PROJECT REPORT

ON

INVESTMENT BANKING
Bachelor of Commerce
B.com (Banking & Insurance)
Semester v
(2014-15)

Submitted by:
SALASKAR AMEY ANIL
Seat No:

T.Z.A.SHIKSHAN PRASARAK MANDALS

PRAGATI COLLEGE OF ARTS&COMMERCE
Dombivli (East), Maharashtra- 421 201

INVESTMENT BANKING

Bachelor of commerce
Banking & Insurance
Semester V
Submitted
In partial Fulfillment of the requirements for the Award of
Degree of Bachelor of Commerce Banking & Insurance

By
SALASKAR AMEY ANIL
Seat No:

T.Z.A.SHIKSHAN PRASARAK MANDALS

PRAGATI COLLEGE OF ARTS&COMMERCE
Dombivli (East), Maharashtra- 421 201

DECLARATION

I AMEY ANIL SALASKAR, the student of B.COM BANKING &

INSURANCE SEMESTER V (2014-15) declare that I have completed the project
on INVESTMENT BANKING.

The information submitted is true and original to the best of my knowledge.

Signature of student
Salaskar Amey Anil
Seat No. :

T. Z. A. SHIKSHAN PRASARAK MANDALS

PRAGATI COLLEGE OF COMMERECE,
NANDIVLI ROAD, DOMBIVLI (EAST)

CERTIFICATE
(2014-15)
This is to certify that Mr. Amey Anil Salaskar, Seat No:

of B.com

Banking & Insurance Semester VI (2014-15) has successfully completed the

project on, Investment Banking under the guidance of Prof. Avdhut Joshi.

(Prof. Swati Pusalkar)

(A.P.Mahajan)

Course Coordinator

Principal

(Prof. Avdhut Joshi)

Project Guide / Internal Examiner

External Examiner

ACKNOWLEDGEMENT
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I feel deeply indebted people who have guided me in this project. It

would have not been possible to make such an extensive report without help,
guidance and inputs from them. This was all the more significant , since the
changes in the banking sector, were of recent origin and relatively less material
was available in the form of books or articles or information on the net. Most of
my information source has been form professionals and Newspaper.

Project guide:Mr. AVDHUT JOSHI

I would firstly like to express my gratitude towards my guide Mr.

AVDHUT JOSHI for having shown so much flexibility the time. He showed us a
lot of openness in his approach and I would like to thank him for support in a way
that has lead to proper and effective learning.
Also, I am very grateful to all my friends and senior for being by my
side always. Without their help and motivation, it would have been impossible
to complete my project.

1.1 Introduction of Bank:

Finance is the life blood of a trade, commerce and industry. Now-a-days, banking
sector acts as the backbone of modern business. Development of any country
mainly depends upon the banking system. A bank is a financial institution which
deals with deposits and advances and other related services under one roof. It
receives money from those who wants to save in the form of deposit and lends
money those who need it. Now-a-days Banks are also dealing with other activities
like factoring, housing finance, giving credit cards, debit cards, making portfolio
management, facilities of ATMs , mobile banking, internet banking etc.

1.2 Definition of Bank:

The Banking Regulation Act, 1949, section5 (b) defines the term bank as,
accepting for the purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise and withdraw able by cheque, draft, and
order or otherwise.

1.3 History of Bank in India:

From the ancient times in India, an indigenous banking system has prevailed. The
businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been
carrying on the business of banking since ancient times. These indigenous bankers

included very small money lenders to shroffs with huge businesses, who carried on
the large and specialized business even greater than the business of banks.
The first bank in India, called The General Bank of India was established in the
year 1786. The East India Company established The Bank of Bengal/Calcutta
(1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank was
Bank of Hindustan which was established in 1870. These three individual units
(Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as
Presidency Banks. Allahabad Bank which was established in 1865 was for the first
time completely run by Indians.

CHAPTER I
INTRODUCTION

1.1 INTRODUCTION
At a very macro level, Investment Banking as term suggests, is concerned with
the primary function of assisting the capital market in its function of capital
intermediation, i.e., the movement of financial resources from those who have
them (the Investors), to those who need to make use of them for generating GDP
(the Issuers). Banking and financial institution on the one hand and the capital
market on the other are the two broad platforms of institutional that investment for
capital flows in economy. Therefore, it could be inferred that investment banks are
those institutions that are counterparts of banks in the capital markets in the
function of intermediation in the resource allocation. Nevertheless, it would be
unfair to conclude so, as that would confine investment banking to very narrow
sphere of its activities in the modern world of high finance. Over the decades,
backed by evolution and also fuelled by recent technologies developments, an
investment banking has transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and exciting segment of
financial services. Investment bankers have always enjoyed celebrity status, but at
times, they have paid the price for the price for excessive flamboyance as well.
To continue from the above words of John F. Marshall and M.E. Eills, investment
banking is what investment banks do. This definition can be explained in the
context of how investment banks have evolved in their functionality and how
history and regulatory intervention have shaped such an evolution. Much of
investment banking in its present form, thus owes its origins to the financial
markets in USA, due o which, American investment banks have banks have been
leaders in the American and Euro markets as well. Therefore, the term investment

banking can arguably be said to be of American origin. Their counterparts in UK

were termed as merchant banks since they had confined themselves to capital
market intermediation until the US investments banks entered the UK and
European markets and extended the scope of such businesses.

Investment banks help companies and governments and their agencies to raise
money by issuing and selling securities in the primary market. They assist public
and private corporations in raising funds in the capital markets (both equity and
debt), as well as in providing strategic advisory services for mergers, acquisitions
and other types of financial transactions.

Investment banks also act as intermediaries in trading for clients. Investment banks
differ from commercial banks, which take deposits and make commercial and retail
loans. In recent years, however, the lines between the two types of structures have
blurred, especially as commercial banks have offered more investment banking
services. In the US, the Glass-Steagall Act initially created in the wake of the Stock
Market Crash of 1929, prohibited banks from both accepting deposits and
underwriting securities; Glass- Steagall was repealed by the Gramm-Leach-Bliley
Act in 1999. Investment banks may also differ from brokerages, which in general
assist in the purchase and sale of stocks, bonds, and mutual funds. However some
firms operate as both brokerages and investment banks; this includes some of the
best known financial services firms in the world.
More commonly used today to characterize what was traditionally termed
investment banking is sells side." This is trading securities for cash or securities
(i.e., facilitating transactions, market-making), or the promotion of securities (i.e.

10

underwriting, research, etc.).

The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the
investing public who consume the products and services of the sell-side in order to
maximize their return on investment. Many firms have both buy and sell side
components.
Definition
An individual or institution, which acts as an underwriter or agent for corporations
and municipalities issuing securities. Most also maintain broker/dealer operations,
maintain markets for previously issued securities, and offer advisory services to
investors. Investment banks also have a large role in facilitating mergers and
acquisitions, private equity placements and corporate restructuring. Unlike
traditional banks, investment banks do not accept deposits from and provide loans
to individuals. Also called investment banker.

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1.2 OBJECTIVES OF THE STUDY

To find the Evolution of Investment Banking.

To identify Its Mechanism (statement of investment banking).

To analysis Products/Services Offered.

To know the Lists of explanations.

To identify the Special services.

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1.3 RESEARCH METHODOLOGY

RESEARCH DESIGN:
A research design indicates a plan of action to be carried out in connection with a
proposed research work. Descriptive design is being adopted for this study as it
helps to portray the prevalence of the phenomenon as it is.
UNIVERSE:
Universe is the target group, which the researcher wants to know about by studying
one or more of its samples. All the customers of the ICICI Bank in a chosen
Branch. Constitute the universe for this study.
FIELD OF STUDY:
The study was carried out among the investors of ICICI Bank.
TYPE OF THE RESEARCH
Case Study Method and Bibliographical Research.
SOURCE OF DATA COLLECTION:
Through RBI Bulletin and Banks annual Reports
ACTUAL COLLECTION OF DATA:
Actual collection of data was done during February 2014.

