modes of Venture Financing (Funding Pattern)/Dimensions of Venture Capital Venture

 capital is typically available in four forms in India: equity, conditional loan, income note, and conventional loan.

Equity: 

All VCFs in India provide equity but generally, their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remain with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains. 

Conditional loan: 

It is repayable in the form of royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 and 15 percent; the actual rate depends on the other factors of the venture, such as gestation period, cost-flow patterns,  and riskiness. 

Income note: 

It is a hybrid security that combines the features of both conventional loans and conditional loans. The entrepreneur has to pay both interest and royalty on sales but at substantially low rates. 

Conventional loan:

Under this form of assistance, the enterprise is assisted by way of loans. On the loans, a lower fixed rate of interest is charged, till the unit becomes commercially operational. When the company starts earning profits, normal or higher rate of interest will be charged on the loan. The loan has to be repaid as per the terms of the loan agreement. 

Other financing methods: 

A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures introduced by TCFC.

Stages of Venture Capital Financing

1. Early-stage financing: This stage has three levels of financing. These three levels are: 

(a) Seed financing: This is the finance provided at the project development stage. A small amount of capital is provided to the entrepreneurs for concept testing or translating an idea into a business. 

(b) Start-up finance/first stage financing: This is the stage of initiating commercial production and marketing. At this stage, the venture capitalist provides capital to manufacture a product. 

(c) Second stage financing: This is the stage where the product has already been launched in the market but has not earned enough profits to attract new investors. Additional funds are needed at this stage to meet the growing needs of the business. Venture capital firms provide larger funds at this stage

2. Later-stage financing: 

This stage of financing is required for the expansion of an enterprise that is already profitable but is in need of further financial support. This stage has the following levels: 

(a) Third stage/development financing: This refers to the financing of an enterprise that has overcome the highly risky stage and has recorded profits but cannot go for public issues. Hence it requires financial support. Funds are required for further expansion. 

(b) Turnarounds: This refers to finance to enable a company to resolve its financial difficulties. Venture capital is provided to a company at a time of severe financial problem for the purpose of turning the company around. 

(c) Fourth stage financing/bridge financing: This stage is the last stage of the venture capital financing process. The main goal of this stage is to achieve an exit vehicle for the investors and for the venture to go public. At this stage the venture achieves a certain amount of market share. 

(d) Buy-outs: This refers to the purchase of a company or the controlling interest of a company’s share. Buy-out financing involves investments that might assist management or an outside party to acquire control of a company. This results in the creation of a separate business by separating it from their existing owners.

Venture Capital in India In India

venture capital plays a vital role in the development and growth of innovative entrepreneurship. Venture capital activity in the past was possibly done by developmental financial institutions like IDBI, ICICI, and state financial corporations. These institutions promoted entities in the private sector with debt as an instrument of funding. 

For a long time, funds raised from the public were used as a source of venture capital. And with the minimum paid-up capital requirements being raised for listing at the stock exchanges, it became difficult for smaller firms with viable projects to raise funds from the public. 

In India, the need for venture capital was recognized in the 7 five-year plan and long-term fiscal policy of the Government of India. In 1973, a committee on the development of small and medium enterprises highlighted the need to foster VC as a source of funding for new entrepreneurs and technology. VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) – promoted by ICICI and UTI.

The first private VC fund was sponsored by Credit Capital Finance Corporation (CEF) and promoted by the Bank of India, Asian Development Bank, and the Commonwealth Development Corporation, namely, Credit Capital Venture Fund. At the same time, Gujarat Venture Finance Ltd. and AFIDC Venture Capital Ltd. were started by state-level financial institutions. Sources of these funds were the financial institutions, foreign institutional investors or pension funds, and high networth individuals. The venture capital funds in India are listed in the following table:

Guidelines for the Venture Capital Companies 

The Government of India has issued the following guidelines for various venture capital funds operating in the country. 

1. The financial institutions, State Bank of India, scheduled banks, and foreign banks are eligible to establish venture capital companies or funds subject to the approval as may be required from the Reserve Bank of India. 

2. The venture capital funds have a minimum size of Rs. 10 crores and a debt-equity ratio of 1:1.5. If they desire to raise funds from the public, promoters will be required to contribute a minimum of 40% of the capital. 

3. The guidelines also provide for NRI investment up to 74% on a non-repatriable basis. 

4. The venture capital funds should be independent of the parent organization. 

5. The venture capital funds will be managed by professionals and can be set up as joint ventures even with non-institutional promoters. 

6. The venture capital funds will not be allowed to undertake activities such as trading, broking, and money market operations but they will be allowed to invest in leasing to the extent of 15% of the total funds deployed. The investment or revival of sick units will be treated as a part of venture capital activity. 

7. A person holding a position of being a full-time chairman, chief executive, or managing director of a company will not be allowed to hold the same position simultaneously in the venture capital fund/company. 

8. The venture capital assistance should be extended to the promoters who are now and are professionally or technically qualified with inadequate resources.

SEBI (Venture Capital Funds) (Amendment) Regulations, 2000 and SEBI (Foreign Venture Capital Investors) Regulations, 2000

A. Following are the salient features of the SEBI (Venture Capital Funds) (Amendment) Regulations, 2000: 

1. Definition of venture capital fund: The venture capital fund is now defined as a fund established in the form of a Trust, a company including a body corporate and registered with SEBI which: 

(a) has a dedicated pool of capital; 

(b) raised in the manner specified under the Regulations; and 

(c) to invest in venture capital undertakings in accordance with the Regulations.

2. Definition of venture capital undertaking: Venture capital undertaking means a domestic company: 

(a) Whose shares are not listed on recognized stock exchanges in India 

(b) Which is engaged in the business including providing services, production or manufacture of articles or things, or does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf. The negative list includes real estate, non-banking financial services, gold financing, activities not permitted under the Industrial Policy of the Government of India.

3. Minimum contribution and fund size: The minimum investment in a Venture Capital Fund from any investor will not be less than Rs. 5 lakhs and the minimum corpus of the fund before the fund can start activities shall be at least Rs. 5 crores. 

4. Investment criteria: The earlier investment criteria have been substituted by a new investment criterion which have the following requirements: 

(a) Disclosure of investment strategy; 

(b) Maximum investment in a single venture capital undertaking not to exceed 25% of the corpus of the fund; 

(c) Investment in the associated companies not permitted; 

(d) At least 75% of the investible funds to be invested in unlisted equity shares or equity linked instruments. 

