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Merchant Banking
and
Financial Services
Second Edition
 About the Authors
Madhu Vij is Professor of Finance at the Faculty of Management Studies, University of Delhi, where
she has been teaching for over three decades. Her professional and teaching interests include the areas
of International Finance, Risk Management, Banking and Financial Services, Corporate Finance and
Accounting. She has received the Alumni Excellence Award from Shri Ram College of Commerce,
University of Delhi. Dr Vij has participated and attended the Global Colloquium on ‘Participant Centered
Learning’ at Harvard Business School, Boston, USA. She was on the Panel of Judges for the award of
PM’s trophy for selecting the best steel plant during 2011–2013 and has also been a member of Ad-hoc
Task Force, Results-Framework Document (2011–2013). Dr Vij has been an Independent Director of
MOIL Limited. Currently, she is an independent director for four private limited companies.
She has published several research papers in international and national journals of repute and has

by national bodies like UGC, RBI, ICSSR, SAIL and Delhi University. She serves on the editorial
board and is also a reviewer for several academic journals, national and international conferences.
Dr Vij is actively involved in research, consultancy and training for several leading public and private

Swati Dhawan is Assistant Professor at the Shri Ram College of Commerce, University of Delhi. She is
a graduate from Shri Ram College of Commerce, a postgraduate from Delhi School of Economics and
PhD from the Faculty of Management Studies, University of Delhi.
She has a rich teaching experience of more than 10 years in the areas of Accounting and Finance in
several colleges of University of Delhi and management institutes of repute like Faculty of Management
Studies, Institute of Management Technology, Lal Bahadur Shastri Institute of Management, etc. She
has several research papers to her credit and has presented papers in several national and international
conferences. Dr Dhawan has also been a resource faculty in management development programmes at
GAIL and Alchemist in the past. She has also worked as a research scholar in several ICSSR sanctioned

examination. In pursuit of her personal training and development, she has successfully completed
curriculum for Living program at Landmark Worldwide.
 Merchant Banking
and
Financial Services
Second Edition

Madhu Vij
Professor of Finance
Faculty of Management Studies
University of Delhi

Swati Dhawan
Assistant Professor
Shri Ram College of Commerce
University of Delhi

McGraw Hill Education (India) Private Limited

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Copyright © 2018, 2012 by McGraw Hill Education (India) Private Limited.

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Dedicated To Our
Mothers
 Contents

Preface to the Second Edition xix

Preface to the First Edition xxii
Acknowledgements xxv

Part I

1. Financial System, Markets and Services: An Overview 3

Learning Objectives 3
Financial System: An Introduction 4
Indian Financial Sector 5
An Overview of India’s Financial Services Sector 6
Merchant Banking 10
Future Challenges for Financial Services Industry 12
Summary 17
Key Terms 17
Objective Type Questions 17
Review Questions 18
Critical Thinking Exercise 19
Group Learning Exercise 19
Answers to Objective Type Questions 19
Case 20
2. Financial and Money Markets 21
Learning Objectives 21
Financial Market—Meaning and Functions 22
23
Types of Financial Assets 25
Developments in the Financial Market in India 34
Legislative Framework 35
Summary 38
Key Terms 38
Objective Type Questions 39
Review Questions 40
Critical Thinking Exercise 40
Group Learning Exercise 41
Answers to Objective Type Questions 41
Case 41
viii Contents

3. Merchant Banking 43
Learning Objectives 43
Merchant Banks 44
Registration of Merchant Bankers with SEBI 45
Merchant Banking and Investment Banking 45
Investment Banks 46
Merchant Banking in India 46
Qualities of Merchant Bankers 47
48
SEBI Regulations for Merchant Banking 49
Red Herring Prospectus (RHP) 53
Summary 56
Key Terms 56
Objective Type Questions 56
Review Questions 57
Critical Thinking Exercise 58
Group Learning Exercise 58
Answers to Objective Questions 58
Case 59
Annexure 1 60
4. Issue Management 62
Learning Objectives 62
Issue Management—Meaning and Processes 63
Different Kinds of Issuses 63
Book Building 69
Eligibility for Registration 71
Types of Investors 72
Applications Supported by Blocked Amount (ASBA) 75
IPO Grading 76
Summary 77
Key Terms 77
Objective Type Questions 77
Review Questions 78
Critical Thinking Exercise 79
Group Learning Exercise 80
Answers to Objective Questions 80
Case 81
Annexure 1 81
Annexure 2 83
5. Depository System 84
Learning Objectives 84
Depository System—An Introduction 85
 Contents ix

Bank and Depository—An Analogy 86

Types of Depository Accounts 87
Functions of Depository 88
Advantages of Depository System 89
Services Offered by Depository Participants 92
SDL 94
CDSL (Central Depository Services Limited) 97
SHCIL (Stock Holding Corporation of India Ltd.) 97
Legal Framework 98
Recent Developments 101
Summary 102
Key Terms 103
Objective Type Questions 103
Review Questions 104
Critical Thinking Exercise 104
Group Learning Exercise 105
Answers to Objective Questions 105
Case 106
6. Broking Services/Stock Exchange 107
Learning Objectives 107
Stock Exchanges 108
Stock Exchanges in India 108
Stock Broker 110
Sub-Brokers 111
Stock Trading System 111
Order Types and Conditions 113
Order Matching 115
Order Management 116
Trade Management 116
Clearing and Settlement 118
Settlement Agencies 119
T + 2 Rolling Settlement Cycle 121
Risks in Settlement 121
Measures for Risk Management and Containment 122
Legal Framework 122
De-Mutualization and Corporatization of Stock Exchanges 125
Insider Trading 127
Online Trading 130
AlgoTrading 132
High Frequency Trading (HFT) 133
Summary 133
Key Terms 134
x Contents

Objective Type Questions 135

Review Questions 135
Critical Thinking Exercise 136
Group Learning Exercise 137
Answers to Objective Questions 137
Case 138

Part II

7. Mutual Funds 141

Learning Objectives 141
Concept of Mutual Fund 142
Organization of Mutual Fund 142
Mutual Fund Schemes 144
150
Measuring Fund Returns 152
Performance Evaluation of Mutual Fund 153
Advantages and Disadvantages of Investing in Mutual Fund 158
History of the Indian Mutual Fund Industry and Recent Developments 159
Regulation of Mutual Funds in India 162
Summary 166
Key Terms 167
Objective Type Questions 167
Review Questions 168
Review Problems 168
Critical Thinking Exercise 169
Group Learning Exercise 169
Answers to Objective Questions 170
Case 170
Annexure 1 171
8. Insurance 174
Learning Objectives 174
Basics of Insurance 175
Key Concepts in Insurance 176
Insurance—Types and Products 177
181
Underwriting—The Backbone of Insurance 182
ALM in Insurance 185
Evolution and Development of Insurance in India 187
Recent Developments 192
Summary 199
Key Terms 199
 Contents xi

Objective Type Questions 199

Review Questions 200
Critical Thinking Exercise 201
Group Learning Exercise 201
Answers to Objective Questions 202
Case 202
9. Private Equity and Hedge Funds 204
Learning Objectives 204
Concept of General Partners and Limited Partners 205
Who are General Partners (GPs)? 206
Private Equity Deals 208
Advantages of Private Equity 212
Returns Associated with a Private Equity Investment 213
Private Equity—Emerging Trends and Challenges 215
ICICI Venture 216
Hedge Funds 217
Global Private Equity Firms and Hedge Funds Investing in India 221
Concept of Exchange Traded Funds (ETFs) 222
Summary 223
Key Terms 224
Objective Type Questions 224
Review Questions 225
Critical Thinking Exercise 225
Group Learning Exercise 226
Answers to Objective Questions 226
Case 226
10. Securitization 228
Learning Objectives 228
What is Securitization? 229
Securitization Process 231
Structuring a Securitization Deal 232
236
Difference between Securitization and Factoring 237
Advantages of Securitization 237
Limitations of Securitization 239
Risks of Securitization 240
Legal Status of Securitization 241
Asset Liability Management and Securitization 242
Securitization and the Financial Crisis 244
Applications of Securitization 245
248
250
xii Contents

