CURRICULUAM & SYLLABI

BA9258 MERCHANT BANKING AND FINANCIAL SERVICES

UNIT I MERCHANT BANKING 5 Introduction An Over view of Indian Financial System Merchant Banking in India Recent Developments and Challenges ahead Institutional Structure Functions of Merchant Bank - Legal and Regulatory Framework Relevant Provisions of Companies Act- SERA- SEBI guidelines- FEMA, etc. - Relation with Stock Exchanges and OTCEI. UNIT II ISSUE MANAGEMENT 12

Role of Merchant Banker in Appraisal of Projects, Designing Capital Structure and Instruments Issue Pricing Book Building Preparation of Prospectus Selection of Bankers, Advertising Consultants, etc. - Role of Registrars Bankers to the Issue, Underwriters, and Brokers. Offer for Sale Green Shoe Option E-IPO, Private Placement Bought out Deals Placement with FIs, MFs, FIIs, etc. Off - Shore Issues. Issue Marketing Advertising Strategies NRI Marketing Post Issue Activities. UNIT III OTHER FEE BASED SERVICES 10

Mergers and Acquisitions Portfolio Management Services Credit Syndication Credit Rating Mutual Funds - Business Valuation. UNIT IV FUND BASED FINANCIAL SERVICES Leasing and Hire Purchasing Basics of Leasing and Hire purchasing Evaluation. UNIT V OTHER FUND BASED FINANCIAL SERVICES Consumer Credit Credit Cards Real Estate Financing Bills Discounting Forfeiting Venture Capital. 10 Financial 8 Factoring and

TEXT BOOKS 1. 2. M.Y.Khan, Financial Services, Tata McGraw-Hill, 11th Edition, 2008 Nalini Prava Tripathy, Financial Services, PHI Learning, 2008.

REFERENCES: 1. 2. Machiraju, Indian Financial System, Vikas Publishing House, 2nd Edition, 2002. J.C.Verma, A Manual of Merchant Banking, Bharath Publishing House, New

UNIT I

MERCHANT BANKING

Introduction An Over view of Indian Financial System Merchant Banking in India Recent Developments and Challenges ahead Institutional Structure Functions of Merchant Bank - Legal and Regulatory Framework Relevant Provisions of Companies Act- SERA- SEBI guidelines- FEMA, etc. - Relation with Stock Exchanges and OTCEI.

INTRODUCTION INDIAN FINANCIAL SYSTEMS

The financial system is concerned about money, credit and finance. Money is used as a medium of exchange and standard of value. Credit is a sum of money and it should return with interest. Finance is the basic foundation to all kinds of economic activities. Finance is the money at the time it is wanted. It comprises debt and ownership funds of the state, company or person. Therefore, money, credit, finance are the lifeblood of economic development. The financial system of a country refers to a set of closely linked complex network of institutions, agents, practices, markets, transactions, claims and liabilities in the economy. Finance is the study of the nature, creation, behavior, regulation and administration of money. Financial system includes all those activities dealing in finance, organized in to a system. The financial system consists of financial institutions, markets, financial instruments and the services provided by the financial institutions.

FINANCIAL INTERMEDIARIES

BORROWERS SAVER (Investable funds) FINANCIAL MARKETS 2

CHARACTERISTIC FEATURES OF INDIAN FINANCIAL SYSTEM

The characteristic features of Indian Financial systems are: Financial system provides an ideal linkage between depositors and investors encouraging both savings and investments It facilitates expansion of financial markets over space and time. It promotes efficient allocation of financial resources for socially desirable and economically productive purpose. It influences both quality and pace of economic development.

AN OVERVIEW OF INDIAN FINANCIAL SYSTEM

The evaluation of Indian financial system has been briefly reviewed over 70 years. The Indian financial system can be studied through three phases.  First phase (prior 1950)  Second phase (organization 1951-1990)  Third phase (policies and reforms 1991 to ..) First Phase (prior 1950) y y y y y y y Currency and money Banking systems Small savings Insurance funds Stock markets Fixed deposits Govt. securities

Second phase (organization 1951-1990) Financial development Equity culture Secondary markets Third phase (policies &Reforms 1991 to ..) y y y Financial reforms policy, capital, Banking, Global financial system. Monetary policy Financial sector reforms monetary measures, credit delivery mechanism, money market, govt. securities, NBFCs.

COMPONENTS OF INDIAN FINANCIAL SYSTEM

The financial structure refers to shape, constituents and their order in the financial system. The financial system deals about (a) various financial institutions, (b) with their financial services, (c) financial markets which enable individual, business and government concerns to raise finance; and (d) various instruments issued in the financial markets for the purpose of raising financial resources. Thus, financial system consists of:

FINANCIAL SYSTEMS

Financial Institutions

Financial Markets

Financial Instruments

Financial services

CONCEPTS OF INDIAN FINANCIAL SYSTEM

An understanding of the financial system requires an understanding of the following important concepts. i. ii. iii. iv. v. vi. Financial assets Financial intermediaries Financial markets Financial rates of return Financial instruments Financial guarantee market

FINANCIAL GUARANTEE MARKET

FINANCIAL INTERMEDIARY

FINANCIAL ASSETS

FINANCIAL MARKETS
FINANCIAL

INSTRUMEN TS

Financial Rate of Return

1. FINANCIAL ASSETS: In any financial transaction, there should be creation or transfer of financial asset. Hence, the basic product of any financial system is the financial asset. A financial asset is one which is used for production or consumption or further creation of assets. For instance, A buys equity shares and these shares are financial assets since they earn income in future. In this context, one must know the distinction between financial assets and physical assets. Unlike financial assets, physical assets are not useful for further production of goods for earning income. For example X purchases land and buildings or gold and silver. These are physical assets since they cannot be used for further production. Many physical assets are useful for consumption only. It is interesting to note that the objective of investment decides the nature of the asset. For instance, if a building is bought for residence purposes, it becomes a physical asset. If the same is bought for hiring it becomes a financial asset. Classification of Financial Assets Financial assets can be classified differently under different circumstances. One such classification is:  Marketable assets  Non- marketable assets  Other assets. 1. Marketable Assets:

Marketable assets are those which can be easily transferred from one person to another without much hindrance. For examples: Shares of Listed companies, Government securities, Bonds of public sector Undertakings etc. 2. Non Marketable Assets: On the other hand, if the assets cannot be transferred easily, they come under this category. Examples: Bank Deposits, Provident Funds, Pension Funds, National saving certificates, Insurance policies etc. 3. Other Assets: a. Cash Assets: In India, all coins and currency notes are issued by the R.B.I. and the Ministry of Finance, Government of India. Besides, commercial banks can also create money by means of creating credit. When loans are sanctioned, liquid cash is not granted. Instead an account is opened in the borrowers name and deposit is created. It also kind of money asset. b. Debt Asset: Debt asset is issued by a variety of organizations for the purpose of raising their debt capital. Debt capital entails a fixed repayment schedule with regard to interest and principal. There are different ways of raising debt capital. Example: issue of debentures, raising of term loans, working capital advance, etc. c. Stock Asset: Stock is issued by business organizations for the purpose of raising their fixed capital. There are two types of stock namely equity and preference. Equity share holders are the real owners of the business and they enjoy the fruits of ownership

and the same time they bear the risks as well. Preference share holders, on the other hand get a fixed rate of dividend (as in the case of debt asset) and at the same time they retain some characteristics of equity. 2. FINANCIAL INTERMEDIARIES The term financial intermediary includes all kinds of organizations which intermediate and facilitate financial transactions of both individuals and corporate customers. Thus, it refers to all kinds of financial institutions and investing institutions which facilitate financial transactions in financial markets. They may be in the organized sector or in the unorganized sector. Classification of Financial Intermediaries Financial intermediaries can be classified differently under different circumstances. One such classification is:  Capital Market intermediaries  Money Market intermediaries 1. Capital Market Intermediaries: These intermediaries mainly provide long term funds to individuals and corporate customers. They consist of term lending institutions like financial corporations and investing institutions like LIC. 2. Money Market Intermediaries: Money market intermediaries supply only short term funds to individuals and corporate customers. They consist of commercial banks, co-operative banks, etc.

3. FINANCIAL MARKETS Generally speaking, there is no specific place or location to indicate a financial market. Wherever a financial transaction take place, it is deemed to have take place in the financial market. Hence the financial markets are pervasive throughout the economic system. For instance, issue of equity shares, granting of loan by term lending institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on. However, financial markets can be referred to as those centers and arrangements which facilitate buying and selling of financial assets, claims and services. Sometimes, we do find the existence of a specific place or location for a financial market as in the case of stock exchange. Classification of Financial Markets The classification of financial markets in India. One such classification is: y y Unorganized Markets Organized Markets.

1. Unorganized Markets: In these markets there are a number of money lenders, indigenous bankers, and traders etc., who lend money to the public. Indigenous bankers also collect deposits from the public. There are also private finance companies, chit funds, etc., whose activities are not controlled by the RBI. Recently RBI has taken steps to bring private finance companies and chit funds under its strict control by issuing non- banking financial companies (Reserve Bank) Directions, 1998. The RBI has already taken some steps to bring the unorganized sector under the organized fold. They have not been successful.

The regulations concerning their financial dealings are still inadequate and their financial instruments have not been standardized. 2. Organized Markets: In the organized markets, there are standardized rules and regulations governing their financial dealings. There is also a high degree of institutionalization and instrumentalization. These markets are subject to strict supervision and control by the RBI or other regulatory bodies. These organized markets can be further classified into two. They are:  Capital market  Money market 1. Capital Market: The capital market is a market for the financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into three namely:  Industrial securities market  Government securities market and  Long term loans market 1. Industrial Securities Market As the very name implies, it is a market for industrial securities namely: (i) Equity shares or ordinary shares, (ii) preference shares, and (iii) Debentures or bonds. It is a market where industrial concerns raise their capital or debt by issuing appropriate instruments. It can be further subdivided in to two. They are:

i. ii.

Primary market or New issue market Secondary market or Stock exchange.

Primary Market or New Issue market: Primary market is a market for new issues or new financial claims. Hence, it is also called New Issue market. The primary market deals with those securities which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long term funds. Thus, primary market facilitates capital formation. There are three ways by which a company may raise capital in a primary market. They are: y y y Public issue Rights issue Private placement

The most common method of raising capital by new companies is through sale of securities to the public. It is called public issue. When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a preemptive basis. It is called rights issue. Private placement is a way of selling securities privately to a small group of investors. Secondary Market or Stock Exchange Secondary market is a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in buying and selling securities. This market consists of all stock exchanges in India are regulated under the securities contracts

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(Regulations) Act, 1956. The BSE is the principal stock exchange in India which sets the tone of the other stock markets. 2. Government Securities Market It is otherwise called Gilt Edged securities market. It is a market where Government securities are traded. In India there are many kinds of Government securities short term and long- term. Long- term securities are traded in this market while Short term securities are traded in the money market. Securities issued by the central Government, State Governments, Semi Government authorities like City Corporations, Port Trusts etc. Improvement Trusts, State Electricity Boards, All India and State level financial institutions and public sector enterprises are dealt in this market. The Government securities are in many forms. These are generally:  Stock certificates or inscribed stock  Promissory Notes  Bearer Bonds which can be discounted. Government securities are sold through the Public Debt office of the RBI while Treasury Bills (Short term securities) are sold through auctions. Government securities offer a good source of raising finance for the Government exchequer and the interest on these securities influences the prices and yields in this market. Hence this market also plays a vital role in monetary management. 3. Long Term Loans Market Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. Long term loans market may further be classified into:

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 Term loans market  Mortgages market  Financial guarantees market. Term Loans Market In India, many industrial financing institutions have been created by the government both at the national and regional levels to supply long term and medium term loans to corporate customers directly as well as indirectly. These development banks dominate the industrial finance in India. Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under this category. These institutions meet the growing and varied long- term financial requirements of industries by supplying long term loans. They also help in identifying investment opportunities, encourage new entrepreneurs and support modernization efforts. Mortgages Market The mortgages market refers to those centers which supply mortgage loan mainly to individual customers. A mortgage loan is a loan against the security of immovable property like real estate. The transfer of interest in specific immovable property to secure a loan is called mortgage. This mortgage may be equitable mortgage or legal one. Again it may be a first charge or second charge. Equitable mortgage is created by mere deposit of title deeds to properties as securities where as in the case of a legal mortgage the title in the property is legally transferred to the lender by the borrower. Legal mortgage is less risky. 4. FINANCIAL RATES OF RETURN Most house holds in India, still prefer to invest on physical assets like land, buildings, gold and silver etc. But, studies have shown that investment in financial assets like equities in capital market fetches more return than investments on gold. It

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is imperative that one should have some basic knowledge about the rate of return on financial assets also. The return on Government securities and Bonds are comparatively less than on corporate securities due to the lower risk involved therein. The Government and RBI determine the interest rates on Government securities. Thus, the interest rates are administered and controlled. The peculiar feature of the interest rate structure is that the interest rates do not reflect the free market forces. They do not reflect the scarcity value of capital in the country also. Most of these rates are fixed on adhoc basis depending upon the credit and monetary policy of the Government. Generally, the interest rate policy of the government is designed to achieve the following: To enable the government to borrow comparatively cheaply To ensure stability in the macro economic system To support certain sectors through preferential lending rates To mobilize substantial savings in the economy. The interest rate structure for bank deposits and bank credit is also influenced by the RBI. Normally, interest is a reward for risk undertaken through investment and at the same time it is a return for abstaining from between alternative uses. Unfortunately, in India the administered interest. Unfortunately, in India the administered interest rate policy of the Government fails to perform the role of allocating scarce resources between alternatives uses. Recent Trends
With a view to bringing the interest rates nearer to the free market rates, the government has taken the following steps: T he interest rates on company deposits are freed. 14

The interest rates on 364 days treasury bills are determined by auctions and they are expected to reflect the free market rates. The coupon rates on government loans have been revised upwards so as to be market oriented. The interest rates on debentures are allowed to be fixed by companies depending upon the market rates. The maximum rates of interest payable on bank deposits (fixed) are freed for deposits of above one year.

Thus, all attempts are being taken to adopt a realistic interest rate policy so as to give positive return in real terms adjusted for inflation. The proper functioning of any financial system requires a good interest rate structure. 5. FINANCIAL INSTRUMENTS Financial instruments refer to those documents which represent financial claims on assets. As discussed earlier, financial asset refers to a claim to the repayment of a certain sum of money at the end of a specified period together with interest or dividend. Examples: bill of exchange, promissory note, Treasury bill, government bond. Deposit receipt, share, debenture, etc. the innovative instruments introduced in India have been discussed later in the chapter financial services. Financial instruments can also be called financial securities. Financial securities can be classified into:  Primary or direct securities.  Secondary or indirect securities. Primary securities These are securities directly issued by the ultimate investors to the ultimate savers .e.g., shares and debentures issued directly to the public.

