I Banking

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Investment Banking
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Topics of Investment Banking:-
¾ Introduction
¾ Meaning
¾ Overview
~Evolution of Investment Banking
~Its Mechanism (statement of investment banking)
¾ Products/Services Offered
~Lists of explanation
~Special services
¾ How these services server the purpose of clients?
¾ Risks associated with investment banking?
~Types
~Explanation (example){problem impact}
¾ How the risks are managed effectively?
~Why risks management?
~Ways (example){problem action}
¾ Future Scenario
¾ Conclusion

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INTRODUCTION
At a very macro level, ‘Investment Banking’ as term suggests, is

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

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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” banking” is “sells side." This is trading securities for cash
investment
securities (i.e., facilitating transactions, market-making), or the promotion
or
securities (i.e. underwriting, research, etc.).
of
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.
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
finance and corporate development departments provide objectivity,
sophisticated
a

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valuable contact network, allows for efficient use of client personnel, and
vitally interested in seeing the transaction
is
close.
Most small to medium sized companies do not have a large in-house
and in a financial transaction may be at a disadvantage versus
staff,
competitors. A quality investment banking firm can provide the
larger
required to initiate and execute a major transaction, thereby
services
small to medium sized companies with financial and transaction
empowering
without the addition of permanent overhead, an investment bank
experience
objectivity, a valuable contact network, allows for efficient use of
provides
personnel, and is vitally interested in seeing the transaction close.
client
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
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
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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 & 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.
o 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.
o 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 highly regulated, reducing its
importance to the investment
bank.
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o Structuring has been a relatively recent division as derivatives

have come into play, with highly technical and numerate
employees working on creating complex structured products
which typically offer much greater margins and returns than
underlying cash securities.
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 standardised 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.
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,
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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).
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
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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.
Since investment banks engage heavily in trading for their own account, there is
always the temptation or possibility that they might engage in some form of front
running.
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

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

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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,
existing operations, or for specific project financing. Capital can
expand
some combination of debt, common equity, preferred equity, and
include
securities such as convertible debt or debt with warrants. Although
hybrid
people associate raising capital with public stock offerings, a great deal
many
capital is actually raised through private placements with
of
specialized investment funds, and private individuals. The investment
institutions,
bank
will work with the client to structure the transaction to meet
objectives while being attractive to
specific
investors.
Mergers and
Acquisitions
Investment banks often represent firms in mergers, acquisitions,
and
divestitures. Example projects include the acquisition of a specific firm,
sale of a company or a subsidiary of the company, and assistance
the
identifying, structuring, and executing a merger or joint venture. In
in
case, the investment bank should provide a thorough analysis of the
each
bought or sold, as well as a valuation range and recommended
entity
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
a market in a stock, placing new offerings, and publishing research
making
reports.
General Advisory
Services:
Advisory services include assignments such as strategic planning,
business
valuations, assisting in financial restructurings, and providing an opinion
to the fairness of a proposed
as
transaction.

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Terms Related To Investment Bank
Buying and Selling

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

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putting your money into action. Make some mock purchases based on
personal analysis technique and track the results. Not all of your
your
will lead to the results you were expecting, but if most of your choices
decisions
out to be good and there are mitigating factors that you can learn from
turn
explain your missteps, then you may be ready to put your analysis
to
and investing strategy into
technique
action.
At this point, the need to continuously monitor your investments does
disappear. Both under performers and overachievers should be
not
carefully to fine-tune your strategy. You should also regularly look at
studied
securities to make sure that the fundamentals for success that led you to
your
in the first place are intact. If not, you may need to prepare to cash in
buy
start looking for the next
and
opportunity.
One way to avoid the hassles of deciding when to buy altogether is
practice dollar-cost averaging. This strategy advocates investing a
to
dollar amount at regular intervals. The price when you first invest
fixed
relatively unimportant (as long as the fundamentals are sound) because
is
will be purchasing shares at a different price each time you buy. The
you
of your investment then lies not with short-term fluctuations, but with
success
long-term movement of the value of the
the
security.
Selling
:
There comes a time when investments must be liquidated and
back into cash. In a perfect world, selling would only be necessary
converted
investment goals have been reached or time horizons have expired, but,
when
in
reality, decisions about selling can be much more difficult. For one thing,
can be just as hard to decide when to sell as it can be to decide when to
it
No one wishes to miss out on gains by selling too soon, but, at the
buy.
same
time, no one wishes to watch an investment peak in value and then begin
decline
to
.
Investors often seek to sell investments that have dropped in value in
short-term. However, if conditions have not changed significantly, drops
the
price may actually represent an opportunity to buy at a better price. If
in
initial research, which led to the purchase, was sound, a temporary
the
decline
does not preclude the success that was originally predicted. Of course,
change, and if the security no longer meets the criteria that led to
things
purchase, selling may in fact be the best
its
option.
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Selling may also become necessary if investment goals change over

You may need to reduce the amount of risk in your portfolio or you
time.
have the opportunity to seek out greater returns. Additionally, a security
may
have increased in value to the point that it is overvalued. This creates
may
excellent opportunity to cash in and seek out new undervalued
an
Often you will need to make this type of sale in the course of rebalancing
investments.
aportfolio necessitated by gains and losses in different
areas.
Selling can be especially difficult when an under performing stock must
dumped. Some investors let their emotions dictate their actions and hold
be
on
to stocks that have fallen in value rather than to sell, thinking that selling at
aloss is like admitting that they made a mistake. However, realizing the
and moving on to better investments is often preferable to continuing to
loss
hold
onto a loser in the hopes that it will somehow
rebound.
When considering any sale, you must factor in the costs of the sale
itself.
Fees and taxes will eat into profits, so they must be subtracted from
increases in value to understand the true impact of the transaction.
any
gains taxes are higher for gains on investments held less than one year,
Capital
it's often wise to invest for the long term rather than to buy and sell
so
On the other hand, it can be dangerous to hold an investment longer than
quickly.
want to, simply to reduce the tax
you
burden.
It is essential to remember that just because an investment increases in
after it has been sold does not necessarily mean that it was sold
value
Managing risk and diversification are often more important than
prematurely.
capitalizing
on short-term gains in a particular security. Keeping in mind the initial
for the investment and adjusting them to fit your present goals will
goals
you to make smarter decisions about
allow
selling.
Principles of
Investing
1. Start Investing
Now
We say this not just to discourage procrastination, but because an early
can make all the difference. In general, every six years you wait doubles
start
the
required monthly savings to reach the same level of retirement
Another motivational statistic: If you contributed some amount each
income.
for the next nine years, and then nothing afterwards, or if you
month
contributed
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nothing for the first nine years, then contributed the same amount
month for the next 41 years, you would have about the same
each
Compounding is a beautiful thing.
amount.
2. Know Yourself
The right course of action depends on your current situation, your

goals, and your personality. If you don't take a close look at these, and
future
them explicit, you might be headed in the wrong
make
direction.
Current Situation: How healthy are you, financially? What's
your right now? What's your monthly income? What are
net worth
expenses (and where could they be reduced)? How much debt are
your
carrying? At what rate of interest? How much are you saving? How
you
you investing it? What are your returns? What are your
are
expenses?
Goals: What are your financial goals? How much will you need
achieve
to them? Are you on the right
track?
Risk Tolerance: How much risk are you willing and able to accept
in of your objectives? The appropriate level of risk is determined
pursuit
your personality, age, job security, health, net worth, amount of cash
by
have to cover emergencies, and the length of your investing
you
horizon.
3. Get Your Financial House In

Order
Even though investing may be more fun than personal finance, it
more sense to get started on them in the reverse order. If you don't
makes
where the money goes each month, you shouldn't be thinking
know
investing yet. Tracking your spending habits is the first step
about
improving them. If you're carrying debt at a high rate of interest
toward
credit card debt), you should unburden yourself before you begin
(especially
If you don't know how much you save each month and how much you'll
investing.
need to save to reach your goals, there’s no way to know what
are right for
investments
you.
If you've transitioned from a debt situation to paycheck-to-
paycheck

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situation to a saving some money every month situation, you’re ready

begin investing what you save. You should start by amassing enough
to
cover three to six months of expenses, and keep this money in a very
to
investment like a money market account, so you're prepared in the event
safe
an emergency. Once you've saved up this emergency reserve, you
of
progress to higher risk (and higher return) investments: bonds for money
can
you expect to need in the next few years, and stocks or stock mutual
that
for the rest. Use dollar cost averaging, by investing about the same
funds
each month. This is always a good idea, but even more so with the
amount
fluctuations in the market in the past 10 years. Dollar cost averaging
dramatic
make it easier to stomach the inevitable
will
dips.
And remember; never invest in anything you don't
understand.
4. Develop A Long Term Plan
Now that you know your current situation, goals, and personality,
should have a pretty good idea of what your long-term plan should be.
you
should detail where the money will go: cars, houses, college, and
It
It should also detail where the money will come from. Hopefully
retirement.
numbers will be about the
the
same.
Don't try to time the market. Get in and stay in. We don't know
direction the next 10% move will be, but we do know what direction
what
next100% move will be.
the
Review your plan periodically, and whenever your needs or

change. If you are not confident that your plan makes sense, talk to
circumstances
an
investment advisor or someone you
trust.
5. Buy Stocks
Now that you've got a long term view, you can more safely invest in
investments, which the market rewards (in general). This requires
'riskier'
patience
and discipline, but it increases returns. This approach reduces the
universe of investment vehicles to two choices: stocks and stock
entire
funds. In the long run, they're the winners: In this century, stocks beat
mutual
8 out of 9 decades, and they're well in the lead again. According
bonds
to
Ibbotson's Stocks, Bonds, Bills and Inflation 1995 Yearbook, here are
average annual returns from 1926 to 1994 (before
the
inflation):
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Stocks: 10.2% (and small company stocks were

12.1%)
Intermediate term treasury bonds:
5.1%
30-day T-bills:
But is 3.7%
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
only 280%. Compounding is God's gift to long-term
is
planners.
If you buy outstanding companies, and hold them through the
gyrations, you will be rewarded. If you aren't good at selecting stocks,
market's
some mutual funds. If you aren't good at selecting mutual funds, go with
select
index fund (like the Vanguard S&P
an
500).
6. Investigate Before You
Invest
Always do your homework. The more you know, the better off you are.
requires that you keep learning, and pay attention to events that might
This
you. Understand personal finance matters that could affect you (for
affect
proposed tax changes). Understand how each of your investments fits
example,
with the rest of your portfolio and with your overall strategy. Understand
in
risks associated with each investment. Gather unbiased,
the
information. Get a second opinion, a third opinion, etc. Be cautious
objective
evaluating the advice of anyone with a vested
when
interest.
If you're going to invest in stocks, learn as much as you can about
companies you’re considering. Understand before you invest.
the
Research,
research, Read books. Consider joining an investment club or
organization like the American Association of Individual
an
Experiment with various strategies before you put your own money on
Investors.
line. Examine historical data or participate in a stock market simulation.
the
a momentum portfolio, a technical analysis portfolio, a bottom
Try
portfolio, a dividend portfolio, a price/earnings growth portfolio, an
fisher
portfolio, a mega trends portfolio, and any others you think of. In the
intuition
you'll find out which ones work best for you. Learn from your own
process
and learn from the mistakes of
mistakes,
others.
If you don't have time for all this work consider mutual funds,
index funds.
especially

16
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7. Develop the Right

Attitude
The following personality traits will help you achieve financial
success:
Discipline: Develop a plan, and stick with it. As you continue
learn,toyou’ll become more confident that you're on the right track.
your asset allocation based on changes in your personal situation,
Alter
because of some short-term market
not
fluctuation.
Confidence: Let your intelligence, not your emotions; make

your for you. Understand that you will make mistakes and take
decisions
even the best investors do. Re-evaluate your strategy from time to
losses;
but don't second-guess
time,
it.
Patience: Don't let your emotions be ruled by today's performance.

mostIncases, you shouldn't even be watching the day-to-day
unless you like to. Also, don't ever feel like it's now or never. Don't
performance,
pressured into an investment you don’t yet understand or feel
be
with.
comfortable
The following personality traits will hurt your chances of
success
financial
: Fear: If you are unwilling to take any risk, you will be stuck
investments
with that barely beat
inflation.
Greed: As an investment class, 'get rich quick' schemes have

worstthe
returns. If your expectations are unrealistically high, you'll go for
big scores, which usually don’t
the
It work.
is generally a good idea to avoid making financial decisions based
on
emotional
factors.
8. Get Help If You Need
It
The do-it-yourself approach isn't for everyone. If you try it and it's
working, or you're afraid to try it at all, or you just don't have the time
not
or
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desire, there's nothing wrong with seeking professional

assistance.
If you want others to handle your financial affairs for you, you
nevertheless want to remain involved to some degree, to make sure
will
money is being spent
your
wisely.
Initial Public
Offerings
Initial Public Offerings (IPOs) are the first time a company sells its stock
the public. Sometimes IPOs are associated with huge first-day gains;
to
times, when the market is cold, they flop. It's often difficult for an
other
investor to realize the huge gains, since in most cases only
individual
investors have access to the stock at the offering price. By the time
institutional
general public can trade the stock, most of its first-day gains have
the
been made. However, a savvy and informed investor should still watch
already
IPO market, because this is the first opportunity to buy these
the
stocks.
Reasons for an
IPO
When a privately held corporation needs to raise additional capital, it
either take on debt or sell partial ownership. If the corporation chooses
can
sell ownership to the public, it engages in an IPO. Corporations choose
to
"go public" instead of issuing debt securities for several reasons. The
to
most
common reason is that capital raised through an IPO does not have to
repaid, whereas debt securities such as bonds must be repaid with
be
Despite this apparent benefit, there are also many drawbacks to an IPO.
interest.
A
large drawback to going public is that the current owners of the
held corporation lose a part of their ownership. Corporations weigh the
privately
and benefits of an IPO carefully before performing an
costs
IPO.
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
is commonly called "underwriting"; the bank's role as the underwriter
process
according to the method of underwriting agreed upon, but its
varies
function remains the
primary
same.

18
m
In accordance with the Securities Act of 1933, the corporation will file
aregistration statement with the Securities and Exchange Commission
The registration statement must fully disclose all material information to
(SEC).
SEC, including a description of the corporation, detailed
the
statements, biographical information on insiders, and the number of
financial
owned by each insider. After filing, the corporation must wait for the SEC
shares
investigate the registration statement and approve of the full
to
disclosure.
During this period while the SEC investigates the corporation's filings,
underwriter will try to increase demand for the corporation's stock.
the
investment banks will print "tombstone" advertisements that offer
Many
bones" information to prospective investors. The underwriter will also
"bare-
a preliminary prospectus, or "red herring", to potential investors. These
issue
herrings include much of the information contained in the
red
statement, but are incomplete and subject to change. An official summary
registration
the corporation, or prospectus, must be issued either before or along with
of
actual stock
the
offering.
After the SEC approves of the corporation's full disclosure, the
and the underwriter decide on the price and date of the IPO; the IPO is
corporation
conducted on the determined date. IPO’s are sometimes postponed or
then
withdrawn in poor market
even
conditions.
Performanc
e
The aftermarket performance of an IPO is how the stock price behaves
the day of its offering on the secondary market (such as the NYSE or
after
the
NASDAQ). Investors can use this information to judge the likelihood that
IPO in a specific industry or from a specific lead underwriter will
an
well in the days (or months) following its offering. The first-day gains
perform
of
some IPO’s have made investors all too aware of the money to be had in
investing. Unfortunately, for the small individual investor, realizing
IPO
much-publicized gains is nearly impossible. The crux of the problem is
those
that
individual investors are just too small to get in on the IPO market before
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
the
one of reciprocal back scratching, in which the underwriters offer the
is
shares
first to the clients who have brought them the most business recently. By
time the average investor gets his hands on a hot IPO, it's on the
the
market, and the stock's price has already shot
secondary
up.
19
m
SEBI Guidelines
The Government has setup Securities Exchange Board of

(SEBI) in April
India
1988. For more then three years, it had no statutory
Its interim functions during the period
powers.
were:
i. To collect information and advise the Government on matters
relating
to Stock and Capital
Markets.
ii. Licensing and regulatory and Merchant Banks, Mutual Fund,
etc..
iii. To prepare the legal drafts for regulatory and developmental role
of
SEBI and
iv. To perform any other functions as may be entrusted to it
Government.
by
The need for setting up independent Government agency to

regulate
and develop the Stock and Capital Market in India as in
developed countries was recognised since the Seventh Five Year
many
launched (1985) when some major industrial policy changes
was
opening up of the economy to out side the world and greater role
like
the Private Sector were initiated. The rampant malpractices noticed
to
the Stock and Capital Markets stood in the way of infusing
in
of investors, which is necessary for mobilisation of large quantity
confidence
funds from the public, and help the growth of the
of
industry.
The malpractices were noticed in the case of

companies,
Merchant Bankers and Brokers who are all operating in
Markets. The need to curb the malpractices and to promote
Capital
Capital Market in India was felt. The security industry in India has
healthy
develop on the right lines for which a competent Government
to
as in UK (SIB) or in USA (SEC) is
agency
needed.

20
m
As referred to earlier, malpractices have been reported

in market and secondary market. A few examples
both the primary
malpractices in the primary market are as
of
follows:
a) Too may self styled Investment Advisers and
Consultants.
b) Grey Market or unofficial premiums on the new
issues.
c) Manipulation of markets before new issues is
floated.
d) Delay in allotment letters or refund orders or in dispatch of
Certificate
Share
s
e) Delay in listing and commencement of trading in
shares.
A few examples of malpractices in the Secondary Market are as
fallows:
a) Lack of transparency in the trading operations and prices charged
to
clients
.
b) Poor service due to delay in passing contract notes or not
passing
contracts notes, at
all.
c) Delay in making payments to clients or in giving delivery of
shares.
d) Persistence of odd lots and refusal of companies to stop this
of allotting shares in odd lots, which disappeared with the
practice
of Demat form of
introduction
trading.
e) Insider trading by agents of companies or brokers rigging
and
manipulating
prices.
f) Takeover bids to destabilise
management.
Objectives:
The SEBI has been entrusted with both the regulatory

development
and function. The objectives of SEBI are as
follows:
a) Investor protection, so that there is a steady flow of savings
the Capital
into
Markets.