(e) Not more than 25% of the investible funds may be invested by way of; 

      (i) Subscription to initial public offer of a venture capital undertaking whose shares are proposed to             be listed subject to a lock-in period of one year. 

      (ii) Debt or debt instrument of a venture capital undertaking in which the venture capital fund has               already made an investment by way of equity. 

It has also been provided that venture capital funds seeking to avail benefit under the relevant provisions of the Income Tax Act will be required to divest from the investment within a period of one year from the listing of the venture capital undertaking.

5. Disclosure and information to investors: In order to simplify and expedite the process of fundraising, the requirement of filing the placement memorandum with SEBI is dispensed with,  and instead the fund will be required to submit a copy of the Placement Memorandum/copy of contribution agreement entered with the investors along with the details of the fundraised for information to SEBI. Further, the contents of the Placement Memorandum are strengthened to provide adequate disclosure and information to investors. SEBI will also prescribe suitable reporting requirements from the fund on their investment activity. 

6. QIB status for venture capital funds: The venture capital funds will be eligible to participate in the IPO through book building route as Qualified Institutional Buyer subject to compliance with SEBI (Venture Capital Fund) Regulations. 

7. Relaxation in takeover code: The acquisition of shares by the company or any of the promoters from the Venture Capital Fund under the terms of the agreement shall be treated on the same footing as that of acquisition of shares by promoters/companies from the state level financial institutions and shall be exempt from making an open offer to other shareholders. 

8. Investments by mutual funds in venture capital funds: In order to increase the resources for domestic venture capital funds, mutual funds are permitted to invest up to 5% of their corpus in the case of open-ended schemes and up to 10% of their corpus in the case of close-ended schemes. Apart from raising the resources for venture capital funds, this would provide an opportunity for small investors to participate in venture capital activities through mutual funds.

9. Government of India guidelines: The government of India (MOF) guidelines for overseas venture capital investment in India dated September 20, 1995, will be repealed by the MOF on notification of SEBI Venture Capital Fund Regulations. 

10. The following will be the salient features of SEBI (Foreign Venture Capital Investors) Regulations, 2000. 

a. Definition of foreign venture capital investor: outside India and proposes to make an investment in undertaking and registered with SEBI. Any entity incorporated and established venture capital fund or venture capital 

b. Eligibility criteria: Entity incorporated and established outside India in the form of investment company, trust partnership, pension fund, mutual fund, university fund, endowment fund, asset management company, investment manager, investment management company or other investment vehicle incorporated outside India would be eligible for seeking registration from SEBI. SEBI for the purpose of registration shall consider whether the applicant is regulated by an appropriate foreign regulatory authority; or is an income taxpayer, or submits a certificate from the banker of its or its promoters’ track record where the applicant is neither a regulated entity, not an income taxpayer. 

C. Investment criteria: 

  (i) Disclosure of investment strategy; 

  (ii) Maximum investment in a single venture capital undertaking not to exceed 25% of the funds committed for investment to India. However, it can invest its total fund committed in one venture capital fund. 

(iii) At least 75% of the investible funds to be invested in unlisted equity shares or equity-linked instruments. 

(iv) Not more than 25% of the investible funds may be invested by way of; 

1. 1. Subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed subject to the lock-in period of one year; 
2. 2. Debt or debt instrument of a venture capital undertaking in which the venture capital fund has already made an investment by way of equity.

11. Hassle-free entry and exit: The foreign venture capital investors proposing to make venture capital investment under the Regulations would be granted registration by SEBI. SEBI registered foreign venture capital investors shall be permitted to make investments on an automatic route within the overall sectoral ceiling of foreign investment under Annexure III of Statement of Industrial Policy without any approval from FIPB. Further, SEBI registered FVCIs shall be granted general permission from the exchange control angle for inflow and outflow of funds and no prior approval of RBI would be required for pricing, however, there would be an ex-post reporting requirement for the amount transacted.

12. Trading in unlisted equity: The Board also approved the proposal to permit OTCEI to develop a trading window for unlisted securities where Qualified Institutional Buyers (QIB) would be permitted to participate. 

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What Is a Debit Card?

A debit card is a payment card that makes payments by deducting money directly from a consumer’s checking account, rather than on a loan from a bank. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or Mastercard.

There are two types of debit cards that do not require the customer to have a checking or savings account, as well as one standard type.

Types of Debit Cards 

There are various types of debit cards in India. Let’s have a look at each of these: 

Visa Debit Card 

It has a worldwide presence and is widely used in more than 200 countries across the globe. During the transaction, the money is debited from your Savings Account linked to this card in real-time. Visa card’s additional layers of security, such as Verified by Visa ensure your transaction is safe & secure. With this card, you can shop on both Indian and international shopping sites, pay your utility bills like telephone, water, electricity, gas, etc.

MasterCard 

Debit Card With this card, you can enjoy the benefit of accessing your cash across the world. MasterCard users can enjoy 24 hrs uninterrupted banking services, which can be used during emergencies like loss or theft of the card. Needless to say, you can make online transactions for shopping, travel, booking tickets, and at the same time withdraw money from ATM centers. Maestro Debit Cards Maestro is recognized at over 1.5 crore POS (Point of Sale). This means you can make secure online transactions in India as well as international websites. You also get additional security with MasterCard SecureCode’s 2-Factor authentication feature on your Maestro debit. 

EMV cards 

EMV is an acronym for Europay, MasterCard, Visa, and are the latest chip-based technology global standard cards across the globe for making card payments. All banks are replacing ordinary debit cards with EMV chips as it provides enhanced security features. They help to stop malpractices like card cloning and card skimming. The old debit cards have a magnetic stripe that may store all your data. So fraudsters can easily copy your data and create a Fake card. But in an EMV chip debit card, your data is stored only on the microprocessor chip found. This means that every time you swipe your card, the card generates fresh user data, which makes it impossible for fraudsters to copy your previous data. 

Platinum Debit 

Card These cards have higher cash withdrawal limits and higher transaction limits. Platinum debit cards are generally meant for customers who are interested in having high cash withdrawals, although there is a limit to the transactions. Any platinum debit card will cost Rs 200+ST, whereas regular debit cards are charged Rs 100+ ST. But, they also have good loyalty points to offer. So if you are a frequent debit card user who wants to enjoy good rewards, this card can be a good option for you.

What Is a Credit Card?