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Secondary securities These are securities issued by some intermediaries called financial intermediaries to the ultimate savers. e.g. unit trust of India and mutual funds issue securities in the form of units to the public and the money pooled is invested in companies. Again these securities may be classified on the basis of duration as follows: Short term securities Medium term securities Long term securities Short term securities are those which mature within a period of one year. E.g. bill of exchange, Treasury bill, etc. Medium term securities are those which have a maturity period ranging between one and five years. E.g. Debentures, maturing with in a period of five years. Long term securities are those which have a maturity period of more than five years. E.g. Government Bonds maturing after 10 years. CHARACTERISTIC FEATURES OF FINANCIAL INSTRUMENTS Generally speaking, financial instruments possess the following characteristic features: Most of the instruments can be easily transferred from one hand to another without many cumbersome formalities. They have a ready market, i.e., they can be bought and sold frequently and thus, trading in these securities is made possible. They possess liquidity, i.e., some instruments can be converted in to cash readily. For instance, a bill of exchange can be converted into cash readily by means of discounting and re-discounting. Most of the securities possess security value, i.e., they can be given as security for the purpose of raising loans.

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Some securities enjoy tax status, i.e., investments in these securities are exempted from Income Tax, Wealth Tax, etc., subject to certain limits. E.g. public sector Tax Free Bonds, Magnum Tax saving certificates. They carry risk in the sense that there is uncertainty with regard to payment of principal or interest or dividend as the case may be. These instruments facilitate futures trading so as to cover risks due to price fluctuations, interest rate fluctuations, etc. These instruments involve less handling costs since expenses involved in buying and selling these activities are generally much less. The return on these instruments is directly in proportion to the risk under taken. These instruments may be short term or medium term or long term depending upon the maturity period of these instruments.

6. Financial Guarantees Market A Guarantee market is a centre where finance is provided against the guarantee of a reputed person in the financial circle. Guarantee is a contract to discharge the liability of a third party in case of his default. Guarantee acts as a security from the creditors point of view. In this case the borrower fails to repay the loan, the liability falls on the shoulders of the guarantor. Hence the guarantor must be known to both the borrower and the lender and he must have the means to discharge his liability. Though there are many types of guarantees, the common forms are: (i) Performance Guarantee and (ii) Financial Guarantee. Performance guarantees cover the payment of earnest money, advance payments, non- completion of contracts etc. on the other hand financial guarantees cover only financial contracts. In India, the market for financial guarantee is well organized. The financial guarantees in India relate to:

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 Deferred payments for imports and exports  Medium and long- term loans raised abroad  Loans advanced by banks and other financial institutions. These guarantees are provided mainly by commercial banks, development banks, Governments both central and state and other specialized guarantee institutions like ECGC(Export Credit Guarantee Corporation) and DICGC (Deposit Insurance and Credit Guarantee Corporation). This guarantee financial service is available to both individual and corporate customers. For a smooth functioning of any financial system, this guarantee service is absolutely essential. ECGC (Export Credit Guarantee Corporation): Export Credit Guarantee Corporation of India Ltd. (ECGC) has announced introduction of its non-recourse maturity export factoring. The scheme has certain unique features and does not exactly fit into the conventional mould of maturity factoring. The changes devised are intended to give the clients the benefits of full factoring services through a maturity factoring scheme, thus effectively addressing the needs of exporters to avail themselves of pre-finance (advance) on the receivables, for their working capitals requirements. One of the major deviations in this regard is the very important role and special benefits envisaged for banks, under the scheme. The services provided by ECGC under its export maturity factoring scheme are 100 per cent credit guarantee protection against bad debts, sales register maintenance in respect of factored transactions, and regular monitoring of outstanding credits, facilitating due collection in the due date of recovery, at its own cost, of all recoverable bad debts. Payments would be received by the exporter, in his account, through normal banking channels. In the event of non-realization of dues on factored export receivables, ECGC
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will promptly make the payment in Indian currency of an equivalent amount, immediately upon the crystallization of dues by the bank (exchange rate applicable, as on the date of crystallization). The Corporation would facilitate easier availability of bank finance to its factoring clients by rendering such advances to be an attractive proposition to banks. The factoring agreement that would be concluded by ECGC with its clients has an in-built provision incorporating an on-demand guarantee in favor of the bank without any payment or compliance or other requirements to be satisfied by the bank.

The following are the benefits for exporters under the scheme :  Option to give easier credit terms to customers better protection than an ILC, without the need to insist on establishing one.  More friendly delivery terms offered, like direct delivery to the customer (as against DP/DA) without any risk.  Reduced foreign bank handling charges on documents.  Substantial cost savings and complete freedom in monitoring and follow up (telephones, faxes, follow-up visits) of receivables, overdue bank interest on delayed collections and recovery expenses relating to bad debts.  Increase in export sales, thanks to more competitive terms offered to customers.  Better security than letters of credit.  Elimination of uncertainties relating to realization of accounts receivables resulting in better cash management to meet working capital requirements.  Full attention to procurement/production, marketing and sales and growth of business, due to freedom from chasing receivables. For banks, it would be a win-win situation all the way. Advances given against ECGCfactored export receivables could become the most preferred export advance portfolio
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for a bank, even better than the advances granted under an ILC. There is 100 per cent credit protection, free of cost. The other benefits for banks are:  Prompt and immediate payment by ECGC of the full amount outstanding on the receivables to the bank, within three days of crystallization of the dues, in the event of non-realization of factored receivables on the due date, without any protracted processing or scrutiny and without raising any queries.  Savings on post-shipment guarantee premium to be paid to ECGC, if any.  No pre-disbursal risk assessment or post-disbursal monitoring required of the bank. Full risk is on ECGC, with regard to repayment of the amount due (in rupees).  Opportunity to build zero-risk assets, since the bank would not run any risk on the borrower, the country or on the buyer.  Banks could earn interest on a priority sector lending, without any of the attendant risks or hassles.  Opportunity to satisfy additional working capital needs of the customer by sanctioning additional limits without enlarging the exposure risks. Banks would be furnished with a certified copy of the factoring agreement concluded between the client and ECGC. When a limit is established by ECGC on an overseas customer in favor of an exporter-client, the Corporation would directly communicate to the concerned bank branch all relevant details of the limit available to the exporter on that specified overseas customer, and would confirm in writing its obligations to the bank in respect of advances it may grant against such ECGC-factored export receivables. The banks role lies in encouraging exporter-customers to explore the possibility of availing of the factoring facility from ECGC. Factoring, being a high-risk premium

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product, could be made available only in respect of receivables due from select customers. Banks may consider sanctioning of additional limits to exporters against risk-free advances when ECGC communicates setting up of the factoring facility and the permitting limit in respect of individual buyers. Banks also could help ECGC to collect factoring charges on each of the factored invoices. ECGC covers every facet of the exporters risks. It is the only corporation that is committed to taking your exports higher. EXPORT SCENARIO Like the standard policy, this policy is based on the whole-turnover principle. An exporter availing him of it will be able to exercise the options that are available under the standard policy with regard to exclusion of shipments against letters of credit and also those to associates. Further, in respect of policyholders who are trading houses and above, the option available under the standard policy for exclusions of specified countries or specified commodities or any combinations of the same will continue. Premium Based on the projected turnover, the amount of premium payable for the year will be determined. The basic premium rates will be those applicable for the standard policy. Exporters holding the standard policy will be given a turnover discount of 10 percent in addition to the "no-claim bonus" enjoyed by them under their policy, subject to a minimum total discount of 20 per cent. For exporters not holding, the standard policy, a discount of 20 percent will be granted in the premium.
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The premium calculated on the projected turnover will be payable in four equal quarterly installments. However, payment through monthly installments will be considered on a case-to-case basis. The first installment of premium is payable within 15 days from the date the premium is called for. Subsequent installments will have to be paid within 15 days from the beginning of the relevant period. At the end of the policy period, after the policyholder submits the statement for the fourth quarter, the premium payable for the actual exports effected during the year will be worked out. In case the premium payable based on the actual turnover is less than that paid on the basis of projections, the excess amount paid will be carried over to the next policy period and could be adjusted in the premium for the first month/quarter for the renewed policy. If the actual premium exceeds the projected premium by not more than 10 per cent, the excess is not required to be paid (Thus there is a built-in incentive in the scheme for the exporters to increase their export turnover). If the actual premium exceeds the projected premium by more than 10 percent, the exporter will be advised to remit the premium amount in excess of 10 per cent. In case the exporter fails to pay the premium within 30 days from the date it is called for, cover for any loss in respect of the policy would be limited to the turnover in respect of which premium has been paid. Monthly declarations of shipments will not be required to be submitted under the policy. Instead, a statement of shipments made during the quarter in the prescribed format has to be furnished by the policyholder within 30 days from the end of the quarter. Declarations of payments remaining overdue for more than 30 days as at the end of the month are to be made on or before 15th of the following month.

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ECGCs specific buyer-wise policy Export Credit Guarantee Corporation of India Ltd. (ECGC) has been offering different polices to exporters according to their requirement. One such new innovation is the "specific buyer-wise policy". This is meant for those exporters who want to cover exports made to selective buyers from whom they have regular orders. Exporters who want to cover their shipments made to a buyer or a set of buyers can avail of this policy. Those holding the SCR policy also can take advantage of this policy to get he cover in respect of buyers, shipments to whom are in the excluded categories like L/C, Country, commodity, etc., as applicable. The policy is valid for one year. Risk covered Commercial risks covered are insolvency of the buyer/LC opening bank (as applicable); default by the buyer/LC opening bank to make payment within four months from the due date; and the buyers failure to accept the goods, subject to certain conditions/banks failure to accept the bill drawn on it under the letter of credit opened by it. Political risks covered are the imposition of restriction by the Government action which may block or delay the transfer of payment made by the buyer; war, civil war, revolution or civil disturbances in the buyers country; new import restrictions or cancellations of a valid import license; interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer; and any other cause of loss occurring outside India, not normally insured by general insurers and beyond the control of both the exporter and the buyer. Premium is payable on the projected turnover for each quarter in advance. Important obligations of the exporter are the declaration of shipments made during the quarter
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within 15 days after the end of the quarter and that of payments overdue for a period of 30 days or more from the due date as at the end of the month by the 15th of the succeeding month. The exporter should, in consultation with ECGC, take effective steps for recovery of the debt. All amounts recovered, net of recovery expenses, shall be shared with ECGC in the same ratio in which the loss was shared.

Turnover policy offers extra benefits The turnover policy of ECGC is a variation of the standard policy introduced for the benefits of large exporters who contribute not less than Rs. 10 lakhs per annum towards premium. The policy envisages projection of the export turnover by the policyholder for a year and the initial determination of the premium payable on that basis, subject to adjustment at the end of the year based on the actual. It provides additional discount in premium with an added incentive for increasing the exports beyond the projected turnover and also offers a simplified procedure for premium remittance and filing of shipment information. The turnover policy can be availed of by any exporter whose anticipated export turnover would involve payment of not less than Rs. 10 lakhs per annum towards premium. The policy is valid for one year. DICGC (Deposit Insurance and Credit Guarantee Corporation): Deposit insurance, as we know it today, was introduced in India in 1962. India was the second country in the world to introduce such a scheme - the first being the United States in 1933. Banking crises and bank failures in the 19th as well as the early 20th Century (1913-14) had, from time to time, underscored the need for depositor protection
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in India. After the setting up of the Reserve Bank of India, the issue came to the fore in 1938 when the Travancore National and Qulin Bank, the largest bank in the Travancore region, failed. As a result, interim measures relating to banking legislation and reform were instituted in the early 1940s. The banking crisis in Bengal between 1946 and 1948, once again revived the issue of deposit insurance. It was, however, felt that the measures be held in abeyance till the Banking Companies Act, 1949 came into force and comprehensive arrangements were made for the supervision and inspection of banks by the Reserve Bank. It was in 1960 that the failure of Laxmi Bank and the subsequent failure of the Palai Central Bank catalyzed the introduction of deposit insurance in India. The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961 and received the assent of the President on December 7, 1961. The Deposit Insurance Corporation commenced functioning on January 1, 1962. The Deposit Insurance Scheme was initially extended to functioning commercial banks. Deposit insurance was seen as a measure of protection to depositors, particularly small depositors, from the risk of loss of their savings arising from bank failures. The purpose was to avoid panic and to promote greater stability and growth of the banking system what in todays argot are termed financial stability concerns. In the 1960s, it was also felt that an additional the purpose of the scheme was to increase the confidence of the depositors in the banking system and facilitate the mobilization of deposits to catalyst growth and development. When the DIC commenced operations in the early 1960s, 287 banks registered with it as insured banks. By the end of 1967, this number was reduced to 100, largely as a result of the Reserve Bank of Indias policy of the reconstruction and amalgamation of small and financially weak banks so as to make the banking sector more viable. In 1968, the Deposit Insurance Corporation Act was amended to extend deposit insurance to 'eligible co-operative banks'. The process of extension to cooperative banks, however
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took a while it was necessary for state governments to amend their cooperative laws. The amended laws would enable the Reserve Bank to order the Registrar of Cooperative Societies of a State to wind up a co-operative bank or to supersede its Committee of Management and to require the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank of India. Enfolding the cooperative banks had implications for the DIC - in 1968 there were over 1000 cooperative banks as against the 83 commercial banks that were in its fold. As a result, the DIC had to expand its operations very considerably. The 1960s and 1970s were a period of institution building. 1971 witnessed the establishment of another institution, the Credit Guarantee Corporation of India Ltd. (CGCI). While Deposit Insurance had been introduced in India out of concerns to protect depositors, ensure financial stability, instill confidence in the banking system and help mobilize deposits, the establishment of the Credit Guarantee Corporation was essentially in the realm of affirmative action to ensure that the credit needs of the hitherto neglected sectors and weaker sections were met. The essential concern was to persuade banks to make available credit to not so creditworthy clients. In 1978, the DIC and the CGCI were merged to form the Deposit Insurance and Credit Guarantee Corporation (DICGC). Consequently, the title of Deposit Insurance Act, 1961 was changed to the Deposit Insurance and Credit Guarantee Corporation Act, 1961. The merger was with a view to integrating the functions of deposit insurance and credit guarantee prompted in no small measure by the financial needs of the erstwhile CGCI. After the merger, the focus of the DICGC had shifted onto credit guarantees. This owed in part to the fact that most large banks were nationalized. With the financial sector reforms undertaken in the 1990s, credit guarantees have been gradually phased out and the focus of the Corporation is veering back to its core function of Deposit Insurance

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with the objective of averting panics, reducing systemic risk, and ensuring financial stability. (1)Roles and Functions of the Deposit Insurance System:

Deposit Insurance plays a key role in maintenance of financial stability by sustaining public confidence in the banking system in India through protection of depositors, especially small and less informed depositors, Against loss of deposit to a significant extent. The deposit insurance system in India is subject to the Deposit Insurance Law (enacted in 1961). Deposit Insurance and Credit Guarantee Corporation (DICGC), which was established with funding from the Reserve Bank of India is the main body that operates the deposit insurance system, in India. (2) Insured Banks:  All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks are covered under the deposit insurance scheme.  All eligible co-operative banks as defined in Section 2(g) of the DICGC Act are covered by the deposit Insurance Scheme. All State, Central and Primary cooperative banks functioning in the states/Union Territories which have amended their Co-operative Societies Act as required under the DICGC Act, 1961, empowering Reserve Bank to order the Registrar of Co-operative Societies of the respective States/Union Territories to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, Amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank, are treated as eligible Co-operative banks. At present all co-operative banks, other than those

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in the State of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Dadra & Nagar Haveli are covered under the System (3) Registration of new banks as insured banks:  In terms of Section 11 of the DICGC Act, 1961, all new commercial banks are required to be registered with the Corporation soon after they are granted license by the Reserve Bank under Section 22 of the Banking Regulation Act, 1949. Following the enactment of the Regional Rural Banks Act, 1976 all Regional Rural Banks are required to be registered with the Corporation within 30 days from the date of their establishment, in terms of Section 11A of the DICGC Act, 1961.  A new co-operative bank is required to be registered with the Corporation soon after it is granted a license by the Reserve Bank. When the owned funds of a primary co-operative credit society reaches the level of Rs. 1 lakh, it has to apply to the Reserve Bank for a license to carry on banking business as a primary cooperative Bank and is to be registered with the Corporation within 3 months from the date of its Application for license.  A co-operative bank which has come into existence after the commencement of the Deposit Insurance Corporation (Amendment) Act, 1968, as a result of the division of any other co-operative society carrying on business as a co-operative bank, or the amalgamation of two or more co-operative societies carrying on banking business at the commencement of the Banking Law (application to co operative societies) Act, 1965 or at any time thereafter is to be registered within three months of its making an application for license. However, a co-operative bank will not be registered, if it has been informed by the Reserve Bank in writing, that a license cannot be granted it. In terms of section 14 of the DICGC Act, after the corporation registers a bank as an insured Bank, it is required to send, within 30 days of such registration, intimation in writing to the bank to that effect. The letter of intimation, apart from the advice of registration and

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registration number, gives details about the requirements to be complied with by the bank, the rate of premium payable to the corporation, the manner in which the premium is to be paid, the returns to be furnished to the corporation, etc. (4) Scope of Insured Deposits, etc. DICGC insures all bank deposits, such as savings, fixed, current, recurring, etc. except the following Types of deposits.  Deposits of foreign Governments;  Deposits of Central/State Governments;  Inter-bank deposits;  Deposits of the State Land Development Banks with the State co-operative banks;  Any amount due on account of any deposits received outside India;  Any amount which has been specifically exempted by the Corporation with the previous approval of the Reserve Bank. (5) Amount of Coverage (Protection) Under the Scheme, in the event of liquidation, reconstruction or amalgamation of an insured bank e very depositor of that bank in all branches is entitled to repayment of his deposits held by him in the same capacity and right in that bank up to a monetary ceiling of Rs.1,00,000/-. (6) Deposit Protection Scheme There are two methods of protecting deposits by DICGC when an insured bank fails: (i) a method of transferring business to another sound bank (merger or amalgamation) and (ii) a method where the DICGC pays insurance proceeds to depositors (insurance payout method).

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(7) Insurance Premium The consideration for extension of insurance coverage to banks is payment of an insurance premium. The premium is collected in advance at half yearly intervals at the rate of 10 paisa per annum per hundred rupees with effect from the year 2005-06. The premium paid by the insured banks to the Corporation is required to be borne by the banks themselves so that the benefit of deposit insurance protection is made available to the depositors free of cost. (8) Interest Charged due to Default / Delay in Payment of Premium An insured bank is required to remit premium not later than the last day of May (for half year ending March) and November (for half year ending September) each year. If it does not pay on or before the stipulated date the premium payable by it or any portion thereof, it is liable to pay interest at the rate of 8%above the Bank Rate on the default amount of such premium or on the unpaid portion thereof, as the case may be, from the beginning of the half-year till the date of payment. (9) Cancellation of Registration In terms of Section 15A of the DICGC Act, the Corporation has the powers to cancel the registration of an insured bank if it fails to pay the premium for three consecutive halfyear periods. However, the Corporation may restore the registration of the bank, which has been de-registered for non-payment of premium, if the concerned bank makes a request in this behalf and pays all the amounts due by way of premium from the date of default together with interest. Registration of an insured bank stands cancelled if the bank is prohibited from receiving fresh deposits; or its license is cancelled or a license is refused to it by the Reserve Bank; or it is wound up either voluntarily or compulsorily; or it ceases to be a banking company or a co-operative bank within the meaning of Section 36A(2) of the Banking Regulation Act, 1949; or it has transferred all its deposit liabilities to any other institution; or it is amalgamated with any other bank or a scheme
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of compromise or arrangement or of reconstruction has been sanctioned by a competent authority and the said scheme does not permit acceptance of fresh deposits. In the Case of a co-operative bank, its registration also gets cancelled if it ceases to be an eligible cooperative bank. In the event of the cancellation of registration of a bank, other than for default in payment of premium deposits of the bank as on the date of cancellation remain covered by the insurance scheme. (10) Settlement of claims  In the event of the winding up or liquidation of an insured bank, every depositor of the bank is entitled to payment of an amount equal to the deposits held by him in the same capacity and in the same right at all the branches of that bank put together, standing as on the date of cancellation of registration as insured bank (i.e. the date of cancellation of license or order for winding up or liquidation) subject to set-off of his dues to the bank, if any [Section 16(1) and (3) of the DICGC Act]. However, the payment to each depositor is subject to the limit of the insurance coverage fixed from time to time.  When a scheme of compromise or arrangement or re-construction or amalgamation is sanctioned for a bank by a competent authority, and the scheme does not entitle the depositors to get credit for the full amount of the deposits on the date on which the scheme comes into force, the Corporation pays the difference between the full amount of deposit or the limit of insurance cover in force at the time, whichever is less, and the amount actually received by the depositor under the scheme. In these cases also the amount payable to a depositor is determined in respect of all his deposits held in the same capacity and in the same right at all the branches of that bank put together subject to the set-off of his dues to the bank, if any, [Section 16(2) and (3) of the DICGC Act].  Under the provisions of Section 17(1) of the DICGC Act, the liquidator of an insured bank which has been wound up or taken into liquidation, has to submit

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to the Corporation a list showing separately the amount of the deposit in respect of each depositor and the amount set off, in such a manner as may be specified by the Corporation and certified to be correct by the liquidator, within three months.  In the case of a bank in respect of which a scheme of amalgamation/ reconstruction, etc. has been sanctioned, a similar list has to be submitted by the Chief Executive Officer of the concerned transferee bank or insured bank as the case may be, within three months from the date on which the scheme of amalgamation/reconstruction, etc. comes into effect [Section 18(1) of the DICGC Act.  The Corporation is required to pay the amount payable under the provisions of the Act in respect of the deposits of each depositor within two months from the date of receipt of such lists.  The claim lists are to be prepared in accordance with the guidelines issued by the Corporation and got certified by the chartered Accountants appointed for the purpose.  The Corporation generally makes payment of the eligible amount to the liquidator/Chief Executive officer of the transferee/ insured bank, for disbursement to the depositors. However, the amounts payable to the untraceable depositors are held back till the liquidator/ chief executive officer is in a position to furnish all the requisite particulars. (11) Recovery from Settled Claims As per DICGC Act the liquidator or the insured bank or the transferee bank as the case may be, is required to repay to the Corporation out of the amounts realized from the assets of the failed bank and other amounts in hand after making provision for the expenses incurred, as soon as such amounts are sufficient to pay to each depositor one paisa or more in a Rupee.

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FUNCTIONS OF INDIAN FINANCIAL SYSTEM

The functions of financial systems can be classified in to two categories. They are:  Provision of Liquidity  Mobilization of savings. 1. Provision of Liquidity: The major function of the financial system is the provision of money and monetary assets for the production of goods and services. There should not be any shortage of money for productive ventures. In financial language, the money and monetary assets are referred as liquidity. The term liquidity refers to cash or money and other assets which can be converted into cash readily without loss of value and time. Hence, all the activities in a financial system are related to liquidity either provision of liquidity or trading in liquidity. For example, in India the R.B.I. has been vested with the monopoly power of issuing coins and currency notes. Commercial banks can also create cash (deposit) in the form of credit creation and other financial institutions also deal in monetary assets. Over supply of money is also dangerous to the economy. In India the R.B.I. is the leader of the financial system and hence it has control the money supply and creation of credit by banks and regulates all the financial institutions in the country in the best interest of the nation. It has to shoulder the responsibility of developing a sound financial system by strengthening the institutional structure and by promoting savings and investment in the country. 2. Mobilization of Savings: Another important activity of the financial system is to mobilize savings and channelize them into productive activities. The financial system should offer appropriate incentives to attract savings and make them available for more productive ventures. Thus, the financial system facilitates the transformation of savings into investment and

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consumption. The financial intermediaries have to play in a dominant role in this activity.

MERCHANT BANKING
Merchant Banking is a relatively new concept in the area of financial services in India. It caters to the needs of the trade and industry by acting as intermediary, consultant, financial and liaison agency. DEFINITION: Merchant Banker: An organization that underwrites corporate securities and advises clients on issue like corporate mergers, etc. involved in the ownership of commercial ventures. Merchant Banking: According to the Securities Exchange Board of India (Merchant Bankers) rules, 1992. A merchant banker has been defined as any person who is engaged in business of issue management either by making arrangements regarding selling, buying, underwriting or subscribing to the securities as underwriter, manager, consultant, advisor, or rendering corporate advisory services in relation to such issue management. According to Charles P.Kindleberger, Merchant banking is the development of banking from commerce which frequently encountered a prolonged intermediate stage known in England originally as merchant banking.

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MERCHANTBANKING IN INDIA
In India prior to the enhancement of Indian companies Act 1956, management agents acted as issue of houses for securities, evaluated project reports, planned capital structure and to some extent provided venture, capital for new firms. Few share broking firms also functioned as merchant bankers. Specialized Merchant Banking service was felt in India with the rapid growth in the number and size of the issue made in the primary market Merchant banking services started by foreign banks namely the National Grind lays Bank in 1967; city Bank in 1970. The Banking commission in its report in 1972 recommended the setting up of merchant banking institutions by commercial banks and financial Institutions. Merchant Banking services were offered along with banking regulation act was amended permitting commercial banks to offer a wide range of financial services. In 1972, Merchant Banking Division SBI & Indian Bank In 1973 later ICICI set up its Merchant Banking Division by BOI, BOB, canara Bank, PNB, and UCO Bank In 1980s 33 Merchant Bankers belonging to 3 segments commercial banks, financial Institutions, and private firms. In 1983 84 prominence / due to new issue boom. The process of economic reforms and deregulation of Indian economy in 1991. No. of Merchant Banks increased to 115 by the end 1992-93 300 by the end of 1993-94 and 501 by the end of August 1994. All merchant bankers registered with SEBI under four different categories include 50 commercial banks, 6 all India financial institutions ICICI, IFCI, IDBI, IRBI, TFCI, ILFS, and private Merchant bankers.

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Category FIRST (2.5 lakhs paid annually for first 2 years commence from the date of initial registration. 1lakh to keep the registration in force) SECOND (1.5 lakh paid annually for first 2 years commencement from the date of initial registration.50000 to keep the registration in force) y y y y y y y y

Activities & Responsibilities Issue management Preparation of prospectus Financial structure Tie up of financiers Financial allotment and refund of the subscription amount Manager, consultant to an issuer or advisor Portfolio manager Underwriter Co manager Advisor Consultant Underwriter Portfolio manager

Capacities & concerned with an issue THIRD (1.0 lakhs paid annually for first 2 years commencement from the date of y y y Underwriter Advisor consultant

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initial registration.25000 to keep the registration in force) FOURTH (5000 paid annually for first 2 years commencement from the date of initial registration.1 000 to keep the registration in force)  Advisor  Consultant

SCOPE OF MERCHANT BANKING

The scope of Merchant Banking consists of In channelizing the financial surplus of the general public into productive investment avenues To coordinate the activities of various intermediaries to the issue of shares such as the registrars, bankers, advertising agency, printers, underwriters, brokers, etc. To ensure the compliance with the rules and regulations governing the securities market.

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SERVICES RENDERED BY MERCHANT BANKER

Merchant banks in India carry out the following services: 1. Corporate counseling 2. Project counseling 3. Pre- investment studies 4. Capital restructuring 5. Credit syndication and project finance 6. Issue management and underwriting 7. Portfolio management 8. Working capital finance 9. Acceptance credit and Bill Discounting 10. Mergers, Amalgamations and Takeovers 11. Venture capital 12. Lease Financing 13. Foreign currency finance 14. Fixed Deposit Broking 15. Mutual funds 16. Relief to sick Industries 17. Project Appraisal

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FUNCTIONS OF MERCHANT BANKING

Merchant banks in India carry out the following functions:  Management of Debt and Equity offerings  Promotional activities  Placement and Distribution  Corporate Advisory services  Project Advisory services  Loan syndication  Providing venture capital and Mezzanine financing  Leasing finance  Bought out Deals  Non Resident Investment  Advisory services relating to mergers and Acquisitions  Portfolio management

INSTITUTIONAL STRUCTURE MERCHANT BANKING

In India merchant bankers a large number of reputed international merchant bankers like Merrill Lynch, Morgan Stanley, Goldmansochs, and Jardie.Fleming Kleinwort Benson etc. are operating in India under authorization of SEBI. As a result of proliferation Indian Merchant banker faced with severe competition not only among themselves but also with the well developed global players. A chart represents the Merchant Bankers registered with SEBI classified according to the category.

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MERCHANT BANKERS

PUBLIC SECTOR

PRIVATE SECTOR

INTERNATIONAL BANKS 10

CO.BANKS 24

FIs 6

SIs 4 BANKS 10 FINANCE & INVESTMENT 231

LEASING

INSTITUTIONAL STRUCTURE OF MERCHANT BANKERS

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LEGAL & REGULATORY FRAMEWORK RELEVANT PROVISIONS: COMPANIES ACT, SCRA, SEBIGUIDELINES, FEMA (A)COMPANIES ACT 1956
The company law deals with the issue formalities of securities. The shares in India are issued by public limited companies. The public is generally interested in buying shares. The shares which are offered by the companies will be purchased by the investors in public issue. The issuing company shall have to fulfill some formalities before coming to public. The following factors will reveal about the issue of shares process before approaching for raising finance.  Issue of shares MOA, AOA, Prospectus  Buy back the shares (Repurchase of shares)  Issue of share certificates  Prospectus part I, II, III.

(B) SECURITIES CONTRACT REGULATION ACT 1956

The securities contract act regulation provides the broad framework of the functioning of Stock exchange in India. The first legislative measures were enacted in 1925. This act known as The Bombay Securities Contract Act, 1925. The acts were regulated and control certain contracts for sale and purchase of securities in the Bombay city. The Govt. had appointed an expert committee in 1951. Under the chairmanship of A.D. Gorawala committee had prepared a draft bill on the stock exchange regulation in India. Another committee was appointed in 1954 under the chairmanship of Gorawala. The recommendations of the committee were culminated in the enactment of Securities Contract Regulation Act 1956. It provides the broad framework of the present scheme of the stock exchange regulation in India. Stock exchange means, it is a place where the securities are purchased and sold by the investors in a specified time. It regulates the business of buying, selling or dealing in securities.
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The objective of the SCRA is to present malpractice in securities transactions by regulating the business. The act specifies the following instruments as securities y Shares, scrip, stocks bonds, debentures stock or other marketable securities like a nature in or of any incorporated company or other body corporate y y y Government securities Rights or interests in securities Derivatives, units or any other instrument issued by collective investment scheme y Any other instruments such as specified by the SEBI

The SCRA framed the general framework of control regarding the market. It provides the government with a flexible apparatus for the regulation of stock market in India. The Securities Contract Regulation Act can be divided into the following aspects Recognized stock exchanges Contracts and options in securities Listing of securities Penalties Misc.or other matters

(C) SECURITES AND EXCHANGE BOARD OF INDIA GUIDELINES, 1992

The securities and exchange board of India was established in April 1988. It has been functioning under the overall administrative control of the government of India. It works under the guidance of Ministry of finance. It is the agent of the central government in capital market. It is established for the regulation and orderly functioning of the stock exchanges. It also works for protecting the investors rights, prevents malpractices in security trading and promotes healthy growth of the capital markets. It was granted statutory status in 1992 under the SEBI Act. It has the full
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authority to control, regulate, monitor and direct the capital markets. It is the watchdog of the securities market. It is the most powerful organ of the central government in the capital market. After the repeal of the capital issue control act and abolition of CCI (Controller of Capital Issue) the SEBI was given full powers on new issue market and stock market. It has been issuing guidelines since. April 1992 for all financial intermediaries in the capital market. The guidelines have been issued with the objective of investor protection. The guidelines also include the obligations of merchant bankers in respect of free pricing, disclosure of all correct and true information and to incorporate the highlights and risk factors in investment in each issue through prospectus. It has been established for the healthy development and regulation of the capital market. Objectives of Merchant Banking Regulations Authorized Activities Issue management, Corporate advice, Managing, Consultation and advising, Portfolio Management services Method of Authorization Terms of Authorization Prospectus Categories of Merchant Banking Registration Fee to be a Merchant Banker Renewal Fee Lead Manager Code of conduct Obligation and Responsibilities of Merchant Banker Responsibilities of Lead Manager Acquisition of shares Procedure for Inspection Enquiry Action by SEBI
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(D) FOREIGN EXCHANGE MANAGEMENT ACT ,1999

The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came into act on the 1st day of June, 2000. An Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA is applicable to the all parts of India. The act is also applicable to all branches, offices and agencies outside India owned or controlled by a person who is resident of India. FEMA head-office also known as Enforcement Directorate is situated in New Delhi and is headed by a Director. The Directorate is further divided into 5 zonal offices at Delhi, Bombay, Calcutta, Madras and Jalandhar and each office is headed by a Deputy Directors. Each zone is further divided into 7 sub-zonal offices headed by the Assistant Directors and 5 field units headed by the Chief Enforcement Officers

DEFINITIONS UNDER FOREIGN EXCHANGE MANAGEMENT ACT

In this Act, unless the context otherwise requires, (a) "Adjudicating Authority" means an officer authorized under sub-section (1) of section 16; (b) "Appellate Tribunal" means the Appellate Tribunal for Foreign Exchange established under section 18;

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(c) "authorized person" means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized under sub-section (1) of section 10 to deal in foreign exchange or foreign securities; (d) "Bench" means a Bench of the Appellate Tribunal; (e) "capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in sub-section (3) of section 6; (f) "Chairperson" means the Chairperson of the Appellate Tribunal; (g) "Chartered accountant" shall have the meaning assigned to it in clause (b) of subsection (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949); (h) "currency" includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank; (i) "Currency notes" means and includes cash in the form of coins and bank notes; (j) "Current account transaction" means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes:(i) Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business, (ii) Payments due as interest on loans and as net income from investments,

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(iii) Remittances for living expenses of parents, spouse and children residing abroad, and (iv) Expenses in connection with foreign travel, education and medical care of parents, spouse and children; (k) "Director of Enforcement" means the Director of Enforcement appointed under subsection (1) of section 36; (l) "Export", with its grammatical variations and cognate expressions, means (i) The taking out of India to a place outside India any goods, (ii) Provision of services from India to any person outside India; (m) "Foreign currency" means any currency other than Indian currency; (n) "Foreign exchange" means foreign currency and includes, (i) Deposits, credits and balances payable in any foreign currency, (ii) Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency; (o) "foreign security" means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency;

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(p) "Import", with its grammatical variations and cognate expressions, means bringing into India any goods or services; (q) "Indian currency" means currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 (2 of 1934); (r) "Legal practitioner" shall have the meaning assigned to it in clause (i) of sub-section (1) of section 2 of the Advocates Act, 1961 (25 of 1961); (s) "Member" means a Member of the Appellate Tribunal and includes the Chairperson thereof; (t) "Notify" means to notify in the Official Gazette and the expression "notification" shall be construed accordingly; (u) "Person" includes (i) An individual, (ii) A Hindu undivided family, (iii) A company, (iv) a firm, (v) An association of persons or a body of individuals, whether incorporated or not, (vi) Every artificial juridical person, not falling within any of the preceding sub-clauses, and (vii) Any agency, office or branch owned or controlled by such person; (v) "Person resident in India" means
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(i) A person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include (A) A person who has gone out of India or who stays outside India, in either case (a) For or on taking up employment outside India, or (b) For carrying on outside India a business or vocation outside India, or (c) For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) A person who has come to or stays in India, in either case, otherwise than (a) For or on taking up employment in India, or (b) For carrying on in India a business or vocation in India, or (c) For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) Any person or body corporate registered or incorporated in India, (iii) An office, branch or agency in India owned or controlled by a person resident outside India, (iv) An office, branch or agency outside India owned or controlled by a person resident in India; (w) "Person resident outside India" means a person who is not resident in India; (x) "Prescribed" means prescribed by rules made under this Act; (y) "Repatriate to India" means bringing into India the realized foreign exchange and
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(i) the selling of such foreign exchange to an authorized person in India in exchange for rupees, or (ii) the holding of realised amount in an account with an authorized person in India to the extent notified by the Reserve Bank, and includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange and the expression "repatriation" shall be construed accordingly; (z) "Reserve Bank" means the Reserve Bank of India constituted under sub-section (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934); (Za) "security" means shares, stocks, bonds and debentures, Government securities as defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to which the Government Savings Certificates Act, 1959 (46 of 1959) applies, deposit receipts in respect of deposits of securities and units of the Unit Trust of India established under sub-section (1) of section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any mutual fund and includes certificates of title to securities, but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act; (Zb) "service" means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service; (Zc) "Special Director (Appeals)" means an officer appointed under section 18;

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(Zd) "Specify" means to specify by regulations made under this Act and the expression "specified" shall be construed accordingly; (Ze) "Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

Regulation and Management of Foreign Exchange Dealing in foreign exchange, etc. Save as otherwise provided in this Act, rules or regulations made there under, or with the general or special permission of the Reserve Bank, no person shall (a) Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; (b) Make any payment to or for the credit of any person resident outside India in any manner; (c) Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; (d) Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Holding of foreign exchange, etc. Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

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Current account transactions. Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction: Provided that the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Capital account transactions. (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. (2) The Reserve Bank may, in consultation with the Central Government, specify (a) Any class or classes of capital account transactions which are permissible; (b) The limit up to which foreign exchange shall be admissible for such transactions: Provided that the Reserve Bank shall not impose any restriction on the drawl of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. (3) Without prejudice to the generality of the provisions of sub-section (2), the Reserve Bank may, by regulations, prohibit, restrict or regulate the following (a) Transfer or issue of any foreign security by a person resident in India; (b) Transfer or issue of any security by a person resident outside India; (c) Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; (d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called; (e) any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; (f) Deposits between persons resident in India and persons resident outside India;

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(g) Export, import or holding of currency or currency notes; (h) Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; (i) acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; (j) Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred (i) By a person resident in India and owed to a person resident outside India; or (ii) By a person resident outside India. A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Export of goods and services. Every exporter of goods shall (a) furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India;

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(b) Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration in such form and in such manner as may be specified, containing the true and correct material particulars in relation to payment for such services. Realization and repatriation of foreign exchange. Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. Exemption from realization and repatriation in certain cases. The provisions of sections 4 and 8 shall not apply to the following, namely: (a) Possession of foreign currency or foreign coins by any person up to such limit as the Reserve Bank may specify; (b) Foreign currency account held or operated by such person or class of persons and the limit up to which the Reserve Bank may specify; (c) foreign exchange acquired or received before the 8th day of July, 1947 or any income arising or accruing thereon which is held outside India by any person in pursuance of a general or special permission granted by the Reserve Bank; (d) foreign exchange held by a person resident in India up to such limit as the Reserve Bank may specify, if such foreign exchange was acquired by way of gift or inheritance from a person referred to in clause (c), including any income arising there from; (e) foreign exchange acquired from employment, business, trade, vocation, services, honorarium, gifts, inheritance or any other legitimate means up to such limit as the Reserve Bank may specify; and
53

(f) Such other receipts in foreign exchange as the Reserve Bank may specify.

RELATION WITH STOCK EXCHANGES

A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include shares issued by companies, unit, derivatives, pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors which, as in all free markets, affect the price of stocks. There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-thecounter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

54

ROLE OF STOCK EXCHANGES

Stock exchanges have multiple roles in the economy. This may include the following

Raising capital for businesses The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public. Mobilizing savings for investment When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Profit sharing Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses. Corporate governance By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public
55

stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). Despite this claim, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the late 1990's, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), Nextel (2001),Sunbeam (2001), Web van (2001), Adelphia (2002), MCI WorldCom (2002), Parma at (2003), American International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors (2009) and Satyam Computer Services (2009) were among the most widely scrutinized by the media. However, when poor financial, ethical or managerial records are known by the stock investors, the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams. Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. Government capital-raising for development projects Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by

56

selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

FUNCTIONS & SERVICES OF STOCK EXCHANGE

Stock exchanges play an important role in the capital formation of an economy paving way for the industrial and economic development of the country. It induces the public to save and invest in the corporate sector that is profitable to them. Companies depend upon stock exchanges for raising finance. Stock exchanges render many important services to the investors and the corporations alike. Following are some of the functions and services rendered by a stock exchange: i. ii. iii. iv. Common, trading platform Mobilization of savings Safety to investors Distribution of new securities
57

v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. xxii. xxiii.

Ready market Liquidity Capital formation Speculative trading Sound price setting Economic barometer Dissemination of market data Perfect market conditions Seasoning of securities Efficient channeling of savings Optimal resource allocation Platform for public debt Clearing house of business information Evaluation of securities True market mechanism Investor education Fair price discrimination Industrial financing Company regulation

STOCK EXCHANGE TRADERS

Only the registered members are permitted to carry out trading on the floor of a stock exchange. However, for reasons of convenience some other persons are also permitted to enter the premises and transact business on behalf of the members. They are: y y y Recognition of stock exchange Listing of securities Registration of brokers
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y y y y y y y

On line trading Speculative trading Stock indices Margin trading Specialists Market makers Broker - dealer

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

The first electronic OTC stock exchange in India was established in 1990 to provide investors and companies with an additional way to trade and issue securities. This was the first exchange in India to introduce market makers, which are firms that hold shares in companies and facilitate the trading of securities by buying and selling from other participants. Over - the Counter Exchange of India (OTCEI) was incorporated in October 1990 under Section 25 of the Companies Act, 1956 with the objective of setting up a national, ringless, screen-based, automated stock exchange. It is recognized as a stock exchange under Section 4 of the Securities Contracts (Regulations) Act, 1956. It was set up to provide investors with a convenient, efficient and transparent platform for dealing in shares and stocks; and to help enterprising promoters set up new projects or expand. their activities, by providing them an opportunity to raise capital from the capital market in a cost-effective manner. Trading in securities takes place through OTCEIs network of members and dealers spanning the length and breadth of India. OTCEI was promoted by a consortium of financial institutions including:

59

y y y y y y y y

Unit Trust of India. Industrial Credit and Investment Corporation of India. Industrial Development Bank of India. Industrial Finance Corporation of India. Life Insurance Corporation of India. General Insurance Corporation and its subsidiaries. SBI Capital Markets Limited. Canbank Financial Services Ltd.

Salient Features of OTCEI: 1. Ringless and Screen-based Trading: The OTCEI was the first stock exchange to introduce automated, screen-based trading in place of conventional trading ring found in other stock exchanges. The network of on-line computers provides all relevant information to the market participants on their computer screens. This allows them the luxury of executing their deals in the comfort of their own offices. 2. Sponsorship: All the companies seeking listing on OTCE have to approach one of the members of the OTCEI for acting as the sponsor to the issue. The sponsor makes a thorough appraisal of the project; as by entering into the sponsorship agreement, the sponsor is committed to making market in that scrip (giving a buy sell quote) for a minimum period of 18 months. sponsorship ensures quality of the companies and enhance liquidity for the scrips listed on OTCEI. 3. Transparency of Transactions: The investor can view the quotations on the computer screen at the dealers office before placing the order. The OTCEI system ensures that trades are done at the best prevailing quotation in the market. The confirmation slip/trading document generated by the computers gives the exact price at which the deals has been done and the brokerage charged.

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4. Liquidity through Market Making: The sponsor-member is required to give two-way quotes (buy and sell) for the scrip for 18 months from commencement of trading. Besides the compulsory market maker, there is an additional market maker giving two way quotes for the scrip. The idea is to create an environment of competition among market makers to produce efficient pricing and narrow spreads between buy and sell quotations. 5. Listing of Small and Medium-sized Companies: Many small and medium-sized companies were not able to enter capital market due to the listing requirement of Securities Contracts (Regulation) Act, 1956 regarding the minimum issued equity of Rs.10 crores in case of the Mumbai stock Exchange and Rs.3 crores in case of other stock exchanges. The OTCEI provides an opportunity to these companies to enter the capital market as companies with issued capital of Rs.30 lacks onwards can raise finance from the capital market through OTCEI. 6. Technology: OTCEI uses computers and telecommunications to bring

members/dealers together electronically, enabling them to trade with one another over the computer rather than on a trading floor in a single location. 7. Nation-wide Listing: OTCEI network is spread all over India through members, dealers and representative office counters. The company and its securities get nation-wide exposure and investors all over India can start trading in that scrip. 8. Bought-out Deals: Through the concept of a bought-out deal, OTCEI allows companies to place its equity with the sponsor-member at a mutually agreed price. This ensures swifter availability of funds to companies for timely completion of projects and a listed status at a later date. Benefits of getting OTCEI Listing for Companies. The OTCEI offers facilities to the companies having a issued equity capital of more than Rs. 30 lakhs. The benefits of listing at the OTCEI are:
y

Small and medium closely-held companies can go public.

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y y y y y y

The OTCEI encourages entrepreneurship. Companies can get the money before the issue in cases of Bought-out-deals. It is more cost-effective to come with an issue of OTCEI. Small companies can get listing benefits. Easy issue marketing by using the nation-wide OTCEI dealer network. Nation-wide trading by listing at just one exchange.

Benefits of Trading on OTCEI for Investors:

y y

The OTCEI trading counters are easily accessible by any investors. The OTCEI provides greater confidence to investors because of complete transparency in deals.

y y y

At the OTCEl, the transactions are fast and are completed quickly. The OTCEI ensures security, liquidity by offering two-way quotes. The OTCEI is an investor friendly exchange with Single Window Clearance for all investor requests.

Trading on OTCEI: Trading on OTCEI is the first of its kind in India. It is fully computerized set-up where trading takes place through a network of computers at the member/dealer end which in turn are connected to a central computer at OTCEI, Mumbai.
y

Initial Allotment: The tradable document on OTCEI is the Initial/Permanent Counter receipt. The investor who has been allotted a share on OTCEI would be receiving an Initial Counter Receipt.

Buying Process in the Secondary Market: An investor desiring to purchase shares listed on OTCEI in the Secondary market would have to first get himself registered at any of the counters if he has not already registered himself. Then he can approach any of the counters of OTCEI situated in any part of the country and specifies the scrip name and the quantity that he desires to purchase. The
62

investor can specify the price range for the scrip he wishes to purchase. When the transaction takes place, the investor is given a Permanent Counter Receipt (PCR).
y

Selling Process in the Secondary Market: An investor, who has been allotted securities or who has purchased securities in the secondary market, can approach any of the counters situated in the country and fill in a Order Request From specifying the scrip name and the quantity that he desires to sell. The investor has to surrender the PCR + Transfer Deed (TD) to the counter. In case, the PCR is a non-transferred PCR, then the investor has only the PCR to surrender. The counter makes payment to the investor after registrars validation of the signatures on the PCR.

The OTCEI Composite Index: The OTCEI composite index has been introduced. as a broad parameter for investors and analysts. It acts as an indicator of the market movement. The base date for the OTC Composite Index is 23rd July, 1993 when the index was 100. The scrips included in the OTCEl composite index are only listed equities. Market Makers on OTCEI: A market maker on the OTCEI is somewhat akin to a jobber on the regular stock exchange. Their job is to provide two-way-buy and sell-quotes for a scrip and provide liquidity. Any OTCEI counter can be a market maker. The idea is to create an environment of competition among market makers to produce efficient pricing and narrow spreads between buy and sell quotations. The market makers analyse the companies and provide information about them to their investors thus generating investors interest. The market makers are required to give quotes for a minimum depth of three market lots. There are three types of market makers: Compulsory Market Maker (CMM), Additional Market Maker (AMM) and Voluntary Market Maker (VMM).

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Bought-out-deals on the OTCEI: Floating public issue in the primary market involves a lot of formalities and a time lag of at least 3-4 months. In case, where a company wants to get money earlier, it can find a member of the OTCEI, who would be interested in acting as a Sponsor for the Company to get it listed on the OTCEI. As a Sponsor, the member would buy out the total equity which the company intends to offer to the public. The member would later sell the shares of the company to the public through an offer for sale. This method of getting listed on OTCEI is also called a Bought-out-Deals. Sponsors can be authorised members of the OTCEI or a Merchant Banker. They acquire shares in the bought out arrangement and off-load it at a pre-determined price. They provide funds to the promoters and make them free of issue responsibilities. Thus, sponsors act as an important intermediary in mobilization of savings. Benefits to a Company listed on OTCEI:
y

Fast way to get money, as the company does not have to wait for 3-4 months like in regular public issue.

y y y

No worry about under-subscription of the issue. Issue cost depends on negotiations with members. A new promoter with no track record can get a premium in the market if the sponsor finds the project promising.

The company need not have an established name in the market to sell the issue. The issue sales based on the market reputation of the sponsor.

Benefits to an OTCEI Member:

y

Sponsor can buy the shares of the company and sell it at a later time at a premium. For example, a sponsor has bought shares of a company at Rs. 10, if the company does well in six months, and the market conditions of coming out

64

with a public issue are favorable, then the member can sell the shares at Rs. 16 at a later stage, and thereby making a profit of Rs. 6 per share.
y

At the time of the issue, the sponsor need not appoint underwriters to the issue, and can save on underwriting costs.

The sponsor can time the issue and come in the market when the market conditions for a primary issue are favorable.

There is no restriction on the holding period. The sponsor can hold the shares for as long as he wants.

For good projects, the sponsor can help the company to get premium in the market.

Chapter XIV of the SEBI Guidelines, 2000 deals with the regulation of public issue at OTCEI.

UNIT - II ISSUE MANAGEMENT

Role of Merchant Banker in Appraisal of Projects, Designing Capital Structure and Instruments Issue Pricing Book Building Preparation of Prospectus Selection of Bankers, Advertising Consultants, etc. - Role of Registrars Bankers to the Issue, Underwriters, and Brokers. Offer for Sale Green Shoe Option E-IPO, Private Placement Bought out Deals Placement with FIs, MFs, FIIs, etc. Off - Shore Issues. Issue Marketing Advertising Strategies NRI Marketing Post Issue Activities.

ROLE OF MERCHANT BANKER IN APPRAISAL OF PROJECT

A project proposal for capital investment to develop facilities to provide goods and services. JARGONS such as project evaluation, appraisal and assessment are used interchangeably. Project evaluation is used to analyze the soundness of an investment project. Project analysis is done to implement it. The possible net cash flows of the
65

investment are the bases for project analysis. Merchant bankers usually carry out the project analysis for every proposal. The investment proposal may be for setting up a new unit. It may be an expansion of an existing unit. It many aim at improving the existing facilities. Project evaluation is indispensable because resources are scare. The same resources may have high yielding alternative opportunities. Project evaluation helps an entrepreneur or a firm to select the best proposal for investment. Project selection can only be rational if it is superior to others in terms of commercial viability.

The various appraisals,

Project selection

initiated by the merchant banker as a part of project appraisal, are depicted in

Project analysis

Project apprisal

Financial Appraisal

Economic Apprisal

Technical Appraisal

1. Management Appraisal Management appraisal is related to the technical and managerial competence, integrity, knowledge of the project, managerial competence of the promoters etc. The promoters should have the knowledge and ability to plan, implement and operate the entire project effectively. The
66

past record of the promoters is to be appraised to clarify their ability in handling the projects.

2. Technical Appraisal Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The availability of the raw materials, power, sanitary and sewerage services, transportation facility, skilled man power, engineering facilities, maintenance, local people etc are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, risk minimization process and to get approval.

3. Financial Appraisal One of the very important factors that a project team should meticulously prepare is the financial viability of the entire project. This involves the preparation of cost estimates, means of financing, financial institutions, financial projections, break-even point, ratio analysis etc. The cost of project includes the land and sight development, building, plant and machinery, technical knowhow fees, pre-operative expenses, contingency expenses etc. The means of finance includes the share capital, term loan, special capital assistance, investment subsidy, margin money loan etc. The financial projections include the profitability estimates, cash flow and projected balance sheet. The ratio analysis will be made on debt equity ration and current ratio.

4. Commercial Appraisal In the commercial appraisal many factors are coming. The scope of the project in market or the beneficiaries, customer friendly process and preferences, future demand of the supply, effectiveness of the selling arrangement, latest information availability an all areas, government control measures, etc. The appraisal involves the assessment of the current market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into.

5. Economic Appraisal
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How far the project contributes to the development of the sector, industrial development, social development, maximizing the growth of employment, etc. are kept in view while evaluating the economic feasibility of the project.

6. Environmental Analysis Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc.

DESIGNING CAPITAL STRUCTURE AND INSTRUMENTS

The term capital structure refers to the proportionate claims of debt and equity in the total long term capitalization of a company. Merchant banker restricts his activities to two major long term sources like debt and equity, when he deals with capital structure of a firm.

TAKING DECISIONS ON CAPITAL STRUCTURE

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The decisions regarding the use of different types of capital funds in the overall long term capitalization of a firm are known as capital structure decisions. Any decision concerning the capital structure of a firm is guided by the following fundamental principles. y y y y y Cost principle Control principle Return principle Flexibility principle Timing principle

FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS

The following factors significantly influence the capital structure decisions of a firm: Economy characteristics Industry characteristics Company characteristics

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Economic
Business activity stock market Taxation Regulations Credit Policy Financial Institutions

Industry
Cyclical Fluctuations Level Of competition Lifecycle of industry

Company
size of Business Age of company Form Of Organization Stability of earnings Credit Standing Management Philosophy Asset Structure

ISSUE PRICING
While fixing an appropriate price, the relevant guidelines for capital issues by SEBI from time to time must be considered. Companies themselves in the consultation with the merchant bankers, do the pricing of issues. While fixing a price for the security issue, the following factors should be considered: y y Qualitative factors Quantitative factors

The CCI MODEL

Although the CCI was abolished long ago, it would be interesting to discuss the mode of fixing the price for the issue. The fair value of the share is calculated on the basis of NAV of the share, profit Earning capacity value and Average Market price. y Safety Net Scheme

70

This is the most popular method of pricing public issue used by a no. of companies in India. The method aims at affording a measure of protection while fixing the price. Some companies, while making public issues at premium, use this scheme. Under this scheme merchant bankers provide a buy back facility to the individual investor, incase the price of the share goes below the issue price after listing. This arrangement is of great help to investors as it reduces losses. In this connection, SEBI has laid down guidelines for the safety net scheme.

BOOK BUILDING
A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the bids received from the prospective shareholders by the lead merchant bankers is known as book building method. Under the book building method, the share prices are determined on the basis of real demand for the shares at various price levels in the market. For discovering the price at which issue should be made, bids are invited from prospective investors from which the demand at various price levels is noted. The merchant bankers undertake full responsibility for the issue. The book building process involves the following steps: y y y y y y y y y y y Appointment of book runners Drafting prospectus Circulating draft prospectus Maintaining offer records Intimation about aggregate orders Bid analysis Mandatory underwriting Filling with ROC Bank accounts Collection of completed applications Allotment of securities
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y y

Payment schedule and listing Under - subscription

Preparation of Prospectus Selection of Bankers, Advertising Consultants, etc. Preparation of Prospectus Selection of Bankers
A document through which public are solicited to subscribe to the share capital of a corporate entity is called prospectus. The purpose of the prospectus, issued under the provisions of the companies Act, 1956, is to invite the public for the subscription/ purchase of any securities (Shares / debentures) of a company. The form and the contents of the prospectus are prescribed by the part I of schedule II of the companies Act. Contents The nature of contents of prospectus (offer document) varies with the number of issue made by the company. PROSPECTUS FOR THE PUBLIC OFFER In respect of offer of shares and debentures made to the general public, the content of prospectus shall take the following forms: REGULAR PROSPECTUS The contents of a regular prospectus are presented in three parts as follows:

PART I Part I of the prospectus should contain details about the specific information about the company. Following are the details furnished in this regard:

72

General Information Capital structure Terms of issue Particulars of the issue Company, Management and project Disclosure of public issues made by the company Disclosure of outstanding Ligation, criminal prosecution and defaults Perception of Risk factors PART II The information to be included under this part of the prospectus are as follows: General information Financial information Statutory and other information PART III The requirement of this section of the prospectus is that the report by the accountants under Part III must be made by qualified practicing chartered accountant. The time and place at which copies of all balance sheets and profits and loss accounts, materials contracts and documents, etc. to be inspected should be specified under Part III. Declaration Every prospectus must contain a declaration by the directors that all the relevant provisions of the companies Act, 1956 and guidelines issued by the government (SEBI) have been complied with.

ABRIDGED PROSPECTUS A memorandum containing such salient features of a prospectus as may be prescribed is called abridged prospectus. The concept of abridged prospectus was introduced by the
73

companies (amendment) Act of 1988 with a view to make the public issue of shares an inexpensive proposition. Accordingly, a document has to be sent along with the application forms showing a brief version of the salient features of the prospectus. One abridged prospectus can carry two application forms. An abridged prospectus must contain the following particulars: y y y y y y y y y General information Capital structure Terms of issue Issue particulars Company, Management and project Financial performance Refunds and Interest Companies under the same management Risk factors

PROSPECTUS FOR RIGHTS ISSUE Where shares are offered to the existing shareholders, a company is not required to issue a prospectus. Shares offered to the existing shareholders of a company are called right issues. The offer for rights shares is made in the form of a 15 days notice specifying the number of shares offered. Where the right is renounced by the shareholders, the board of directors have the right to dispose off the shares renounced in such a manner as they think most beneficial for the company.

DISCLOSURES IN PROSPECTUS Consequent to the acceptance of the recommendations of the Malegam committee, the following disclosures are made mandatory by the SEBI to be made by issuing companies with effect from November 1995. This is in addition to the requirements of Schedule II of the companies Act.
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An index Project cost Turnover Assets and liabilities Major expansion Future projections Directors statement Promoter definition Promoter group definition Promoters shareholdings Share prices Agreements Management discussion and analysis Buy back Major shareholders No responsibility statement Qualified notes Information about ventures promoted Risk factors Tax benefits Basis for issue price Ratios Other disclosures

Types of prospectus Red herring prospectus Information Memorandum Issue of securities

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SHELF PROSPECTUS (SEC.60A) Information about issue of shares contained in a file lying on a shelf is called Shelf prospectus. Financial institutions and banks issue this type of prospectus. A company filing such a prospectus is also required to file an information memorandum on all material facts relating to new charges created, changes occurring in the financial position in the period from the first offer, previous offer, and the succeeding offer of securities within such time as may be prescribed by the central Government prior to making of a second or subsequent offer of securities under the shelf prospectus

Advertising Consultants
Following are the guidelines applicable to the lead merchant banker who shall ensure due compliance by the issuer company:  Factual and truthful  Clear and concise  Promise of profits  Mode of advertising  Financial data  Risk factors  Issue date  Product advertisement  Subscription  Issue closure  Incentives  Reservation  Undertaking  Availability of copies. 

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APPOINTMENT OF MERCHANT BANKER AND OTHER INTERMEDIARIES

ROLE OF REGISTRAR TO THE ISSUE Registration with SEBI is mandatory to taken on responsibilities as a registrar and share transfer agent. The registrar provides administrative support to the issue process. The registrars of the issue assist in everything. He helps the lead manager in the selection of bankers. He helps the issue and the collection centers in preparing the allotment and application forms, collection of applications and allotment money, reconciliation of bank accounts with application money, listing of issues and grievance handling. BANKERS TO THE ISSUE Any scheduled bank registered with SEBI can be appointed as the banker to the issue. There are no restrictions on the number of bankers to the issue. The main functions of banker involve collection of application forms with money. It maintains a daily report. The banker transfers the proceeds to the share application money account maintained by the controlling branch. He also forwards of the money collected with the application forms to the registrar. UNDERWRITERS TO THE ISSUE Underwriting involves a commitment from underwriter to subscribe to the shares of a particular company to the extent it is under subscribed by the public or existing shareholders of the corporate. An underwriter should have a minimum net worth of Rs.20 lakhs. His total obligation at any time should not exceed 20 times the underwriter s net worth. A commission is paid to the underwriters on the issue price for undertaking the risk of under subscription.

The maximum rate of underwriting commission paid is given in table:

Maximum Rate of Underwriting Commission

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Nature of Issue Shares(Equity & Preference) and Debentures Issue amount up to Rs.5 lakhs Issue amount exceeding Rs. 5 lakhs

On amounts developing on underwriters 2.5%

On amounts subscribed by public 2.5%

2.5%

1.5%

2.0%

1.0%

TYPES OF UNDERWRITERS A brief description of types of underwriting is outlined below.

underwriting

Institutional underwriters

Non Institutional underwritrs

others

IDBI ICICI SBI Capital Market

Any NBFC

Firm Underwriting Subunderwriting Joint underwriting Syndicateunderwriting

BENEFITS / FUNCTIONS OF UNDERWRITING MECHANISMS

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The financial service of underwriting is advantageous to the issuers and the public alike. The function and the role of underwriting firms are explained below: Adequate funds Expert advise Enhanced goodwill Assurance to investors Better marketing Benefits to buyers Benefits to stock market

Corporate Entity
Under writing agreement Purchase of securities

Under writer

Sale of securities

Public

Stock Market

UNDERWRITING AGENCIES

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The Indian capital market is dominated by several underwriting agencies such as private firms, banks and financial Institutions, etc. Private Agencies Investment companies Commercial Banks Development Finance Institutions OBSTACLES Underwriters in India face several debilitating conditions that constitute obstacle to their progress. Some of the hardships faced by them are as follows:  Chaotic capital market  Slow industrialization  Managing agency system  Bashful investors  Lack of specialized institutions  Unsuccessful corporate SEBI GUIDELINES SEBI has issued detailed guidelines regulating underwriting as financial service. Following are the important guidelines:  Optional  No .of underwriters  Registration  Obligations  Sub underwriting  Underwriting commission

BROKERS TO THE ISSUE

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Any member of a recognized stock exchange can become a broker to the issue. A broker offers marketing support, underwriting support, disseminates information to investors about the issue and distributes issue stationery at retail investor level. Only the registered members are permitted to carry out trading on the floor of a stock exchange. However, for reasons of convenience some other persons are also permitted to enter the premises and transact business on behalf of the members. They are:  Remisiers  Authorized clerk  Brokers and Jobbers  Tarawaniwalas  Dealers REQUIREMENTS FOR BROKERS Brokers contribute in large measure to the liquidity and the solvency of the stock market. It is therefore, essential that their smooth functioning is ensured so as to contribute to the growth and the development of an exchange. It is for this purpose that guidelines on the eligibility conditions for brokers and the manner of their selection are laid down by stock exchanges. The eligibility norms are as follows: Written tests Financial background Infrastructure Code of conduct Information Penalty for violation

OFFER FOR SALE

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Where the marketing of securities takes place through intermediaries, such as issue houses, stock brokers and others, it is a case of Offer for Sale Method. Features Under this method, the sale of securities takes place in two stages. Accordingly, in the first stage, the issuer company makes an en- block of securities to intermediaries such as the issue houses and share brokers at an agreed price. under the second stage, the securities are re- sold to ultimate investors at a market related price. The difference between the purchase price and the issue price constitutes profit for the intermediaries. The intermediaries are responsible for meeting various expenses such as underwriting commission, prospectus cost, advertisement expenses, etc.

The issue is also underwritten to ensure total subscription of the issue. The biggest advantage of this method is that it saves the issuing company the hassles involved in selling the shares to the public directly through prospectus. This method is however, expensive for the investor as it involves the offer for securities by issue houses at very high prices.

GREEN SHOE OPTION

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A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.

A green shoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Green shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include green shoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.

Companies that want to venture out and start selling their shares to the public have ways to stabilize their initial share prices. One of these ways is through a legal mechanism called thegreenshoe option. A green shoe is a clause contained in the underwriting agreement of an initial (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. The investment banks and brokerage agencies (the underwriters) that take part in the green shoe process have the ability to exercise this option if public demand for the shares exceeds expectations and the stock trades above the offering price. (Read more about IPO ownership in IPO Lock-Ups Stop Insider Selling.)

The Origin of the Green shoe The term "green shoe" came from the Green Shoe Manufacturing Company (now called Stride Rite Corporation), founded in 1919. It was the first company to implement the green shoe clause into their underwriting agreement. In a company prospectus, the legal term for the green shoe is "over-allotment option", because in addition to the shares originally offered, shares are set aside for underwriters.
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This type of option is the only means permitted by the Securities and Exchange Commission (SEC) for an underwriter to legally stabilize the price of a new issue after the offering price has been determined. The SEC introduced this option in order to enhance the efficiency and competitiveness of the fundraising process for IPOs. (Read more about how the SEC protects investors in Policing the Securities Market: an Overview of the SEC.) Price Stabilization This is how a green shoe option works:
y

The underwriter works as a liaison (like a dealer), finding buyers for the shares that their client is offering.

A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients).

When the price is determined, the shares are ready to publicly trade. The underwriter has to ensure that these shares do not trade below the offering price.

If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the green shoe option.

In order to keep the price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company. (For more on the role of an underwriter in securities valuation, read Brokerage Functions: Underwriting And Agency Roles.)

For example, if a company decides to publicly sell 1 million shares, the underwriters (or "stabilizers") can exercise their green shoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand. (Read more in The Basics Of The Bid-Ask Spread.)

If the market price of the shares exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the green shoe option is useful: it allows the underwriters to buy back the shares at

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the offering price, thus protecting them from the loss.

If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender (issuer).

Full, Partial and Reverse Green shoes The number of shares the underwriter buys back determines if they will exercise a partial green shoe or a full green shoe. A partial green shoe is when underwriters are only able to buy back some shares before the price of the shares increases. A full green shoe occurs when they are unable to buy back any shares before the price goes higher. At this point, the underwriter needs to exercise the full option and buy at the offering price. The option can be exercised any time throughout the first 30 days of IPO trading.

There is also the reverse green shoe option. This option has the same effect on the price of the shares as the regular green shoe option, but instead of buying the shares, the underwriter is allowed to sell shares back to the issuer. If the share price falls below the offering price, the underwriter can buy shares in the open market and sell them back to the issuer. (Learn about the factors affecting stock prices in Breaking Down The Fed Model and Forces That Move Stock Prices.)

The Green shoe Option in Action It is very common for companies to offer the green shoe option in their underwriting agreement. For example, the Esso unit of Exxon Mobil Corporation (NYSE:XOM) sold an additional 84.58 million shares during its initial public offering, because investors placed orders to buy 475.5 million shares when Esso had initially offered only 161.9 million shares. The company took this step because the demand surpassed their share supply by two-times the initial amount.
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Another example is the Tata Steel Company, which was able to raise $150 million by selling additional securities through the green shoe option.

Conclusion one of the benefits of using the green shoe is its ability to reduce risk for the company issuing the shares. It allows the underwriter to have buying power in order to cover their short position when a stock price falls, without the risk of having to buy stock if the price rises. In return, this helps keep the share price stable, which positively affects both the issuers and investors.

E- IPO
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Indian Securities Markets have gone through a major upheaval after a long duration. During the last one year, there has been a surge in the Companies raising funds from the securities markets through Initial Public Offerings (IPO s), which has re-kindled the interest of the investors. Gone are the days when the IPO s used to be fixed price. All the IPO s that come up for issuance has been made to go through the book -building process. This, in fact, has opened up a tremendous business potential for the members of the Stock Exchanges to have their customers participate more and more in the IPO s. Without an adequate system in place, it has become difficult for the members to manage the slew of IPO s. This not only requires speed in populating the data but the accuracy and precision of the data is of paramount importance. Financial Technologies India Limited, an industry leader in providing solutions for the Financial Services Industry, has launched eIPO to address these needs of the exchange members. Designed on a distributed architecture, eIPO is just not data entry software for IPO s but Provides a host of other functionalities, thereby making the life easier for its users.

Some of the key highlights of eIPO are:

It offers a centralized and integrated platform for primary market book building process. y Bidding for IPO s can be done for the clients from Dealer terminal as well as the end clients can connect through Internet and bid for IPO. y y Multiple IPO s can be comfortably managed. Enhanced user access and entitlements permit creation of role based access to thevariousFunctions across multiple issues and securities. y y y Online generation of NSE/BSE bulk files on a single platform. Exporting of NSE bid entries into BSE format and vice versa. It is a user friendly windows based application, which is very interactive for the user and easy to learn y Confirmations received from the exchanges can be uploaded to provide immediate status update to the end-clients.

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Reports are provided which can be sorted by users; column orders can be moved / changed by User. It can be exported to excel also.

Uploading facility for Branch Master and Clients Master.

Feature List for eIPO

 EIPO Administrator facilitates user or group creation. The rights for the users created Can be assigned here, the rights assigned to the users defines the role of the user, the type of data access the user is permitted to and the activities that can be carried by the user. If the users created are administrators or super administrators they are permitted to insert, modify or delete data. Any user created as a guest user is authorized to only view the details. EIPOprovides a report of all the users logged in to the system along with the login details facilitating access management through hierarchal authorization access.  EIPO Branch are the users which are created by the Administrator who can login and place bids for the clients mapped under that branch. The Branch can create a new branch, delete or modify related details, add new IPO details depending upon the privileges or rights given by the Administrator at the time of creation of Branch.

The following are the features which are available in both the Administrator and Branch version. Depending upon the User rights the Branch user will be able to access any of the following menus.  Master Creation EIPO software facilitates the creation of new branches, modification and deletion of Branch related details, Sub broker and Brokers details, Depository Participants details, addition of new IPO details. EIPOalso provides a facility to capture the preference details of the Members and helps the user update the same. Preference details like Preference Date, Exchange, Broker, Sub- Broker, IPO, Branch, User s Bid Limits can be set here. Upload facility for Branch details and Client details.

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 Transaction Entry EIPOfacilitates data entry of relevant mandatory details received from various clients of the Branch / Broker / Suborder for both NSE and BSE for a particular IPO. Option is Provided for Price entry i.e. Best Price, Manual Price or Cut off price on the basis of the price mentioned in the application form submitted by the client. Every entry made into the system is validated through set validations to avoid invalid data entry. Data modification facility is provided in the system till the data entered resides on the local database i.e. before submissions the respective exchange. The system facilitates the user to make entries and store them on the local database and later submit the same on the central database.  Reports EIPO facilitates the users to view reports for the details entered by them for their Respective clients. The branch can view the reports for entries made by all the users. The reports can be viewed based on various criteria such as IPO based, Branch wise, and Broker wise, date wise, exchange wise, only exported data or not exported data.  Export NSE/BSE Entries EIPO facilitates the user to export the NSE/BSE entries as per the predefined format provide by NSE / BSE i.e. pipe (|) separated file in case of NSE and comma (,) separated file in case of BSE. Security measures are taken care of as the data exported by a particular user depends on the type of user he is. The super administrator can export data entered by all the users. The system provides flexibility to export the file in any user defined location and view the exported file. Prior to exporting the file the user can have a filtered view of the data. Post exporting the data, the files generated by the eIPO software are required to be Uploaded to the respective Exchange. Further to the successful upload of the file in the Exchanges system the exchange returns the file with the proper status of the entries and the bided (bid number).eIPO facilitates the user to export the NSE entries in BSE format and vice versa but this activity can be done only once. If it the NSE entries are exported in BSE format then we cannot export the same entries again in NSE format.

 Import NSE/BSE Transactions The file received from the respective exchange (NSE/BSE) with the BID ID number against the respective client entry is required to be uploaded in the eIPO system to facilitate the
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user to view the BID number assigned by the respective exchange against the client entry made in the file exported. The Import feature facilitates the user to import the file received from the exchange for further book building process.  Import DP File This feature facilitates the user to import the DP file in the eIPO system. The details imported are Client Code (CLIENT DP ACCOUNT NO, DP Type and DP Name in a comma separated format. Note: For NSDL CLIENT Code should be of 8 char in length and for CDSL CLIENT Code should be in 16 char in length.  Optimal Database Management eIPO software provides the user the facility to delete all Master entries, transaction entries for particular IPO, all IPO s, selected date or all dates. Further managing the database load helping faster access.  Other features Calculator provided in the software, short cut keys for access to various data for entry, modification, export BSE or NSE entries in a user friendly manner, user login time, date are some of the other features that are provided in eIPO . Each an every window has an Explanation for the use of that window for easy understanding of the use of that window. Various shortcuts are available on the main page of the module for easy and faster access. There s also feature of sending Transaction Slip of the bid s placed by the clients with all the necessary details via e-mail. We can also filter out for which clients or which exchange we would like to send the transaction slip.

Feature List for eIPO Web Client EIPO Web Client is a user-friendly front end, which provides bidding for IPO orders;
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Modifying orders and Order history can be provided to retail and institutional investors through the Internet at very marginal costs. Some of the features are listed below: Market Watch Market Watch provides a view with all the IPO s available for bidding. All the details like IPOname, Price determination, Start date, End Date, Minimum Price, Maximum Price, and Minimum Qty are available. The user can also place an order for IPO through the Market Watch also Transfer Funds Before placing any IPO order the user needs to transfer funds of the amount he is bidding for to the brokers account. The transferred amount will be set as a limit for the user. When the user places an IPO order his limits will be checked. If the transferred amount exceeds the amount he has bid for then the user can send a request to the broker to transfer the rest amount to his account. Order Book The user can see the details of the last placed order for the present IPO. The user can have a look at the previous placed IPO bids by filtering on the date, in a particular range of date. The user can also modify the current placed IPO order by just clicking on the name of the IPO.

Place Order The client can place an IPO order through this window by selecting a IPO. He just has to select the Application no. from the drop down menu and enter QTY and bid price. The Minimum and Maximum Price as well as Minimum Qty and Multiples Qty will be displayed. The user can also select the price module as Best Price, Market Price and Cut -Off Price.

Modify Order The user can modify the IPO order from this window. The user will be able to modify all the

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latest placed IPO. The user can also cancel the order from this window. All necessary validation like Minimum Qty, Minimum price will be checked while modifying an IPO order.

PRIVATE PLACEMENT

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Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.[1] In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated there under. Most private placements are offered under the Rules know as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds. The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market. Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred.

BOUGHT OUT DEALS

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A bought out deal is a process by which an investor (usually the investment banker) buys out a significant portion of the equity of an unlisted company with a view to make it public within an agreed time frame. The advantage of the bought deal from the issuer's perspective is that they do not have to worry about financing risk (the risk that the financing can only be done at a discount too steep to market price.) This is in contrast to a fully-marketed offering, where the underwriters have to "market" the offering to prospective buyers, only after which the price is set. The advantages of the bought deal from the underwriter's perspective include: 1. Bought deals are usually priced at a larger discount to market than fully marketed deals, and thus may be easier to sell; and 2. The issuer/client may only be willing to do a deal if it is bought (as it eliminates execution or market risk.) The disadvantage of the bought deal from the underwriter's perspective is that if it cannot sell the securities, it must hold them. This is usually the result of the market price falling below the issue price, which means the underwriter loses money. The underwriter also uses up its capital, which would probably otherwise be put to better use (given sell-side investment banks are not usually in the business of buying new issues of securities).

PLACEMENT WITH FIS, MFS, FIIS

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Financial Institutions: All Financial Institutions Export Credit Guarantee Corporation (ECGC) Export Import Bank (Exim Bank) Industrial Credit and Investment Corporation of India (ICICI) Industrial Credit and Investment Corporation of India Ventures (ICICI Ventures) Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI) Industrial Investment Bank of India (IIBI) Infrastructure Development Finance Company (IDFC) Investment by Insurance Companies National Bank of Agriculture and Rural Development (NABARD) National Small Industries Corporation (NSIC) Non-Banking Financial Company (NBFC) North Eastern Development Finance Corporation (NEDFi) Risk Capital and Technology Finance (RCTF) Small Industries Development Bank of India (SIDBI) State Industrial Development Corporations (SIDCs)

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Tourism Finance Corporation of India (TFCI) Unit Trust of India (UTI) MUTUAL FUNDS A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).[1] The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. In the U.S., a fund registered with the Securities and Exchange Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually. Most funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors. Since 1940 in the U.S., with the passage of the Investment Company Act of 1940 (the '40 Act) and the Investment Advisers Act of 1940, there have been three basic types of registered investment companies: open-end funds (or mutual funds), unit investment trusts (UITs); and closed-end funds. Other types of funds that have gained in popularity are exchange traded funds (ETFs) and hedge funds, discussed below. Similar types of funds also operate in Canada, however, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, undertakings for collective investments in transferable securities (UCITS, pronounced "YOU-sits") and SICAVs (pronounced "SEE-cavs").

FOREIGN INSTITUTIONAL INVESTORS

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An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Foreign institutional investors (FIIs) poured inflows heavily to bet on the India growth story. As per data released by the Securities and Exchange board of India (SEBI), FIIs invested US$ 2.1 billion in equities in April 2010, and US$ 684.18 million in debt in April 2010. During January to April 2010, FIIs invested US$ 6.6 billion in equity and US$ 5.94 billion in debt, of which US$ 4.4 billion in equity and US$ 2.1 billion in debt was invested in March 2010. According to SEBI, FIIs transferred a record US$ 17.5 billion in domestic equities during the calendar year 2009. FIIs infused a net US$ 1.1 billion in debt instruments during the said period. Data sourced from SEBI shows that the number of registered FIIs stood at 1711 and number of registered sub-accounts rose to 5,382 as of April 30, 2010. According to a report by CNI Research, companies that could be short-listed as short-term investment targets based on interest from FIIs and as yet modest stock movement, have expanded 33 per cent for the quarter ended March 2010. As per the report FII stake rose in 299 companies in the quarter ended March 2010, as compared to 322 companies in the quarter ended December 2009. However, the number of companies which can be

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considered as investment picks has increased to 142 in March from 107 in December, said the report. Moreover, India accounted for more than one-fifth of the US$ 22.1 billion private equity investments received by the emerging markets across the globe in 2009, according to a report by Emerging Markets Private Equity Association (EMPEA) released in March 2010. In 2009, emerging markets accounted for about 26 per cent of global private equity (PE) investment. The report added that global PE investment in emerging markets totalled US$ 22.1 billion across 674 deals in 2009. Asia captured 63 per cent of total emerging market PE investments by value in 2009, with India capturing US$ 4 billion, according to the report. The amount of private equity (PE) and venture capital (VC) funding in India touched US$ 1.9 billion in the first three months of 2010, according to a report by global consulting firm, Deloitte. This funding came from 88 transactions, with an average deal size of US$ 22.1 million. The amount accounts for nearly 50 per cent of the entire funding in the previous year of 2009, i.e., US$ 4.4 billion from 299 deals with average deal size of US$ 14.6 million. Investment Scenario Private equity firms invested about US$ 2 billion across 56 deals during the quarter ended March 2010, according to a study by Venture Intelligence, a research service focused on private equity and merger and acquisitions (M&A) transaction activity in India. The amount invested during the latest quarter (January-March 2010) was the highest in the last six quarters. The figure was significantly higher than that during the same period last year (January-March 2009) which witnessed US$ 620 million being invested across 58 deals and also the immediate previous quarter (October-December 2009) where investments worth US$ 1.7 billion were made across 102 deals. The largest investment during January-March 2010 was the US$ 425 million investment into power generation firm Asian Genco by General Atlantic, Morgan Stanley, Norwest, Goldman Sachs and Ever stone. Other top investments reported during the first quarter of
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2010 included Quadrangle Capital Partners US$ 300 million investment into telecom tower infrastructure company Tower Vision India; Stanch art PE, KKR and New Silk Routes US$ 217 million investment into Coffee Day Resorts and TPG Growths US$ 115 million investment into Clean Tech firm Greenko Group. Moreover, FIIs invested a record US$ 5 billion in Indian corporate paper in the first four months of 2010. Maximum investments have been in top-rated bond offerings at an average tenure of 18-24 months and in commercial paper. The investment limit for FIIs in corporate bonds has been raised to US$ 15 billion in 2009. According to data released by SEBI, FIIs have cumulatively invested US$ 11.24 billion in Indian debt since November 1992. This includes investment in both government and corporate bonds. During 2009-10, FIIs pumped in a record US$ 6.04 billion in corporate and government papers. This is a 12fold rise over their investment of US$ 480 million in 2008-09. Numbers crunched by education-focused private equity fund Kaizen Management Advisors show that venture capitalists and private equity players have pumped in excess of US$ 140 million so far this year, 50 per cent more than what they invested in the whole of 2009. The total VC/PE investment into the sector is expected to be close to US$ 300 million in 2010, according to Sandeep Aneja, managing director of Kaizen Management Advisors. Kidswear maker and retailer Lilliput sold an undisclosed stake to private equity firm TPG Growth for around US$ 25.9 million in April 2010. Earlier, the company had sold a 31 per cent stake for around US$ 60.8 million to private equity player Bain capital. Reliance Equity Advisors (India) Ltd (REAIL), the private equity arm of Reliance Capital Ltd, invested US$ 22.6 million in Pathways World School in April 2010. Singapore-based Temasek Holdings signed an agreement in April 2010 with GMR Energy Ltd (GEL) to raise capital for energy expansion plans. Temasek Holdings would invest US$ 200 million through its wholly-owned subsidiary Claymore Investments (Mauritius) Pte.

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Government Initiatives The Securities and Exchange Board of India (SEBI), in January 2010, allowed equity investors to lend and borrow shares for 12 months compared with the current limit of one month. The new norms will also allow a lender or a borrower to close his position before the agreed-upon expiry date. According to a circular dated April 9, 2010, based on the assessment of the allocation and the utilization of the limits to FIIs for investments in Government and corporate debt, the unutilized limits will be allocated in the following manner:
y

No single entity (FII) shall be allocated more than US$ 45.2 million of the government debt investment limit for allocation through bidding process. The minimum amount which can be bid for shall be US$ 11.3 million and the minimum tick size shall be US$ 11.3 million.

No single entity shall be allocated more than US$ 452.2 million for the corporate debt investment limit.

In terms of SEBI circular dated January 31, 2008, the government and corporate debt limits shall be allocated on a first come first serve basis subject to the following conditions:
y

An investment limit of US$ 45.2 million in Government debt shall be allocated among the FIIs/sub-accounts on a first-come first-served basis, subject to a ceiling of US$ 11.1 million per registered entity.

The remaining amount in corporate debt after bidding process shall be allocated among the FIIs/sub accounts on a first-come first-served basis, subject to a ceiling of US$ 45 million per registered entity.

No single entity (FII) shall be allocated more than US$ 45.2 million of the government debt investment limit for allocation through bidding process. The minimum amount which can be bid for shall be US$ 11.3 million and the minimum tick size shall be US$ 11.3 million.

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No single entity shall be allocated more than US$ 452.2 million for the corporate debt investment limit. In terms of SEBI circular dated January 31, 2008, the government and corporate debt limits shall be allocated on a first come first serve basis subject to the following conditions: An investment limit of US$ 45.2 million in Government debt shall be allocated among the FIIs/sub-accounts on a first-come first-served basis, subject to a ceiling of US$ 11.1 million per registered entity. The remaining amount in corporate debt after bidding process shall be allocated among the FIIs/sub accounts on a first-come first-served basis, subject to a ceiling of US$ 45 million per registered entity. The Government of India reviewed the External Commercial Borrowing (ECB) policy and increased the cumulative debt investment limit by US$ 9 billion (from US$ 6 billion to US$ 15 billion) for FII investments in corporate debt in March 2010

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OFF SHORE ISSUES

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:


greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)

  

low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra. Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements[1], the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts which may or may not be numbered bank accounts they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

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Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition. Advantages of offshore banking


Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, developed countries with regulated banking systems offer the same advantages in terms of stability.

Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.

Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.

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Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.

Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the off shoring of capital.

Disadvantages of offshore banking



Offshore bank accounts are less financially secure. In banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centers often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees 50,000 of net deposits per individual depositor or 20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centers such as the Isle of Man have refused to compensate depositors 100% of their

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funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore.


Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[3]Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.

Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.

Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy [4]. The Laffer curve demonstrates this tendency.

Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality.

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ISSUE MARKETING
Following are the various methods being adopted by corporate entities for marketing the securities in the New Issues Market: Pure prospectus method Offer for sale Private placement Initial public offerings Right Issue method Bonus Issue methods Book building Method Stock option method and Bought out Deals methods Over the counter placement Tender method

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ADVERTISING STRATEGIES
With the increasing number of new issues flooding the market, some of them bunching at the same time, keen competition has emerged in the new issues market. This has led to larger fish swallowing the smaller fish and smaller companies facing rising costs, development and under subscription. Bigger and well established companies having reputed promoters with a track record and professional management could secure easily oversubscription multifold. Medium and small sized projects and relatively new and first generation promoters face stiff competition. Adequate pre- issue planning and proper marketing strategy have become absolutely necessary. Investors have become extremely choosy and shy of the majority of new issues. y y y y y y y y y y Need for aggressive salesmanship Innovative Ideas SEBI S code of Advertisement Advertisement campaign Collection centers and rising cost Advertisement Expenses SEBI code on Advertisement Mailing Agents Pre- issue Mailing Mailing work after issue is closed

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NRI MARKETING
Non resident investment of the merchant banker provide investment advisory services in terms of identification of investment opportunities, selection of securities, portfolio management, etc. to attract NRI investment in primary and secondary markets. They also take care of the operational details like purchase and sale of securities securing the necessary clearances from RBI under FEMA for repatriation of interest and dividends, etc. NriInvestIndia.com is a NRI, PIO and OCI focused financial broker company, offering investment options in India at some unbelievably low charges and fees for Investing in India. We help NRIs - Non resident Indians, PIOs - person of India origin & OCI holders - overseas citizenship of India to Invest in Stock Markets of India. We offer quality NRI investment services to Non Resident Indian clients. Some of our investment services for NRIs include: Stock Trading, Mutual Funds Investments for NRI, Online Dmat account, NRI Derivative trading & Investment advising. We offer a gamut of NRI investment options in India that would make NRI Investing in India easy. Featured Services are: y y y y y y Indian Mutual fund Stock trading Investment advise De mat account Tax services PAN card assistance

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POST ISSUE ACTIVITIES

y Principles of allotment:

After the closure of the subscription list, the merchant banker should inform, with in 3 days of the closure, whether 90% of the amount has been subscribed or not. If it is not subscribed up to 90% then the underwriters should bring thte shortfall amount with in 60 days. In case of over subscription, the shares should be allotted on a pro rata basis and the excess amount should be refunded with the interest to the share holders with in 30 days from the date of closure. y Formalities associated with Listing:

The SEBI lists certain rules and regulations to be followed by the issuing company. These rules and regulations are laid down to protect the interests of investors. The issuing company should disclose to the public its profit and loss account, balance sheet, information relating to bonus and right issue and any other relevant information.

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UNIT III

OTHER FEE BASED SERVICES

Mergers and Acquisitions Portfolio Management Services Credit Syndication Credit Rating Mutual Funds - Business Valuation.

MERGER AND ACQUISTIONS

Merchant banking services that are concerned with planning and execution and acquisition of firms as a part of the corporate restructuring exercise, are referred to as M&A advisory services. The objective is to maximize the share holders value through synergistic effect.

FORMS OF MERGER Merger takes place in the following forms: y y ACQUISITION The term acquisition is used to refer to the act of acquiring of ownership right in the property and assets of another company and thereby bringing about the change in the management of the acquiring company. Acquisitions could happen in any of the following ways: Entering into an agreement with a person or persons holding controlling interest in the other company Subscribing new issue of shares issued by the other company in the open market Purchasing shares of the other company at stock exchange Making an offer to buy the shares of the other company, to existing share holders of that company Merger through absorption Merger through consolidation

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TAKE OVER Another term associated with merger is take over. In the case of a take over, one company obtains control over the management of another company. Under both acquisition and take over it is possible for a company to have effective control over another company even by holding minority ownership. For instance, the Monopolies and Representative Trade practices (MRTP) Act prescribes that a minimum of 25 percent voting power must be acquired to constitute a takeover. Similarly, sec. 372 of the companies Act defines the limit of a company s investment in the share of another company anything more than 10% of the subscribed capital so as to constitute takeover.

HOSTILE TAKE OVER Where in a merger one firm acquires another firm without the knowledge and consent of the management target firm, it takes the form of a hostile takeover. The acquiring firm makes a unilateral attempt to gain a controlling interest in the target firm, by purchasing share of the later firm directly in the open (stock) market.

HOSTILE TAKEOVER STRATEGIC TACTIS According to Weston, J.J.Chung, K.S. and Hoag, SE , a target company which faces the threat of a hostile takeover, would adopt the following strategies: Divesture Crown jewels Poison pill Green mail White- knight Golden parachutes Other strategies Legal, Tactical, Offensive

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PREY FOR TAKEOVERS Following provide ideal conditions for an acquiring firm to prey a target firm for takeover bid:  Over all poor market performance of the target firm, especially in items of return to the shareholders in the preceding years  Less profitability of the target firm as compared to the firms  Lower share holding of the promoter/ owner group in the target firm HOLDING COMPANY A parent corporation that owns enough voting stock in another corporation to control its board of directors (and, therefore, controls its policies and management). A holding company must own at least 80% of voting stock to get tax consolidation benefits, such as tax-free dividends.

MERGER TYPES Mergers are different types as discussed below: Horizontal merger Vertical merger Diagonal merger Forward merger Reverse merger Forward triangular merger Reverse triangular merger Conglomerate merger Congeneric merger Negotiated merger Arranged merger Agreed merger Unopposed merger Defended merger Competitive merger
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Tender offer Diversification

ARGUMENTS IN FAVOUR OF M&A Following are the arguments advanced in favour of M&A y y y y y y y y y y y y Synergy argument Growth Profitability Diversification Tax benefit argument Efficient cash use argument Cash flow argument Lower borrowing cost Market value Management control National interest Shareholder interest

FINANCIAL EVALUATION ON MERGER y y Purchase price Asset approach, Earnings Approach, Cash flow Settlement Cash, Stock, CD settlement mode.

STEPS IN M&A Following are the steps involved in M&A: Review of objectives Data for analysis Analysis of information Fixing price Finding merger value.

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RATIONAL MERGERS IN INDIA Following are the underlying factors behind the wave of mergers and acquisitions happening in the Indian companies world in recent times: y y y y y y y y y y y y y y Diversification Growth through acquisitions Economies of scale Early mover benefit Tax advantages Regulatory considerations Size Synergy Diversifying risk Good price Creating shareholder value Better corporate governance Better portfolio Investors perspective

SEBI GUIDELINES SEBI guidelines are aimed at protecting the interest of the shareholders especially from the hazards of hostile takeovers. Most of these guidelines are applicable to the acquiring company. The salient features of the guidelines are as follows: y y y y y y Notification Acquisition limit Offer to public Offer price Disclosure Offer document

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PORTFOLIO MANAGEMENT SERVICES

Portfolio management service (PMS) is a type of professional service offered by portfolio managers to their client to help them in managing their money in less time. Portfolio managers manage the stocks, bonds, and mutual funds of clients considering their personal investment goals and risk preferences. In addition to money, the portfolio managers manage the portfolio of stocks, bonds, and mutual funds.

Functions of PMS The objective of portfolio management is to develop a portfolio that has a maximum return at whatever level of risk the investor deems appropriate. i. ii. iii. iv. v. Risk diversification Efficient portfolio Asset allocation Beta estimation Rebalancing portfolios

SERVICES AND STRATEGIES A portfolio manager may adopt any of the following strategies as part of an efficient portfolio management y y y y Buy and Hold strategy Indexing Laddered portfolio Barbell portfolio

Portfolio Management Payment Criteria: There are types of payment criteria offered by portfolio managers to their client, such as:
y y

Fixed-linked management fee. Performance-linked management fee.

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In fixed-link management fee the client usually pays between 2-2.5% of the portfolio value calculated on a weighted average method. In performance-linked management fee the client pays a flat fee ranging between 0.51.5percent based on the performance of portfolio managers. The profits are calculated on the basis of 'high watermarking' concept. This means, that the fee is paid only on the basis of positive returns on the investment. In addition to these criteria, the manager also gets around 15-20% of the total profit earned by the client. The portfolio managers can also claim some separate charges gained from brokerage, custodial services, and tax payments. Value Your Money Before Selecting Portfolio Management Services (PMS):
y

Equity bias: Equity portfolio offered by Portfolio management services helps in adding high value than what a debt portfolio offers. Because of this, many portfolio managers emphasis on equity investments and some offer hybrid products.

Large surplus to invest: The client should always choose the portfolio managers after considering his portfolio size and the fee he would charge for managing his portfolio. PMS are recommended to those clients who have large surplus amount of money to invest. Otherwise, the company can also think for cheap options like a financial planner or advisor to construct an asset allocation plan and to manage investment.

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CREDIT SYNDICATION
It is the alternative term for syndicated loan. It is the process of involving numerous different lenders in providing various portions of a loan. It is mainly used in extremely large loan situations, syndication allows any one lender to provide a large loan while maintaining a more prudent and manageable credit exposure because they aren't the only creditor. At the most basic level, arrangers serve the investment-banking role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for this service, and this fee increases with the complexity and risk factors of the loan. As a result, the most profitable loans are those to leveraged borrowers issuers whose credit ratings are speculative grade and who are paying spreads (premiums or margins above LIBOR in the U.S., Euribor in Europe or another base rate) sufficient to attract the interest of non-bank term loan investors. Though, this threshold moves up and down depending on market conditions. In the U.S., corporate borrowers and private equity sponsors fairly even-handedly drive debt issuance. Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, who, in turn, determine many of the standards and practices of loan syndication. Types of Syndications Globally, there are three types of underwriting for syndications: an underwritten deal, bestefforts syndication, and a club deal. The European leveraged syndicated loan market almost exclusively consists of underwritten deals, whereas the U.S. market contains mostly bestefforts. Underwritten deal An underwritten deal is one for which the arrangers guarantee the entire commitment, and then syndicate the loan. If the arrangers cannot fully subscribe the loan, they are forced to absorb the difference, which they may later try to sell to investors. This is easy, of course, if market conditions, or the credit s fundamentals, improve. If not, the arranger may be forced

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to sell at a discount and, potentially, even take a loss on the paper. Or the arranger may just be left above its desired hold level of the credit. Arrangers underwrite loans for several reasons. First, offering an underwritten loan can be a competitive tool to win mandates. Second, underwritten loans usually require more lucrative fees because the agent is on the hook if potential lenders balk. Of course, with flexlanguage now common, underwriting a deal does not carry the same risk it once did when the pricing was set in stone prior to syndication. Best-efforts syndication A best-efforts syndication is one for which the arranger group commits to underwrite less than the entire amount of the loan, leaving the credit to the vicissitudes of the market. If the loan is undersubscribed, the credit may not close or may need major surgery to clear the market. Traditionally, best-efforts syndications were used for risky borrowers or for complex transactions. Since the late 1990s, however, the rapid acceptance of market-flex language has made best-efforts loans the rule even for investment-grade transactions. Club deal A club deal is a smaller loan usually $25 100 million, but as high as $150 million that is

premarket to a group of relationship lenders. The arranger is generally a first among equals, and each lender gets a full cut, or nearly a full cut, of the fees.

CREDIT SYNDICATION SERVICES Merchant bankers provide various services towards syndication of loans. The services vary depending on whether loans sought are long term fixed capital or of working capital funds. Following are the credit syndication services rendered by merchant bankers with regard to long term loans y y y y y Ascertaining promoter details Ascertainment of cost detail Comparison of cost details Identification of funding sources Ascertainment of loan details
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y y y y y y y y

Furnishing beneficiary details Making application Project appraisal Compliance for loan disbursement Documentation and creation of security Pre- disbursement compliance. Locating working capital needs Identifying type of loan Cash credit, overdraft, Demand loans, bill financing, LOG and LOC.

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CREDIT RATING AGENCIES

A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower s overall credit history.[1] A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender (Black's Law Dictionary). Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.

Personal Credit ratings

An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks. The factors that may influence a person's credit rating are
     

ability to pay a loan interest amount of credit used saving patterns spending patterns debt

Corporate credit ratings The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. These are assigned bycredit rating agencies such as A.M.

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Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.[3] The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. A.M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S. CREDIT RATING AGENCIES Credit Rating Information Services of India Limited (CRISIL) Credit Rating and Information Services of India Ltd. (CRISIL) (BSE: 500092) is India's leading Ratings, Research, Risk and Policy Advisory Company based in Mumbai.[2] CRISIL s majority shareholder is Standard & Poor's, a division of The McGraw Companies and the world's foremost provider of financial market intelligence. CRISIL offers domestic and international customers (IREVNA, international arm and a division of CRISIL handles international customers) with independent information, opinions and solutions related to credit ratings and risk assessment; energy, infrastructure and corporate advisory; research on India's economy, industries and companies; global equity research; fund services; and risk management. IREVNA is the off-shoring Knowledge Process Outsourcing arm of CRISIL, with niche analytical skills to cater to financial analysis. Investment Information and Credit Rating Agency of India (ICRA) Credit Analysis & Research Limited (CARE) Duff & Phelps Credit Rating India Private Ltd. (DCR India) ONICRA Credit Rating Agency of India Ltd.

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MUTUAL FUNDS
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

A mutual fund is a managed group of owned securities of several corporations. These corporations receive dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors purchase shares in the mutual as if it was an individual security. After paying operating costs, the earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion to the amount of money invested. Investors hope that a loss on one holding will be made up by a gain on another. Heeding the adage "Don't put all your eggs in one basket" the holders of mutual fund shares are able collectively to gain the advantage by diversifying their investments, which might be beyond their financial means individually.

A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; it may be considered as a fluid capital stock. The number of shares changes as investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time for a market price. However the open-end market price is influenced greatly by the fund managers. On the other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with the market. But with close-end funds, the fund manager has less influence because the price of the underlining owned securities has greater influence. Mutual funds vs. other investments From investors viewpoint mutual funds have several advantages such as:

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y y

Professional management and research to select quality securities Spreading risk over a larger quantity of stock whereas the investor has limited to buy only a hand full of stocks. The investor is not putting all his eggs in one basket

y y

Ability to add funds at set amounts and smaller quantities such as $100 per month Ability to take advantage of the stock market which has generally out performed other investment in the long run

Fund manager are able to buy securities in large quantities thus reducing brokerage fees

However there are some disadvantages with mutual funds such as:
y y y y

The investor must rely on the integrity of the professional fund manager Fund management fees may be unreasonable for the services rendered The fund manager may not pass transaction savings to the investor The fund manager is not liable for poor judgment when the investor's fund loses value

There may be too many transactions in the fund resulting in higher fee/cost to the investor - This is sometimes call "Churn and Earn"

y y y

Prospectus and Annual report are hard to understand Investor may feel a lost of control of his investment dollars There may be restrictions on when and how an investor sells/redeems his mutual fund shares

Advantages of mutual funds Mutual funds provide professional management and research to select quality securities. They spread the risk over a larger quantity of stock than the investor usually has funds to buy. In a fund the investor can add funds to his/her investments at set amounts and smaller quantities such as $100 per month. The investor can access the advantage of the stock market which overall has out performed other investments in long term investments. The mutual fund managers are able to buy securities in large quantities thus reducing brokerage fees.

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Disadvantages of mutual funds Fund management fees may be unreasonable for the services rendered. The investor must rely on the integrity of the professional fund manager. In some cases the fund manager may not pass on transaction savings to the investor. The fund managers are not liable for fund losses due to poor judgment on their part. The fund managers may make so many transactions in the fund that high fee/cost result and are passed on to the investor. Prospectuses and Annual reports are hard to understand. Restrictions on when and how an investor sells/redeems his mutual fund shares. The investor may feel a loss of control of his investment dollars. Types of mutual funds Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk start up companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and style is important.

Types of mutual funds are: Value stocks Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains. Growth stock Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income. Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small.

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Income stock The investor is looking for income which usually come from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks. Index funds The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following. Enhanced index This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking. Stock market sector The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc. Defensive stock The securities in this fund are chosen from a stock which usually is not impacted by economic down turns. International Stocks from international firms. Real estate Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc. Socially responsible
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This fund would invests according to non-economic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling, pornography etc. Balanced funds The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired. Tax efficient Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that are taxable in the year that they are received. These funds still shoot for solid returns; they just want less of them showing up on the tax returns. Convertible Bonds or Preferred stock which may be converted into common stock. Junk bond Bonds which pay higher that market interest, but carry higher risk for failure and are rated below AAA. Mutual funds of mutual funds This funds that specializes in buying shares in other mutual funds rather than individual securities.

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Closed end This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has less influence because the price of the underlining owned securities has greater influence. Exchange traded funds (ETFs) Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a stock exchange. Money market funds Money market funds hold 26% of mutual fund assets in the United States.[11] Money market funds generally entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs), open-end money fund shares are generally liquid and redeemable at "any time" (that is, normal business hours during which redemption requests are taken generally not after 4 PM ET). Money funds in the US are required to advise investors that a money fund is not a bank deposit, not insured and may lose value. Most money fund strive to maintain an NAV of $1.00 per share though that is not guaranteed; if a fund "breaks the buck", its shares could be redeemed for less than $1.00 per share. While this is rare, it has happened in the U.S., due in part to the mortgage crisis affecting related securities Hedge funds Hedge funds in the United States are pooled investment funds with loose, if any, SEC regulation, unlike mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act of 1940.[12] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a performance fee of 20% of the hedge fund's profit. There may be a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund for individual investors.

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Business valuation
The five most common ways to valuate a business are
    

asset valuation, historical earnings valuation, future maintainable earnings valuation, relative valuation (comparable company & comparable transactions), discounted cash flow (DCF) valuation

Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit. Accurate business valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. These reports generally get more detailed and expensive as the size of a company increases, however, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size.

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UNIT IV FUND BASED FINANCIAL SERVICES Leasing and Hire Purchasing Basics of Leasing and Hire purchasing Financial Evaluation.

LEASING
A lease is a contractual agreement between the lessor (owner) and the lessee (second party) for a specified asset, which can be property, a house or apartment, business or office equipment, an automobile or even a horse. The lessee receives the right to total ownership for a spelled out period of time and conditions in return for payments. Do not confuse a lease with a rental, although these words are often interchanged. A rental is for a short period of time, such as a month, where, in this case, the agreement is renewed or the terms are changed monthly. Written or implied contract by which an owner (the lessor) of a specific asset (such as a parcel of land, building, equipment, or machinery) grants a second party (the lessee) the right to its exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments. A term written lease (also called a deed) creates a leasehold interest which in itself can be traded or mortgaged, and is shown as a capital asset in a firm's books.

Types of leasing
They are 11 types of leasing. They are 1. FinancialLease 2. Operating Lease 3. Leaveraged and non-leveraged leases 4. Conveyance type lease 5. Sale and lease back 6. Fulland non-payout lease 7. Specialised service lease 8. Net andnon-net lease
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9. Sales aid lease 10. Cross border lease 11. Taxoriented lease. PARTICIPANTS OF LEASING There are number of players in the leasing industry. A brief discussion of these players is presented below: y y y y Lessors Lessees Lease brokers Lease financiers

LEASING PROCESS The process of leasing takes the following steps  Lease selection  Order and delivery  Lease contract  Lease period Services of Lessor The lessor renders the following services to the benefit of the lessee Provision of credit facility Absorbing obsolesce risks Comprehensive package

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Advantages & Dis advantages of leasing It has become increasingly more common in recent years for companies to lease equipment. Each leasing agreement needs to be read through carefully to understand the terms and conditions within said lease. