Professional Documents
Culture Documents
co
m
Project
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
INTRODUCTION
Definition
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
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.
Raising
Capital
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.
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
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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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
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.
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
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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Going Public
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.
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SEBI Guidelines
Objectives:
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
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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
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
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:
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
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
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
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,
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.
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(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
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
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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
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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
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bankers.
Functions
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
(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
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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.
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
Less than
4C
II Major 3
I Defaults
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.
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
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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
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
PORTFOLIO MANAGEMENT
SERVICES
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:
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:
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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.