A credit card is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back with interest, according to the institution’s terms. Credit cards are issued in the following variety of categories:

• Standard cards simply extend a line of credit to their users for making purchases, balance transfers, and/or cash advances and often have no annual fee.
• Premium cards offer perks such as concierge services, airport lounge access, special event access, and more, but they usually have higher annual fees.
• Rewards cards offer cash back, travel points, or other benefits to customers based on how they spend.
• Balance transfer cards have low introductory interest rates and fees on balance transfers from another credit card.
• Secured credit cards require an initial cash deposit that is held by the issuer as collateral.
• Charge cards have no preset spending limit but often don’t allow unpaid balances to carry over from month to month.

Types of Credit Cards in India

Credit cards’ growing popularity has led to disrupting the space of lending and credits. Many new cards enter the market frequently with a whole new range of features and benefits.
These features and benefits go a long way in categorizing the cards into different types. Individuals choose a card based on these categories. There are basic cards that a beginner prefers and there are air miles cards that can get you free flights. Here is a list of types of credit cards based on various criteria:

• Basic Credit Cards: This credit card will be the preferred choice for those who wish to try out using a credit card. You will be given a small credit limit based on your income and you can make purchases with the given limit. There are no additional benefits given on transacting with the card.
• Secured Credit Cards: Individuals who have a poor credit history can get hold of a secured credit card by making a deposit equal to the credit limit of the card. This deposit acts as a security to issue credit card for banks. If you make payments on time consecutively for a few months, the bank may return the security deposit.
• No Annual Fee Credit Cards: A no annual fee credit card is one that does not levy an annual fee for the usage of the credit card. It can be considered as a basic credit or slightly above that level that provides very few benefits. Individuals at the entry-level of credit card usage or those who make limited use of the card would prefer a no annual fee credit card.
• Low-Interest Credit Cards: Credit cards that offer a lower interest rate as compared to the other cards from a similar category is known as low-interest credit card. However, this category is different from the balance transfer cards as the interest rate will not be as low as 0% and the rates are not valid for a specified time as in the latter case.
• Balance Transfer Credit Cards: Though most credit cards offer the facility to transfer balance, a balance transfer credit card comes with a low-interest rate for a specified period of time. If your current card has a high-interest rate, you may transfer the outstanding balance on your current card to a balance transfer card with a low rate. Some cards offer an opening rate as low as 0%.
• Rewards Credit Cards: A rewards credit card is one that offers some kind of rewards for every rupee you spend with the card. Every bank defines the number of reward points you get for a specified type of transaction, such as grocery shopping and online bill payment, you make with each rewards card it offers.
• Cashback Credit Cards: Cashback credit cards offer a certain percentage of the purchase amount as cashback whenever you make a transaction with the card. The bank may also mention criteria such as cashback is applicable only for petrol transactions.
• Travel Credit Cards: Frequent travelers benefit from a travel credit card as the card offers benefits such as travel insurance, global acceptance, favorable currency conversion rates, and more.
• Shopping Credit Cards: Credit cards that come with deals and offers when the card is used to pay for shopping expenses. Online and offline shopping can get you additional rewards for every purchase.
• Entertainment Credit Cards: Credit cards that provide discounts and offers on entertainment-related spending are known as entertainment credit cards. Such spending includes movie ticket purchase, concert ticket purchase, amusement park ticket purchase, and other events.
• Airmiles Credit Cards: Every rupee you spend with an air miles card will offer air mile points to your card account. Upon accumulating the air mile points, you can redeem them for free flight tickets or other goodies available on the redemption catalog.
• Lifestyle Credit Cards: This type of credit card gives benefits when the card is swiped for lifestyle expenses such as premiere screenings, nightlife, fashion shows, and more.
• Premium Credit Cards: Premium credit cards are dedicated to a selected few. It provides free access to golf clubs, airport lounges, concierge service, and insurance. It may also come with complimentary travel and hotel accommodation coupons. Some cards also offer a personal relationship manager to handle the assets of the cardholder. Not everyone can get approval to own this card.
• Co-Branded Credit Cards: Banks tie up with brands to bring out co-branded cards that provide special discounts and deals when you make a transaction associated with the brand. Though you can make other transactions, they wouldn’t be very profitable. This strategy is, generally, used to increase the customer base for the brand.
• Student Credit Cards: The primary users of this category of cards are college students. The card considers the fact that students do not, often, have a credit history. The approval for a student credit card has fewer criteria to be satisfied as compared to the other full-fledged cards. It also comes with a lower interest rate.
• Business Credit Cards: These cards are designed specifically for business use. This is to make sure that business and personal expenditures are maintained separately. However, even a business credit card requires you to have a good credit history to be eligible. This is because the card issuer considers the applicant to be accountable for bill repayment.
• Prepaid Cards: Prepaid cards require you to load money before they can be used. For every transaction you make with the card, funds are fetched from the card balance. There is no finance charge or minimum payment criterion applicable to this card.

Debit Cards Vs. Credit Cards: A Comparison Between the Two

Let’s take a closer look at the differences between credit cards and debit cards.

Parameters	Debit Card	Credit Card
Definition	Deducts money directly from your savings bank account or your current account.	Allows you to borrow funds to pay for goods and services.
Source of funds	Your savings bank account or current account.	Credit extended to you by your card issuer. It gives you access to money you otherwise do not have (like a very short-term loan).
Spending advantage	You can only spend how much you have.	Can spend more than what you have.
Who pays for the purchase?	You pay for your purchase.	The credit card company pays the vendor for your purchase. You pay the credit card company.
Bill	There is no bill or statement	You get a bill or statement each month with details of the transactions you have made.
Payment	There is no payment that needs to be made since you are using your own money.	A bill needs to be paid each month since it is being borrowed.
Fees and charges	Annual fees and PIN regeneration fees are applicable.	Credit cards have multiple fees applicable. These include joining fees, annual fees, late payment fees, and bounced cheque fees among others.
Interest	There is no interest that is charged.	Interest is charged on the outstanding amount if it hasn’t been paid by the due date.
Limit to funds that can be accessed	You can access any amount up to what is currently available in your savings bank or current account.	You can use the card only up to the pre-set credit limit on your card.
Rewards	Typically, the rewards you get are minimal	Get to enjoy cashback, air miles, and reward points which can be redeemed.
Privileges	Doesn’t come with many privileges.	Come with numerous dining, retail, entertainment, and travel privileges (depending on the type of card you have).
Lost card liability	Protection from theft or loss of the card is minimal.	Most cards offer 100% lost liability protection. So, you are not liable for any unauthorized transactions made.

Debit Cards

Pros

• There is no debt involved since you are using your own money.
• It is cheaper to use since there are no interest charges involved.
• Serves as an ATM card as well, so you can use it to withdraw money from an ATM.
• Approval for a debit card is easier and faster.
• Doesn’t help build a credit history.