13

CHAPTER II
REVIEW OF LITERATURE

14

REVIEW OF LITERATURE
Who needs an Investment Bank?
Any firm contemplating a significant transaction can benefit from the advice of an
investment bank. Although large corporations often have sophisticated finance and
corporate development departments provide objectivity, a valuable contact
network, allows for efficient use of client personnel, and is vitally interested in
seeing the transaction close.
Most small to medium sized companies do not have a large in-house staff, and in a
financial transaction may be at a disadvantage versus larger competitors. A quality
investment banking firm can provide the services required to initiate and execute a
major transaction, thereby empowering small to medium sized companies with
financial and transaction experience without the addition of permanent overhead,
an investment bank provides objectivity, a valuable contact network, allows for
efficient use of client personnel, and is vitally interested in seeing the transaction
close.
Most small to medium sized companies do not have a large in-house staff, and in a
financial transaction may be at a disadvantage versus larger competitors. A quality
investment-banking firm can provide the services

15

Organizational structure of an investment bank

The main activities and units
The primary function of an investment bank is buying and selling products both on
behalf of the bank's clients and also for the bank itself. Banks undertake risk
through proprietary trading, done by a special set of traders who do not interface
with clients and through Principal Risk, risk undertaken by a trader after he or she
buys or sells a product to a client and does not hedge his or her total exposure.
Banks seek to maximize profitability for a given amount of risk on their balance
sheet.
An investment bank is split into the so-called Front Office, Middle Office
and Back Office. The individual activities are described below:

Front Office
Investment Banking is the traditional aspect of investment banks which involves
helping customers raise funds in the Capital Markets and advising on mergers and
acquisitions. Investment bankers prepare idea pitches that they bring to meetings
with their clients, with the expectation that their effort will be rewarded with a
mandate when the client is ready to undertake a transaction. Once mandated, an
investment bank is responsible for preparing all materials necessary for the
transaction as well as the execution of the deal, which may involve subscribing
investors to a security issuance, coordinating with bidders, or negotiating with a
merger target. Other terms for the Investment Banking Division include Mergers &
16

Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin").

Investment management is the professional management of various securities
(shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment
goals for the benefit of the investors. Investors may be institutions (insurance
companies, pension funds, corporations etc.) or private investors (both directly via
investment contracts and more commonly via collective investment schemes eg.
mutual funds).

Financial Markets is split into four key divisions: Sales, Trading, Research and
Structuring.

Sales and Trading is often the most profitable area of an investment bank,
responsible for the majority of revenue of most investment banks In the process of
market making, traders will buy and sell financial products with the goal of making
an incremental amount of money on each trade. Sales is the term for the investment
banks sales force, whose primary job is to call on institutional and high-net-worth
investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales
desks then communicate their clients' orders to the appropriate trading desks,
which can price and execute trades, or structure new products that fit a specific
need.
Research is the division which reviews companies and writes reports about their
prospects, often with "buy" or "sell" ratings. While the research division generates
no revenue, its resources are used to assist traders in trading, the sales force in
suggesting ideas to customers, and investment bankers by covering their clients. In
recent years the relationship between investment banking and research has become
17

highly regulated, reducing its importance to the investment bank.

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Middle Office
Risk Management involves analysing the market and credit risk that traders are
taking onto the balance sheet in conducting their daily trades, and setting limits on
the amount of capital that they are able to trade in order to prevent 'bad' trades
having a detrimental effect to a desk overall. Another key Middle Office role is to
ensure that the above mentioned economic risks are captured accurately (as per
agreement of commercial terms with the counterparty) correctly (as per
standardized booking models in the most appropriate systems) and on time
(typically within 30 minutes of trade execution). In recent years the risk of errors
has become known as "operational risk" and the assurance Middle Offices provide
now include measures to address this risk. When this assurance is not in place,
market and credit risk analysis can be unreliable and open to deliberate
manipulation.

Back Office
Operations involve data-checking trades that have been conducted, ensuring that
they are not erroneous, and transacting the required transfers. While it provides the
greatest job security of the divisions within an investment bank, it is a critical part
of the bank that involves managing the financial information of the bank and
ensures efficient capital markets through the financial reporting function. The staff
in these areas are often highly qualified and need to understand in depth the deals
and transactions that occur across all the divisions of the bank.

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Recent evolution of the business

New products
Investment banking is one of the most global industries and is hence continuously
challenged to respond to new developments and innovation in the global financial
markets. Throughout the history of investment banking, many have theorized that
all investment banking products and services would be commoditized. New
products with higher margins are constantly invented and manufactured by bankers
in hopes of winning over clients and developing trading know-how in new
markets. However, since these can usually not be patented or copyrighted, they are
very often copied quickly by competing banks, pushing down trading margins.
For example, trading bonds and equities for customers is not a commodity business
but structuring and trading derivatives is highly profitable .Each OTC contract has
to be uniquely structured and could involve complex pay- off and risk profiles.
Listed option contracts are traded through major exchanges, such as the CBOE,
and are almost as commoditized as general equity securities.
In addition, while many products have been commoditized, an increasing amount
of profit within investment banks has come from proprietary trading, where size
creates a positive network benefit (since the more trades an investment bank does,
the more it knows about the market flow, allowing it to theoretically make better
trades and pass on better guidance to clients).

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Possible conflicts of interest

Potential conflicts of interest may arise between different parts of a bank, creating
the potential for financial movements that could be market manipulation.
Authorities that regulate investment banking (the FSA in the United Kingdom and
the SEC in the United States) require that banks impose a Chinese wall which
prohibits communication between investment banking on one side and research
and equities on the other.

Some of the conflicts of interest that can be found in investment

banking are listed here
Historically, equity research firms were founded and owned by investment banks.
One common practice is for equity analysts to initiate coverage on a company in
order to develop relationships that lead to highly profitable investment banking
business. In the 1990s, many equity researchers allegedly traded positive stock
ratings directly for investment banking business. On the flip side of the coin:
companies would threaten to divert investment banking business to competitors
unless their stock was rated favorably. Politicians acted to pass laws to criminalize
such acts. Increased pressure from regulators and a series of lawsuits, settlements,
and prosecutions curbed this business to a large extent following the 2001 stock
market tumble
Many investment banks also own retail brokerages. Also during the 1990s, some
retail brokerages sold consumers securities which did not meet their stated risk
profile. This behavior may have led to investment banking business or even sales
of surplus shares during a public offering to keep public perception of the stock
favorable.

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Types of Investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade
for their own accounts, make markets, and advise corporations on capital markets
activities such as mergers and acquisitions.
Merchant banks were traditionally banks which engaged in trade financing. The
modern definition, however, refers to banks which provide capital to firms in the
form of shares rather than loans. Unlike Venture capital firms, they tend not to
invest in new companies.

Investment banks provide four primary types of services:

Raising capital, advising in mergers and acquisitions, executing securities sales and
trading, and performing general advisory services. Most of the major Wall Street
firms are active in each of these categories. Smaller investment banks may
specialize in two or three of these categories.

Raising Capital
An investment bank can assist a firm in raising funds to achieve a variety of
objectives, such as to acquire another company, reduce its debt load, expand
existing operations, or for specific project financing. Capital can include some
combination of debt, common equity, preferred equity, and hybrid securities such
as convertible debt or debt with warrants. Although many people associate raising
capital with public stock offerings, a great deal of capital is actually raised through
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private placements with institutions, specialized investment funds, and private

individuals. The investment bank will work with the client to structure the
transaction to meet specific objectives while being attractive to investors.

Mergers and Acquisitions

Investment banks often represent firms in mergers, acquisitions, and divestitures.
Example projects include the acquisition of a specific firm, the sale of a company
or a subsidiary of the company, and assistance in identifying, structuring, and
executing a merger or joint venture. In each case, the investment bank should
provide a thorough analysis of the entity bought or sold, as well as a valuation
range and recommended structure.

Sales and Trading

These services are primarily relevant only to publicly traded firms, or firms, which
plan to go public in the near future. Specific functions include making a market in
a stock, placing new offerings, and publishing research reports.
General Advisory Services:
Advisory services include assignments such as strategic planning, business
valuations, assisting in financial restructurings, and providing an opinion as to the
fairness of a proposed transaction.