21
m
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
and others intermediaries so that they become competitive
bankers
professional
and
.
SEBI AND FREE PRICING OF EQUITY

SHARES
With the repeat of Capital Issuers Control Act of 1947 in
1992, the SEBI Mayissued fresh guidelines for new Capital issues from June
1992. Pricing of Shares expect in case of new companies with no
11,
record is left to free market forces. The new Companies have to
track
shares at par only. The existing unlisted companies if they desire listing
issues
make public issue upto 20% of equity and price can be determined by
can
market forces, as determined by the issuer or the lead manager. Similarly,
free
existing listed company can also fix the price of issue depending on
an
markets forces. In all these cases, the reasons for such price
the
transparency and proper disclosers are insisted upon by the SEBI. The
fixation,
letter of offer to the public is to be vetted by SEBI, which was delegated
draft
lead merchant bankers by SEBI after
to
1996.
As per SEBI guidelines, 12 months should elapse
bonus issue andbetween
public or rights issue. A private placement of
quota is not permitted. Merchant bankers held responsible for ensuring
promoters’
prospectus is fair and disclosures are full and correct and that highlights
that
and
risk factors are slept out in all issues. Although free pricing is permitted,
rationale of such fixation is to be provided to the SEBI when it examines
the
drafts letter of
the
offer.
SEBI POWERS
The SEBI powers on stock exchanges and their member brokers and
brokers were exercised under SEBI (stock brokers and sub
sub
Regulations of October 23 1992. These relate to registration, licensing,
brokers)
code
of conduct, and inspection of books accounts, etc. These powers
exercised under Section 12 of SEBI
were
Act.
22
m
SEBI was delegated more powers of administration of SC

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

Market including
Capital
all affairs of listed Companies, Venture Funds,
MMMFs,
etc. Already it has been regulating the foreign agencies or a body
in the capital market and it has announced guidelines for all players
operating
markets, including a code of
in
conduct.
Institutional Agencies:
All the FIIs together can invest upto 24-30% of the
company’s
paid up capital, of which a limit of 50% is allowed to foreign individuals
corporates investing in India through FIIs; this limit of 30% was raised
and
40% by the Central Budget for 2000-01.
to
The SEBI has also allowed the domestic Mutual Funds to invest in
foreign
listed securities and to manage foreign portfolios. According to
some
23
m
amendments to Mutual Fund regulations of SEBI, the Mutual Funds

required to send a complete statement of their portfolios to all unit
are
within one month from the close of each half-year. In order to deter
holders
funds from delay in despatch of redemption warrants, SEBI has
mutual
mutual funds to provide for payment of interest to the unit holders on
directed
delayed payment, wherever
this
applicable.
Latest Primary Markets Reforms

In pursuance with the recommendations of the Informal
Group the SEBI has dispensed with the requirements
on Primary Markets,
issuing shares at fixed par value of Rs.10 and Rs.100. They are now free
of
issue shares at any value of Rs.1 and above. The SEBI modified the
to
framework for the book building. Some issues following the book
existing
process have already been issued in 1999-
building
2000.
In order to encourage Initial Public Offer, the SEBI has
the guidelinesrelaxed
stipulating “the ability to pay” criteria in place of
criteria of “actual payment of dividend” by the issuing companies to
existing
eligible to make public offers. The regulations for Credit Rating
be
were finalised and published by the SEBI. The categories of promoters
Agencies
are eligible to promote CRA’s are laid
who
down.
Book Building Process:

The changes in book building
guidelines:
The modified framework makes display of demand at
terminals
optional. The reservation of 15% of issue size for individual
bidding upto 10 marketable lots is no longer compulsory. Allotment in
investors
Building process should be in Demat form only and other requirements
Book
shall
be the same as for any public issue. The issuer is allowed to disclose
the issue size or number of securities to be offered to the
either
public.
The regulatory mechanism on secondary market
strengthened was
during 1999-2000, through the rationalisation and
of margin system and through mark to market margins, volatility
refinement
incremental carry forward margins, etc. The circuit breakers for the
margins,
volatility

24
m
have been fixed by SEBI at 8% to 12% to be raised upto 16%. The

limits for members are also
exposure
fixed.
Informal Group on Primary

Market
As part of its efforts to receive the dressed primary market,

the the listed norms for I.T. sector companies to make
SEBI has relaxed
public offers with a minimum offer of 10%, instead of 25% for all
initial
companies. Book building norms are to encourage new issues. The norm
other
90% subscription as the minimum for enabling the company offering
of
issue to make allotment was waived. Similarly, the stipulation of
public
payment of dividend in three out of the past 5 years for the company to
actual
out with a public issue was replaced by requirements of “ability to pay”
come
dividends. As recommended Informal Group on primary market,
the
initiated to improve the sentiment in the Primary Market. The SEBI
measures
given freedom to the Companies to determine the par value of shares
has
by them in accordance with section 13(4) of the Companies Act, 1956.
issued
companies with dematerialized shares have been allowed to alter the
the
value of share indicated in the Memorandum and Articles of
par
Reference was already to changes in Book Building
Association
Norms.
SEBI has also accepted the introduction of a system of
using
the existing infrastructure of stocks Exchanges for marketing of IPOs
NSE has offered these services through its wide network terminals spread
and
over the country.
all
Demat Coverage:
From January 2000, the scrips for trading in Demat form
raised to 200.was
With this, the compulsory trading in Demat form has
raised
the proportion of market deliveries in Demat form to 90% of the
deliverers. The physical deliverers of shares has come down drastically.
total
The

25
m
transaction costs have been reduced and volume have

phenomenally due to electronic form of trading and in demat
increased
form.
Committee on Market Making:

A committee on the Market Making under the Chairmanship
of was set by the SEBI to study the various facets of
Shri G.P. Gupta
market making, including the merits and demerits of order driven
the
and quote driven system. The committee was of the view that shares
system
be classified into the categories namely liquid and illiquid and
should
making facility should be provided to the illiquid category of shares.
market
making should be made compulsory in such cases and market markers
Market
to give two way quotes for each such scrip. The mechanism pf
have
making and risked involved in it are to be understood by market
market
makers.
Legal
Framework:In the legal field, the securities Laws, 1999 was passed by
Parliament inthe
December 1999. This has incorporated the
instruments in the definition of securities under Securities
derivative
Regulation Act, 1956, as also the units of Collective Investments
Contract
with a view to facilitating their transaction and regulation. The new
Schemes,
provided for transfer of Appellate functions under the securities
Act
Securities Appellate Tribunal (SAT). The stamp duty payable on
Laws
derivative
transactions those in demat Form was withdrawn by necessary
changes. Banks now accept the ownership pf securities in Demat
legal
Form.
Negotiated
Deals:
A negotiated deal in listed company has to be reported to
stock15 minutes and information in such deals has to
exchange within
disseminated to all Stock Exchanges. A negotiated deal is defined as
be
transaction which has on order value of 25 lakhs or trade volume of not
any
than 10,000shares at one price, not formed on Stock Exchanges and
less
the order matching system. But with a view to enhance the price
through
discovery

26
m
process and improve the transparency, SEBI made such deals

permissible in 1999. Guidelines were issued to permit negotiated deals
not
if they are executed on the screen of Stock Exchange, following the
only
and order matching system of the
price
exchange.
SEBI Committee on Corporate

Governance:
The committee on Corporate Governance, set up by SEBI
reported and has
the report was accepted by SEBI and implemented. The
Exchanges listing agreement was amended to include a clause on
Stock
governance to be observed by listed companies. It is an important tool
corporate
corporates listed on Stock Exchange. The SEBI code on
for
Governance was released in January 2000 for adoption by listed
Corporate
It is expected that this measures may raise the standard of
companies.
governance in India and improve the disclosure standards and
corporate
protection
investor
.
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
governance mandatory for companies seeking listing for the first time.
corporate
companies which are included Group A of BSE and in S&P CNX
The
Index have to comply with the requirements by March 31, 2001.
Nifty
listed companies with paid up capital of Rs.10crores and above or
Besides
of Rs.25crores or more have to comply with this requirement by March
networth
end
2002. Other listed companies with a paid up capital of Rs.3crores and
have to comply with this requirement of corporate governance by March
above
2003.
end
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
set up to streamline the existing risk containment measures namely
was
margin system and simplify
the
it.
SEBI’s Record:

27
m
The SEBI has set a creditable record of regulation for

the
growth of a healthy Capital Market during the period of 1995-2000. In
year 2000, it has set for itself the tasks of speeding up the
the
measures
following
.
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.
5) Promotion of trading in debt market and in securities
debt
instruments
.
Products and Services

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

28
m
Venture capital is a post-war phenomenon in the

world, mainlybusiness
developed as a sideline activity of the rich in USA.
connote the risk & adventure & some element of investment, the
To
name of ‘venture capital’ was coined. In the late 1960’s a new breed
generic
professional investors called venture capitalists emerged whose
of
was to combine risk capital with entrepreneurial management & to
specialty
advance technology to launch new products and companies in the
use
place. Undoubtedly, it was ‘venture capitalists’ astute ability to assess
markets
manage enormous risks & export from them tremendous returns
and
changed the face of
that
America.
Innovative, hi-tech ideas are necessarily risky. It is here that
concept of venture
the capital steps in. Venture Capital provides long start
costs to high risks & returns project. Typically, these projects have
up
rates and therefore are unattractive to risks-averse bankers & private
mortality
companies
sectors
.
Venture Projects:
Proposals come to the venture capitalists in the form

business plans.
of He appraises the same, giving due regard to the
of the founders, the nature of the product or services to be developed,
credentials
market to be saved & the financing required. If satisfied, he will invest
the
his
own money in the equity shares of the new company, known as the
company.
assisted
In addition to money, managerial & marketing assistance

also be provided
maythat is, the venture capitalist not only provides funds
also on line operational advice. In short, he identifies himself with
but
the
project as much as the innovator promoter & as such works hard
accomplish ambitious targets & consequents higher appreciation of
to
capital
his
.
Indian
Position:
In India, most project financing schemes require at least 25
cent of the project
per 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