Summary 251
Key Terms 252
Objective Type Questions 252
Review Questions 253
Critical Thinking Exercise 254
Group Learning Exercise 254
Research Project 255
Answers to Objective Questions 255
Case 255
Annexure 1 256
Annexure 2 257
Annexure 3 259
11. Leasing and Hire Purchase 262
Learning Objectives 262
What is a Lease? 263
Elements of a Lease Transaction 265
Types of Lease 266
Lease Finance vs Term Loan 270
Hire Purchase 271
272
Limitations of Leasing 274
Evolution and Development of Leasing in India 275
Financial Evaluation of Lease Financing 277
Summary 286
Key Terms 286
Objective Type Questions 286
Review Questions 287
Review Problems 288
Group Learning Exercise 288
Answers to Objective Questions 289
Case 289
Annexure 1 290
12. Non-Banking Finance Companies 292
Learning Objectives 292
293
296
298
301
The Future: Challenges and Opportunities 303
Summary 304
Key Terms 305
Objective Type Questions 305
 Contents xiii

Review Questions 306

Critical Thinking Exercise 307
Group Learning Exercise 307
Answers to Objective Questions 308
Case 309

Part III

13. Credit Rating 313

Learning Objectives 313
A Perspective of the Global Financial Crisis 314
Business of Credit Rating 315
What Is Credit Rating? 316
Credit Rating Agencies 316
Credit Analysis & Research Ltd. (CARE) 318
Investment Information and Credit Rating Agency of India Ltd. (ICRA) 319
Credit Rating Information Services of India Limited (CRISIL) 320
International Credit Rating Agencies 322
Importance of Credit Rating 322
The Credit Rating Process and Methodology 324
CRISIL—The Rating Process 324
CRISIL Rating Methodology 324
Moody’s Rating Methodology 326
Factors Contributing to the Success of the Rating System 326
327
333
Credit Rating Agencies and the Global Financial Crisis 333
Summary 335
Key Terms 335
Review Questions 335
Objective Type Questions 336
Critical Thinking Exercise 337
Group Learning Exercise 338
Answers to Objective Type Questions 339
Case 339
Annexure 1 341
Annexure 2 342
Annexure 3 344
Annexure 4 344
14. Consumer Finance 346
Learning Objectives 346
Consumer Finance—Meaning and Types 347
xiv Contents

347
Key Players Involved in Authorizing and Settling a Credit Card Transaction 349
Drivers of Growth 351
Concerns 353
Types of Credit Cards 353
Digitalization in India 359
Global Outlook 362
Summary 364
Key Terms 364
Objective Type Questions 364
Review Questions 365
Critical Thinking Exercise 366
Group Learning Exercise 366
Answers to Objective Type Questions 367
Case 367
Annexure 1 367
15. Venture Capital 370
Learning Objectives 370
Venture Capital 371
Venture Capital Financing—Key Advantages 371
Factors Affecting Venture Capital Investment 372
Key Aspects in a Venture Capital Investment 375
How Venture Capitalists Value Business? 380
What Industries do Venture Capitalists Favour? 383
Term Sheet 383
Alternative Investment Funds (AIFs)—SEBI (Alternative Investment Funds)
Regulations, 2012 390
History of Venture Capital Industry 391
Summary 396
Key Terms 396
Objective Type Questions 396
Review Questions 397
Critical Thinking Exercise 398
Group Learning Exercise 398
Answers to Objective Type Questions 399
Case 399
16. Factoring and Forfaiting 400
Learning Objectives 400
Factoring 401
Mechanism of Factoring 403
Types of Factoring 403
How can Factoring Help Companies to Succeed? 405
 Contents xv

Bill Discounting and Factoring 405

Advantages and Disadvantages of Factoring 409
Forfaiting 409
Factoring in India 412
Factoring and the SME Sector 415
Case Studies on Factoring 416
Summary 417
Key Terms 418
Objective Type Questions 418
Review Questions 419
Critical Thinking Exercise 419
Group Learning Exercise 420
Answers to Objective Type Questions 420
Case 420

Part IV

17. Analysing Bank’s Financial Statements 425

Learning Objectives 425
Financial Statements 425
Shareholder’s Equity 428
Financial Statements of Banks—A Comparison 428
431
Summary 438
Key Terms 439
Objective Type Questions 439
Review Questions 440
Critical Thinking Exercise 441
Group Learning Exercise 441
Answers to Objective Questions 442
18. Bank Capital—Risk, Regulation and Capital Adequacy 443
Learning Objectives 443
Understand Basel Capital 443
Risk Management and Basel III 444
Key Elements of Basel III in Terms of Capital and Liquidity Standards* 446
Capital Adequacy Ratio: Risk-Weighted Assets and Tiers of Capital 448
Difference between Basel II and Basel III 451
Summary 455
Key Terms 455
Objective Type Questions 456
Review Questions 456
Critical Thinking Exercise 457
Group Learning Exercise 457
xvi Contents

Answers to Objective Questions 458

Annexure 1 458
19. Asset Liability Management in Banks and Financial Institutions 461
Learning Objectives 461
ALM Structure 463
Objectives of ALM 464
ALM Framework 465
ALM Policies 466
Ways to Make ALM More Effective 466
Reporting as Part of the ALM Process 467
Risk Relevant to Indian Banking 468
ALM Models 472
Summary 490
Key Terms 491
Objective Type Questions 491
Review Questions 492
Review Problems 493
Critical Thinking Exercise 494
Group Learning Exercise 494
Answers to Objective Type Questions 495
Case 495
Annexure 1 496
Annexure 2 496
Annexure 3 498
20. Risk Management in Banks 499
Learning Objectives 499
Risk Management in Banks 500
Operational Risk 503
Credit Risk 505
Securitization Act 508
Market Risk 509
Summary 509
Key Terms 510
Objective Type Questions 510
Review Questions 511
Critical Thinking Exercise 512
Group Learning Exercise 512
Research Project 513
Answers to Objective Type Questions 513
Case 514
 Contents xvii

21. Mergers and Acquisitions 516

Learning Objectives 516
Meaning of Mergers and Acquisitions 517
Types of Mergers 518
Buy-out—Concept and Types 518
Motives behind Mergers and Acquisitions 520
Synergy Value 521
Mergers and Acquisitions Deals in India 522
Steps in M&A Process 523
Valuation in M&A 525
Regulation for Mergers and Acquisitions in India 528
Break-Ups 529
Restructuring Methods 530
Banking and Financial Services Industry (BFSI) Mergers 531
Summary 533
Key Terms 534
Objective Type Questions 534
Review Questions 535
Review Problems 535
Critical Thinking Exercise 536
Answers to Objective Type Questions 536
Case 537

Learning Objectives 539

540
542
544
Key Concerns 545
Financial Inclusion 546
Perspectives 549
Key Challenges 551
Summary 551
Key Terms 552
Objective Type Questions 552
Review Questions 553
Critical Thinking Exercises 554
Group Learning Exercise 554
Answers to Objective Type Questions 555
Case 555
Index 557
 Preface to the Second Edition

Financial services have become increasingly internationalized over the years. The last 25 years have

witnessed in this sector. How these regulations along with the innovations will have an impact on

trends impacting and changing the nature of the services sector.

is a lesson that policy makers have learnt. Regulatory action has been taken to reduce the adverse
effects of the crisis with renewed focus on prudential regulation, accounting standards and transparency
issues with an aim to prevent another crisis in the future. Accordingly, the second edition represents a

Digitalization in India.

Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at different universities
and other professional institutes across India. It will be of immense use to the students pursuing
MBA, MCom, MBE, and other postgraduate courses. The book is also well suited for professional and

reference, supplementary reading and guide for practicing managers. For someone new to merchant

in the area.

Salient Features
This edition of the book takes the same innovative approach as taken in the previous edition and focuses
on three main blocks: Conceptual understanding, Critical thinking exercise, and Group learning exercise.
The main features of the text are as follows:

Learning Objectives at the start of each chapter

Critical Thinking Exercise and Group Learning Exercise at the end of each chapter to relate the
concept studied with the real world scenario
xx Preface to the Second Edition

Case Studies and Projects at the end of some chapters

Updated Review Questions to provide a complete testing of the concepts studied in the chapter
The objective is to build the analytical skills of the students and to teach them how to apply the
concepts studied to real life situations. The problems encourage students to develop decision-making
skills, critical thinking ability as well as provide students with a deeper learning opportunity. In addition,
students learn through interactive classroom activities by gathering and processing the information.