Cons

• You don’t have the ability to leave disposable cash in your account since money is directly debited.
• It can complicate balancing your passbook at the end of the month if you don’t keep track of your spending.
• You may be charged a fee if you withdraw money from a different bank ATM.
• There is very little protection when it comes to debit card fraud.

Credit Cards

Pros

• Credit cards are extremely convenient and prevent you from having to carry cash with you.
• Credit cards help you build your credit score.
• The rewards you earn are much higher than those on debit cards.
• They provide you with flexibility when it comes to spending since they come with relatively high credit limits.

Cons

• If you don’t pay your bills on time or in full, you are charged a high rate of interest.
• Credit cards have multiple fees.
• Missing a payment (even due to genuine reasons) could end up adversely affecting your credit score. You then must work much harder to build it.
• While there is a credit limit, you could always be tempted to spend more than what you have. This leads to debt.

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Financial regulations are laws that govern banks, investment firms, and insurance companies. They protect you from financial risk and fraud. But they must be balanced with the need to allow capitalism to operate efficiently.

As a matter of policy, Democrats generally advocate more regulations. Republicans typically promote deregulation.

Federal and state governments have a myriad of agencies in place that regulate and oversee financial markets and companies. These agencies each have a specific range of duties and responsibilities that enable them to act independently of each other while they work to accomplish similar objectives.

Although opinions vary on the efficiency, effectiveness, and even the need for some of these agencies, they were each designed with specific goals and will most likely be around for some time. With that in mind, the following article is a review of many of the regulatory bodies active in the U.S. financial sector.

Why Financial Regulations Are Important

Regulations protect consumers from financial fraud. These include unethical mortgages, credit cards, and other financial products.

Effective government oversight prevents companies from taking excessive risks. Some have concluded, for example, that tighter regulations would have stopped Lehman Brothers from engaging in risky behavior, a change that could have prevented or curbed the 2008 financial crisis. Laws like the Sherman Anti-Trust Act prevent monopolies from taking over and busing their power. Unregulated monopolies have the freedom to gouge prices, sell faulty products, and stifle competition.

Government protection can help some critical industries get started. Examples include the electricity and cable industries. Companies wouldn't invest in high infrastructure costs without governments to shield them. In other industries, regulations can protect small or new companies. Proper rules can foster innovation, competition, and increased consumer choice.

Regulations protect social concerns. Without them, businesses will ignore damage to the environment. They will also ignore unprofitable areas such as rural counties.\

Who Regulates the Financial Industry?

There are three types of financial regulators.

Banking

Bank regulators perform four functions that help to strengthen and maintain trust in the banking system—and trust is critical to a functioning system. First, they examine banks' safety and soundness. Second, they make sure the bank has adequate capital. Third, they insure deposits. Fourth, they evaluate any potential threats to the entire banking system.4

The Federal Deposit Insurance Corporation (FDIC) examines and supervises more than 5,000 banks, a significant portion of the banks in the U.S. When a bank fails, the FDIC brokers its sale to another bank and transfers depositors to the purchasing bank. The FDIC also insures savings, checking, and other deposit accounts.

The Dodd-Frank Wall Street Reform and Consumer Protection Act strengthened the Fed's power over financial firms. If any become too big to fail, they can be turned over to the Federal Reserve for supervision. The Fed is also responsible for the annual stress test of major banks.

The Office of the Comptroller of the Currency supervises all national banks and federal savings associations. It also oversees national branches of foreign banks.7 The National Credit Union Administration regulates credit unions.

Financial Markets

The Securities and Exchange Commission (SEC) is at the center of federal financial regulations. It maintains the standards that govern the stock markets, reviews corporate filing requirements, and oversees the Securities Investor Protection Corporation.

The SEC also regulates investment management companies, including mutual funds. It reviews documents submitted under the Sarbanes-Oxley Act of 2002. Most importantly, the SEC investigates and prosecutes violations of securities laws and regulations.

The Commodity Futures Trading Commission regulates the commodities futures and swaps markets. Commodities include food, oil, and gold. The most common swaps are interest-rate swaps.

Consumers

The Consumer Financial Protection Bureau (CFPB) is under the U.S. Treasury Department. It makes sure banks don't overcharge for credit cards, debit cards, and loans. It requires banks to explain risky mortgages to borrowers. Banks must also verify that borrowers have an income.

Who Regulates the Financial Industry

• Regulatory bodies are established by governments or other organizations to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.
• The goal of regulation is to prevent and investigate fraud, keep markets efficient and transparent, and make sure customers and clients are treated fairly and honestly.
• Several different regulatory bodies exist from the Federal Reserve Board which oversees the commercial banking sector to FINRA and the SEC which monitor brokers and stock exchanges.

The Federal Reserve Board

The Federal Reserve Board (FRB) is one of the most recognized of all the regulatory bodies. As such, the "Fed" often gets blamed for economic downfalls or heralded for stimulating the economy. It is responsible for influencing money, liquidity, and overall credit conditions. Its main tool for implementing monetary policy is its open market operations, which control the purchase and sale of U.S. Treasury securities and federal agency securities. Purchases and sales can change the number of reserves or influence the federal funds rate—the interest rate at which depository institutions lend balances to other depository institutions overnight. The Board also supervises and regulates the banking system to provide overall stability to the financial system. The Federal Open Market Committee (FOMC) determines the Fed's actions.

One of the key regulatory roles of the FRB is to oversee the commercial banking sector in the United States. Most national banks must be members of the Federal Reserve System; however, they are regulated by the Office of the Comptroller of the Currency (OCC). The Federal Reserve supervises and regulates many large banking institutions because it is the federal regulator for bank holding companies (BHCs).

Office of the Comptroller of the Currency

One of the oldest federal agencies, the Office of the Comptroller of the Currency (OCC) was established in 1863 by the National Currency Act.1 Its main purpose is to supervise, regulate, and provide charters to banks operating in the U.S. to ensure the soundness of the overall banking system. This supervision enables banks to compete and provide efficient banking and financial services.

The OCC is an independent bureau within the Department of Treasury. Its mission statement verifies it is to "ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations."

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) was created by the Glass-Steagall Act of 1933 to provide insurance on deposits to guarantee the safety of funds kept by depositors at banks.3 Its mandate is to protect up to $250,000 per depositor. The catalyst for creating the FDIC was the run on banks during the Great Depression of the 1920s.

Checking accounts, savings accounts, CDs, and money market accounts are generally 100% covered by the FDIC. Coverage extends to individual retirement accounts (IRAs), but only the parts that fit the type of accounts listed previously. Joint accounts, revocable and irrevocable trust accounts, and employee benefit plans are covered, as are corporate, partnership, and unincorporated association accounts.

FDIC insurance does not cover products such as mutual funds, annuities, life insurance policies, stocks, or bonds. The contents of safe deposit boxes are also not included in FDIC coverage. Cashier's checks and money orders issued by the failed bank remain fully covered by the FDIC.

Office of Thrift Supervision

The Office of Thrift Supervision (OTS) was established in 1989 by the Department of Treasury through the Financial Institutions Reform, Recovery and Enforcement Act of 1989.5 It is funded solely by the institutions it regulates. The OTS was similar to the OCC except that it regulated federal savings associations, also known as thrifts or savings and loans.

Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) was created in 1974 as an independent authority to regulate commodity futures and options and other related derivatives markets and to provide for competitive and efficient market trading.7 It also seeks to protect participants from market manipulation, investigates abusive trading practices and fraud, and maintains fluid processes for clearing.

The CFTC has evolved since 1974 and in 2000, the Commodity Futures Modernization Act of 2000 was passed.8 This changed the landscape of the agency by creating a joint process with the Securities and Exchange Commission (SEC) to regulate single-stock futures.

Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) was created in 2007 by its predecessor, the National Association of Securities Dealers (NASD).9

 FINRA is considered a self-regulatory organization (SRO) and was originally created as an outcome of the Securities Exchange Act of 1934.

FINRA oversees all firms that are in the securities business with the public. It is also responsible for training financial services professionals, licensing and testing agents, and overseeing the mediation and arbitration processes for disputes between customers and brokers.

State Bank Regulators

State bank regulators operate similarly to the OCC, but at the state level for state-chartered banks. Their oversight works in conjunction with the Federal Reserve and the FDIC.

For example, in New York State, the Department of Financial Services (DFS) supervises and regulates the activities of approximately 1,500 N.Y.-domiciled banking and other financial institutions with assets totaling more than $2.6 trillion and more than 1,800 insurance companies with assets of more than $4.7 trillion.

They include more than 130 life insurance companies, 1,168 property/casualty insurance companies, about 100 health insurers and managed care organizations, and more than 375,000 individual insurance licensees, 122 state-chartered banks, 80 foreign branches, 10 foreign agencies, 17 credit unions, 13 credit rating agencies, nearly 400 licensed financial services companies, and more than 9,455 mortgage loan originators and servicers.

State Insurance Regulators

State regulators monitor, review and oversee how the insurance industry conducts business in their states. Their duties include protecting consumers, conducting criminal investigations, and enforcing legal actions. They also provide licensing and authority certificates, which require applicants to submit details of their operations. (For a directory of specific state agencies visit www.insuranceusa.com.)

State Securities Regulators

These agencies augment FINRA and the SEC for matters associated with regulation in the state's securities business. They provide registrations for investment advisors who are not required to register with the SEC and enforce legal actions with those advisors.

Securities and Exchange Commission (SEC)

The SEC acts independently of the U.S. government and was established by the Securities Exchange Act of 1934.11

One of the most comprehensive and powerful agencies, the SEC enforces the federal securities laws and regulates the majority of the securities industry. Its regulatory coverage includes the U.S. stock exchanges, options markets, and options exchanges as well as all other electronic exchanges and other electronic securities markets. It also regulates investment advisors who are not covered by the state regulatory agencies.

The SEC consists of six divisions and 24 offices.12 Their goals are to interpret and take enforcement actions on securities laws, issue new rules, provide oversight of securities institutions, and coordinate regulation among different levels of government. The six divisions and their respective roles are:

Financial Regulatory Bodies in India

The Reserve Bank of India (RBI)

Established under the RBI Act, 1934, RBI is the central bank of India; and is vested with various responsibilities under the Banking Regulation Act, 1949. Following are some of its primary functions:

1. Issuance of banknotes
2. Banker to the government
3. Custodian of cash reserves of commercial banks
4. Custodian of foreign exchange reserves
5. Controller of credit
6. Lender of the last resort

Securities and Exchange Board of India (SEBI)

Established on April 12, 1992, under the SEBI Act 1992, the Securities and Exchange Board of India (SEBI) is a statutory body owned by the government of India. Its primary function is to safeguard the interests of investors in securities exchange and regulate the securities market. The headquarters of SEBI is located in Mumbai and the branch offices are located in Delhi, Kolkata, and Chennai.

Insurance Regulatory and Development Authority of India (IRDAI)

Established under the Insurance Regulatory and Development Authority Act, 1999, IRDAI is an autonomous statutory body tasked with regulating and promoting the insurance and re-insurance industries in India. Headquartered in Hyderabad, it is a 10-member body consisting of a Chairman, five full-time members, and four part-time members appointed by the government of India.

PFRDA under the Finance Ministry

PFRDA stands for Pension Fund Regulatory and Development Authority. Established by the government of India on August 23, 2003, by executive order, PFRDA was mandated to act as a regulator of pension funds. Headquartered in Delhi, India, it is currently headed by Mr. Supratim Bandopadhyay who is the chairperson of PFRDA. The organizational structure consists of a chairperson, 3 whole-time members from finance, law, and economics along with a chief vigilance officer.

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Introduction 

The Indian financial services industry has undergone a metamorphosis since1990. Before its emergence, the commercial banks and other financial institutions dominated the field and they met the financial needs of the Indian industry. It was only after the economic liberalization that the financial service sector gained some prominence. Now, this sector has developed into an industry. In fact, one of the world’s largest industries today is the financial services industry. 

Financial service is an essential segment of the financial system. Financial services are the foundation of a modern economy. The financial service sector is indispensable for the prosperity of a nation.

Meaning of Financial Services

In general, all types of activities that are of financial nature may be regarded as financial services. In a broad sense, the term financial services mean mobilization and allocation of savings. Thus, it includes all activities involved in the transformation of savings into investment. 

Financial services refer to services provided by the finance industry. The finance industry consists of a broad range of organizations that deal with the management of money. These organizations include banks, credit card companies, insurance companies, consumer finance companies, stockbrokers, investment funds, and some government-sponsored enterprises. 

Financial services may be defined as the products and services offered by financial institutions for the facilitation of various financial transactions and other related activities. 

Financial services can also be called financial intermediation. Financial intermediation is a process by which funds are mobilized from a large number of savers and make available to all those who are in need of it and particularly to corporate customers. There are various institutions that render financial services. Some of the institutions are banks, investment companies, accounting firms, financial institutions, merchant banks, leasing companies, venture capital companies, factoring companies, mutual funds, etc. These institutions provide a variety of services to corporate enterprises. Such services are called financial services. Thus, services rendered by financial service organizations to industrial enterprises and to ultimate consumer markets are called financial services. These are the services and facilities required for the smooth operation of the financial markets. In short, services provided by financial intermediaries are called financial services.

Key Understanding

Commercial banks are the heart of our financial system. They hold the deposits of millions of persons, governments, and business units. They make funds available through their lending and investing activities to borrowers - individuals, business firms, and governments. In doing so, they facilitate both the flow of goods and services from producers to consumers and the financial activities of governments. They provide a large portion of our medium of exchange and they are the media through which monetary policy is effected. These facts obviou51y add up to the conclusion that the commercial banking system of the nation is important to the functioning of its economy.

Commercial banks play a very important role in our economy; in fact, it is difficult to imagine how our economic system could function efficiently without many of their services. They are the heart of our financial structure, since they have the ability, in cooperation with the Reserve Bank of India, to add to the money supply of the nation and create additional purchasing power. Banks' lending, investments, and related activities facilitate the economic processes of production, distribution, and consumption. 

The major task of banks and other financial institutions is to act as intermediaries, channeling savings into investment and consumption: through them, the investment requirements of savers are reconciled with the credit needs of investors and consumers.

If this process of transference is to be carried out efficiently, it is absolutely essential that the banks are involved. Indeed, in performing their tasks, they realize important economies of scale: the savings placed at their disposal are employed in numerous and large transactions adapted to the specific needs of borrowers. In this way, they are able to make substantial cost savings for both savers and borrowers, who would otherwise have to make individual transactions with each other. However, there is more to these economies of scale than just the cost aspect.

Commercial banks have been referred to as 'department stores of finance' as they provide a wide variety of financial services. In addition to the acceptance of deposits, lending, and investing, they provide a multitude of services, including transfer of funds, collection, foreign exchange, safe custody, safe deposit locker, traveller'5 cheque, merchant banking services, credit cards, gift cheques, etc. Commercial Banks provide various securities-related services. Commercial banks in India have set up subsidiaries to provide capital market-related services, recruitment banking merchant banking, etc. Merchant banking services are activities i.e. counseling corporate clients who are in need of capital on capital structure, the form of capital to be raised, the terms and conditions of issue underwriting of the issue, the timing of the issue & preparation of the prospectus, and publicity for grooming the issue for the market. While providing these services they act as sponsors of issues, render expert advice on matters pertaining to investment decisions, render the services as corporate counseling, and advice on mergers acquisition, and reorganization.

Functions of financial services 

1. Facilitating transactions (exchange of goods and services) in the economy. 

2. Mobilizing savings (for which the outlets would otherwise be much more limited). 

3. Allocating capital funds (notably to finance productive investment). 

4. Monitoring managers (so that the funds allocated will be spent as envisaged). 

5. Transforming risk (reducing it through aggregation and enabling it to be carried by those more willing to bear it).

Characteristics or Nature of Financial Services 

From the following characteristics of financial services, we can understand their nature: 

1. Intangibility: 

Financial services are intangible. Therefore, they cannot be standardized or reproduced in the same form. The institutions supplying the financial services should have a better image and confidence of the customers. Otherwise, they may not succeed. They have to focus on the quality and innovation of their services. Then only they can build credibility and gain the trust of the customers. 

2. Inseparability: 

Both production and supply of financial services have to be performed simultaneously. Hence, there should be a perfect understanding between the financial service institutions and their customers. 

3. Perishability: 

Like other services, financial services also require a match between demand and supply. Services cannot be stored. They have to be supplied when customers need them. 

4. Variability: 

In order to cater to a variety of financial and related needs of different customers in different areas, financial service organizations have to offer a wide range of products and services. This means the financial services have to be tailor-made to the requirements of customers. The service institutions differentiate their services to develop their individual identity. 

5. Dominance of the human element: 

financial services are labor-intensive. quality financial products. Financial services are dominated by the human element. Thus, It requires competent and skilled personnel to market the 

6. Information based: 

The financial service industry is an information-based industry. It involves the creation, dissemination, and use of information. Information is an essential component in the production of financial services.

Importance of Financial Services 

The successful functioning of any financial system depends upon the range of financial services offered by financial service organizations. The importance of financial services may be understood from the following points: 

1. Economic growth: 

The financial service industry mobilizes the savings of the people, and channels them into productive investments by providing various services to people in general and corporate enterprises in particular. In short, the economic growth of any country depends upon these savings and investments. 

2. Promotion of savings: 

The financial service industry mobilizes the savings of the people by providing transformation services. It provides liability, asset, and size transformation services by providing huge loans from small deposits collected from a large number of people. In this way financial service industry promotes savings. 

3. Capital formation: 

The financial service industry facilitates capital formation by rendering various capital market intermediary services. Capital formation is the very basis for economic growth. 

4. Creation of employment opportunities: 

The financial service industry creates and provides employment opportunities to millions of people all over the world. 

5. Contribution to GNP: 

Recently the contribution of financial services to GNP has been increasing year after year in almost all countries. 

6. Provision of liquidity: 

The financial service industry promotes liquidity in the financial system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial assets into liquid cash.

Types of Financial Services 

Financial service institutions render a wide variety of services to meet the requirements of individual users. These services may be summarized as below: 

1. Provision of funds: 

• (a) Venture capital 
• (b) Banking services 
• (c) Asset financing 
• (d) Trade financing 
• (e) Credit cards 
• (f) Factoring and forfaiting 

 2. Managing investible funds: 

• (a) Portfolio management 
• (b) Merchant banking 
• (c) Mutual and pension funds 

3. Risk financing: 

• (a) Project preparatory services 
• (b) Insurance 
• (c) Export credit guarantee 

4. Consultancy services: 

• (a) Project preparatory services 
• (b) Project report preparation
•  (c) Project appraisal 
• (d) Rehabilitation of projects 
• (e) Business advisory services 
• (f) Valuation of investments 
• (g) Credit rating 
• (h) Merger, acquisition, and reengineering 

5. Market operations: 

• (a) Stock market operations 
• (b) Money market operations 
• (c) Asset management 
• (d) Registrar and share transfer agencies 
• (e) Trusteeship 
• (f) Retail market operation 
• (g) Futures, options, and derivatives 

6. Research and development: 

• (a) Equity and market research
• (b) Investor education 
• (c) Training of personnel 
• (d) Financial information services.

7. Asset management company
8. Liability management company

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Financial Instruments

Financial instruments are contracts for monetary assets that can be purchased, traded, created, modified, or settled for. In terms of contracts, there is a contractual obligation between involved parties during a financial instrument transaction.

Information about financial instruments is important to users, as it provides insight into the risks related to financial assets and financial liabilities including the exposure to risks arising from these to the entity and how they are managed. Such information can influence a user’s assessment of the financial position and financial performance, as well as provide insight into the amount, timing, and uncertainty of an entities future cash flows.

The extent and nature of financial instruments held by public sector entities varies significantly from entities that have few financial instruments (e.g., a government department whose only financial instruments are accounts receivable and accounts payable) and those that have many and complex financial instruments (e.g., a financial institution whose assets and liabilities are comprised mostly of financial instruments). The complexity and extent of the requirements for presentation, recognition, measurement, and disclosures of financial instruments depend on the extent of the entity’s use of financial instruments and of its exposure to risk. 

It is common for public sector entities to use derivatives in managing interest rate risk, credit risk, and risks associated with fluctuating market prices of commodities. This module addresses the recognition of derivatives acquired to off et these risks and their measurement.

A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. 

Assets and liabilities in the public sector arise out of both contractual and non-contractual arrangements. Assets and liabilities arising out of non-contractual arrangements do not meet the definition of a financial asset or a financial liability. For example, provisions accounted for in accordance with IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets would generally not be a financial instrument. Physical assets (such as inventories, property, plant, and equipment), leased assets and intangible assets (such as patents and trademarks) are not financial assets. Similarly, prepaid assets are not financial assets because they represent economic benefits in the form of future receipt of goods or services. 

Constructive obligations do not arise from contracts and are therefore not financial liabilities. 

A contract is an agreement between two or more parties that has clear economic consequences that the parties have little if any, discretion to avoid, usually, because the agreement is enforceable by law. Contracts, and thus financial instruments, may take a variety of forms and need not be in writing. 

Public sector entities may enter into arrangements that have the substance of contracts. Application The guidance explains the factors an entity should consider in assessing whether an arrangement is contractual or non-contractual. 

An entity considers the substance rather than the legal form of an arrangement in determining whether it is a contract that meets the definition of a financial instrument. Contracts are generally evidenced by the following (although this may differ from jurisdiction to jurisdiction): 

a) Contracts involve willing parties entering into an arrangement; 

b) The terms of the contract create rights and obligations for the parties to the contract and those rights and obligations need not result in equal performance by each party; and 

c) The remedy for non-performance is enforceable by law.

Common examples of financial assets representing a contractual right to receive cash in the future: 

a) Accounts receivable; 

b) Notes receivable; 

c) Loans receivable; 

d) Equity securities; and 

e) Bonds receivable. 

A financial liability is any liability that is: 

a) A contractual obligation: 

(i) To deliver cash or another financial asset to another entity; or 

(ii) To exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the entity. 

b) A contract that will or may be settled in the entity’s own equity instruments The material does not cover the item.

(b), a contract that will or may be settled in the entity’s own equity instruments.

Types of Financial Instruments

1. SHARES 

Shares are capital share securities. The owner of shares or the shareholder is the company co-owner. If the company makes a profit, in certain cases, a portion of it shall be paid out to shareholders in the form of dividends. The more shares are owned by the shareholder, the greater the stake it owns, and the higher the portion of the distributable profits are due. It should be remembered that when the company's operation brings a loss, its equity should be reduced, resulting in a decrease in the value of shareholders' investment. If the company goes bankrupt, there is a possibility for a partial or complete loss of investments in its shares. 

There are common and preferred shares. Holder of common shares is entitled to participate in the company's administration, by exercising the right to vote at shareholders' meetings. In turn, preferred shares give to their owner the prior right to receive dividends, but usually do not give the voting rights. Shares are most often traded in the regulated markets i.e. at a stock exchange. Particular company's stock price depends on the supply and demand interaction determined by a number of various factors, such as: 

1) the company's current situation (including sales, organizational structure, productivity, etc.), as well as future prospects. As it is not possible to accurately predict how successfully the company will operate in the future (it depends on, for example, technology, applicable legal requirements, competition), the stock price is largely determined by investors' estimates of the company's operations in the future. 

2) market interest rates. First, higher interest rates mean higher debt service costs for the company, thus reducing its profits and growth opportunities. Second, an increase in interest rates will increase the yield on debt securities, and investors' demand for shares decreases, thus negatively affecting the stock price.

3) stock turnover, or a total number of shares to be bought or sold at a stock exchange. If the company's stock turnover is high, the difference between the price that the buyers are willing to pay and the price demanded by the seller decreases. Such shares are easy to buy and sell. Conversely, if the turnover is low, the customer may have difficulties with the purchase or sale of shares at the desired price. 

Market players often have different opinions about the company's prospects, resulting in a balanced market, because some market players may want to sell the shares, the others - to buy. If the majority of market players have a common viewpoint on the share price in the future, the situation leading to more rapid changes in stock prices occurs, because the demand for shares increases or decreases. Declines in stock prices have a negative impact on the investor's returns.

2. DEBT SECURITIES 

 Debt securities, such as bonds, confirm one party's (the issuer's) debt obligations to the other party (the holder of the bond). The bond issuer's obligations to the bondholders are set forth in the bond prospectus. Usually, the issuer is obliged to repay to bondholders the face value of bonds acquired on a certain date (the bond maturity date), and to pay the interest (make coupon payments) from time to time (for example, once or twice a year). However, there are bonds with no fixed maturity and bonds, the issuer of which is not required to pay coupons to bondholders (known as T-bills, zero or zero-coupon bonds). The bond coupon is expressed as an annual percentage of the face value of bonds. It can be either fixed or variable (floating). Bond issuers may be national governments, banks, companies, and other market players. 

The bondholder may sell their bonds before their maturity date. In this case, one should expect that the bond price may be higher or lower than the purchase price of the bond. Bond prices are affected by several factors, and the bondholders have to take account of the following ones: 

1) the issuer's creditworthiness. The better the issuer's financial results, the lower its borrowing costs. Consequently, the price of such issuer's bonds is higher. If the issuer's creditworthiness deteriorates, the price of bonds decreases, so the bondholders may suffer a loss. If the issuer becomes insolvent, the holders of its bonds may partially or even completely lose their investment, despite the fact that they have held their investment in bonds until maturity. 

2) market interest rates. When the market interest rates grow, the prices of bonds decline, so their holders may incur a loss, if they want to sell the bonds before their maturity date. The fluctuations of market interest rates will mostly affect the long-term bond prices. 