29
m
IFCI’s subsidiary company, Risks Capital And Technology Foundation

India, which provides finance to bridge the shortfall in the
of
contribution, but they could fulfill the requirements of a great many
promoter’
entrepreneurs. As results of promoters not being able to bring in those
budding
initial inputs of money, many of their good projects were hanging
vital
Venture capital could remedy this situation as
fire.
well.
A beginning was made in this direction by the setting up
venture capital of divisions under the aegis of ICICI, IDBI &
Encouraged by the response to technology financing, ICICI floated
IFCI.
aseparate company ---Technology Development and Information Company
India (TDICI) includes, apart from venture capital financing,
of
consultancy as well as entrepreneur escort services such as
technology,
business management, vendor development etc. The successful operation
marketing,
this fund will hopefully spark off some interest from the private
of
which will then consider entering this line of activity. Ultimately, it is
sector,
when venture capital financing becomes more broad-based and
only
that it will truly taking root in economy. In tune with its tradition
widespread
pioneering new ideas, ICICI deviated from the beaten path to usher in
of
unusual type of financial support. Addition to equity participation (up
an
maximum of 49 percent) undertaken by typical venture capital
to
TDICI offer the conditional loans. The entrepreneur neither pays interest
companies,
it nor does he have to repay the principal amount. If the venture
on
succeeds, TDICI recoups its investment in the form of royalty on
capital
sales
which ranges between two and eight percent. On the other hand, if
venture fails to take off even after five years TDICI will consider writing
the
the loan.
off
Public financing agencies :
It is to be noted that the floating venture capital companies

the financial are
institutions or banks (the Andhra Pradesh
Industrial
Development Corporation, Canara bank and others). This can be
directly
30
m
attributed to the Government guidelines, which restrict private

participation in venture capital funds to a maximum of 20
sector
percent.
But if the concept is to make a mark in the economy it
private sectorneeds
initiative and not institutional or government patronage.
fact, herein lies the strategic significance of the venture capital. It paves,
In
way for the private sector to share the burden of industrial
the
particularly risk finance with the public
finance,
sector.
The activities of the venture capital fund of ANZ
bank includeGrindlays
making equity investments in new companies, which may
may not involve any new technology or other such related risk. This
or
of the direct subscriptions by financial institutions and banks has been
activity
on for decades and cannot be termed as venture capital activity.
going
difference in ANZ Grindlays bank activity id one of the nomenclature
The
not of means of financing. Also, on the whole, venture capital is
and
more in the nature of mezzanine loans than
provided
equity.
Private Agencies:
One Venture Capital fund set up the private sector in India

Credit Capitalis Venture Capital (India) or CVF for the short, the
shareholders of which are Credit Capital Finance Corporation, Bank
principal
of
India, Asian Development Bank, and CommonWealth
Corporation. Another set up in the private sector jointly by the ICICI th
Development
Century
20 Finance Corporation, bank of Baroda, Asian development Bank
Asian Finance and investment Corporation is the th Century
and
20
Capital Corporation Ltd. One reason why private capitalists
Ventureare
shy may be the high rate of capital gains tax applicable to the profit
generally
of
Venture Capital Funds. Though the guidelines provide for a
rate of capital gains tax, the move can hardly be deemed as a ‘concession’
concessional
view of the enormous risks involved in the
in
activity.
Policy
Initiatives:
The idea of providing venture capital finance (VCF) to the
entrepreneursnew
in India was mooted by the then finance minister in the
term fiscal policy announced by him in 1985. A fresh reference to
long-
the

31
m
“difficulties faced by new entrepreneurs in raising equity capital”

made by the finance minister in his 1988-89 budget speech and
was
guidelines for providing such finance by registered companies or funds
detailed
announced.
were
In India, the government has set up a Venture Capital

with a contribution
Funds of Rs.10crore. The fund was brought into
st
on 1 April 1986 by the IDBI. For financing this fund, a levy
operation
was
imposed on all payments made by Indian industries for the acquisition
foreign technologies. This fund finance projects with minimum
of
maximum project costs of Rs.5lakhs and Rs.250lakhs
and
respectively.
Grindlays Bank has set up the Indian Investment Fund
Finance theto start up cost of entrepreneurs. This fund was
mainly by Non-resident Indians. The Government of India
subscribed
announced on 1989 a National Equity Fund for financing small-
also
entrepreneurs setting up units in rural areas and urban areas population
scale
below Rs.5lakhs. Institutions like ICICI,IFCI,SBI Capital
of
Canbank Financial Services and others have also set up their own
Markets
for providing Venture Capital
funds
Finance.
However, in general, the experience is that the Indian
institutions are yet to reorient their financing policies to meet the
financial
Capital maxims. The traditional conservation of these
Venture
organisations
makes their approach unacceptable. They fail to recognise that
criteria of debt-equity ratio, existence of security etc., are not the
normal
for evaluating venture capital
criteria
projects.
The policy of Government with regard to Venture
Funds hasCapital
changed in 1999-2000. The Government has allowed a
free
hand and transparency for I.T. Venture Funds Foreign Funds are
freely into these
allowed
Funds.
Difficulties in
India:
Fundamentally, there are no private pools of the capital of finance
ventures in India. The financial institutions perforce occupy a
risk
position in the provision of long-term capital to Indian industry. They
dominant
the State development agencies do provide limited amount of equity
and
finance
to assist the development of new business but there is no
private,
32
m
professionally managed investment capital sources. There are no

sector insurance companies or the pension funds gathering regular
private
income and virtually no private banks willing to devote a small portion
premium
their resources to the venture capital niche. It is unlikely that
of
enterprises will be created in the foreseeable future to mobilise
such
saving for investments. As an answer the situation, mutual funds
private
investment trusts are permitted to set up and to commit the part of
and
resources to the venture capital area. As a part of the broader
their
investment fund, given suitable standards of the valuation for
equity
investments, it should be possible for the fund managers to commit
unquoted
portion of there portfolios to venture capital situations. The participation
the
the private sector in venture capital funding, as it has come to be defined
of
the narrow Indian context, is not possible in isolation from the opportunity
in
develop a broadly spread investment
to
business.
Tax
Treatment:
The tax treatment of the venture capital funds in India
ungenerous andis falls well short of what is required. Whereas the
Funds established by the government controlled financial institutions
Mutual
nationalised commercial bank suffer no tax on either income or
and
gains, a venture capital fund would suffer at 20 per cent on dividend
capital
income
and a similar rate on long-term capital gains. Given an adequate
spread and tax incentives, mutual funds step into the early stage
investment
arena, professionally assess and the monitor investments assist the launch
financing
of
new medium size businesses. SBI Mutual Fund is really
investment work with its ‘brought deals’. The creation of more funds
undertaking
participate in this area of the market is now clearly seen. Early
to
stage
financings could then be syndicated between number of
managed funds and sound, competitive situation between them might also
professionally
created
be
.
The Government has since 1995-96 been treating the
funds like Mutual funds for tax benefits and brought them under
venture
Regulation
of SEBI. The SEBI has set out the guidelines for their registration
control by itself a code of conduct for them to operate as in the case
and
capital market mutual funds and for their investment and operations on
of
fund. In the Central Budget for 2000-01 the income of the Venture
the
Capital

33
m
Fund is taxed at the rate of 20%, although the dividends declared in

hands of the investors are tax-
the
free.
Need for Growth of Venture Capital:
There is need for encouragement of risk capital in India, as

will widen the
this
industrial base of, high-tech industries and promote
growth of technology.
the
The initial step might be to permit the launch of the

fund by all those
mutualbanks authorise to conduct business in India, at the
same
time extending the investment range of such funds to embrace
stocks
unquoted
.
Liberating the capital market would bring greater depth to
capital markettheas a whole, introducing more genuine investors of
with long time horizons, provide avenues for the institutions to realise
substance
equity portfolios more easily (freeing funds for more new investments),
their
generally improve market liquidity. This would improve equity
and
cult.
So moves towards a freer and less regulated market
important in are
considering measures to simulate the entry of the private
into the risk capital
sector
formation.
Latest Policy Charges:
In the year of 2000 of new millennium, the I.T. industry

along-
with many start up industries like Telecom, Biotech, Multimedia etc…
experienced rapid growth potential but with Scarcity of the Venture
have
To encourage Venture Capital Funds to grow rapidly to help
Funds.
these
industries, the Government has announced the following measures early
2000.
in
1. SEBI to be the sole authority for the regulation of Venture

2. The
Capitals.
single window clearance facility is extended without the need
going for clearance with the government RBI and I.T.
for
Authorities.

34
m
3. In the first Millennium Budget, 2000-2001, Venture Capital have

“on par” Status with Mutual Funds for the purpose of the
got
treatment under section 10(23D) of I.T. Act. Tax exemption is
tax
to Venture Capitals like those of Mutual Funds, so that
granted
taxation is avoided and tax is levied only at one level, namely at
double
hands of
the
4. The
investors.
IPO norms are liberalised for the Venture Capital Funds for
purpose of listing. Appraisal and finding are allowed to extent of
the
of the equity capital of a start-up company. The condition of 3
10%
track record of profitability is waived. Even a public issue of 10%
years
paid up capital is enough for the I.T companies for the purpose
of
listing
of
5. The
. Government have set up a separate ministry of I.T and started
I.T Venture Fund of Rs.100crores for the financing new start up
an
projects
I.T
6. Venture
. Funds were set up by ICICI, UTI, IDBI, Tatas etc.
Venture Capital Vs. Mutual Fund
In the matters of tax, venture capital funds and mutual fund

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

earlyWhile earlier, a Venture Capital Funds could not
January 2000.
more than 40% of equity of a high risk business or a start up
acquire
now there is no such ceiling and Venture Capital Funds is free to
company,
as it likes. However, the only restriction that remains is that the
invest
Venture
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m
Capital Funds cannot invest more than 25% of its own Fund base in
one company. Now Venture Capital Funds can hold upto even 100%
any
equity of a start up the company as that ceiling of 40% is now
of
but it can now hold up to 25% of its own fund in any company’s equity.
removed,
Foreign Venture Capital is made eligible to participate in

building process
book since July 2001. There is no lock in period for the
issue share capital of an unlisted company held by Venture Capital
pre
and FVCFs. Mutual Funds are now eligible to invest in units of
Funds
Venture Capital Funds, like investments in listed and unlisted
the
There has been a considerable liberalisation in investments by
securities.
Capital Funds as much as investments in Venture Capital
Venture
Funds.
Merchant banking
What is Merchant
Banking?
Merchant banks are issue houses rendering such services to
projects
industrial
or corporate units as floatation of new ventures and new
preparation, planning and execution of new projects, consultancy and
companies,
in technical, financial, managerial and organisational fields. A number
advice
other function such as restructuring, revaluation of assets,
of
takeovers,
acquisitions, etc, are also undertaken by
them.A major function of merchant banking is the issue management.
issue The
can be public issue through prospectus, offer of sale, or
private
placements
etc.
Issue
Management
The issue management involves the following functions in respect
issueofthrough
prospectus:
(a) Obtaining approval for the issue from the
(b) Arranging underwriting for the proposed
SEBI
(c) Drafting and finalizing of the prospectus and obtaining its clearance
issue.
the underwriters, stock exchanges, auditors, solicitors, Registrar
from
of
Companies and other necessary consents required for filing the
(d) Drafting and finalization of other documents such as application
prospectus.
stock
forms,
exchanges.
36
m
(e) Selection of the registrar to the issue, printing press, advertising

underwriters, brokers and bankers to the issue and finalisation of the
agencies
and charges to be paid to
fees
them.
(f) Arranging through the advertising agency the press, brokers
investor's
and
conferences.
(g) Co-coordinating the printing, and advertisements relating to the
and
issue,
work of the
registrars to the issue, the receipt and processing of applications
preparation
and of the basis of allotment, negotiation of the same with the
exchanges and preparation of register of
stock
allotment.
In the case of management of debentures, apart from the Managers
to the issue have to do the following
things:
(a) To finalize the terms of the issue which will make the debenture
attractive;
issue
(b) To assist in the finalisation of the relative security or
and
documents and obtaining approval there to from the Company's
mortgage
and
solicitors
trustees
Other
Functions
Merchant banks in foreign countries undertake a larger number

activities.
of They operate both in the money market and capital
market,
undertake direct and indirect lending portfolio management for
trusts, charities, etc, funds management for existing companies,
institutions,
for new and old companies etc. They are also active in the money
underwriting
market
and discount market operations in undertaking bills discounting
investing the short-term funds in treasury bills, commercial bills and
and
money market instruments. In India, these functions are carried on by
other
banks
themselves with the result that their merchant banking divisions confine
underwriting, consultancy, new issue business, involving management
to
issues and related activities. The Indian merchant banking is still in
of
infancy and their activities are, therefore, limited to a few selected
its
activities
of new issues market at present such as project planning,
consultancy, advice and planning and execution of these projects,
financial
the preparation for the public issue, observance of necessary formalities
involving
for
37
m
such issued applications to SEBI, RBI and for listing on the stock
collection and allotment of share application moneys, underwriting
exchange,
etc .s
Offer of
Sale
Usually, when the closely-held companies, whose shares are not
on the
listed
stock exchange, approach the financial institutions for assistance
the expansion of their existing operations or diversification, the
for
institutions stipulate a condition that the company should get its
financial
listed. Where the capital base of the company is already large and
shares
further equity capital is not justified from the servicing angle, the
issuing
can offer such part of their exist holding for sale through a letter of offer
promoters
the members of the public as Is necessary to get the equity shares of
to
company listed on the stock exchange. Although the letter of offer is
the
governed by the provisions of the Companies Act, 1956, in practice,
not
letter of offer contains all the similar provisions which are to be found in
the
prospectus
the
.
The offer for sale must give all material particulars relating to
company
the as if it were a prospectus issued under the Companies Act.
particular, it should include information regarding the shares on offer
In
the terms of sale, its capital structure, and capitalisation of reserves,
and
revaluation of assets or schemes of arrangements or reorganizations, last
any
years' profit and loss account summarised accordance with the
five
prescribed
listing
requirements.
Any document by which the offer for sale to the public is made shall,
all for
purposes, be deemed to be a prospectus issued by the company and
enactments and rules of law as to the contents of prospectuses and as to
all
liabilities in respect of statement’s or omissions from prospectuses
the
otherwise
relating to the prospectus, shall apply as if the shares or debentures
been offered to the public for subscription and as if the persons accepting
had
offer in respects of any shares or debentures were subscribers for
the
those
shares or
debentures.
The said letter of offer will have to be signed by the persons offering
shares
the or debentures for sale in the same manner as the directors of
the
company sign the prospectus in terms of Section 60 of the Companies
Act.
The offers collectively and individually accept full responsibility for
the
38
m
accuracy of the information given in this offer of sale and confirm that to
best of their knowledge and belief there are no other facts, the
the
of which makes any statement in the offer for sale misleading, and
commission
further confirm that they have made all reasonable inquiries to ascertain
they
facts
such
.
The offers have to certify that neither the stock exchange to which
application
an for official quotation is made nor the Central Government
SEBI has any responsibility for the financial soundness of this offer, or
or
the price at which the offer of sale is made, or for the statements made
for
opinions expressed in the offer of
or
sale.
The initial issues should normally be at par and if further issues are
at amade
premium, this has to be justified by acceptable norms by the
bankers.
merchant
Private
Placement
When the financial institutions directly subscribes to
equity/preference
the shares and/or debentures issued by the company,
company is said to have privately placed these securities with the
the
institutions. This does not require either a prospectus or letter of offer.
financial
terms and conditions subject to which the financial institutions agree
The
subscribe to the privately placed shares or debentures are
to
usually
incorporated in the debenture subscription agreement or the
agreement entered into between the financial institutions and the
investment
company.
The company could, if it so desires, approach, in the place of
institutions,
financial a well-identifiable body of persons like merchant banks
private placement. The provision of the Act are to be interpreted strictly
for
and
therefore, if the company sends the offer to Mr. X and the offer is
by Mrs.X to whom the allotment is finally made, it could deem to be
accepted
public offer necessitating compliance of requirements of the
the
prospectus.
This exercise is, therefore, to be undertaken with great caution to see that
final transfer takes place only to those for whom the original offer
the
made. In practice, till recently the companies hardly took any recourse
was
this mode of private placement of their securities due to these
to
restrictions.
The company has to agree upon the list of persons to whom the offer is
be to
sent much in advance and its is thereafter necessary that the
company
39
m
should send offers to the same persons as per the list approved by
Company with a clear-cut instructions to the officers that the
the
offered are strictly to be subscribed for by them and them alone and
securities
officers are not supposed to pass on the offer of the company to
the
else. He would also ensure that the company would receive
someone
only from those persons to whom the original offers had been sent by
subscription
company and finally, the company would allot securities to the
the
persons.
same
Services of Merchant
Banks
Merchant banking is normally considered to be related only to
services
the associated with public issue management but they also
domestic project finance syndication. Large merchant banks in
offer
country offer a wide range of services. Merchant banks
the
generally the following
offer
services.
(a) Pre-investment studies for investors: These are in the
of financial
nature feasibility explorations in selected areas of interest of
client. They include such studies for foreign companies wishing
the
participate in joint adventures in India, and often involve a
to
covering advice on the nature of participation and
package
Government
regulatory
factors.
(b) Project finance: Once the decision embark on a
particular
project/expansion/modernisation scheme has been taken, assistance
working out a comprehension package for the project funding
in
pattern of financing is available from the merchant banks. They
and
work
in close liaison with the client, his technical consultants, and
funding institutions, prepare and submit complete e financial
the
and arrange for the various sources of finance. Assistance in
dossiers,
legal
documentation for the finance arranged is also
provided.
(c) Working capital: Finance for working capital, particularly
newforventures, often needs to be syndicated on behalf of the
promoters,
and merchant banks assist in this as well. For existing
non/traditional sources such as through the issue of debentures for
companies,
purpose, and others have been successfully tapped by
this
merchant
40
m
bankers.
(d) Foreign currency finance: Of late, India has

increasingly
become active in the international money markets, and this
is likely to continue. For import of capital goods and services
trend
overseas, the arrangement of various kinds of export credits
from
different countries is also
from
required.
In addition to this wide range of services, some of the larger
arebanks
also involved in areas such as the arrangement of lease
and assistance in acquisitions and mergers
finance,
etc.
Why Merchant
Banks?
The following are some of the reasons why specialist
banks
merchant
have a crucial role to play in
India:
1. Growing industrialisation and increase of
advanced
technologically
industries.
2. Need for encouragement of small and medium
whoindustrialists,
require specialist
services.
3. Growing complexity in rules and procedures of
Government.
the
4. Need to develop backward areas and states which
different
require
criteria.
5. Exploring the possibility of joint ventures abroad and
markets
foreign
. 6. Promoting the role of New Issue Market in mobilising
fromsavings
of public.
Functions
With increasing industrialisation of the country and the

emphasis
growing in the Five Year Plans on industrialisation,
banking in India has a very extensive role to play. The National
merchant
Gsrindlays Bank was the first to set up merchant banking division
&
India followed by the State Bank of India and other
in
banks.
Functions of the merchant banking divisions are as
follows:
1 advice and liaison obtaining consent of the Central and Stat
e
41
m
Government, for the project if

necessary;
2. Preparation of economic, technical and financial feasibility
3. Initial project preparation, pre-investment survey, and
reports;
studies
market
;4. Help in raising rupee resources from financial institutions
commercial
and
banks;
5. Underwriting and also for subscription, if necessary, to the
issues
new or syndication of loans,
etc;
6. Assistance in raising foreign exchange resources so as to
the
enable
industrial concerns to import machinery and technical know-
and secure foreign
how
collaboration.
7. Advice on setting up turnkey project s in foreign countries
locating
and foreign
markets;
8. Help in financial management and in designing proper
structure
capital and debt-equity ratio, etc, for the
company.
9. Advice on restructuring of capital, amalgamation,
takeovers,
mergers,
etc;
10. Management of investment trust, charitable trusts
11.
etc;Management aid and entrepreneurial aid (management
providing designs of the complete system, operational research
audit
management consultancy);
and
12. Recruitment (selection of technical and managerial
and
etc
personnel),
.
Role of Merchant
Banks
To promote the new issue market there is need for a
improvement
qualitative in the offer of new issues both in terms of time
and the cost of floatation. The time taken for organising a new
taken
is between 12 to 18 months and the cost of raising new capital
issue
from 3% to 8% and sometimes even 20%. This has been
varied
down relatively by specialised merchant banking institutions
brought
catering to the requirements of both large and small industrial
by
Cost of floatation of equity and preference capital is higher for
units.
companies than for existing companies, indicating thereby
new
difficulties experienced by new companies in making a new
the
Merchant banks help saving in the cost of new companies and
issue.
of
small
companies.
The new issue market has not succeeded fully in
mobilising
42
m
savings partly due to the preferences of the public to

deposits and partly due to low yields on equities as compared to
company
on fixed interest securities. There has been a decline in the
those
of share capital in the total capital employed due to the steep rise
proportion
the cost of new issues. There are certain minimum costs to
in
incurred in respect of fees to brokers, promoters'
be
underwriting commission etc, irrespective of the size of the
expenses,
While bigger companies are able to manage this, small units find
project.
extremely difficult to meet this minimum cost with
it
prospects of their own internal resources in order to avoid the
uncertain
cost of making public
high
issues.
Underwritin
g
The main work of merchant banks relates to underwriting of
issues
newand rising of new capital for the corporate sector. Of
amount underwritten, some part devolves on the underwriters,
the
varies depending on the state of the capital market, and the
which
worth of the project. The SEBI has made
intrinsic
Compulsory for all issues offered to Public first but later it was
underwriting
optional. SEBI made it necessary for merchant bank to undertake
made
make a firm commitment for 5% of issued amount to the
or
public.
Type of Expertise
Required
The type of staff required for a merchant bank will depend upon
functions
its which are themselves flexible. The merchant bank
should
have an organisation large enough to deal with a number
applications at a time. The issue house which acts as the
of
banker normally pays visits to the company's plant, warehouses,
merchant
and
other physical assets and if a company is making its first issue,
might secure independent reports from Chartered
it
industrial consultants, technical experts etc. The issue house, which
Accountants,
is
a merchant bank also, requires, plant, management,
competitors, profit margins, taxations, etc. They have to keep ready
labour,
the information needed in the form of dossiers with respect to
all
affairs of the company generally enquired into by the investing
the
public,
lending financial institutions and the
government.
Secondly, a merchant bank has to suggest an appropriate time
of
43
m
issue and provisional terms. Once these terms are settled the
certificates, prospectus and other documents are drafted by
share
merchant bank with the assistance of lawyers, accountants and
the
They have to satisfy the Companies Act and other SS requirements
others.
law. Subsequently, the merchant bank may have to get ready
of
application to the SEBI for the public issues. This
the
familiarity with the regulations under the Companies Act and
requires
SEBI guidelines and the procedures to be followed and the
the
to be approached. The provisions under the MRTP Act
authorities
monopoly practices and other activities of big industrial houses
regulating
also be looked into.
should
Thirdly, they may have to make an application to the

stock
appropriate
exchange for quotation and satisfy the stock
authorities with respect to the terms of issue and
exchange
requirements are to be observed and familiarity with the
prospectus.Listing
exchange rules and bye-laws as well as the provisions of
stock
Securities Contracts Regulations) Act would be essential. They
the
have to advise on the desirability or otherwise of listing on the
may
exchange as well as help the companies go through the process
stock
getting their shares listed. Advertisements containing all
of
information legally required to be given in the prospectus must
the
published in all the leading proposed date of opening and closing,
be
asummary of the company’s business history, balance sheet, etc,
to
which a reference was made earlier. Once the issue made, the work
the merchant bank relates to arranging for the allotment of shares
of
consultation with the company and the stock exchange
in
authorities
with the help of
Registrars.
SECURITIES AND EXCHANGE BOARD OF INDIA

(SEBI)
MERCHANT BANKING -ROLE & FUNCTIONS
(a)
Authorisation
Any person or body proposing to engage in the business
Merchant
of Banking would need authorisation by SEBI in
prescribed format. This will apply to those presently engaged in
the
the
44
m
Merchant Banking activity, including as Manager, Consultants

Advisers to
or
issues.
(b) Authorised
Activity
(i) Issue
(ii)
Management
Corporates Advisory services relating to the
(iii)
issue
(iv) Portfolio Management
Underwriting
(v) Managers, Consultants or Advisers to the
Services
issue
(c) Authorisation
Criteria
All Merchant Bankers are expected to perform with high
of integrity
standardsand fairness in all their dealings. A code of conduct for
Merchant Bankers is prescribed by SEBI which will take into
the
the
account
following:
(i) Professional
(ii) Personnel, their adequacy and quality and other
Competence
(iii) Capital
infrastructure
(iv) Past track record, experience, general reputation and fairness
Adequacy
all their
in
transactions.
(d) Terms of
Authorisation
(i) All Merchant bankers shall have a minimum net worth of
Rs.5 crore
(ii) The . Authorisation will be for an initial period of 3
(iii) All issues should be managed by at least one authorised
years.
to Merchant banker functioning as the Lead Manager or
Manager
sole
.
Issue No. of Lead

Manager
Amount
s
Up to Rs. Not
50crores
more than 2

45
m
Over Rs. 50 crores not Not

more
more than 3
Than Rs.100
crores
Over Rs.100 Not
crores
more than 4
(iv) The Merchant Bankers shall exercise due

independently verifying the contents of the prospectus. The
diligences
Bankers of the issues shall certify to this effect to
Merchant
SEBI.
(v) In respect of issues managed by the Merchant Bankers,
would be required to accept a minimum 5% underwriting obligation
they
the issue subject to a ceiling of Rs. 25
in
lakh.
(vi) Lead managers would be responsible for ensuring
refunds and allotment of securities to the
timely
investor.
(vii) The merchant banker’s involvement will continue till
complete on of essential follow-up steps including listing of the
the
and dispatch of certificates and
shares
refund.
(viii) The Merchant Banker shall make available to SEBI
information, returns and reports as may be called
such
for.
(ix) Merchant Bankers shall adhere to the code of conduct
shall prepared by
which
SEBI.
(x) Merchant Bankers to ensure that Publicity /
material accompanying the application form to the issue meets
Advertisement
the
requirement of
GOI/SEBI.
(xi) SEBI shall be informed well before the opening of the issue
the
Inter allocation of activities/sub-activities, among lead managers
the
to
issue.
(xii) Merchant Bankers performing or planning to perform
portfolio
management services shall furnish the details in the prescribed
format.
(e) Classification of merchant
Bankers
46
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-----------------------------------------------------------------------------
--------------------------------
-------
--- Category Requiremen
Authorised to Act t
as (1) (2) (3)
-----------------------------------------------------------------------
------
--------------------------------------
Category 1
---- Minimum Net worth Rs.50 Lead
crore Manager/co.manage
r
Adviser/consultant to an
issue, Portfolio
manager
and underwrite
to an issue r
is Mandatory
required
. ---------------------------------
----------------------------------------------------------------------------
---
-------
(f) Grading of
Prospectus
Grading of Prospectus will be done by SEBI using the
following
parameters
:
(i) Objective description of the project, its status
and
implementation
.(ii) Track record of the promoters and their
(iii) Disclosure about Demand - Supply position, Market
competence.
and
Marketing arrangements, Raw materials availability
infrastructural
and
(iv) Disclosure of Risk
facility.
factors.
(v) Objective assessment of Business prospects and
profitability.
If highlights are provided the following deficiencies will

negative
attract
points:
47
m
1. Absence of Risk
2. Absence of
Factor
3. Extraneous contents in
Listing
prospectus
The Maximum grading points of prospectus will be
10
Points
Category
More than or Equal to 8

+A
More than or equal to 6 but less than

8A
More than or equal to 4 but less than

6B
Less than
4C
(g) Penalty Point

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

e Points
-----------------------------------------------------------------------------
--------------------------------
-------
--- I General 1
Defaults
II Minor Defaults 2
II Major 3
I Defaults

48
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IV 4 Serious
Defaults
INVESTOR
PROTECTION
Introductio
n
The term "Investor Protection” is a wide term
various measures designed to protect the investors from
encompassing
of companies, brokers, merchant bankers issue managers,
malpractices
Registrars
of new issues, etc. "Investors Beware" should be the watchword of
programmes for mobilisation of savings for investment. As
all
investment has some risk element, this risk factor should be borne
all
mind by the investors and they should take all precautions to
in
their interests in the first place. If caution is thrown to the winds
protect
they invest in any venture without a proper assessment of the
and
they have only to blame themselves. But if there are malpractices
risk,
companies, brokers, etc, they have every reason to complain.
by
grievances have been increasing in number in more recent
Such
years.
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,
merchant
agents,bankers, issue managers, etc, which cannot be
by the stock exchanges as per their rules. However,
entertained
against registered sub-brokers can be
complaints
entertained.
Complaints against
Members
Investors have complaints against brokers regarding the
quantity
price,etc. at which transactions are put through, defective
or delayed delivery, delayed payment or non-payments etc,
delivery
non-
49
m
settlement of vyaj badla ducs, non-payment of agreed brokerage

authorised assistants, etc. In the event of default of a member
to
the dues of clients are also to be looked
broker,
into.
There is a Grievance Cell in many Stock Exchanges which
to investor
attends complaints. Of the total, nearly 95% are
companies and they are more difficult to settle, as many companies
against
not attend to the complaints promptly despite reminders and
do
by the stock exchange, in view of the fact that penal powers of
warnings
Exchange are limited SEBI has been given these penal powers
the
respect of listed companies by an amendment to the SEBI Act in
in
and many other subsequent a amendments including the latest
1995
2002.
in
The grievance procedure in respect of complaints

members is as
against
follows:
(a) Joint meeting of member’s vis-à-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 settlemen
t
(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
saleof
proceeds, non-settlement of accounts etc. Of the total
against members, about 85% are settled during the year,
complaints
itself.

50
m
Complaints against
Companies
The complaints against companies are in the nature of non-
of allotment
receipt Letters, refund orders, non receipt of dividends,
etc., delay in transfer of shares and in splitting and consolidation.
interest
clearance of these complaints is also attended to by the Cell by
The
to the companies, follow-up telexes, etc. and finally by warning
writing
delist the companies concerned. But the clearance of these
to
is slow due to the non-compliance or slow compliance by
complaints
companies to the References made by the Cell. The powers of
the
Stock Exchange are limited to warnings and delisting of shares and
the
such compliance by the companies was
as
poor.
Customers' Protection
Fund
The Customers' Protection Fund is constituted by all
Exchange
Stock to safeguard the interests of the investor clients
defaults of the stock brokers. The Fund is financed by way of a
from
on the turnover of members and from out of the listing
levy
earmarked by the
fees,
Exchanges.
Investors
BewareInvestors in stock and capital market need a word of
Firstly,caution.
these investments are more risky, returns are uncertain
share values are subjected to wide fluctuations. Secondly,
and
investments require an art and expertise to pick up the right
such
failing which the investors would burn their fingers. Thirdly,
stocks,
players in the market namely, Brokers and issuers of
the
companies’ etc are not rated high for their honesty with the result
securities,
the investor’s complaints against stock brokers and companies
that
been increasing over the
have
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
housing and for a regular income to meet his minimum needs and comforts of life. Even
in
all the stock market investments are wiped out due to a market crash, the investor should
if
not
51
m
be pauper on the streets. Besides, if the investor spends sleepless nights on the fall of
prices, he cannot be a good stock market
share
investor.
Pre-requisites of
Investor The investor should have abundant common sense and a strong heart to
the vicissitudes
withstand
of fortune. He need not be a holder of high academic degrees like an
from Harvard or a finance graduation from the Wharton School. Nor does he need to
MBA
hereditary characteristics or family tradition of investment. The only requirement he
have
have is abundant logic and common sense and strong nerves and develops the art
should
investment on a scientific
of
basis.
Preparing to
InvestInvestors desiring to invest in stocks require a lot of preparation. The weak hearted
risk -averter
and should first make an entry by buying only debentures, particularly
debentures of good companies, or subscribe to new issues of promising and well-
convertible
companies. After sufficient study and preparation, the investor should act like stag-
established
in the market, picking up scripts on a selective basis. That means selected companies
pickers
promising and growing industries should be picked up after collection of all
from
information and data on the companies and scientific analysis of their fundamentals.
relevant
undervalued scripts should be purchased at the right time with the help of technical
The
Rumors and advices: of so-called consultants have to be carefully scrutinized. As the
analysis.
investment is both a science and an art, it requires both expertise and intuition. There
market
need for prior preparation and a lot of home works before investments are undertaken.
is
high degree of caution and planning is necessary but the scientific basis and knowledge
A
are
to be acquired by a proper
study.
Balance Sheet Study
Investors entering the stock market should also get into
habit of detailed
the and careful study of the balance sheets of companies
which they wish to invest. Similarly, they should examine carefully
in
the
detailed prospectus before subscribing to the new issues of companies.
habit of relying on rumours, or advice of brokers or friends should
The
replaced by habit of self-study of balance sheets and prospectus of
be
the
companies
.
Choice of a Broker
Investors should as far as possible deal only with

registered stocks exchanges. In place where no
members of recognised
stock
52
m
exchanges are; they may deal with those sub-brokers who have
with registered brokers. An honest and dependable broker is too
connections
through proper introduction and orders should be placed with him in
chosen
manner with limits on prices at which sales or purchases can be made.
proper
and when a transaction is completed, he should insist on a contract note
As
due
in
time.
Protection in the New Issues Market
The main sources of information on which investors depend

the new issuesin market is the prospectus, which should contain
statements of fats. Any false statements, fraud, etc. are punishable under
correct
Companies Act. Under Section56 of the Companies Act, the Directors
the
subject to civil liability for any misstatement facts or untrue
are
statements.
Under Section 63 and 68 of the companies Act, the directors
also liable criminally
are for any fraud of false statement in the
Companies’ liability for misstatements arises from statements
prospectus.
statements, which are material to the investors and the particulars on
and
investors depend to make investments. The directors or promoters of
which
company are thus subject to both criminal and civil liability under the
the
for nay misstatements in the prospectus. Even so, the small investors
Act
afford to go to court and, should therefore, carefully read and examine
cannot
the
prospectus for the viability of the project and marketability of the
and for integrity and dependability of the promoters. The investors have
product
a responsibility to assess the prospectus and risk involved in the
also
project
before making any
investment.
Protection for Fixed
Deposits
Section 58A of Companies Act, deals with the subject of
Deposits. There
Fixedare some rules, which apply to non-banking
companies,
private limited companies, who wish to raise deposits from the
public.
No deposits can be invited from investors or the public
the companies unless
follow the rules and guidelines made by the Department
company Affairs in consultation with the RBI. Interest rates, maturity
of
of deposits, and the amounts permissible to be raised by the companies
period
all given in the form of guidelines by the Department of Company
are
Affairs.
The companies have to follow these guidelines while accepting
deposits
53
m
from the public. Renewal and repayments are also regulated by

Companies Act and the rules framed by the Department of
the
Affairs. When the company fails to repay the deposit, the depositor
Company
complain to the Company Law Board (CLB) in the specified form
can
filled in together with the fees for non-payment of the interest or
duly
payment of deposits. The order of the CLB is final and binding on
non-
company and the company has to comply with it. Any non-law would
the
penalty of imprisonment and fine. This provision however, does not apply
invite
sick
to
companies.
All NBFCs been registered and licensed by the RBI since
1997 and guidelines
July for them have been issued by the RBI early in
The raising of deposits by them is subject to credit rating and a host of
1998.
requirements
other
.
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
are made in the name of a registered broker and sub-broker
contracts
also registered with the
is
2. SEBI.that all your deals are done in the trading ring or
Insist
the
through
3. exchange.
Give specific orders to buy or sell within the fixed price
and/or time periods within which orders have be
limits
4. Insist on contacts notes to be passed on to you on the
executed.
dates.
When the orders are
5. executed.
Make sure that your deal is registered with the stock
In the case of a dispute, this will help trace the details of
exchange.
the
deal
6. easily. a settlement table from the stock exchange
Collect
the pay-in and payout days. Each stock exchange has its
mentioning
one
trading periods, which are called settlements. All
done within this period are settled at end of it. All payments
transactions
the shares bought and share deliveries take place on the pay-
for
in
day. An awareness of pay-in and payout days is use full when
abroker tries to make
7. Keep separate records of dealings in specified shares (Group
excuses.
and non-specified shares (Group B1 and B2). The
A)
settlements
for each is on different days with the present
compulsory
54
m
rolling settlements system, deliveries and payments are

quicker with in three to five
made
8. Execute
days. periodic settlements of dues and delivery of shares
avoid accumulation of
to
9. Insist
transactions.
on delivery. If the company returns your papers
shares with objections, contact your broker
and
10.Ensure
immediately.
that shares bought are transferred in your name
the company’s book closure date. This is necessary to
before
sure that you receive benefits like dividend, interest and
make
shares. All companies have a book closure date on which
bonus
list of shareholders in the company is
the
11.Complain
finalised. if broker does not deliver the shares bought in
name. Proceed to contact another broker with the bill/
your
given to you by the earlier broker and the latter will
contact
the shares on your behalf. In such an event, the first broker
purchase
have to pay the difference in
will
12.Do
price.
not sell shares that are transferred in your name after
book closure, as there are not valid in the
the
13.Do
market.
not sell/deal in shares where even one of the holders
passed away. In cases where the holder has died, a
has
certificate is necessary. In cases where one of the joint
succession
passed away, the surviving holder should send the shares
holders
with the death certificate to the company. Only after the
along
of the deceased has been deleted from the shares, can they
name
be
transferred
14.Do
. not expect the money shares to come immediately. It
take at least 7 to 15 days from the date of transaction, which
will
is
now made quicker in, demat form of
15.Unless
trading.you have special arrangements with the broker, do
expect the adjustments of purchases and sales against
not
one
another. One pays first and receives
16.Do
later.
not take delays or harassment lying down. You have
complain to the Grievance Cell of the stock exchanges
to
or
Securities and Exchanges Broad of the India (SEBI) in case
delay or
of
harassment.
PORTFOLIO MANAGEMENT
SERVICES

55
m
A list of all those services and facilities that are provided by

a
portfolio manager to its clients, relating to the management
administration of portfolio of securities or the funds of clients, is
and
to as ‘portfolio management services’. The term ‘portfolio’ means
referred
total holdings of securities belonging to any
the
person.
Portfolio
Manager:According to SEBI, ‘Portfolio Manager’ means any person
pursuant towhocontract or arrangements with a clients, advices or directs
undertakes on behalf of the clients the management or administration of
or
aportfolio 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
portfolio management, exercises any degree of discretion as to
to
investments or management of the portfolio of securities or the funds
the
the clients, as the case may
of
be.
FUNCTION
S The objective of portfolio management is to develop a
portfolio return at whatever level of risk the investor
that has maximum
appropriate
deems
.
Risk
Diversification
An essential function of portfolio management is spread risk akin
investment
to of assets. Diversification could take place across
different
securities and across different industries. Diversification achieved
different industries is an effective way of diversifying the risk in
in
investment. Simple diversification reduces risk within categories
an
stocks that all have the same quality
of
rating.
The portfolio managers could as well adopt the ‘Markotiwz
model’portfolio risk are sought to be reduced through
whereby
assets, which are less than perfectly positively
combining
correlated.
Efficient
Portfolio:

56
m
A portfolio manager aims at building ‘dominant investment’

called
‘efficient portfolio’. An efficient portfolio consists of combination
assets that maximizes return and maximizes the risk level of
of
return. The objective of portfolio management is to analyze
expected
individual assets and delineate efficient portfolios. A group of
different
of efficient portfolios is called ‘efficient set of portfolios’. The
portfolio
set of portfolio comprises efficient
efficient
frontier.
Asset
allocation
An important function of portfolio management is asset allocation.
It with attaining proportion of investments from categories.
deals
managers basically aim at stock-bond mix. For this purpose
Portfolio
weighted categories of assets are
equally
used.
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
assets. Beta coefficient is an index of the systematic risk. This is useful
different
making ultimate selection of securities for investment by
in
manager
portfolio
.
Rebalancing
Portfolios:
Rebalancing of portfolio involves the process of periodically
adjusting
the portfolios to maintain the original conditions of portfolio.
adjustments may be made either by way of ‘constant
The
portfolio’ or by way of ‘constant beta portfolio’. In constant
proportion
portfolio, adjustments are made in such a way as to maintain the
proportion
weighting in portfolio components according to the change in
relative
Under the constant beta portfolio, adjustments are made to
prices.
the values of component betas in the
accommodate
portfolio.
STRATEGIE
S
A Portfolio manager may adopt any of the following strategies
part of an efficient
as
management:
57
m
Buy and Hold Strategy

Under the ‘buy and hold’ strategy, the portfolio manager builds
aportfolio of stock, which is not disturbed at all for a long period of
This practice is common in case of perpetual securities such as
time.
stock.
common
Indexing
Another strategy employed by portfolio managers is ‘
indexing’.
Indexing involves an attempt to replicate the investment characteristics
a popular measure of the bond market. Securities that are held in
of
known bond indexes are basically high-grade
best-
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
aportfolio manager aims at distributing the funds throughout the
curve.
yield
Barbell
Portfolio
Under this portfolio strategy, less investment of funds is made in
maturities
middle
.
REGISTERATION OF PORTFOLIO
MANAGERS
Following are steps involved in the registration of
managers
portfolio
:
Application for Grant of
Certificate
An application by portfolio manager for grant of a certificate shall
be to the Board in ‘Form A’. Any application is made by
made
portfolio
manager prior to coming into force of these regulations containing
particulars or as near thereto as mentioned in the Form A shall be
such
as an application made in pursuance of sub-regulation (1) and dealt
treated
accordingly
with
.

58
m
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
Board. Before rejecting any such application, the applicant shall be
the
an opportunity to remove within the time specified such objectives
given
may be indicated by the
as
Board.
Furnishing of Further Information,
ETC .
The board may require the applicant to furnish further information
or
clarification regarding matters relevant to his activity of a
manager for the purpose of disposal of application. The applicant or
portfolio
principal officer shall, if so required, appear before the Board
its
personal
for
representation.
Consideration of Application
For the consideration the grant of certificate of registration to
the
applicant, the Board takes into account all matters, which it
relevant to activities relating to the activities to portfolio
deems
The Board considers the following in this
management.
regard:
1. Whether the applicant is a body
corporate.
2. Whether the applicant has the necessary infrastructure
like
adequate office space, equipments and the manpower to
discharge the activities of a portfolio
effectively
manager.
3. Whether the principal officer of the applicant has the
professional
qualifications in finance, law, accountancy or
management from an institution recognized by the
business
Government.
4. Whether the applicant has in its employment a minimum of
two
persons who, between them, have at least five years of
as portfolio manager or stock broker or investment manager or
experience
the areas related to fund
in
management.
5. Whether any previous application for grant of certificate made
by person directly or indirectly connected with the applicant
any
been rejected by the
has
Board.

59
m
6. Whether any disciplinary action has been taken by the

Board a person directly or indirectly connected with the
against
has been under the Act or the Rules or the Regulations
applicant
thereunder
made
.
7. Whether the applicant fulfills the Capital adequacy
requirements
as specified in regulation
7
8. Whether the applicant, its director, principal officer or
employee as specified in clause (d) is involved in any
the
connected with securities markets which has an adverse bearing
litigation
the business of the
on
applicant.
9. Whether the applicant, its director, principal officer or
the
employee as specified in clause (d) has at any time been
for any offence involving moral turpitude or has been found
convicted
of any economic
guilty
offence.
10.Whether the applicant is a fit and proper
person.
11.Whether the granting of certificate to the applicant is in
the
interests of
investors.
Capital Adequacy Requirement

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

60

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ProjectsParadise.com UniversalTeacher.com ManagementHeaven.

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Topics of Investment Banking:-

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At a very macro level, ‘Investment Banking’ as term suggests, is

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Investment banks also act as intermediaries in trading for clients. Investment

An individual or institution, which acts as an underwriter or agent for

Who needs an Investment

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Organizational structure of an investment bank

involve subscribing investors to a security issuance, coordinating with

Investment management is the professional management of various

Financial Markets is split into four key divisions: Sales, Trading,

o Sales and Trading is often the most profitable area of an

o Research is the division which reviews companies and writes

o Structuring has been a relatively recent division as derivatives

Recent evolution of the business

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

competitors unless their stock was rated favorably. Politicians acted to

Types of investment banks

Investment banks provide four primary types of

Raising capital, advising in mergers and acquisitions, executing

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An investment bank can assist a firm in raising funds to achieve a variety

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Terms Related To Investment Bank

Buying and Selling

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Selling may also become necessary if investment goals change over

The right course of action depends on your current situation, your

3. Get Your Financial House In

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situation to a saving some money every month situation, you’re ready

Review your plan periodically, and whenever your needs or

Stocks: 10.2% (and small company stocks were

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7. Develop the Right

Confidence: Let your intelligence, not your emotions; make

Patience: Don't let your emotions be ruled by today's performance.

Greed: As an investment class, 'get rich quick' schemes have

desire, there's nothing wrong with seeking professional

If a corporation decides that it is going to perform an IPO, it will first hire

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The Government has setup Securities Exchange Board of

The need for setting up independent Government agency to

The malpractices were noticed in the case of

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As referred to earlier, malpractices have been reported

The SEBI has been entrusted with both the regulatory

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b) Ensuring the fair practices by the issuers of securities,

SEBI AND FREE PRICING OF EQUITY

SEBI was delegated more powers of administration of SC

SEBI in the New Millennium:

SEBI has got all the needed powers to regulate the

amendments to Mutual Fund regulations of SEBI, the Mutual Funds

Latest Primary Markets Reforms

Book Building Process:

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have been fixed by SEBI at 8% to 12% to be raised upto 16%. The

Informal Group on Primary

As part of its efforts to receive the dressed primary market,