Organization of the Book

The book has been reorganized into four parts. Part I consists of six chapters and prepares the necessary

incorporated in light of changing contours of Indian banking. Chapter 2 has been rechristened as

segments. Also, latest developments in equity and bond markets have been included. Chapter 3 discusses
at length the importance and need for merchant banking with special emphasis on role of merchant
banker in primary market issue management. Chapter 4 has been updated and explains the nuances
of issue management with a focus on IPOs, Bonus and Rights. Chapter 5 discusses the functions of

the important dimensions of demutualization, insider trading, algo trading and high frequency trading in
this regard apart from taking stock of a regulatory perspective.

to the industry. It analyses the growth of mutual fund industry over years. A new case on direct plans
is also included. Chapter 8 on Insurance has been revised thoroughly to include a separate section on
Health Insurance. It presents the developments in the insurance sector and also discusses the concepts

been extensively revised to include different measures of hedge funds performance. Also, global private

explaining the concept of ETFs. Chapter 10 on Securitization has been updated and revised to include
Risks of Securitization, Limitations of Securitization, Advantages of Securitization – to the issuer,

included. Additional review questions and group learning exercise have also been included. Chapter 11
on Leasing has been thoroughly updated to include the difference between hire purchase and installment
credit and Lease Finance and Term Loans. It also includes Applications of Leasing in Industries, the
Chapter 12 is concerned with the

Part III of the book is devoted to the various details of advisory services in India (Chapters 13–

agencies – SMERA and Brickwork’s rating, discussion on international credit rating agencies with a
focus on Moody’s rating methodology. It discusses the main functions of credit rating agencies and the
 Preface to the Second Edition xxi

rating process employed by them – CARE, ICRA and CRISIL. Also the challenges have been outlined

been revised extensively to include the key players involved in authorizing and settling a credit card
transaction, working of credit cards, digitalization in India, reasons for lack of awareness and consumer

Chapter 15 on Venture Capital includes a separate section on SEBI (Alternative Investment Funds)

How does bill discounting work, steps in the process,

difference between bill discounting and factoring,

and Basel accord with a view to gaining an understanding of risk, regulation and adequacy norms.

Risks relevant to Indian banking – Interest Rate Risk, Liquidity Risk, Funding Liquidity and Funding
Liquidity Risk have been discussed in detail. Chapter 20 focusses on Risk Management in Banks and
discusses the risk facing banks in India, namely Liquidity Risk, Interest rate risk, Operational risk and

Chapter 21 on Mergers and Acquisitions has been thoroughly revised to include a separate section
on Buyouts with a detailed discussion on LBOs taking the case of Tata and Tetley. Also, M&A deals
have been illustrated taking popular cases such as Vodafone –Hutchison Essar, Tata Steel – Corus,

Chapter 22 on Micro Finance has been revised to include discussion on Priority Sector Lending

MFIs have been included. A new critical thinking exercise has also been added.

Madhu Vij
Swati Dhawan

Publisher’s Note:
McGraw Hill Education (India) invites suggestions and comments, all of which can be sent to info.india@
mheducation.com (kindly mention the title and author name in the subject line).
Piracy-related issues may also be reported.
 Preface to the First Edition

in a well-structured format. It elaborates the basic concepts, functions, regulatory issues and the
contemporary developments in the industry in an easy-to-understand manner. A complete and thorough

The book provides the students with a complete overview of the subject. It deals with all aspects

have become integrated in the last few years, both at the national and international level, even though

not only have to understand the markets but also have to be ahead of the learning curve. The role of

sector reforms as they provide specialist services to the corporate clients. In the last few years, they have

led to further growth of the market. They have emerged as the most critical link between a company

merchant bankers is by far the most diverse, which establishes their relevance in the present economic

stability of the economy.

The focus of this book is to help the students understand the importance of merchant banking and

has highlighted the importance of prudential regulation, accounting standards and transparency issues.

Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at universities and
other professional institutes. It will be of immense use to the students pursuing MBA, MCom, MBE
and other postgraduate courses. The book is also well suited to professionals and special programmes

range of activities and many new developments in the area.

 Preface to the First Edition xxiii

Organization of the Book

of the subject and highlights the changing role and importance of the sector. Chapter 2 discusses the

detail. Chapter 4 provides an overview of the stock exchange in India. It also discusses the important
dimensions of insider trading and the SEBI regulations in this regard.

in India. Chapter 5 discusses the importance and growth of merchant banking and how since the last

management, which has become an important fee-based service with companies in recent years. Chapter

highly lucrative business with more and more banks offering them to their customers in the recent past.

Part III (Chapters 10 to 15) provides the students with a complete understanding of the various facets

expanding economy, especially after the liberalization of the banking and insurance sector over the past
decade. Chapter 10 is concerned with the growth, importance and challenges faced by non-banking

rapidly. Chapter 11 deals with the concept and growth of mutual fund industry in India. This sector has
traditionally been a key player both in collecting domestic savings and also in lending to companies.

micro-insurance, reinsurance and bancassurance. Chapter 13 discusses hedge funds and private equity.
Chapter 14 elaborates the process and structuring of a securitization deal. The recent crisis in the credit
markets has forced analysts and regulators to look into the desirability of certain aspects of securitization
activity. Chapter 15 covers the importance and developments of leasing and hire purchase.

factoring and forfaiting. Chapter 18 explains the concept of mergers and acquisitions and how mergers
are valued.

management models—gap, duration, simulation and value at risk. Chapter 20 explains the Basel 2
Accord and its impact on Indian banks. It discusses the Basel 1 and Basel 2 accords and also the Three
Pillars. Finally, Chapter 21 deals with risk management in banks.

Key Features

Throughout the text, special features have been integrated to encourage the students and help them
xxiv Preface to the First Edition

understand the concepts. A full line of teaching and learning resources developed at the end of
each chapter help the students apply the concepts to real-life situations. The book has the following
pedagogical features:
Each chapter includes Learning Objectives, Opening Case, Summary and Key Terms.
Besides Objective Type Questions and Review Questions, two activities—Group Learning Ex-
ercise and Critical Thinking Exercise have been added at the end of each chapter to promote dis-
cussion and develop critical thinking skills so as to prepare the students for real-world situations.
In the Group Learning Exercise, students are asked to attempt the problem in groups rather than
alone or in pairs. This helps them to foster comfort and familiarity in the group and also develop
a range of communication and learning styles. In Critical Thinking Exercise, the participants are
encouraged to think critically about their experiences, develop their understanding of the related
issues and create a dynamic and innovative learning environment. This helps them to improve

an exciting alternative to traditional classroom learning.

Cases with discussion questions are at the end of each chapter. Each Case Study is built on the
concepts introduced in the chapter and provides a framework for applying them to different
situations.

improvement in the book are welcome and will be incorporated in its future editions.
Madhu Vij
Swati Dhawan
 Acknowledgements

This book has evolved over a number of years of teaching and doing research at different academic

who has made this book possible. During the writing of this book, we received support from many
friends and colleagues. I would like to express my gratitude to all of them. I am particularly indebted to
Prof Vivek Suneja, Prof Harsh Verma, Prof Pankaj Sinha, Prof Mala Sinha and Dr Anupama Vohra, from
the Faculty of Management Studies, Prof Suvera Gill, University Business School, Chandigarh, Prof P
K Jain and Prof S S Yadav from the Department of Management Studies, IIT Delhi and Prof A M Sherry,

in completing the book.

I have no words to express my deep sense of love and respect for my late father, Prof M C Kapoor,

works would have been complete without his constant encouragement and guidance. His beliefs will
always inspire me. My family has always been my inspiration and motivation for continuing to improve
my knowledge and move my career forward. I take this opportunity to convey my sincere thanks to my
husband, Anil Vij. I also thank my wonderful daughter, Anu Priy, her husband, Akshay, my son, Arjun,
his wife, Parul and the youngest addition in our family, Arav Purkayastha. Their continued love and
appreciation is what keeps me motivated.
Madhu Vij
I am indebted to the Almighty God with whose blessings I have been able to conquer another task
in my life. I pronounce with reverence, my deep sense of gratitude to Prof Madhu Vij, for her resolute
guidance and abiding interest throughout the work. A meticulous supervision by her has helped me

enough words that can express my feelings of respect and love for my late grandfather and parents who
left no stone unturned for giving me the best of everything in my life. I owe so immensely to them for

express my feelings for my in-laws for their sustained love, blessings and encouragement in completing
the book. Mere words will never match the quantum of love, affection, inspiration and moral support
that I receive from my daughter, Suhani, and my husband, Vikram who has always stood by me and
reassured my faith in my abilities that made me complete my task.
Swati Dhawan
xxvi Acknowledgements

We are thankful to numerous colleagues who helped us in writing this book. Of great help, were the
reviewers whose detailed comments and advice guided us in revising the text and coming out with the
second edition.
We express our sincere gratitude to all our colleagues from management schools, universities and
professional institutes across India for adopting the book and extending their support and encouragement.
The help and support from everyone at McGraw Hill Education is much appreciated. Special thanks
are due to Mr Piyaray Pandita and Ms Laxmi Singh, who have relentlessly worked to ensure a quality

Madhu Vij
Swati Dhawan
PA RT I
Chapter 1 Financial System, Markets and Services: An Overview
Chapter 2 Financial and Money Markets
Chapter 3 Merchant Banking
Chapter 4 Issue Management
Chapter 5 Depository System
Chapter 6 Broking Services/Stock Exchange
 CHAPTER Financial System,
Markets and Services:
1 An Overview

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO 1 Know the model of a Financial System
LO 2 Understand the Indian Financial Sector
LO 3 Understand Nature of Financial Services
LO 4 Review the future challenges for the financial services industry

An excerpt from The Financial Stability Report (Dec. 2016) of RBI

G lobal recovery remains fragile amidst slowdown in trade, rising tendency towards protectionism and
slower growth in productivity. Global financial markets continue to face elevated levels of uncertainty,
notwithstanding the resilience exhibited in overcoming the outcomes of Brexit referendum and the US
presidential elections. While the unconventional monetary policy measures have so far fallen short of achieving
their intended objectives, the systemic central banks in advanced economies are unlikely to end them abruptly
because of the concerns on potential impact on financial stability and limited scope for alternative measures on
fiscal front. However, financial markets would continue to grapple with headwinds from uptick in the interest
rates. In India, domestic macroeconomic conditions remain stable with significant moderation in inflation.
Moreover, reduced policy uncertainty and legislative and tax reforms such as implementation of GST (goods
and services tax) and enactment of bankruptcy laws are expected to reinforce the benefits from the strong
macro fundamentals. The withdrawal of legal tender status of specified bank notes could potentially transform
the domestic economy. While the overall risks to the corporate sector moderated in 2016–17, concerns remain
over its recovery.
4 Merchant Banking and Financial Services

Financial System: An Introduction [LO1]

Surplus Deficit
spending Financial Intermediaries spending
units Banks units
Financial institutions
Stock brokers
Sub brokers
Stock exchange
Savers/ Investment banks Borrowers/
Investors/ Regulators Corporates
Households Credit rating agencies
Merchant bankers

FIGURE 1.1 Basic Model of the Financial System

`
` `

` `
`

`
 Financial System, Markets and Services: An Overview 5

Invest in equity share

Mr. Issue equity share

Kishore

Have
surplus Financial Mint enterprises
funds market (Requires funds)

Ms.
Alka
Invest in form of a
bank recurring deposit

FIGURE 1.2 Graphical Presentation of an

Example of the Financial System

Indian Financial Sector [LO2]

6 Merchant Banking and Financial Services

Commercial banks

Banks Cooperative banks

Differentiated banks
(payment banks
and small banks)

Financial institutions Development banks

Insurance companies

Non-banks Mutual funds

Non banking finance

companies

Others
(pension funds,
primary dealers etc)

FIGURE 1.3 Institutions Characterizing the Indian Financial Sector

An Overview of India’s Financial Services Sector

 Financial System, Markets and Services: An Overview 7

Nature of Financial Services [LO3]

8 Merchant Banking and Financial Services

Lok
Adalats

Types of Financial Services

Financial System, Markets and Services: An Overview 9
10 Merchant Banking and Financial Services

Merchant Banking

Nature of Merchant Banking

Functions of Merchant Bankers

 Financial System, Markets and Services: An Overview 11

Registration of Merchant Bankers

`
12 Merchant Banking and Financial Services

Future Challenges for Financial Services Industry [LO4]

Globalization

inter
alia

Beyond Basel 2 Norms

 Financial System, Markets and Services: An Overview 13

Asset Liability Management

14 Merchant Banking and Financial Services

Improving Risk Management Systems Relevant to Indian Banking

Liquidity Risk Management

Exploring the Variety of Random
Documents with Different Content
 "Have no fear, Andrew," answered my mother. "Nothing
is farther from my thoughts than to put my child into such
hands. I would almost as soon have her in the hospital with
poor Lucille."

"I am sure my uncle and aunt seem very kind," said I

rather indignantly, and feeling somehow vexed that Andrew
should say "our Vevette," though he had often done so
before. I was quite dazzled, in truth, by the splendor of
these new relations, who revived in some degree my old
daydreams.

"They are so in their way, but that way is not ours," said
my mother; "and even were the advantages they offer
greater than I think them, I do not believe my child would
wish to leave her mother for their sake."

"Oh, no, no!" I cried, feeling for the moment all I said.
"Not for worlds."

"That is settled, then," said my mother. "And now tell

us, Andrew, where have you been?"

Andrew told us he had been to the naval office, where

he had met an old friend, Mr. Samuel Pepys, with whom,
knowing him to be a man of honor and wise in such
matters, he had taken counsel as to the sale of my mother's
jewels. He said further that Mr. Pepys believed he could find
a merchant who would give good value for the said jewels,
and that the gentleman proposed to bring his wife to visit
us on the morrow, if it would be agreeable.

"I must warn you not to judge him by the outside, for
he is a vain little fellow in some ways," said Andrew,
smiling; "but he is in truth a good man, and his wife is a
bright little body."
 Of course my mother could say no less than that we
should esteem the visit an honor, and the next morning
they came. I had thought my uncle's dress wonderful fine,
but it was nothing to that of Mr. Pepys, though I must say
the latter was both richer in itself and better fancied. His
wife was a pretty, black woman, who spoke French very
nicely, and indeed it was in some sort her native tongue. Mr.
Pepys bought some of my mother's lesser jewels himself,
especially a diamond in a clasp which his wife fancied, and
promised to find a purchaser for the rest—a promise which
he fulfilled to our great advantage.

His conversation was an odd mixture of worldly

shrewdness and an almost childlike simplicity, but I
observed with approval that he did not load his discourse
with oaths as my uncle, and even his wife, had done. On
the whole, I liked our new friends very well, and when he
proposed to carry me out and show me something of the
parks and the city, I looked to my mother rather anxiously
for her approval. She made no objection; so Mr. Pepys came
by and by with his coach (which I fancy he had not
possessed a great while, he seemed so proud of it), and
took us into the park, and there showed us many great
lords and ladies, pointing out to us, with a kind of awful
reverence, my Lady Castlemaine, and some other person of
the same stamp. I saw my mother flush as with indignation
as she said, half to herself:

"And it is in such a world as this that they would have

me leave my child to be brought up!"

"You must not think, madame, that all the ladies about
the court are like these," said Mr. Pepys. "There are many
who bring up their families in all virtue and godly living, like
my good Lady Sandwich and others I could name. But I am
quite of your mind as to Mrs. Genevieve, and if I were so
happy as to be blessed with a daughter, she should, if
possible, grow up in the country. His Majesty is a most
noble prince—Heaven bless him, with all my heart!—but his
example in some things hath done our young people little
good."

It seemed that the merchant to whom we hoped to

dispose of our jewels was out of town, but as he was to
return in a few days, Andrew advised us to wait for him.
Meantime, at their earnest entreaty, we spent a few days
with my uncle and aunt.

My mother indeed passed much of her time in her own

apartment, which, as her widowhood was so recent, no one
could decently object to; but I went out several times with
my aunt to the park, and even to Whitehall, where I saw
the king and queen, and many great people besides. It
seemed that the king had heard something of our story; at
all events, he noticed me, and asking who I was, I was
informally presented to him. There was less formality about
the court at that time than ever has been before or since.
He spoke kindly to me—for he was always kind when it cost
him nothing—asked after my mother, and made me a
compliment on my good looks. I noticed after this, that my
aunt was rather in a hurry to get me away, and she never
took me thither again.

But the mischief was done. All my old daydreams of

wealth and ambition waked to life again, and I began to
indulge them more and more. My conscience did not let me
fall into my old courses without warning me, it is true; but I
began to disregard its teachings, and to repine at the strict
manner in which I had been brought up. I had grown very
handsome since my illness, and I was quite aware of the
fact—as what girl is not? And when I was away from my
mother's side and in my aunt's drawing-room, I received
many flourishing compliments, such as were then in
fashion, from the gallants who visited her.

I soon began to compare my good Andrew with these

fine gentlemen, not at all to his advantage, and I wished, if
it were my fate to marry him, that he had a more genteel
figure, and knew better how to set himself off. My aunt and
uncle did not scruple to say before me that it was a shame I
should so sacrificed—sent down to the country to be
brought up by a set of Puritans, and married to another,
without any chance to raise myself by a good match, as I
might easily do.

"'Tis a poor thing for Andrew, too," I heard my uncle

say one day; "he ought to marry some rich merchant's
daughter, and renew his estate."

"Why do you not tell him so?" asked my aunt. "There is

Mrs. Mary Bakewell, who would jump at the chance of
making herself a lady with her thousands. Truly, she is plain
enough, and something the elder, but she is a good creature
after all. Why not propose it to him?"

"I did," replied my uncle, laughing; "and you should

have seen him. He treated me to a real Cornish thunder-
gust."

"Why, what did he say?" asked my aunt, while I listened

with all my ears, as we say.

"He said he would rather travel the country with an ass

and panniers, selling sand to the old wives, than sell his
manhood for a fortune. I said the lady was a good lady, and
well nurtured, and he answered:

"'So much the worse,' and then added, 'You mean

kindly, I dare say, and I thank you, but I am old-fashioned
enough to desire to love my wife.'"

"He is a rustic, without doubt," returned my lady, with a

little touch of sarcasm in her voice. "I think you may as well
let matters stand as they are, Charles. You will gain nothing
by meddling, and 'tis but a thankless office, educating of
other people's children."

"I believe you may be right," said my uncle, "and yet I

confess I should like to keep the girl."

My aunt made no reply, and the conversation was

dropped. I must say I looked on Andrew with a good deal
more favor after this. It was something to have a servant
(that was the fine phrase at that time) who had refused a
great match for my sake.

Our visit at my uncle's was cut rather short from two

circumstances, I fancy. One was that he was displeased my
mother should have taken Mr. Pepys' advice about selling
her jewels. My lady herself had a fancy for these same
jewels, and would have bought them on credit, which we
could ill afford. Besides which my mother told Andrew and
me that it was not well to have money transactions between
near relatives.

"They are sure to lead to misunderstanding and

coldness, if not to open rupture," said she. "Moreover, from
what I have seen, I believe my brother to be already
embarrassed with debts."

"I know it for a fact," said Andrew; "and I believe you

have done wisely. Mr. Bakewell is now returned, and is
ready to treat with you for the jewels at any time."

"Then we will finish the affair as soon as may be, that

we may turn our faces homeward," replied my mother. "I
long for the sight of green trees and running streams, and,
above all, for a cup of cold water from St. Monica's well. I
can see it now, bubbling up under the ruined arch," she
added musingly, with that far-away look which had lately
come to her eyes. "Some day, Andrew, you must restore
that arch."

"I will," said Andrew, with a certain solemnity, and they

were both silent a moment. Then he added, more
cheerfully, "Then I will tell the good woman at our lodgings
that you will return to-morrow."

"This afternoon," said my mother; and so it was settled.

I believe another reason why my mother was willing to

cut her visit short was that she saw the influence my aunt
and her way were beginning to have upon me. I shall never
forget how she looked at me when, in some fit of
impatience with my work; I gave vent to one of my aunt's
modish oaths. Those of the Religion in France looked upon
all such expressions with as much abhorrence as the
Puritans of England or America.

"Genevieve," said she sternly, "what would your father

say?"

"I did not mean anything," said I, abashed and vexed at

the same time.

"And there is just the fault," returned my mother.

"Against what is the commandment aimed, if not at the use
of sacred names without meaning anything?"

I did not reply, of course, and I was more careful in

future, but inwardly I murmured at my mother's strictness
and Puritanism, as I called it. I had learned this phrase from
my uncle and his friends, with whom everything serious or
reverent was Puritanism.

I should have said that I went to church on Sunday with

my uncle and aunt. I was quite amazed at the splendor of
the church, which had recently been refitted, and delighted
with the service, especially with the chanting and singing.
The sermon also I thought very good, though I did not quite
like the preacher's manner. But if I was pleased with the
clergyman, I was horrified at the manners of the
congregation. I saw the fine ladies and gentlemen bowing
and curtsying to each other, whispering—nay, all but talking
aloud—and passing snuff-boxes and smelling-bottles back
and forth. One of the gentlemen I had seen at my aunt's
the day before, bowed to me as he came in, but I looked
the other way.

"What a gracey sermon—just like a Presbyterian," said

my aunt, yawning, without any disguise, almost before the
congregation was dismissed. "And why did you not curtsy
when Mr. Butler bowed to you? Did you not see him?"

Then I made one of the great mistakes of my life. I

yielded to that miserable shame of doing right, which is the
undoing of so many, and answered, "I was looking another
way."

"Oh, I thought perhaps it was against your principles,"

said my aunt, in that light tone of contempt which always
stung me to the quick. "I know some of our Puritans will not
acknowledge a salute in church. I don't believe my old Lady
Crewe would return a bow from the king himself, if prayers
had begun."

"Yes, she is true to her colors," said my uncle. "I like

her the better for it too," and he sighed a little.
 I heard afterward that he had been a great precisian in
the days of the Protector, though, like many others of the
same sort, he went to the other extreme now. Their fear of
God, like mine own, was taught by the precept of men, and
therefore was easily enough overthrown by the same.

"But you must have your wits about you, child," said my
aunt. "'Tis a dreadfully uncivil thing not to return a salute.
Mr. Butler will think you a little rustic."

I am ashamed to say that I was more troubled at the

thought that Mr. Butler should think me a rustic than at the
lie I had told. When I came to my mother, she asked me of
the sermon, and I told her all I could remember.

"'Tis a great privilege to hear the blessed Word

preached openly to all the people," said my mother, sighing
a little.

"'Tis a privilege a good many do not seem to

appreciate," said Andrew, who had come in as usual to see
my mother; "you should see the king and countess at
church, madame. The Duke of York spent the whole of
sermon-time this morning talking and laughing with some
painted madams or other, through the curtains of the pews.
If my cousin had been the preacher, I believe he would have
spoken to them before all the congregation. What can you
expect when our rulers set such an example?"

"What did the king do?" I asked.

"He was more attentive to the preacher. He is not one

to hurt any one's feelings by incivility, though he would not
care for his going to the rack, so he did not see it."

"Hush, my son!" said my mother reprovingly. "'Tis a

besetting sin of yours to speak evil of dignities."
 Andrew shrugged his shoulders, but he had too much
respect to answer my mother back again.

But I am going back in my story. That very afternoon

we returned to our lodgings. Our friends took leave of us
cordially enough, and my aunt made me several very pretty
presents, especially of a pocket working equipage,
containing scissors, needles, thimble, and other
implements, beautifully wrought, and packed in a very small
compass.

Besides these she gave me a volume of plays and

poems, which last, I am ashamed to say, I did not show to
my mother. My mother presented her with a handsome
clasp of Turkey stones and pearls, and my uncle with a gold
snuff-box, which had belonged to her husband's father, and
had a picture of some reigning beauty—I forget whom—
enamelled on the lid; so we all parted friends.

The next day being Sunday, we went to a French

Protestant church, where the worship was carried on
according to the forms used by us in our own country. There
had been an attempt made in the days of Charles the First
to compel the French Protestants to conform to the Church
of England, but it had not been carried out in the present
reign. Great numbers of the refugees did in fact conform to
the church, and indeed take orders therein, not considering
the differences as essential; but others preferred the ways
they were used to, and these had chapels of their own. It
was to one of these churches, in Threadneedle Street, that
we went; and here a great surprise awaited us.

We were no sooner seated than I began to have that

feeling we have all experienced, that some one was looking
earnestly at me, and turning my head about I saw in the
gallery Simon and Jeanne Sablot. I could hardly believe my
eyes; but there they were, decent as usual, though poorly
dressed enough, and sadly changed since I had seen them
last. Simon's hair was white as snow, and Jeanne's ruddy
cheeks were faded and sunken. They both smiled, and then
Jeanne's face was buried in her hands and her frame
shaken with sobs.

I had no time to direct my mother's attention to them,

for the minister at that moment entered the desk and the
service began. Here was no whispering, no exchange of
salutes or snuff-boxes. Many of those before the preacher
had but just escaped from their enemies, thankful to have
their lives given them for a prey, as the prophet says; and it
was to them a wonderful thing to attend upon their worship
openly and in safety.

It was not the regular minister who preached, but one

who had but lately escaped from the house of bondage, and
was able to give us the latest account of the unhappy
country we had left behind. It was a sad tale of oppressive
edicts, pressing always more and more severely upon our
brethren; of families desolated and scattered; of temples
pulled down and congregations dispersed. There were still
sadder tales to be told, of abjurations and apostasies—some
forced by harshness, others brought about by bribes and
cajolery. Then the preacher changed his tone and spoke of
midnight assemblies, like that of ours in the cellar of the old
grange; of consistories held and discipline administered in
caves and lonely places of the mountains, and of our fallen
brethren coming, with tears and on bended knees,
imploring to be restored to that communion to which to
belong meant shame, imprisonment, and death. The old
man's face shone and his voice rang like a trumpet as he
told of these things, stirring every heart in the assembly,
even mine. I felt miserably ashamed of my late frame of
mind, and resolved that I would forsake the world, and live
for heaven once more.

