EVOLUTION OF FINANCIAL SERVICES IN INDIA

The financial services industry in India is in the process of attaining full bloom. To reach the present position, it has passed through a number of stages as mentioned below:

1. The Stage of Infancy

This existed between 1960 and 1980 and covered in its gamut merchant banking, insurance and leasing services. Merchant Banking Services were unknown until the early 1960s. The policy makers and researchers had lack of clarity about the term merchant bankers. Some one defined them as institutions which were acting; neither as merchants nor as bankers. However the term was used as an umbrella function, providing a wide range of services, starting from project appraisal to arranging funds from bankers. The merchant bankers are expected to identify projects, prepare feasibility reports, develop detailed project reports, and in doing so conduct marketing, managerial, financial, and technical analyses. Having done this, they are approached to garner project finance, and in order to do this resolve the problems of capital structuring. They are asked to act as a bridge between the capital market and the fund-seeking institutions. They underwrite the issues and become subject to developments in case such issues are not fully subscribed. They assist the enterprises in getting listed on the stock exchanges. They offer legal advice on registration of companies and removing legal tangles. They provide advice and help in mergers and acquisitions. They give technical advice on leveraged - buyouts and takeovers. Recently they have added the syndication activity in their portfolio, wherein they form a syndicate or become a part of it to raise project finance. They arrange working capital loans and manage the risk element present in the form of general risk which is covered by the insurance policies of the General Insurance Company. Investment companies such as the Unit Trust of India, the life insurance business initiated by the Life Insurance Corporation of India, and the general insurance business, also made their mark in the first stage of financial services. During this period, the Life Insurance Corporation of India has grown as a public monopoly. Priorto its setting up, the private sector was operating the life insurance business. The general insurance business was nationalised in the early 1970s. A holding company was set up with four subsidiaries to handle the general insurance business in the public sector. Suggestions

were given very frequently to privatise the insurance business, as in no way could the insurance business be considered as a national monopoly. Leasing made its mark in the closing years of the 1970s. Initially such companies were engaged in equipment lease financing. Later, they undertook leasing operations of different kinds, including financial, operating and wet leasing. During this period the number of leasing firms has shot up to a high of 400. The reorganisation of such firms due to their non-viability later led to a contraction in their numbers.

2. Modern Financial Services

Financial services have entered the second rung during the later part of the 1980s.Over the counter services, share transfers, pledging of shares, mutual funds, factoring, discounting, venture capital, and credit rating, constitute some of the modern financial services. In the West, these services emerged on the scene about100 years back. The mutual fund business is the major provider of funds to industry anywhere in the developed countries. The mutual funds there have been innovative in terms of schemes. They have been giving stable rate of return. Their asset and liability management is transparent. The small investor is secure in their hands. Their business policies are such that they create value for their investors. Investors are not victimised by shifts in valuation policies, and efforts are made to harmonise the net asset valuation. The mutual funds have their own code of conduct. Credit rating is another important financial service which made its mark in India in themid-1980s. Credit rating boosts investor confidence in capital market operations and prevents fly -by-night companies from making forays in the capital market. There was one credit rating company initially and we have ended up with eight finally. In terms of spread of the credit rating function, initially only debt instruments issues were covered. However later, instruments such as commercial papers and fixed deposits were brought under the purview of credit rating. Incidentally, there is a sovereign credit rating assigned by credit rating firms for the country. The Discount and Finance House of India Limited and a number of factoring institutions, such as State Bank of India Factors and Can bank Factors Ltd. Venture capital funds made their appearance in the late 1980s, Most of these firms have been operating in the public sector.

3. The Third Flush

The third flush in financial services includes the setting up of new institutions, and paving the way innovating new instruments and also their flotation. The setting up of depositories has brought the India financial services industry in line with the global financial services industry. It has promoted the concept of paperless trading and resulted into dematerialisation of shares and bonds. The stock-lending scheme approved by the Central Government in 1997-98 budget and the setting up of a separate corporation to deal with the trading of the Gilts are innovative measures. The steps initiated to popularise book building in order to help both the investors and fund users. The online trading interface by the Bombay Stock Exchange, the Delhi Stock Exchange, and computerisation of the National Stock Exchange, is acting as the fulcrum for the development of financial services arid is another major advancement in the field of financial services. This has given a fillip to paperless trading, save the investors from the onslaught of jobbers and brokers, and reduce tax evasion. The guidelines from the Securities and Exchange Board of India in relation to the capital adequacy ratio for the merchant bankers and their categorisation into different groups is a major advancement. This will ensure investor protection and create a differentiation in the market place. The creation of the Securities and Exchange Board of India itself can be hailed as a path-breaking development in terms of regulation, growth, and development of financial services. The ongoing efforts to revamp the Companies Act, Income-Tax Act, etc. would also lead to the deliverance of effective financial services. The guidelines about permitting foreign financial institutions to operate in the Indian capital market will do a two-way good to the country in terms of enabling the foreign investors to plug into the Indian capital market, and the Indian investors and financial institutions to study the modus operandi of such firms. Public enterprise disinvestment are sure to prop up the stateof-art in the realm of financial services. It would provide a fillip to the presence of foreign financial firms in India, as well as result into creating pressure on the Indian financial firms to master the disinvestment business. The financial services firms would have to gain expertise in valuation, financial and legal restructuring, and taking the public sector firms to the commercial and capital markets. During this period financial services firms scouted for funds abroad to finance the Indian corporate sector. They have approached the European capital markets, the most prominent of which belong to the UK and Luxembourg. These portfolio investments have

flowed to India through the GDR route. It requires an understanding of raising funds abroad and also working together with world level financial services institutions, such as Lehman Brothers, Arthur Anderson, and Glodman Sachs, to mention a few. With the passage of the Insurance Regulatory and Development Authority (IRDA)Act, 1999, the Insurance Regulatory and Development Authority was set up with statutory powers to function as the regulator for the insurance sector in India. This act has opened the doors for private players including foreign equity participation upto a prescribed limit of paid up capital. It has come out with regulations on various aspects of insurance business such as licensing of agents, solvency margin for insurers, accounting norms, investment norms and registration of Indian Insurance Companies. RBI allowed banks to enter into the insurance business by issuing a notification specifying insurance as a permissible form of business under section 6(1) (o) of the Banking Regulation Act, 1949. Thus providing banks another avenue for generating fee based income.

REGULATION OF MUTUAL FUND

Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India. SEBI is also apex regulator of capital markets. Issuance and trading of capital market instruments and the regulation of capital market intermediaries is under the purview of SEBI. Apart from SEBI, mutual funds follow the regulations of other regulators in limited manner. 1. RBI - RBI acts as regulator of sponsors of bank-sponsored mutual funds, especially in case of funds offering guaranteed/assured returns. No mutual fund is allowed to bring out a guaranteed returns scheme without taking approval from RBI 2. Companies Act, 1956 Asset Management Company and Trustee Company will be subject to the provisions of the Companies Act, 1956. 3. Stock Exchange Closed-end funds might list their units on a stock exchange. In such a case, the listings are subject to the listing regulation of stock exchanges. Mutual funds have to sign the listing agreement and abide by its provisions, which primarily deal with periodic notifications and disclosure of information that may impact the trading of listed units.

4. Indian Trusts Act, 1882 Recall that mutual funds are formed and registered as a public trusts under the Indian trusts Act, 1882. Hence, they have to follow the provisions of the Indian Trusts Act, 1882. 5. Ministry of Finance (MoF) The finance ministry is the supervisor of both the RBI and SEBI. The MoF is also the appellate authority under SEBI regulations. Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds.

REGULATION OF MUTUAL FUNDS IN INDIA

Immediately after its constitution , SEBI issued the mutual fund regulations in 1993 . however ,with the growth of mutual funds , it was imperative that they should follow uniform policies in respect of NAV , valuation of investment , accounting practices ,etc . SEBI prepared a MUTUAL FUND 2000 REPORT and on the basis of this report , it prepared more stringent and comprehensive regulations in 1996 , known as SEBI regulations ,1996. since then , there have been number of amendments in regulations ,1996. besides SEBI has also issued several guidelines in respect of working of mutual fund .some of the provisions of the SEBI regulations ,1996 have been summarized hereunder: 1. The sponsor who wants to establish a mutual fund should have a sound track record and a general reputation of fairness and integrity i.e. , must be in business of financial services for 5 years and must have contributed at least 40% of the net worth of the asset management company. 2. A mutual fund is constituted in the form of trust .The trust shall incorporate an asset management company .the trustees shall ensure that the AMC has been managing the schemes independently of other activities. 3. Two third of trustees shall be independent persons and not be associated with sponsor. 4. The trustees shall ensure that activities of the AMC are in accordance with the regulation. 5. The trust shall periodically review the investors complaints received and shall be redressed by the AMC.

6. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes. The sponsor or its associate shall not have 50% or more 14. Detailed guidelines are prescribed for valuation of investment for this purpose, the investment are classified into traded, thinly traded and nontraded investment. 7. Advertisement in respect of every scheme shall be in conformity with with the advertisement code. 8. Every close ended scheme shall be listed at a recognized stock exchange, or there will be repurchase facility. 9. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed by the sponsor or the AMC. 10. An open-ended scheme shall be wound up after the expiration of the fixed period or in case, 75% of the unit holders decide so, after repaying the amount due to the unit holders. 11. The unquoted debt instruments shall not exceed 10% in case of growth funds and 40%in case of income funds. 12. Funds under the same AMC should not lent or invest from one scheme to another unless the funds are transferred at prevailing market price. 13. Mutual Funds are permitted to participate in the securities lending scheme of SEBI under certain guidelines. 14. Detailed guidelines are prescribed for valuation of investment for this purpose, the investment are classified into traded, thinly traded and nontraded investment. 15. Every close ended scheme shall be listed at a recognized stock exchange.

CONSUMER FINANCE
The division of retail banking that deals with lending money to consumers. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate. Consumer finance company The division of retail banking that deals with lending money to consumers. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate. Consumer finance in brief Consumer finance has to do with the lending process that occurs between the consumer and a lender. In some instances, the lender may be a bank or financial institution. At other times, the lender may be a business that offers in house credit in exchange for the business of the consumer. Consumer finance can include just about any type of lending activity that results in the extension of credit to a consumer. Most people have received financial assistance in obtaining desirable products through the use of consumer finance methods. In retail banking, the lender extends secured and unsecured loans to consumers who wish to purchase automobiles, homes, or engage in other activities that require substantial financing, such as remodeling a home. Generally, consumer lending of this type caries some degree of competition, since the consumer with a solid credit rating can often shop around and secure superior interest rates and terms for the loan agreement. At the same time, not all forms of consumer finance are in the best interests of the consumer. In many parts of the world, institutions are in the business of lending money even to consumers with poor credit ratings, or who lack a reasonable ability to repay the borrowed funds. This can take the form of credit card offers, loans with extremely high rates of interest included in the finance structure of the loan, and other terms that will be difficult if not impossible for the consumer to meet.

CONSUMER FINANCE 1. MEANING OF CONSUMERFINANCE It refers to the raising of finance by individuals formeeting their personal expenditure or for theacquisition of durable consumer goods and for thepurchase /creation of an assets. Details about the Consumer Finance T h i s i s d i r e c t l y r e l a t e d w i t h t h e m o n e y l e n d i n g t o t h e p e o p l e o r t h e co ns um e rs . In Un i t ed S t at es i t r ef e rs t o t he br a nc h t h at i s l en di n g t h e amount which is actually very low than the perfect credit. It is the part

of r e t a i l b a n k i n g . O n e o f t h e b e s t w a y s t o Loans

Indirect Finance Loan shark is different than the consumer finance; it provides the high interest rate on the loan which is higher than the other companies. This

concept is very wise for thosewho are not involved in the financialma r k e t s . S o t h i s t h i n g h a s h e l p e d m a n y p e o p l e i n s u p p o r t i n g t h e i r businesse s. Through consumer financing one can easily get the loans and can meet the demands and the desires. There are many organizations working for the consumers to gain stability in the financial matters. The consumer credit should be in a good state and it is a very good point to

see the history of the consumer regarding the financial matters. Consumer credit counseling is very essential on the part of the organization so that this thing improves to decrease the debt status and

also it can increase the financial stability to its peak. ACCC is t h e organization which is giving the knowledge about the consumer debt and o ff e rs t h e w a y t o t he co nsu m e r t o a gai n co p e t h e s t a bi l i t y.

Advantages of consumer credit

Convenient

One advantage of consumer credit is the convenience it provides. With lightweight credit cards, it is not always necessary to carry around a large wallet or purse filled with cash. You can purchase items without carrying your checkbook everywhere. Credit cards are accepted in most retail and grocery stores. Emergencies

Many people live paycheck to paycheck. If the car breaks down or a child becomes ill, these families could quickly find themselves in a financial crisis. One small emergency could ruin a family's finances. With consumer credit, you can have the purchasing power that can see you through these emergencies. Handled responsibly, credit cards can keep you from stress and worry about how your family's financial needs will be met. Large Purchases

Without consumer credit, large purchases would not be possible for many people. The ability to pay cash for a car or other big-ticket items isn't available to everyone. Consumer credit allows a family to afford the necessities and use the purchased item while paying for it. If the family car breaks down, consumer credit allows you to replace it immediately instead of saving for years and doing without the transportation you need. Builds Credit

For young people, using a small amount of consumer credit helps to establish a good credit rating. A good credit rating becomes important if you need to borrow money for a financial emergency or large purchase. In some instances, a poor credit rating can also cost you a shot at a job or apartment. A good credit rating helps you to stay out of financial trouble, and you can build your credit by making small credit card purchases and paying the bill in full every month.

ROLE OF MERCHANT BANKER IN PRE ISSUE MANAGEMENT.

1. Documents to be submitted I. MOU between merchant banker and issuer company. ii. Due diligence certificate by lead merchant banker. iii. Certificate signed by the company secretary or company accountantin case of listed companies making further issue of capital. iv. A list of persons who constitute the promoters group and their individual shareholdings. v. Draft prospectus in computer floppy in prescribed format. vi. Ten copies of draft offer document. vii. The issuer shall submit an undertaking to the Board within 24 hoursof the transaction.

2. Appointment of IntermediariesIn case a public or rights issue ismanaged by more than one merchant banker, the rights obligationsand responsibilities of each merchant banker shall be demarcated asspecified in Schedule II. Other intermediaries such as advisor, bankersto the issue, registrar, underwriters etc. shall be appointed inconsultation with lead merchant banker.

3. Underwriting - Underwriting of public issue is not mandatory. However,if an issue is underwritten, the unsubscribed portion has to purchased by the underwriters.

4. Offer documents to be made publicThe draft offer document filed with the Board shall be made public for a period of 21 days from thedate of filing the offer document. The lead merchant banker shall also fill the draft offer document with the stock exchange where thesecurities are proposed to be listed and make it available to the public.

5. Appoinment of compliance officerAn issuer company shall appointa compliance officer who have direct link with the Board with regard tocompliance with various laws, rules, regulations and other directivesissued by the Board.

6. Mandatory Collection centresThe minimum number of collectioncentres for issue of capital shall be (a) four metropolitan citiessituated at Mumbai, Delhi, Calcutta and Chennai; (b) all such centreswhere the stock exchanges are located in the region in which registered office of the company is situated.

7. Final offer documentThe lead manager shall certify that all amendments, suggestions or observation made by SEBI have beencarried out. He has to furnish a new due diligence certificate. Final prospectus is to be submitted with Registrar of Companies and theoffer document with regional stock exchange. A computer floppy of final prospectus offer shall be submitted to SEBI.

8. Application formsApplication form must be accompanied by abridged prospectus. Disclaimer clause of SEBI should be printed in bold.Highlights and risk factor should be given same prominence. The formshall contain provision for mentioning name and address of bank and account number of the applicant.

9. Minimum application amountMinimum application money to be paid along with application shall not be less than 25% of issue price. Application for shares or debentures should be for such a number thatthe total amount payable is not less than Rs.2000.

10. Listing of securitiesThe securities offered to public shall be listed ina stock exchange. In case these are not listed, entire application moneybecomes refundable.

11. Period of subscriptionSubscription for public issues shall be keptopen atleast 3 working days and not more than 10 working days. In caseof an infrastructure company, it may be kept open for 21 working days.Rights issue shall be kept open for atleast30 days and not more than 60days.

12. OversubscriptionThe quantum of issue trough a rights or a publicissue, shall not exceed the amount specified in the prospectus of offer,however an oversubscription to the extent of 10% of the net offer to public is permissible.

OBJECTIVES OF MERCHANT BANKING

Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: I. To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India.

II. The main object of merchant banker is to create secondary market for billsand discount or rediscount bills and acts as an acceptance house. III. Merchant bankers another objective is to set up and p rovide services for the venture capital technology funds.

IV. They also provide services to the finance housing schemes for the construction of houses and buying of land.

V. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways incompliance with the relevant laws of India.

VI. They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

CHARACTERISTIC OF MERCHANT BANKING:

High proportion of decision makers as a percentage of total staff. Quick decision process. High density of information. Intense contact with the environment. Loose organizational structure. Concentration of short and medium term engagements. Emphasis on fee and commission income. Innovative instead of repetitive operations. Sophisticated services on a national and international level. Low rate of profit distribution. High liquidity ratio.

REGULATORY FRAMEWORK FOR MERCHANT BANKERS

1. Operational Guidelines 2. Pre- Issue Obligations 3. Post Issue Obligations 4. Guidelines for Unlisted companies.

1. Operational Guidelines Submission of offer document Dispatch of issue material Underwriting Compliance obligations A. association of resource personnel B. redressal of investor grievances C. submission of post issue monitoring reports D. issue of no objection certificate E. registration of merchant bankers F. reporting requirements G. impositions of penalty points

2. Pre- Issue Obligations 1. Obligations 2. Documents to be submitted A. Memorandum of Understanding B. Due Diligence Certificate C. Certificates Signed by Professionals D. Undertaking E. List of Promoters Group 3. Appointment of Intermediaries 4. Underwriting 5. Offer document to be made public 6. No complaints certificate 7. Mandatory collection Center 8.Authorised collection agents 9. Advertisement for rights post issue 10. Appointment of compliance officer 11. Agreements with depositories

4. Post Issue Obligations 1. post Issue monitoring reports 2. Redressal of investor grievances 3. Coordinating with intermediaries 4. Stock Investment 5. Underwriters 6. Bankers to an Issue 7. Post- Issue Advertisement 8. Basis of Allotment 9. Reservation for small individual investors 10. Other Responcibilities

5. Guidelines for Unlisted companies 1. Listing of Shares 2. Market Makers 3. Listing of pure Debt/Convertible Instruments 4. Disclosures 5. Net Offer 6. Offer by IT Sector companies 7. Reservations 8. Capital Structure 9. Firm Allotment and Reservations.

What is project appraisal ?

Project appraisal refers to the systematic and comprehensive process of analysing the aspects of a project to determine if meets its objectives. The aspects include financial, social, technical and economic feasibility of the project. Project appraisal is important since it reduces chances of project failures.

A project appraisal is an important stage in project management. The project sponsors look at various aspects of the project to decide whether or not it should proceed. They consider factors such as outcome, feasibility, use of resources, funding, management requirements, payback and sustainability. In a situation where sponsors are considering a number of projects competing for the same funds, the winning project must demonstrate that it delivers the best outcome for the most effective use of resources. Resources

Projects use scarce resources such as money, people, materials and time. Project appraisal ensures that a project is using those resources effectively. According to consultant Kostas Sillignakis, the decision on whether a project goes ahead or not is "a choice between alternative ways of using resources."

Appraisal Model

The larger the project, the more complex the appraisal process. The European Investment Bank has developed a model that ensures sponsors appraise all aspects of a project thoroughly. The main elements of the model include: eligibility by meeting important criteria, such as regeneration or environmental protection; investment cost in terms of cost justification; economic viability in terms of payback period and cost effectiveness; and promoter's standing in relation to financial robustness and management capability. Benefits

The aim of a project is to deliver benefits. The appraisal team assesses the project to see whether it will succeed in delivering outcomes that meet the original objectives. The UK's New Deal for Communities program manages a range of projects aimed at regenerating areas of social or economic deprivation. Their project appraisal considers factors such as value for money, piloting new ideas, involving the local community in project development and delivering planned outcomes. Sustainability

Increasingly, sponsors look beyond the completion of the project to see whether it delivers sustainable, long-term benefits. The ProVention Consortium Secretariat, which supports projects in areas affected by natural disasters, puts sustainability as one the most important criteria in its project appraisal. Payback

Finance is an important consideration in project appraisal. The European Investment Bank assesses the rate of return on the project, the phasing of expenditure and financial risk in terms of possible cost variations. According to consultant Kostas Sillignakis, sponsors rank projects with shorter payback periods higher than those with longer paybacks. This is based on the assumption that a short project involves less financial risk and also allows the sponsor to reinvest funds in other projects.