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Terms Related To Investment Bank

Buying
Deciding on the proper time to purchase a security that you would like to add to
your holdings can be a daunting task. If the price drops immediately after you buy,
it may seem as if you missed out on a better buying opportunity. If the price jumps
right before you make your move, you may feel as if you paid too much. As it turns
out, you should not let these small fluctuations influence your decision too much.
As long as the fundamentals that led you to decide on the purchase have not
changed, a few points in either direction should not have a large impact on the
long-term value of your investment.
Similarly, the fact that an investment has been increasing in value of late is not a
sufficient reason for you to purchase it. Momentum can be very fickle, and recent
movement is not necessarily an indicator of future movement. Therefore, buying
decisions should be based on sound and thorough research geared toward
discerning the future value of a security relative to its current price. This analysis
will probably not touch upon price movement in the very recent past. As you learn
more about investing you'll get better at deciding when to buy, but most experts
recommend that beginners avoid trying to time the market, and just get in as soon
as they can and stay in for the long haul.
The proper time to buy a security is quite simply when it is available for less than
its actual value. These undervalued securities are actually not as rare as they sound.
However, the problem is simply that they are never sure bets. The value of a
security includes estimates of the future performance of factors underlying the
value of the security. For stocks, these factors include things like earnings growth

24

and market share. Changes can be predicted to a degree, but they are subject to
fluctuation due to forces both within and beyond the control of the company.
The overall economic climate, changes in the industry or even bad decisions by
management can all cause a security poised to ascend in value to become an under
performer. Therefore, it is essential to practice your analysis before putting your
money into action. Make some mock purchases based on your personal analysis
technique and track the results. Not all of your decisions will lead to the results you
were expecting, but if most of your choices turn out to be good and there are
mitigating factors that you can learn from to explain your missteps, then you may
be ready to put your analysis technique and investing strategy into action.
At this point, the need to continuously monitor your investments does not
disappear. Both under performers and overachievers should be studied carefully to
fine-tune your strategy. You should also regularly look at your securities to make
sure that the fundamentals for success that led you to buy in the first place are
intact. If not, you may need to prepare to cash in and start looking for the next
opportunity.
One way to avoid the hassles of deciding when to buy altogether is to practice
dollar-cost averaging. This strategy advocates investing a fixed dollar amount at
regular intervals. The price when you first invest is relatively unimportant (as long
as the fundamentals are sound) because you will be purchasing shares at a different
price each time you buy. The success of your investment then lies not with shortterm fluctuations, but with the long-term movement of the value of the security.

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There comes a time when investments must be liquidated and converted back into
cash. In a perfect world, selling would only be necessary when investment goals
have been reached or time horizons have expired, but, in reality, decisions about
selling can be much more difficult. For one thing, it can be just as hard to decide
when to sell as it can be to decide when to buy. No one wishes to miss out on gains
by selling too soon, but, at the same time, no one wishes to watch an investment
peak in value and then begin to decline.
Investors often seek to sell investments that have dropped in value in the shortterm. However, if conditions have not changed significantly, drops in price may
actually represent an opportunity to buy at a better price. If the initial research,
which led to the purchase, was sound, a temporary decline does not preclude the
success that was originally predicted. Of course, things change, and if the security
no longer meets the criteria that led to its purchase, selling may in fact be the best
option.
Selling may also become necessary if investment goals change over time. You may
need to reduce the amount of risk in your portfolio or you may have the
opportunity to seek out greater returns. Additionally, a security may have increased
in value to the point that it is overvalued. Often you will need to make this type of
sale in the course of rebalancing a portfolio necessitated by gains and losses in
different areas.
Selling can be especially difficult when an under performing stock must be
dumped. Some investors let their emotions dictate their actions and hold on to
stocks that have fallen in value rather than to sell, thinking that selling at a loss is
like admitting that they made a mistake.
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Principles of Investing
Start Investing Now
We say this not just to discourage procrastination, but because an early start can
make all the difference. In general, every six years you wait doubles the required
monthly savings to reach the same level of retirement income. If you contributed
some amount each month for the next nine years, and then nothing afterwards, or if
you contributed nothing for the first nine years, then contributed the same amount
each month for the next 41 years, you would have about the same amount.

Know Yourself
The right course of action depends on your current situation, your future goals, and
your personality. If you don't take a close look at these, and make them explicit,
you might be headed in the wrong direction.
Current Situation: How healthy are you, financially? What's your net
worth right now? What's your monthly income? What are your expenses?
How much debt are you carrying? At what rate of interest? How much are
you saving? How are you investing it? What are your returns?

Goals: What are your financial goals? How much will you need to achieve
them? Are you on the right track?
Risk Tolerance: How much risk are you willing and able to accept in
pursuit of your objectives? The appropriate level of risk is determined by
your personality, age, job security, health, net worth, amount of cash you
have to cover emergencies, and the length of your investing horizon.
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Develop a Long Term Plan

Now that you know your current situation, goals, and personality, you should have
a pretty good idea of what your long-term plan should be. It should detail where
the money will go: cars, houses, college, and retirement. It should also detail where
the money will come from. Hopefully the numbers will be about the same.
Don't try to time the market. Get in and stay in. We don't know what direction the
next 10% move will be, but we do know what direction the next100% move will
be.
Review your plan periodically, and whenever your needs or circumstances change.
If you are not confident that your plan makes sense, talk to an investment advisor
or someone you trust.

Buy Stocks
Now that you've got a long term view, you can more safely invest in 'riskier'
investments, which the market rewards (in general). This requires patience and
discipline, but it increases returns. This approach reduces the entire universe of
investment vehicles to two choices: stocks and stock mutual funds. In the long run,
they're the winners: In this century, stocks beat bonds 8 out of 9 decades, and
they're well in the lead again. According to Ibbotson's Stocks, Bonds, Bills and
Inflation 1995 Yearbook, here are the average annual returns from 1926 to 1994
(before inflation):

28

 Stocks: 10.2% (and small company stocks were 12.1%)

Intermediate term treasury bonds: 5.1%
30-day T-bills: 3.7%
But is it really worth the additional risk just for a few percentage points? The
answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is only
280%. Compounding is God's gift to long-term planners.
If you buy outstanding companies, and hold them through the market's gyrations,
you will be rewarded. If you aren't good at selecting stocks, select some mutual
funds. If you aren't good at selecting mutual funds, go with an index fund (like the
Vanguard S&P 500).

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Investigate Before You Invest

Always do your homework. The more you know, the better off you are. This
requires that you keep learning, and pay attention to events that might affect you.
Understand personal finance matters that could affect you (for example, proposed
tax changes). Understand how each of your investments fits in with the rest of your
portfolio and with your overall strategy. Understand the risks associated with each
investment. Gather unbiased, objective information. Get a second opinion, a third
opinion, etc. Be cautious when evaluating the advice of anyone with a vested
interest.
If you're going to invest in stocks, learn as much as you can about the companies
youre considering. Understand before you invest. Research, research, Read books.
Consider joining an investment club or an organization like the American
Association of Individual Investors. Experiment with various strategies before you
put your own money on the line. Examine historical data or participate in a stock
market simulation. Try a momentum portfolio, a technical analysis portfolio, a
bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, an
intuition portfolio, a mega trends portfolio, and any others you think of. In the
process you'll find out which ones work best for you. Learn from your own
mistakes, and learn from the mistakes of others.

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Initial Public Offerings

Initial Public Offerings (IPOs) are the first time a company sells its stock to the
public. Sometimes IPOs are associated with huge first-day gains; other times, when
the market is cold, they flop. It's often difficult for an individual investor to realize
the huge gains, since in most cases only institutional investors have access to the
stock at the offering price. By the time the general public can trade the stock, most
of its first-day gains have already been made. However, a savvy and informed
investor should still watch the IPO market, because this is the first opportunity to
buy these stocks.

Reasons for an IPO

When a privately held corporation needs to raise additional capital, it can either
take on debt or sell partial ownership. If the corporation chooses to sell ownership
to the public, it engages in an IPO. Corporations choose to "go public" instead of
issuing debt securities for several reasons. The most common reason is that capital
raised through an IPO does not have to be repaid, whereas debt securities such as
bonds must be repaid with interest. Despite this apparent benefit, there are also
many drawbacks to an IPO. A large drawback to going public is that the current
owners of the privately held corporation lose a part of their ownership.
Corporations weigh the costs and benefits of an IPO carefully before performing
an IPO.

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Going Public
If a corporation decides that it is going to perform an IPO, it will first hire an
investment bank to facilitate the sale of its shares to the public. This process is
commonly called "underwriting"; the bank's role as the underwriter varies
according to the method of underwriting agreed upon, but its primary function
remains the same.
In accordance with the Securities Act of 1933, the corporation will file a
registration statement with the Securities and Exchange Commission (SEC). The
registration statement must fully disclose all material information to the SEC,
including a description of the corporation, detailed financial statements,
biographical information on insiders, and the number of shares owned by each
insider. After filing, the corporation must wait for the SEC to investigate the
registration statement and approve of the full disclosure.
During this period while the SEC investigates the corporation's filings, the
underwriter will try to increase demand for the corporation's stock. Many
investment banks will print "tombstone" advertisements that offer "bare- bones"
information to prospective investors. The underwriter will also issue a preliminary
prospectus, or "red herring", to potential investors. These red herrings include
much of the information contained in the registration statement, but are incomplete
and subject to change. An official summary of the corporation, or prospectus, must
be issued either before or along with the actual stock offering.

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Performance
The aftermarket performance of an IPO is how the stock price behaves after the
day of its offering on the secondary market (such as the NYSE or the NASDAQ).
Investors can use this information to judge the likelihood that an IPO in a specific
industry or from a specific lead underwriter will perform well in the days (or
months) following its offering. The first-day gains of some IPOs have made
investors all too aware of the money to be had in IPO investing. Unfortunately, for
the small individual investor, realizing those much-publicized gains is nearly
impossible. The crux of the problem is that individual investors are just too small
to get in on the IPO market before the jump. Those large first-day returns are made
over the offering price of the stock, at which only large, institutional investors can
buy in. The system is one of reciprocal back scratching, in which the underwriters
offer the shares first to the clients who have brought them the most business
recently. By the time the average investor gets his hands on a hot IPO, it's on the
secondary market, and the stock's price has already shot up.

33

SEBI Guidelines
The Government has setup Securities Exchange Board of India (SEBI) in April
1988. For more then three years, it had no statutory powers. Its interim functions
during the period were:
To collect information and advise the Government on matters relating to Stock
and Capital Markets.
Licensing and regulatory and Merchant Banks, Mutual Fund, etc..
To prepare the legal drafts for regulatory and developmental role of

SEBI

To perform any other functions as may be entrusted to it by Government.

The need for setting up independent Government agency to regulate and develop
the Stock and Capital Market in India as in many developed countries was
recognized since the Seventh Five Year was launched (1985) when some major
industrial policy changes like opening up of the economy to out side the world and
greater role to the Private Sector were initiated. The rampant malpractices noticed
in the Stock and Capital Markets stood in the way of infusing confidence of
investors, which is necessary for mobilization of large quantity of funds from the
public, and help the growth of the industry.
The malpractices were noticed in the case of companies, Merchant Bankers
and Brokers who are all operating in Capital Markets. The need to curb the
malpractices and to promote healthy Capital Market in India was felt. The security
industry in India has to develop on the right lines for which a competent
Government agency as in UK (SIB) or in USA (SEC) is needed.
34

Objectives:
The SEBI has been entrusted with both the regulatory and development
function. The objectives of SEBI are as follows:

a)

Investor protection, so that there is a steady flow of savings into the Capital
Markets.

b)

Ensuring the fair practices by the issuers of securities, namely, companies so

that they can raise resources at least cost.

c)

Promotion of efficient services by brokers, merchant bankers and others

intermediaries so that they become competitive and professional.

35

SEBI AND FREE PRICING OF EQUITY SHARES

With the repeat of Capital Issuers Control Act of 1947 in May 1992, the SEBI
issued fresh guidelines for new Capital issues from June 11, 1992. Pricing of
Shares expect in case of new companies with no track record is left to free market
forces. The new Companies have to issues shares at par only. The existing unlisted
companies if they desire listing can make public issue upto 20% of equity and
price can be determined by free market forces, as determined by the issuer or the
lead manager. Similarly, an existing listed company can also fix the price of issue
depending on the markets forces. In all these cases, the reasons for such price
fixation, transparency and proper disclosers are insisted upon by the SEBI. The
draft letter of offer to the public is to be vetted by SEBI, which was delegated to
lead merchant bankers by SEBI after 1996.
As per SEBI guidelines, 12 months should elapse between bonus issue and public
or rights issue. A private placement of promoters quota is not permitted. Merchant
bankers held responsible for ensuring that prospectus is fair and disclosures are full
and correct and that highlights and risk factors are slept out in all issues. Although
free pricing is permitted, the rationale of such fixation is to be provided to the
SEBI when it examines the drafts letter of offer.

36

SEBI POWERS
The SEBI powers on stock exchanges and their member brokers and sub brokers
were exercised under SEBI (stock brokers and sub brokers) Regulations of October
23 1992. These relate to registration, licensing, code of conduct, and inspection of
books accounts, etc. These powers were exercised under Section 12 of SEBI Act.

SEBI was delegated more powers of administration of SC (R) Act in respect of

many provisions including recognition of stocks exchanges (Sec.3, 4&5) and
control and regulation of stocks exchanges under Sections 7, 13, 18, 22 and 28 etc.,
These were concurrent powers wielded by both Government and SEBI, effective
from September1993.
Subsequently, by an ordinance in January 1995, the SEBI was given further powers
to impose penalties on insider trading and capital markets intermediaries for
violation of SEBI regulations and companies for not complying with Listing
agreement. In particular penalties can be imposed in monetary terms, for failure to
furnish books of accounts, failure to enter into agreements with clients, failure to
redress investor grievances, defaults in case of mutual funds, and non-disclosures
of acquisition of shares and take over etc.
Venture capital funds like mutual funds were brought under the control of SEBI.
Earlier to that, the SEBI has started licensing and regulations the underwriters,
debenture trustees, collecting bankers, and all intermediaries in the capital market.

37

Demat Coverage:
From January 2000, the scrips for trading in Demat form was raised to 200. With
this, the compulsory trading in Demat form has raised the proportion of market
deliveries in Demat form to 90% of the total deliverers. The physical deliverers of
shares have come down drastically. The transaction costs have been reduced and
volumes have increased phenomenally due to electronic form of trading and in
demat form.

Committee on Market Making:

A committee on the Market Making under the Chairmanship of Shri G.P. Gupta
was set by the SEBI to study the various facets of the market making, including the
merits and demerits of order driven system and quote driven system. The
committee was of the view that shares should be classified into the categories
namely liquid and illiquid and market making facility should be provided to the
illiquid category of shares. Market making should be made compulsory in such
cases and market markers have to give two way quotes for each such scrip. The
mechanism pf market making and risked involved in it are to be understood by
market makers.

Legal Framework:
In the legal field, the securities Laws, 1999 was passed by the Parliament in
December 1999. This has incorporated the derivative instruments in the definition
of securities under Securities Contract Regulation Act, 1956, as also the units of
Collective Investments Schemes, with a view to facilitating their transaction and

38

regulation. The new Act provided for transfer of Appellate functions under the
securities Laws Securities Appellate Tribunal (SAT). The stamp duty payable on
derivative transactions those in demat Form was withdrawn by necessary legal
changes. Banks now accept the ownership pf securities in Demat Form.

Negotiated Deals:
A negotiated deal in listed company has to be reported to stock exchange within 15
minutes and information in such deals has to be disseminated to all Stock
Exchanges. A negotiated deal is defined as any transaction which has on order
value of 25 lakhs or trade volume of not less than 10,000shares at one price, not
formed on Stock Exchanges and through the order matching system. But with a
view to enhance the price discovery process and improve the transparency, SEBI
made such deals not permissible in 1999. Guidelines were issued to permit
negotiated deals only if they are executed on the screen of Stock Exchange,
following the price and order matching system of the exchange.

SEBI Committee on Corporate Governance:

The committee on Corporate Governance, set up by SEBI has reported and the
report was accepted by SEBI and implemented. The Stock Exchanges listing
agreement was amended to include a clause on corporate governance to be
observed by listed companies. It is an important tool for corporate listed on Stock
Exchange. The SEBI code on Corporate Governance was released in January 2000
for adoption by listed companies. It is expected that this measures may raise the
standard of corporate governance in India and improve the disclosure standards
and investor protection.

39

SEBI Guidelines on Listing:

In February 2000, the SEBI has asked the Stock Exchanges to amend the listing
agreement by adding clause 49, providing for corporate governance mandatory for
companies seeking listing for the first time. The companies which are included
Group A of BSE and in S&P CNX Nifty Index have to comply with the
requirements by March 31, 2001. Besides listed companies with paid up capital of
Rs.10crores and above or net worth of Rs.25crores or more have to comply with
this requirement by March end 2002. Other listed companies with a paid up capital
of Rs.3crores and above have to comply with this requirement of corporate
governance by March end 2003.
The SEBI has also directed the companies listed, to reduce the No- delivery period
to one week in the case of Demat shares. A committee was set up to streamline the
existing risk containment measures namely the margin system and simplify it.
SEBIs Record:
The SEBI has set a creditable record of regulation for the growth of a healthy
Capital Market during the period of 1995-2000. In the year 2000, it has set for
itself the tasks of speeding up the following measures.
1) Pursuit of healthy Corporate Governance Regulations.
2) Strengthening of Rolling Settlement System by adding 500 more scrips to its.
3) Introduction of Derivative Trading.
4) Development of the internet practices by brokers.

40

CHAPTER III
CASE STUDY & DISCUSSION

41

Products and Services

Venture Capital:
Venture capital is risks money, which is used in risky enterprises either as equity or
debt capital. It may be in new sunshine industries or older risk enterprises. The
funds, which finance such risky,venture capital funds.
Ventures capital was originated & popularized in USA in sixties. In developed
countries, this capital came from pension funds, insurance companies & even large
banks. Some large companies with excess funds may provide this capital to
achieve diversification, market expansion & window on technology or to share in
this result of R&D of others.
In India, as the majority of the above institutions are in the public sector, only the
government or public financial institutions can provide the funds for venture
capital.

What is Venture Capital?

Venture capital is a post-war phenomenon in the business world, mainly developed
as a sideline activity of the rich in USA. To connote the risk & adventure & some
element of investment, the generic name of venture capital was coined. In the late
1960s a new professional investors called venture capitalists emerged whose
specialty was to combine risk capital with entrepreneurial management & to use
advance technology to launch new products and companies in the markets place.
Undoubtedly, it was venture capitalists astute ability to assess and manage
enormous risks & export from them returns that changed the face of America.

42

Venture Projects:
Proposals come to the venture capitalists in the form of business plans. He
appraises the same, giving due regard to the credentials of the founders, the nature
of the product or services to be developed, the market to be saved & the financing
required. If satisfied, he will invest his own money in the equity shares of the new
company, known as the assisted company.
In addition to money, managerial & marketing assistance may also be provided that
is, the venture capitalist not only provides funds but also on line operational
advice. In short, he identifies himself with the project as much as the innovator
promoter & as such works hard to accomplish ambitious targets & consequents
higher appreciation of his capital.

Indian Position:
In India, most project financing schemes require at least 25 per cent of the project
cost to be contributed by the promoters, while the latter can raise barely 5-10
percent. For long, there were a few agencies such as IFCIs subsidiary company,
Risks Capital And Technology Foundation of India, which provides finance to
bridge the shortfall in the promoter contribution, but they could fulfill the
requirements of a great many budding entrepreneurs. As results of promoters not
being able to bring in those vital initial inputs of money, many of their good
projects were hanging fire. Venture capital could remedy this situation as well.

43

A beginning was made in this direction by the setting up of venture capital

divisions under the aegis of ICICI, IDBI & IFCI. Encouraged by the response to
technology financing, ICICI floated a separate company ---Technology
Development and Information Company of India (TDICI) includes, apart from
venture capital financing, technology, consultancy as well as entrepreneur escort
services such as marketing, business management, vendor development etc. The
successful operation of this fund will hopefully spark off some interest from the
private sector, which will then consider entering this line of activity. Ultimately, it
is only when venture capital financing becomes more broad-based and widespread
that it will truly taking root in economy. In tune with its tradition of pioneering
new ideas, ICICI deviated from the beaten path to usher in an unusual type of
financial support. Addition to equity participation (up to maximum of 49 percent)
undertaken by typical venture capital companies, TDICI offer the conditional
loans. The entrepreneur neither pays interest on it nor does he have to repay the
principal amount. If the venture capital succeeds, TDICI recoups its investment in
the form of royalty on sales which ranges between two and eight percent. On the
other hand, if the venture fails to take off even after five years TDICI will consider
writing off the loan.

Public financing agencies:

It is to be noted that the floating venture capital companies are the financial
institutions or banks (the Andhra Pradesh Industrial Development Corporation,
Canara bank and others). This can be directly attributed to the Government
guidelines, which restrict private sector participation in venture capital funds to a
maximum of 20 percent.

44

The activities of the venture capital fund of ANZ Grind lays bank include making
equity investments in new companies, which may or may not involve any new
technology or other such related risk. This activity of the direct subscriptions by
financial institutions and banks has been going on for decades and cannot be
termed as venture capital activity. The difference in ANZ Grind lays bank activity
id one of the nomenclature and not of means of financing. Also, on the whole,
venture capital is provided more in the nature of mezzanine loans than equity.
Private Agencies:
One Venture Capital fund set up the private sector in India is Credit Capital
Venture Capital (India) or CVF for the short, the principal shareholders of which
are Credit Capital Finance Corporation, Bank of India, Asian Development Bank,
and Commonwealth Development Corporation. Another set up in the private sector
jointly by the ICICI 20th Century Finance Corporation, bank of Baroda, Asian
development Bank and Asian Finance and investment Corporation is the 20th
Century Venture Capital Corporation Ltd. One reason why private capitalists are
generally shy may be the high rate of capital gains tax applicable to the profit of
Venture Capital Funds. Though the guidelines provide for a concessional rate of
capital gains tax, the move can hardly be deemed as a concession in view of the
enormous risks involved in the activity.
Policy Initiatives:
The idea of providing venture capital finance to the new entrepreneurs in India was
mooted by the finance minister in the long- term fiscal policy announced by him in
1985. A reference to difficulties faced by new entrepreneurs in raising equity
capital was made by finance minister in his 1988-89 budget speech and guidelines
for providing such finance by registered companies or funds were announced.
45

In India, the government has set up a Venture Capital Funds with a contribution of
Rs.10crore. The fund was brought into operation on 1st April 1986 by the IDBI.
For financing this fund, a levy was imposed on all payments made by Indian
industries for the acquisition of foreign technologies. This fund finance projects
with minimum and maximum project costs of Rs.5 lakhs and Rs.250 lakhs
respectively.
Grind lays Bank has set up the Indian Investment Fund to Finance the start up cost
of entrepreneurs. This fund was subscribed mainly by Non-resident Indians. The
Government of India also announced on 1989 a National Equity Fund for financing
small-scale entrepreneurs setting up units in rural areas and urban areas population
of below Rs.5lakhs. Institutions like ICICI, IFCI,SBI Capital Markets and others
have also set up their own funds for providing Venture Capital Finance.
However, in general, the experience is that the Indian financial institutions are yet
to reorient their financing policies to meet the Venture Capital maxims. The
traditional conservation of these organizations makes their approach unacceptable.
They fail to recognize that normal criteria of debt-equity ratio, existence of security
etc., are not the criteria for evaluating venture capital projects.
The policy of Government with regard to Venture Capital Funds has changed in
1999-2000. The Government has allowed a free hand and transparency for I.T.

46

Tax Treatment:
The tax treatment of the venture capital funds in India is ungenerous and falls well
short of what is required. Whereas the Mutual Funds established by the
government controlled financial institutions and nationalized commercial bank
suffer no tax on either income or capital gains, a venture capital fund would suffer
at 20 per cent on dividend income and a similar rate on long-term capital gains.
Given an adequate investment spread and tax incentives, mutual funds step into the
early stage financing arena, professionally assess and the monitor investments
assist the launch of new medium size businesses. SBI Mutual Fund is really
undertaking investment work with its brought deals. The creation of more funds
to participate in this area of the market is now clearly seen. Early stage financings
could then be syndicated between number of professionally managed funds and
sound, competitive situation between them might also be created.
The Government has since 1995-96 been treating the venture funds like Mutual
funds for tax benefits and brought them under Regulation of SEBI. The SEBI has
set out the guidelines for their registration and control by itself a code of conduct
for them to operate as in the case of capital market mutual funds and for their
investment and operations on the fund. In the Central Budget for 2000-01 the
income of the Venture Capital Fund is taxed at the rate of 20%, although the
dividends declared in the hands of the investors are tax-free.

47

Need for Growth of Venture Capital:

There is need for encouragement of risk capital in India, as this will widen the
industrial base of, high-tech industries and promote the growth of technology.
The initial step might be to permit the launch of the mutual fund by all those banks
authorize to conduct business in India, at the same time extending the investment
range of such funds to embrace unquoted stocks.
Liberating the capital market would bring greater depth to the capital market as a
whole, introducing more genuine investors of substance with long time horizons,
provide avenues for the institutions to realize their equity portfolios more easily
(freeing funds for more new investments), and generally improve market liquidity.
This would improve equity cult.
So moves towards a freer and less regulated market are important in considering
measures to simulate the entry of the private sector into the risk capital formation.

48

Venture Capital Vs. Mutual Fund

In the matters of tax, venture capital funds and mutual fund are kept on par.
Foreign Venture funds are given a free hand tom flow in for the investments
permitted for foreign investment. During the first quarter of 2000, about $17 billon
have flowed in as Venture Funds mostly invested in the technology based small
companies, according to a Survey Conducted by price water house coopers (PWC)
Company.
Among the measures to promote the capital market banks are now allowed to
invest in equities and bonds on a discretionary basis and to invest in Venture
Capital Funds beyond the permitted ceiling of 5% of their funds in shares and
securities of the companies during 1999-2000.

49

Rules on Venture Capital Funds:

The norms of Venture Capital Funds are liberalized early January 2000. While
earlier, a Venture Capital Funds could not acquire more than 40% of equity of a
high risk business or a start up company, now there is no such ceiling and Venture
Capital Funds is free to invest as it likes. However, the only restriction that remains
is that the Venture Capital Funds cannot invest more than 25% of its own Fund
base in any one company. Now Venture Capital Funds can hold upto even 100% of
equity of a start up the company as that ceiling of 40% is now removed, but it can
now hold up to 25% of its own fund in any companys equity.
Foreign Venture Capital is made eligible to participate in book building process
since July 2001. There is no lock in period for the pre issue share capital of an
unlisted company held by Venture Capital Funds and FVCFs. Mutual Funds are
now eligible to invest in units of the Venture Capital Funds, like investments in
listed and unlisted securities. There has been a considerable liberalisation in
investments by Venture Capital Funds as much as investments in Venture Capital
Funds.

50

Merchant banking
What is Merchant Banking?
Merchant banks are issue houses rendering such services to industrial projects or
corporate units as floatation of new ventures and new companies, preparation,
planning and execution of new projects, consultancy and advice in technical,
financial, managerial and organisational fields. A number of other function such as
restructuring, revaluation of assets, takeovers, acquisitions, etc, are also undertaken
by them.
A major function of merchant banking is the issue management. The issue can be
public issue through prospectus, offer of sale, or private placements etc.

Issue Management
The issue management involves the following functions in respect of issue through
prospectus:
(a) Obtaining approval for the issue from the SEBI (b) arranging underwriting for
the proposed issue.
(b) Drafting and finalizing of the prospectus and obtaining its clearance from the
underwriters, stock exchanges, auditors, solicitors, Registrar of Companies and
other necessary consents required for filing the prospectus. (d) Drafting and
finalization of other documents such as application forms, stock exchanges.
(c) Selection of the registrar to the issue, printing press, advertising agencies
underwriters, brokers and bankers to the issue and finalization of the fees and
charges to be paid to them.

51

Other Functions
Merchant banks in foreign countries undertake a larger number of activities.
They operate both in the money market and capital market, undertake direct and
indirect lending portfolio management for institutions, trusts, charities, etc, funds
management for existing companies, underwriting for new and old companies etc.
They are also active in the money market and discount market operations in
undertaking bills discounting and investing the short-term funds in treasury bills,
commercial bills and other money market instruments. In India, these functions are
carried on by banks themselves with the result that their merchant banking
divisions confine to underwriting, consultancy, new issue business, involving
management of issues and related activities. The Indian merchant banking is still in
its infancy and their activities are, therefore, limited to a few selected activities of
new issues market at present such as project planning, financial consultancy,
advice and planning and execution of these projects, involving the preparation for
the public issue, observance of necessary formalities for such issued applications to
SEBI, RBI and for listing on the stock exchange, collection and allotment of share
application moneys, underwriting etc.

Private Placement
When the financial institutions directly subscribes to the equity/preference shares
and/or debentures issued by the company, the company is said to have privately
placed these securities with the financial institutions. This does not require either a
prospectus or letter of offer. The terms and conditions subject to which the
financial institutions agree to subscribe to the privately placed shares or debentures

52

are usually incorporated in the debenture subscription agreement or the investment

agreement entered into between the financial institutions and the company.
The company could, if it so desires, approach, in the place of financial
institutions, a well-identifiable body of persons like merchant banks for private
placement. The provision of the Act are to be interpreted strictly and therefore, if
the company sends the offer to Mr. X and the offer is accepted by Mrs. X to whom
the allotment is finally made, it could deem to be the public offer necessitating
compliance of requirements of the prospectus.
This exercise is, therefore, to be undertaken with great caution to see that the final
transfer takes place only to those for whom the original offer was made. In
practice, till recently the companies hardly took any recourse to this mode of
private placement of their securities due to these restrictions.
The company has to agree upon the list of persons to whom the offer is to be
sent much in advance and its is thereafter necessary that the company should send
offers to the same persons as per the list approved by the Company with a clear-cut
instructions to the officers that the securities offered are strictly to be subscribed
for by them and them alone and the officers are not supposed to pass on the offer
of the company to someone else. He would also ensure that the company would
receive subscription only from those persons to whom the original offers had been
sent by the company and finally, the company would allot securities to the same
persons.

53

Services of Merchant Banks

Merchant banking is normally considered to be related only to the services
associated with public issue management but they also offer domestic project
finance syndication. Large merchant banks in the country offer a wide range of
services. Merchant banks offer generally the following services.
(a) Pre-investment studies for investors: These are in the nature of financial
feasibility explorations in selected areas of interest of the client. They include such
studies for foreign companies wishing to participate in joint adventures in India,
and often involve a package covering advice on the nature of participation and
Government regulatory factors.
(b)

Project

finance:

Once

the

decision

embark

on

particular

project/expansion/modernization scheme has been taken, assistance in working out

a comprehension package for the project funding and pattern of financing is
available from the merchant banks. They work in close liaison with the client, his
technical consultants, and the funding institutions, prepare and submit complete e
financial dossiers, and arrange for the various sources of finance. Assistance in
legal documentation for the finance arranged is also provided.
(c) Working capital: Finance for working capital, particularly for new ventures,
often needs to be syndicated on behalf of the promoters, and merchant banks assist
in this as well. For existing companies, non/traditional sources such as through the
issue of debentures for this purpose, and others have been successfully tapped by
merchant bankers.

54

(d) Foreign currency finance: Of late, India has become increasingly active in the
international money markets, and this trend is likely to continue. For import of
capital goods and services from overseas, the arrangement of various kinds of
export credits from different countries is also required. In addition to this wide
range of services, some of the larger banks are also involved in areas such as the
arrangement of lease finance, and assistance in acquisitions and mergers etc.

Why Merchant Banks?

The following are some of the reasons why specialist merchant banks have a
crucial role to play in India:
1. Growing industrialization and increase of technologically advanced industries.
2. Need for encouragement of small and medium industrialists, who require
specialist services.
3. Growing complexity in rules and procedures of the Government.
4. Need to develop backward areas and states which require different criteria.
5. Exploring the possibility of joint ventures abroad and foreign markets.
6. Promoting the role of New Issue Market in mobilizing savings from of public.

Functions
With increasing industrialization of the country and the growing emphasis in the
Five Year Plans on industrialization, merchant banking in India has very extensive
role to play. The National & Grind lays Bank was the first to set up merchant
banking division in India followed by the State Bank of India and other banks.

55

Role of Merchant Banks

To promote the new issue market there is need for a qualitative improvement in the
offer of new issues both in terms of time taken and the cost of floatation. The time
taken for organizing a new issue is between 12 to 18 months and the cost of raising
new capital varied from 3% to 8% and sometimes even 20%. This has been
brought down relatively by specialized merchant banking institutions by catering
to the requirements of both large and small industrial units. Cost of floatation of
equity and preference capital is higher for new companies than for existing
companies, indicating thereby the difficulties experienced by new companies in
making a new issue. Merchant banks help saving in the cost of new companies and
of small companies.
The new issue market has not succeeded fully in mobilizing savings partly due to
the preferences of the public to company deposits and partly due to low yields on
equities as compared to those on fixed interest securities. There has been a decline
in the proportion of share capital in the total capital employed due to the steep rise
in the cost of new issues. There are certain minimum costs to be incurred in respect
of fees to brokers, promoters' expenses, underwriting commission etc, irrespective
of the size of the project. While bigger companies are able to manage this, small
units find it extremely difficult to meet this minimum cost with uncertain prospects
of their own internal resources in order to avoid the high cost of making public
issues.

56

Underwriting
The main work of merchant banks relates to underwriting of new issues and rising
of new capital for the corporate sector. Of the amount underwritten, some part
devolves on the underwriters, which varies depending on the state of the capital
market, and the intrinsic worth of the project. The SEBI has made underwriting.
Compulsory for all issues offered to Public first but later it was made optional.
SEBI made it necessary for merchant bank to undertake or make a firm
commitment for 5% of issued amount to the public.

Authorization
Any person or body proposing to engage in the business of Merchant Banking
would need authorization by SEBI in the prescribed format. This will apply to
those presently engaged in the Merchant Banking activity, including as Manager,
Consultants or Advisers to issues.

Authorized Activity
(i) Issue Management
(ii)

Corporate Advisory services relating to the issue

(iii) Underwriting
(iv) Portfolio Management Services
(v) Managers, Consultants or Advisers to the issue

57

Authorization Criteria
All Merchant Bankers are expected to perform with high standards of integrity and
fairness in all their dealings. A code of conduct for the Merchant Bankers is
prescribed by SEBI which will take into account the following:
(i) Professional Competence
(ii) Personnel, their adequacy and quality and other infrastructure
(iii) Capital Adequacy
(iv) Past track record, experience, general reputation and fairness in all their
transactions.

Terms of Authorization
(i)

All Merchant bankers shall have a minimum net worth of Rs.5 crore.

(ii)

The authorization will be for an initial period of 3 years.

(iii) All issues should be managed by at least one authorized to Merchant

banker functioning as the Lead Manager or sole Manager.
(iv) The Merchant Bankers shall exercise due diligences independently verifying
the contents of the prospectus. The Merchant Bankers of the issues shall certify to
this effect to SEBI.
(v)

In respect of issues managed by the Merchant Bankers, they would be

required to accept a minimum 5% underwriting obligation in the issue subject to a

ceiling of Rs. 25 lakh.

58

(vi)

Lead managers would be responsible for ensuring timely refunds and

allotment of securities to the investor.

(vii)

The merchant bankers involvement will continue till the complete on of

essential follow-up steps including listing of the shares and dispatch of certificates
and refund.
(viii)

The Merchant Banker shall make available to SEBI such information,

returns and reports as may be called for.

(ix)

Merchant Bankers shall adhere to the code of conduct which shall prepared

by SEBI.
(x)

Merchant Bankers to ensure that Publicity / Advertisement material

accompanying the application form to the issue meets the requirement of

GOI/SEBI.

Penalty Point System

SEBI has introduced penalty point system for Merchant Bankers who fail to
comply with the various provisions. The areas of non- compliance/defaults have
been categorized into following four categories. The activities are classified within
these four categories:

59

Type

Nature

Penalty Points

General Defaults

II

Minor Defaults

III

Major Defaults

IV

Serious Defaults

INVESTOR PROTECTION
Introduction
The term "Investor Protection is a wide term encompassing various measures
designed to protect the investors from malpractices of companies, brokers,
merchant bankers issue managers, Registrars of new issues, etc.

"Investors

Beware" should be the watchword of all programs for mobilization of savings for
investment. As all investment has some risk element, this risk factor should be
borne in mind by the investors and they should take all precautions to protect their
interests in the first place. If caution is thrown to the winds and they invest in any
venture without a proper assessment of the risk, they have only to blame
themselves. But if there are malpractices by companies, brokers, etc, they have
every reason to complain. Such grievances have been increasing in number in more
recent years.

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The complaints of investors come from two major sources:

(i)

Against member brokers of Stock Exchanges;

(ii)

Against companies listed for trading on the Stock Exchanges. Besides,

there can be complaints against sub-brokers, agents, merchant bankers, issue

managers, etc, which cannot be entertained by the stock exchanges as per their
rules. However, complaints against registered sub-brokers can be entertained.

Complaints against Members

Investors have complaints against brokers regarding the price, quantity etc. at
which transactions are put through, defective delivery or delayed delivery, delayed
payment or non-payments etc, non-payment of agreed brokerage to authorized
assistants, etc. In the event of default of a member broker, the dues of clients are
also to be looked into.
There is a Grievance Cell in many Stock Exchanges which attends to investor
complaints. Of the total, nearly 95% are against companies and they are more
difficult to settle, as many companies do not attend to the complaints promptly
despite reminders and warnings by the stock exchange, in view of the fact that
penal powers of the Exchange are limited SEBI has been given these penal powers
in respect of listed companies by an amendment to the SEBI Act in 1995 and many
other subsequent a amendments including the latest in 2002.

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The grievance procedure in respect of complaints against members is as

follows:
(a)

Joint meeting of members vis--vis the clients for an amicable

settlement.

(b)

Arbitration proceedings by the committee under the bye-laws.

(c)

Special committee appointed by the Executive Director for

Settlement.

(d)

Disciplinary proceedings including warnings, fines penalties, etc.

particularly in cases of fraud, cheating, etc. by the members.

Grievances Cell
Complaints against members were in the nature of non-payment of sale
proceeds, non-settlement of accounts etc.

Of the total complaints against

members, about 85% are settled during the year, itself.

Complaints against Companies
The complaints against companies are in the nature of non-receipt of allotment
Letters, refund orders, non receipt of dividends, interest etc., delay in transfer of
shares and in splitting and consolidation. The clearance of these complaints is also
attended to by the Cell by writing to the companies, follow-up telexes, etc. and
finally by warning to delist the companies concerned. But the clearance of these
complaints is slow due to the non-compliance or slow compliance by the
companies to the References made by the Cell.
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Customers' Protection Fund

The Customers' Protection Fund is constituted by all Stock Exchange to safeguard
the interests of the investor clients from defaults of the stock brokers. The Fund is
financed by way of a levy on the turnover of members and from out of the listing
fees, earmarked by the Exchanges.

Investors Beware
Investors in stock and capital market need a word of caution. Firstly, these
investments are more risky, returns are uncertain and share values are subjected to
wide fluctuations. Secondly, such investments require an art and expertise to pick
up the right stocks, failing which the investors would burn their fingers. Thirdly,
the players in the market namely, Brokers and issuers of securities, companies etc
are not rated high for their honesty with the result that the investors complaints
against stock brokers and companies have been increasing over the years.

Specific Goals
The investor should be clear in the objectives of the income, capital appreciation,
short term gains or long term gains etc. He should have made already enough
investments in housing and for a regular income to meet his minimum needs and
comforts of life. Even if all the stock market investments are wiped out due to a
market crash, the investor should not be pauper on the streets. Besides, if the
investor spends sleepless nights on the fall of share prices, he cannot be a good
stock market investor.

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Preparing to Invest
Investors desiring to invest in stocks require a lot of preparation. The weak hearted
and risk -averter should first make an entry by buying only debentures, particularly
convertible debentures of good companies, or subscribe to new issues of promising
and well-established companies. After sufficient study and preparation, the investor
should act like stag-pickers in the market, picking up scripts on a selective basis.
That means selected companies from promising and growing industries should be
picked up after collection of all relevant information and data on the companies
and scientific analysis of their fundamentals. The undervalued scripts should be
purchased at the right time with the help of technical analysis.
Rumors and advices: of so-called consultants have to be carefully scrutinized. As
the market investment is both a science and an art, it requires both expertise and
intuition. There is need for prior preparation and a lot of home works before
investments are undertaken. A high degree of caution and planning is necessary but
the scientific basis and knowledge are to be acquired by a proper study.

Choice of a Broker
Investors should as far as possible deal only with registered members of
recognized stocks exchanges. In place where no stock exchanges are; they may
deal with those sub-brokers who have connections with registered brokers. An
honest and dependable broker is too chosen through proper introduction and orders
should be placed with him in proper manner with limits on prices at which sales or
purchases can be made.
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Protection in the New Issues Market

The main sources of information on which investors depend in the new issues
market is the prospectus, which should contain correct statements of fats. Any false
statements, fraud, etc. are punishable under the Companies Act. Under Section56
of the Companies Act, the Directors are subject to civil liability for any
misstatement facts or untrue statements.
Under Section 63 and 68 of the companies Act, the directors are also liable
criminally for any fraud of false statement in the prospectus. Companies liability
for misstatements arises from statements and statements, which are material to the
investors and the particulars on which investors depend to make investments. The
directors or promoters of the company are thus subject to both criminal and civil
liability under the Act for nay misstatements in the prospectus. Even so, the small
investors cannot afford to go to court and, should therefore, carefully read and
examine the prospectus for the viability of the project and marketability of the
product and for integrity and dependability of the promoters.

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CHAPTER IV
CONCLUSIONS

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CONCLUSIONS
Guidelines to Investors
1. Deal with a registered member of the stock exchange. If you are dealing with a
sub-broker, make sure that all bills and contracts are made in the name of a
registered broker and sub-broker is also registered with the SEBI.
2. Insist that all your deals are done in the trading ring or through the exchange.
3. Give specific orders to buy or sell within the fixed price limits and/or time
periods within which orders have be executed.
4. Insist on contacts notes to be passed on to you on the dates. When the orders are
executed.
5. Make sure that your deal is registered with the stock exchange. In the case of a
dispute, this will help trace the details of the deal easily.
6. Collect a settlement table from the stock exchange mentioning the pay-in and
payout days. Each stock exchange has its one trading periods, which are called
settlements. All transactions done within this period are settled at end of it. All
payments for the shares bought and share deliveries take place on the pay-in day.
An awareness of pay-in and payout days is use full when a broker tries to make
excuses.
7. Keep separate records of dealings in specified shares (Group A) and nonspecified shares (Group B1 and B2). The settlements for each is on different days
with the present compulsory rolling settlements system, deliveries and payments
are made quicker with in three to five days.
8.

Execute periodic settlements of dues and delivery of shares to avoid

accumulation of transactions.
9.

Insist on delivery. If the company returns your papers and shares with
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objections, contact your broker immediately.

10. Ensure that shares bought are transferred in your name before the companys
book closure date. This is necessary to make sure that you receive benefits like
dividend, interest and bonus shares. All companies have a book closure date on
which the list of shareholders in the company is finalized.
11.

Complain if broker does not deliver the shares bought in your name. Proceed

to contact another broker with the bill/ contact given to you by the earlier broker
and the latter will purchase the shares on your behalf. In such an event, the first
broker will have to pay the difference in price.
12.

Do not sell shares that are transferred in your name after the book closure, as

there are not valid in the market.

13.

Do not sell/deal in shares where even one of the holders has passed away. In

cases where the holder has died, a succession certificate is necessary. In cases
where one of the joint holders passed away, the surviving holder should send the
shares along with the death certificate to the company. Only after the name of the
deceased has been deleted from the shares, can they be transferred.
14.

Do not expect the money shares to come immediately. It will take at least 7

to 15 days from the date of transaction, which is now made quicker in, demat form
of trading.
15.

Unless you have special arrangements with the broker, do not expect the

adjustments of purchases and sales against one another. One pays first and receives
later.
16.

Do not take delays or harassment lying down. You have to complain to the

Grievance Cell of the stock exchanges or Securities and Exchanges Broad of the
India (SEBI) in case of delay or harassment.

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PORTFOLIO MANAGEMENT SERVICES

A list of all those services and facilities that are provided by a portfolio manager to
its clients, relating to the management and administration of portfolio of securities
or the funds of clients, is referred to as portfolio management services. The term
portfolio means the total holdings of securities belonging to any person.

Portfolio Manager:
According to SEBI, Portfolio Manager means any person who pursuant to
contract or arrangements with a clients, advices or directs or undertakes on behalf
of the clients the management or administration of a portfolio of securities or the
funds of client, as the case may be

Discretionary Portfolio Manager:

According to SEBI, discretionary portfolio manager means a portfolio manager
who exercises or may, under a contract relating to portfolio management, exercises
any degree of discretion as to the investments or management of the portfolio of
securities or the funds of the clients, as the case may be.

FUNCTIONS
The objective of portfolio management is to develop a portfolio that has maximum
return at whatever level of risk the investor deems appropriate.

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Risk Diversification
An essential function of portfolio management is spread risk akin to investment of
assets. Diversification could take place across different securities and across
different industries. Diversification achieved in different industries is an effective
way of diversifying the risk in an investment. Simple diversification reduces risk
within categories of stocks that all have the same quality rating.
The portfolio managers could as well adopt the Markowitz model whereby
portfolio risk are sought to be reduced through combining assets, which are less
than perfectly positively correlated.

Efficient Portfolio:
A portfolio manager aims at building dominant investment called efficient
portfolio. An efficient portfolio consists of combination of assets that maximizes
return and maximizes the risk level of expected return. The objective of portfolio
management is to analyze different individual assets and delineate efficient
portfolios. A group of portfolio of efficient portfolios is called efficient set of
portfolios. The efficient set of portfolio comprises efficient frontier.

Asset allocation
An important function of portfolio management is asset allocation. It deals with
attaining proportion of investments from categories. Portfolio managers basically
aim at stock-bond mix. For this purpose equally weighted categories of assets are
used.

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Beta Estimation
Another important function of a portfolio manger is to make an estimate of beta
coefficient. It measures and ranks the systematic risk of different assets. Beta
coefficient is an index of the systematic risk. This is useful in making ultimate
selection of securities for investment by portfolio manager.

Rebalancing Portfolios:
Rebalancing of portfolio involves the process of periodically adjusting the
portfolios to maintain the original conditions of portfolio. The adjustments may be
made either by way of constant proportion portfolio or by way of constant beta
portfolio. In constant proportion portfolio, adjustments are made in such a way as
to maintain the relative weighting in portfolio components according to the change
in prices.
Under the constant beta portfolio, adjustments are made to accommodate the
values of component betas in the portfolio.

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STRATEGIES
A Portfolio manager may adopt any of the following strategies as part of an
efficient management:

Buy and Hold Strategy

Under the buy and hold strategy, the portfolio manager builds a portfolio of stock,
which is not disturbed at all for a long period of time.

Indexing
Another strategy employed by portfolio managers is indexing. Indexing involves
an attempt to replicate the investment characteristics of a popular measure of the
bond market. Securities that are held in best- known bond indexes are basically
high-grade issues.
Laddered Portfolio
Under the laddered portfolio, bonds are selected in such a way that their maturities
are spread uniformly over a long period of time. This way a portfolio manager
aims at distributing the funds throughout the yield curve.
Barbell Portfolio
Under this portfolio strategy, less investment of funds is made in middle maturities.

REGISTERATION OF PORTFOLIO MANAGERS

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Following are steps involved in the registration of portfolio

managers:
Application for Grant of Certificate
An application by portfolio manager for grant of a certificate shall be made to the
Board in Form A. Any application is made by portfolio manager prior to coming
into force of these regulations containing such particulars or as near thereto as
mentioned in the Form A shall be treated as an application made in pursuance of
sub-regulation (1) and dealt with accordingly.

Conformance to Requirements
Any application, which is not complete in all respects and does not conform to the
instructions specified in the form, shall be rejected by the Board. Before rejecting
any such application, the applicant shall be given an opportunity to remove within
the time specified such objectives as may be indicated by the Board.

Capital Adequacy Requirement

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The capital adequacy requirement shall not be less than the net worth of fifty lakhs
rupees. For the purpose of this regulation, net worth means the aggregate value
of paid up equity capital value of paid up equity capital plus free reserves reduced
by the aggregate value of accumulated losses and deferred expenditure not written
off, including miscellaneous expenses not written off.

Procedure for Registration

The Broad on being satisfied that the applicant and on receipts of the payment of
fees as specified in Schedule II, then grants a certificate in Form B.

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BIBLIOGRAPHY

75

REFERENCES

Kothari. C.R., (2004). 'Research Methodology', second edition, New age

international (P) limited, Wishwa Prakashan, Chennai.
Reilly, F.K., and Brown, K.C.(2005). 'Investment Analysis and Portfolio
Management'. Thomson South-Western.
Cleary S., 1999, ''The relationship between firm investment and financial status'',
Journal of Finance, Vol.54, pp. 673-692.
Cleary S., 2006, ''International corporate investment and the relationships between
financial constraint measures'', Journal of Banking and Finance.

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