The sermon was long, but it came to a close at last, and

the Lord's Supper was administered. It was then that my
mother discovered our two old friends. I feared at first that
she would faint, but she recovered herself, and when they
came to us after sermon, she was far calmer and more
collected than they were. She invited them home to our
lodgings, which were not far distant, and they spent the
rest of the day with us.

"How and when did you leave home?" was naturally the
first question.

"About two weeks after the house was burned,

madame," answered Simon.

"It is burned, then," said my mother.

"Oh, yes, madame. The mob plundered it thoroughly

and then set it on fire, and little is left but the shell. A fine
gentleman came down from Paris a few days afterward. He
was very angry at the destruction, and threatened all sorts
of things if the plunder was not brought back, but he
recovered very little. Our house was also set on fire, but
owing to the rains it did not burn, and after a few days we
ventured to return to it and gathered together some few
things. I have a parcel for you, madame, intrusted to my
care by Monsieur, which the wretches did not find. Our small
store of ready money also escaped their hands. David,
whom you know we were expecting, came just then, and
we returned with him to Dieppe, and after a week or two,
he found us a passage to England. As I said, we had a small
store of ready money, but it soon melted away, and though,
by Jeanne's skill in lace-making and mending and my own
work with a market gardener, we have made shift to live, it
has been poorly enough. But why should we complain? We
are in safety, and can worship God according to our
conscience."

"But David!" said I.

"He would not come, mamselle. He is in high favor with

his employer, who protects him, and he says he has so
many opportunities of helping others, that he will not as yet
abandon his post. Besides, he cherishes a hope, though I
believe it is a vain one, of rescuing Lucille."

"Why do you think it a vain one?" I asked.

"Because, mamselle, she does not wish to be rescued.

She has made a profession, as they call it, and we hear she
is high in favor with her superiors, and a willing instrument
in their hands in coaxing or compelling the poor little
children to abjure. We thought it a great mercy when she,
the last of five babes, was spared to us; but now I wish she
had died in the cradle, like the rest."

"She is not yet out of the reach of mercy, my poor

Simon," said my mother. "We must all remember her in our
prayers." She paused, and then added, with a great effort,
"Do you know what became of my husband's body?"

"He rests in peace, madame," answered Sablot. "Jean

La Roche and myself buried him at midnight, by the side of
my own babes, in our orchard. We levelled the ground and
laid back the turf, so that none should suspect."

My mother rose and left the room, making me a sign

not to follow her. When she came back at the end of an
hour she had evidently been weeping bitterly; but she was
now quite calm. She asked many questions about our
servants, our tenants, and neighbors. The maids had all
escaped, in one way or other, he told us. Julienne, he
thought, would conform, as her sweetheart was earnest
with her to do so. Marie had gone to Charenton. Old
Mathew was found dead in the orchard, but without any
marks of violence, and Simon thought he had died of the
shock, as he was a very old man. Of Henri, he knew
nothing.

"And what will you do, my poor friends?" said my

mother. "How can we help you? If I were not going to the
house of another, I would take you with me."

"Oh, we shall do very well, madame," said Jeanne

cheerfully. "I get a great deal of fine washing and mending,
especially of lace, and if Simon could buy some turner's
tools of his own, he might set up a little shop."

"I have a better plan than that," said Andrew. "My

mother writes me that our old gardener is just dead, and
she knows not where to find another. You shall go down to
Cornwall and take his place. As for Jeanne, she can wait
upon madame, and teach old Deborah to make omelettes
and galette. That will be better than living in a dingy street
in London, will it not?"

"May Heaven's blessing rest upon you, my son," said

my mother, while my poor foster-parents could hardly speak
a word, so overpowered were they with the prospect
suddenly opened before them. I was as pleased as my
mother, and at that moment would not have exchanged my
sailor for the finest gallant about the court.

The next day the business of the jewels was finished,

and so favorably for us that we were made quite
independent in point of means. My mother insisted on
Simon's retaining at least half of the package of gold he had
brought away with him, and which he had never broken in
upon in his greatest needs, and Jeanne was soon neatly
dressed in English mourning. In a few days, we embarked
with all our goods, which indeed were not burdensome by
reason of quantity, in a ship going to Plymouth. We had a
short and prosperous voyage, and after resting a day or two
in Plymouth, we took horse for the far more toilsome
journey into Cornwall.

CHAPTER XI.
TRE MADOC.

IT was a toilsome journey. Andrew had taken great

pains to provide easy horses for us, and we carried some
comforts in the way of provisions, biscuits, gingerbread, two
or three flasks of wine, and small packages of coffee, and
one of the new Chinese drink called tea, which had just
begun to come in fashion, and which has now become quite
common, even in tradesmen's families. For this, as for
many other kindnesses, we were indebted to Mr. Pepys and
his good little wife.

We did not travel very rapidly, the roads being bad,

even at this time of the year, and such as in many places
forbade our travelling otherwise than in single file. The
weather was charming—that was one comfort—and the air
as delicious as any I ever breathed in my life. As we crossed
the high moors, we saw abundance of those old heathen
monuments which abound in Normandy, and still more in
Brittany, and once we passed one almost exactly like that
above our orchard, where my father and I had our
memorable conversation.

We stopped for rest and refreshment in little country

towns, and sometimes at lonely inns standing by
themselves, such as would not have been considered very
safe abiding-places in France, and where we should have
been at a loss to make ourselves understood but for Andrew
and the sailor whom he had taken along from Plymouth.
The Cornish tongue, which is now fallen greatly into disuse,
was at that time generally spoken among the common
people. I picked up a good deal of it afterward, but at that
time it was all heathen Greek to me, though my mother
could speak it a little.

I must needs say that, though we must have appeared

as outlandish to them as they did to us, the good folks were
most kind to us, especially when they had heard something
of our story. They would express their sympathy by sighs
and tears, and by bringing out to us the best that they had;
and the men would often leave their work and walk miles
beside us to guide us on our way.

Simon kept up his courage very well, and indeed he

enjoyed the journey; but poor Jeanne's spirits sank lower
and lower, and I think she would have given out altogether
had we not come, on the fifth day, to cultivated fields and
orchards. The sight of these last revived her drooping
courage, and when at last we reached the village of Tre
Madoc, always a neat little place, and passing it came to the
brow of the hill from which we looked down on the house of
Tre Madoc, nestling amid great trees in its south-land valley,
with the clear stream falling in a cascade at the upper end
and rushing down to the sea, she was quite another
woman.

"Is this not beautiful, Jeanne?" said my mother, her

eyes filling with tears as she gazed on the old home, unseen
for so many years.

"It is, madame; I won't deny it, though the house is

nothing in grandeur to the Tour d'Antin. And the cottages do
look snug and comfortable; but after all it is not France!"

"No, it is not France: don't you wish it were?" said I.

"How nice it would be to see a party of dragoons coming
after us over the hill, and to be afraid to pass yonder
tumbling old cross lest some one should see that we did not
bow to it!"

I am conscious that I spoke these words all the more

sharply because I was myself dreadfully homesick—not for
France so much as for London, with which I had fallen in
love, though I had begun by disliking it so much. I had had
a taste of that life of which I had so often dreamed, and I
found the cup too sweet to wish to have that taste the only
one.

My mother looked at me in surprise, but she had no

time to speak the reproof which her eyes uttered. It seemed
that we were expected and watched for. We saw a little lad,
who had been sitting with his dog and clapper watching the
birds, leave his occupation and run down toward the house,
and presently an elderly lady, surrounded by three or four
young ones, came out upon the porch.

"There are my mother and sisters," said Andrew "and,"

he added to me, in a lower tone, "your mother, too,
Vevette! I hope you will love her."

"I am sure I shall," I tried to answer graciously, though

I felt inwardly vexed. I always was provoked when Andrew
said any such thing implying a kind of property in me.

I felt an unaccountable shyness of these new relatives,

such as I had not been conscious of either in Jersey or
London, and I wished the meeting with them could be
postponed. But our tired beasts now put themselves into
brisk motion, rejoicing, poor creatures, in the thought of
rest and food. We descended the hill, passed through a
short avenue of nut-trees, and came out before the same
porch, overgrown with ivy and a groat Virginia vine, as we
used to call it, and found ourselves in presence of our
friends.

Andrew sprang from his horse and assisted my mother

and myself to dismount. The older lady clasped my mother
in her arms.

"Dearest sister Margaret," said she, kissing her on both

cheeks, "welcome home! It is a happy day that sees you
enter your father's house once more. And this is my new
daughter. Heaven bless you, my love! I have a flock of
maidens, as you see, but there is plenty of room for one
more. And who are these?" Turning to Simon and Jeanne,
who had also dismounted and stood modestly in the
background.

My mother explained matters, and our poor friends

were welcomed in their turn and committed to the care of a
very nice old woman, to be made comfortable, while one of
half a dozen old blue-coated serving-men led away our
horses and attended to our luggage.

Then we were conveyed into a parlor, a large low room

wainscoted with cedar and hung with handsome though
faded needlework. Here we were relieved of our riding gear
and presented to our other cousins, of whom I was too tired
and confused to see aught but that Betty was small and
dark, Margaret tall and fair, and Rosamond very much like
somebody I had known, I could not say whom.

"But you are both tired with your long journey, I am

sure," said my aunt, after the first greetings had been
exchanged. "Rosamond and Betty shall show you your
lodgings, and when you have refreshed yourselves we will
meet at supper. I have given you the gilded room,
Margaret, and to Agnes—or do you call her Genevieve?—the
little chamber over the porch beside it. I might have given
you a more sumptuous apartment, my dear," she added,
turning to me; "though indeed we are but plain country
folks at best; but the porch room hath a pleasant lookout,
and I thought you would like to be near your mother."

I murmured something, I hardly knew what, and my

mother answered for me. "Vevette is not used to luxury, my
dear sister, and the porch room is good enough for any
young maid. May I ask you to send Jeanne to me? She will
feel herself very strange, I fear."

"She shall attend you directly," answered my aunt; "and

glad I am that two such confessors for the faith should find
a shelter under this roof."

"Take heed to the steps," said Rosamond, as we came

to the foot of the staircase; "they are somewhat slippery."

That they were, being of dark oak, and polished like

glass with age and much scrubbing. However, I was used to
polished floors, and so did not get a fall. We traversed a
long gallery hung with pictures, and came to my mother's
room, which was large and low. Above the wainscot, the
walls were covered with old-fashioned stamped and gilded
leather, such as one seldom sees now. The bed was of
needlework, with wondrous white and fine linen—a matter
in which we Corbets have always been particular. There was
a small Turkey carpet on the floor, and quite a fine Venice
glass, with branches, handsomer than that in my aunt's
dressing-room in London. I thought the room as pretty as
any one I had ever seen. Indeed, the whole house was
finished with a richness uncommon in remote country
houses at that day, for the men of the family, taking
naturally to a seafaring life, had brought home from abroad
many articles of luxury and beauty.

My own room was by far the prettiest I had ever

inhabited, even at any aunt's house in London. It was partly
over the porch, as my aunt had said, and had a kind of
projecting window which commanded a lovely view of the
sea and the shore. The bed was small and hung with white,
and there was a queer old cabinet or chest of drawers,
which reminded me at once of Jeanne's cherished bahut,
which she often sighed over.
 "That cabinet came from the south of France, they say,"
said Rosamond, seeing my eyes fixed upon it. "My
grandfather brought it home for a present to his wife."

"There she goes," said Betty, laughing. "Rosamond

knows the history of every old piece of furniture and
tapestry and every old picture and sampler in the old
house, and will retail them to you by the hour, if you care to
listen to her. They are all precious relics in her eyes."

"I am sure I shall care," said I, seeing that Rosamond

looked a little dashed. "I love things that have histories, and
that old cabinet is so like one that my poor foster-mother
used to have, that I fell in love with it in a moment; I think
Rosamond and I will agree finely."

It was now Betty's turn to look a little vexed, but her

face cleared up directly.

"You will have abundance of entertainment, then, for

the house is a museum of old furniture and oddities. But
this old tabernacle is a convenient affair. Here are empty
drawers, as you see, and a place to write, and in this large
drawer you will find clean towels and napkins as you want
them. Come, Rosamond, let us leave Agnes to dress herself.
I am sure she must feel the need of it."

I did indeed need such a refreshment, after my long

ride. My mail was already in the room, and it was with
considerable satisfaction that I arrayed myself in one of the
new frocks which had been made for me in London, and
which, as I could not but be aware, set off to considerable
advantage my slender, erect figure. Then, very well satisfied
with myself, I went into my mother's room, where I found
Jeanne, much refreshed in mind and body, and disposed to
regard her new home with more favorable eyes. My mother
was already dressed, and, seated in a great chair covered
with needlework flowers in faded silks, was directing Jeanne
in the unpacking of her mail and the disposition of her
clothes.

"You look well, my child," said she, holding out her hand
to me. "Have not the lines fallen to us in pleasant places?
Even Jeanne admits that the Cornish folk are Christian
people, since, though they cannot speak French, they know
how to make cider."

"And very good cider too, madame," answered Jeanne;

"and though I think them not very polite to smile at the
English which I learned so well to speak in London, yet one
must not expect too much of them, living as they do at the
very world's end. Why, they tell me, at least that old sailor
did, there is absolutely no land between the shore yonder
and that savage country of America. Do you think that can
be true, madame? It makes one almost afraid."

"It is quite true, my Jeanne; but I see no cause for

fear," answered my mother, smiling. "Some of our own
people have settled in America, and are prospering well. We
have even relatives abiding there. My husband and I have
sometimes talked of the possibility of going thither
ourselves. Is not this a pretty place, my Vevette?"

"Yes, maman, very pretty, only—" and here I stopped;

for something choked me, and I felt a great disposition to
cry.

"Only it is all strange and new, and my little one is

overwrought," said my mother, kissing me. "I forget it is not
a home-coming to you as to me. Yet I hope you will try to
be happy here," she added, regarding me wistfully.
 "Indeed I will, dear maman," I answered, making a
great effort to control myself, and succeeding pretty well. "I
think the house is beautiful, especially this room and my
own; and only think, Mother Jeanne, there is a bahut
almost like yours, and my cousin Rosamond says it came
from the south of France. Perhaps it was made by the same
man."

"That could hardly be, mamselle, for my great-

grandfather made mine. He was a skilful man, I have heard
say, and made many beautiful pieces for great houses."

"Then why not this one? Go and look at it," said I.

Jeanne obeyed, and soon came back in great

excitement.

"It was—it really was made by my great-grandfather,

madame!" she cried. "There are the two doves pecketting
on the top just the same, and the very sign—the olive-leaf
marked with a circle—which he used to put on all his work.
Is it not wonderful, madame? Is it not a good omen?"

And again she went back to examine the cabinet, and I

followed her, listening with interest while she pointed out
the maker's sign carved here and there upon the doors and
drawers, and the peculiar beauty of the steel hinges and
locks.

This little incident diverted my mind and put me into

better spirits, and when Rosamond came to call us to
supper, I was ready to meet her with a smile. The meal was
served in another room from that we had seen before—a
high-arched room with a gallery crossing one end, which
was situated—so Rosamond told me—in the older part of
the house, and was formerly the great hall. The meal was
well served, and seemed wonderfully abundant, though I
was growing accustomed to English profusion in the matter
of eating and drinking. I could not but admire the white,
glossy sheen of the damask cloth and napkins, and the
beautiful china dishes, more beautiful than any I had ever
seen. China collecting was a great passion then, and my
aunt in London would have given one of her little pink ears
for the curious standard dish full of early strawberries which
adorned the supper table, or the tall jug crowned with
frothy whipped cream beside it.

We young ones were more or less silent, of course,

while my mother and my Aunt Amy talked about old times,
and who was dead, and whose son had married which one's
daughter, and all the rest of the chat which goes on when
old neighbors come together. My dear mother was—no
disparagement to her either—a bit of a gossip; though, as
we had few friends among our French neighbors, she had
had little opportunity of indulging her tastes; but now she
grew more animated and interested than I had ever seen
her, in hearing all the news my Aunt Amy had to tell.

"And what about our cousins at Stanton?" asked my

mother presently. "From what Andrew tells me, I suppose
the present lady is not much like the one I knew."

"No more than chalk is like cream cheese," answered

Aunt Amy. "Yet she is a good lady, too, and a kind
stepmother to the lad who is left, though she had two
daughters of her own when she married my lord."

"And what like are they?"

"Nay, that you must ask Andrew. He has seen more of

them than I have."

"Theo is well enough," said Andrew. "She is a merry

girl, who cares not much for anything but pleasure and
finery, but she is good-natured at least. Martha is a girl of
another stamp. I pity the man who marries her. She hath
far more mind than Theo, but such a temper! Disagree with
her ever so little—do but dare to like what she hates or
know something she does not—and she is your enemy for
life."

"Gently, gently, my son," said his mother, with a little

laugh. "What hath poor Martha done to you?"

"Nothing to me, mother, but I have seen enough of her

doings to others. I believe there is but one person in the
world she stands in awe of—her mother—and but one she
loves—her half-brother, the young lord. I do think she cares
for him."

"Ah, well!" said my aunt easily. "If she has such a

temper, it brings its own punishment."

"And the punishment of a good many others also,

unluckily," said Andrew, and then the conversation turned to
other things.

After supper Andrew proposed that we should go up and

see the gardens. The elders preferred sitting in the house,
but we young ones went out, after proper injunctions to
keep moving and not to stay out after the dew began to fall.
Gardening, it appeared, had also been a fashion with these
curious Corbets, who seem to me from the earliest records
to have made their homes as pleasant as possible, only to
run as far-away from them as the limits of the world would
allow. The flower-beds were in their spring beauty, and
were filled with rare plants and flowers, which I never saw
anywhere else.

The climate of Cornwall is very mild, so that the myrtle

grows to a great size out of doors, and many tender trees
flourish which will not live at all about London. I particularly
admired a tall shrub With red-veined leaves and covered
with little scarlet bells in immense profusion, and asked its
name.

"I cannot tell you that," said Andrew. "My father

brought it from the West Indies, where it grows very large.
This other bush, with bright scarlet flowers and broad
leaves, is from the Cape of Good Hope, but it will bear no
frost, so we take it in, in the winter."

"What great rosemary and lavender plants!" said I.

"They make me think of what Jeanne has told me about
Provence, where they grow wild."

"They do fairly well, though the place is damp for them.

See, yonder is a tulip-tree. Is it not a grand one? The
Americans make great use of the wood, which, though soft,
is very lasting for some purposes."

"What a pity to cut down such beautiful trees!" said I.

Andrew laughed.

"Trees are the great enemies over there," said he. "It
did look terribly wasteful to me to see great logs of bard
maple, chestnut, and oak, rolled into heaps and burned in
the field, just to get rid of them."

"What a shame!" said Betty. "Why not at least give

them to the poor for fuel. Goody Penaluna would be glad
enough of such a log."

"If Goody Penaluna were there, she would have wood

enough for the asking," replied Andrew. "One can hardly
say there are any poor, for though they have often had hard
times enough, yet it mostly comes share and share alike."
 "I believe Andrew hath a hankering after those same
colonies in his secret soul," said Betty. "You will find yourself
transplanted thither some time or other, Agnes."

Again I felt annoyed. I did not know why.

"Do not call me Agnes; call me Vevette," said I. "That is

the name I have always been used to."

"But Agnes is so much prettier. Vevette is like a

nickname," objected Betty.

"It is a sort of pet name, I suppose—short for

Genevieve," remarked Margaret. "If Vevette likes it best,
she certainly has a right to choose."

"But it is French," objected Betty again, "and she is an

English girl now. I am quite sure mother would prefer to
have her called Agnes, and Andrew too; wouldn't you,
Andrew?"

"I should prefer that she should have her own way in
the matter," answered Andrew shortly, and there the
discussion ended for the time; but we were no sooner in the
house than Betty began it again, appealing to her mother to
say if it would not be much better for me to be called by my
English name now I was come to live in England.

"That is for her mother to say," replied Aunt Amy. "I

presume she will prefer to call her by the name she has
been used to."

"I certainly shall prefer to do so, and to have others do

so," said my mother. "The name of Agnes was never a
favorite of mine."
 Betty said no more, but she never lost an opportunity of
calling me Agnes, till I took to calling her Elizabeth, to
which name she had a special aversion.

The next morning and for many succeeding days my

mother was very unwell, and I naturally spent most of my
time with her in her apartment, which was at some little
distance from the rest of the house. Jeanne attended on
her, and Simon worked in the garden, taking great pleasure
in the variety of plants and flowers he found there. He got
on very well with his fellow-servants, being of a quiet and
sober disposition. He did not at all disturb himself when
laughed at for his mistakes in English, but only laughed
back, or contented himself with quietly correcting his
mistake. But Jeanne's southern blood was more easily
stirred, and she more than once came to my mother
declaring that she could endure her life no longer.

Betty used to take pleasure in teasing her, as indeed

she did every one who came within her reach, except her
mother and Andrew, of whom she stood in awe. She and I
had more than one encounter, in which I can safely say that
she met her match, and she did not like me the better for
it; but Rosamond was her especial butt, and she made the
poor girl's life miserable. Rosamond was of a studious turn
of mind, and loved nothing so much as to get away by
herself, with a great chronicle, or with her French or Latin
books. It was a somewhat uncommon disposition at that
time, when the education of women was much neglected,
even more than it is now. But the Corbets have always been
rather a bookish race, and Rosamond was a true Corbet in
all things. She loved acquiring new ideas above any other
pleasure in the world. She made Simon tell her all about
Normandy and Brittany, and there were several old sailors
in the village to whose tales of foreign parts she was
delighted to listen for hours, albeit I fear they were
sometimes more romantic than reliable.

Aunt Amy never interfered with this taste of

Rosamond's, but allowed her to read as much as she
pleased, though she never cared to open a book herself.
Margaret was Rosamond's champion in all things, though
she thought so much reading a waste of time; but Betty
was always tormenting the poor girl, hiding her books,
destroying her collections of dried plants and shells, and
laughing at and exaggerating the mistakes which she now
and then made in her preoccupation. I must say that in
general Rosamond bore all with the utmost sweetness, but
now and then she would fly into a passion. Then Betty
would provoke her more and more till she succeeded in
driving Rosamond into a burst of passionate crying, which
generally ended in a fit of the mother, which brought my
aunt on the scene.

Then Betty would be all sweetness and soothing

attentions to the sufferer, bringing everything she could
think of to relieve her, and affecting to pity and pet her till,
if it had been me, I am sure I should have boxed her ears.
Aunt Amy never saw through these manœuvres, but when
Rosamond recovered, she would talk to her seriously about
the necessity of governing her temper, and Rosamond
would listen humbly and meekly promise to try and do
better. There was always more real worth in her little finger
than there was in Betty's whole person, but her timidity and
absent-minded ways often made her appear at a
disadvantage.

She and my mother were soon great friends, and she

used to bring her precious books to our apartment, where
Betty dared not intrude. Here she would read aloud to us
for hours, or practise her French and Italian with maman
and myself. She spoke them both horribly, but was very
desirous to improve, and made great progress.

Margaret also joined in the French lessons, but she had

a great many other things on her hands. She took a good
deal of the care of housekeeping off her mother. She visited
the poor in the village, and worked for them, and she had
taken upon herself a kind of supervision of the dame school,
which furnished all the education for the village of Tre
Madoc. Old Dame Penberthy, who taught or rather kept it,
had not been a very good scholar in her best days, I
imagine, and she was now old and half blind. The little
children were sent to her to be kept out of mischief, and
taken away as soon as they were fit for any sort of work.
Some of the brightest of them learned enough to pick out,
with much stammering, a chapter in the Testament, and
these were the dame's best scholars, whom she exhibited
with great pride.

Margaret, however, had lately taken the school in hand,

moved thereto by something she had read, and also by
Andrew's wish for a better state of things. He had seen in
the American colonies day-schools established for all sorts
of children, and he wished for something of the same sort
at Tre Madoc. So Margaret had persuaded the dame to take
home an orphan grandniece, a clever girl who had lived a
while at the court, and the old woman easily fell into the
way of letting this girl, Peggy Mellish by name, have most of
the charge of the school.

Margaret herself went every other day, to inspect the

sewing and spinning, and to hear the children say their
horn-book and teach them their Belief and Commandments.
* By and by she would have me join her in this work. I was
fond of walking and of children; my mother and Andrew
favored the plan, and so I took hold of it with great zeal,
and after a few visits along with Margaret to learn her ways,
I even took charge of the school on alternate days, and
soon knew as much about the families of the children, their
wants and ways, as Margaret herself.

* A horn-book was a printed sheet containing the

alphabet and some other lessons, protected from moist
little lingers by a sheet of transparent horn.

Thus it came to pass that Betty was in a manner left out

in the cold. It was her own fault, I must needs say, for she
laughed equally at Meg's and my teaching and Rosamond's
learning; but she was not any more pleased for that; and
so, partly from idleness, partly for revenge, she set herself
to make mischief between Andrew and me. But I must put
off the relation to another chapter.

CHAPTER XII.
MISCHIEF.
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