3) bond trade turnover. If the number of buyers is not sufficient in the market, the sale of bonds at the desired price may be difficult. 

3. CERTIFICATES OF CERTAIN INVESTMENT FUNDS 

Investment funds can be both non-complex (such as UCITS, an open-end fund "DNB Reserve Fund" certificates), and complex financial instruments. 

An investment fund is a combination of many investors' monetary funds, which is managed by a professional specialist (fund manager) with the aim to get a profit from the growth of the investment value. In order to ensure the growth of investment value, the fund manager invests in various assets, such as stocks, bonds, term deposits, and real estate. The fund manager's right to invest in one or asset class is defined in the investment fund's prospectus. The prospectus also covers the remuneration that the fund manager receives for his work. It is from time to time charged on the fund's assets.

Investment fund certificates are securities that confirm the investor's participation in the fund and the resulting investor's rights. When buying fund certificates, the investor becomes a fund participant and is entitled to claim the appropriate share of the fund profits. However, investors must take into account that the investment fund shares neither have a guaranteed nominal value, nor guaranteed yield. This means that the investor may lose part or entirely the money invested in the fund. It should also be noted that the investment fund has the same risks that are inherent to assets, in which the fund existing resources are deployed. The most common types of investment funds:

• Money market funds - investors' funds are placed in term deposits and short-term bonds. These funds have the lowest risk. 
• Bond funds - investors' funds are placed in debt securities. 
• Balanced funds - investors' assets are placed in both bonds and equities. 
• Equity funds - investors' funds are deployed inequities. 
• Hedge funds - in addition to traditional investments in stocks and/or bonds the investments in derivative instruments are used, thus increasing the investment risk degree, but at the same time also increasing the expected profitability. Investments in hedge funds are subject to considerable fluctuations, and at the same time it ought to be taken into account that hedge funds may have certain trade and settlement dates, as a result, it is possible that by selling the fund certificates the investor will receive the returns from the sale on its account over time. Hedge funds can be both non-complex and complex financial instruments. 

Investment funds are grouped into close-end (the fund has a certain expiry date and restricted number of certificates) and open-end (the fund expiry date is not determined and the number of fund certificates is not limited). 

A separate sub-type of investment funds is exchange-traded funds (ETFs). Its certificates are traded at stock exchanges (like shares). An exchange-traded fund's share value may be linked to a variety of assets such as stock or bond indices, commodities, currencies, and more. Exchange-traded funds can be both non-complex and complex financial instruments. 

COMPLEX FINANCIAL INSTRUMENTS 

1. NON-COMPLEX FINANCIAL INSTRUMENTS ACQUIRED FOR BORROWED FUNDS 

 The customer may have an opportunity to increase the size of its investment with the funds borrowed from the Bank. In such cases, the customer's own capital investment may be significantly less than the total face value of the investment. However, the customer must understand that purchasing financial instruments for borrowed funds he may lose not only his own investment but also the borrowed funds and stay indebted if the financial asset price developments will be unfavorable.

2. STRUCTURED FINANCIAL INSTRUMENTS 

Structured financial instruments include, for example, index-linked bonds. Index-linked bonds typically offer a yield that is dependent on the development of a stock index or an index basket. If the index value grows, the value of the bond grows as well. Conversely, if the index decreases in value, the investor may not receive the return, that is, recover only the face value of the bond. 

The index-linked bond issuer guarantees the face value of bonds at the maturity date, so the investor may suffer a loss if he chooses to sell the bond before the maturity date. Index-linked bonds have a risk of the issuer, i.e. if the bond issuer (usually a bank) goes bankrupt, an investor may lose some or all funds invested in the bonds, including borrowed funds, if such has been used for the purchase of the bonds.

3. CERTIFICATES OF CERTAIN INVESTMENT FUNDS 

Investment funds may be both a non-complex (such as UCITS business certificates, an open-end fund "DNB Reserve Fund" certificates), and a complex financial instrument. 

If investing in the investment fund is related to certain difficulties (e.g. investment fund units cannot be easily and quickly sold or information comprehensible to the average customer is not available), this type of fund unit is considered to be a complex financial instrument. The principal risk, contributing to such financial instruments are the risk of a total loss of the invested funds. 

A separate sub-type of investment funds is exchange-traded funds (ETFs). Their certificates are traded at stock exchanges (like shares). The value of exchange-traded fund shares may be linked to a variety of assets, such as stock or bond indices, commodities, currencies, and more. Exchange-traded funds can be both non-complex and complex financial instruments.

4. DERIVATIVE FINANCIAL INSTRUMENTS 

Derivatives are financial and commodity instruments, whose price is dependent on the value of the underlying asset. The underlying assets of derivatives can be interest rates, exchange rates, stocks, bonds, stock indices, oil, gold, cotton, and other commodities. 

Derivatives may be used to reduce the risks associated with the underlying asset price fluctuations, as well as to profit from the price fluctuations of derivatives themselves. Before making a deal with derivatives, the customer should clearly understand how the underlying asset’s prices fluctuate, which financial and other risks are associated with these instruments, what the aims of using derivatives are, and which alternative instruments are available for reducing the risks in question.

When trading derivatives is conducted for risk reduction purposes, they may be useful for the reduction of underlying asset price volatility effect. However, note that the fluctuations of prices of derivatives and their underlying assets may be different.

When trading in derivatives is conducted for for-profit purposes, the customer should be aware that such a trade entails high risks. Certain derivatives are characterized by large price fluctuations. Consequently, even small changes in the market may have a significant negative impact on the customer's financial position.

Most settlements for derivatives are made in the future. In order to purchase or sell derivatives, it is not always necessary to deliver funds in the full amount of the transaction at the moment of the transaction. In certain cases, when making transactions with derivatives, the customer must provide a guarantee or collateral in the amount required by the bank. In case of adverse changes in the market prices, the Bank shall be entitled to request the customer to increase the amount of the guarantee or collateral provided earlier. If the client does not make the supplement mentioned above, the Bank has the right to terminate the derivative transaction before the due date.

The customer who wants to make derivative transactions should have adequate knowledge of the derivative instruments' nature, principles, and associated risks. Each derivative type is characterized by specific risks, and the customer's knowledge and experience in making transactions with one type of derivatives derivative do not guarantee the understanding of other derivatives

Special Considerations

There are no securities under foreign exchange. Cash equivalents come in spot foreign exchange, which is the current prevailing rate. Exchange-traded derivatives under foreign exchange are currency futures. OTC derivatives come in foreign exchange options, outright forwards, and foreign exchange swaps.

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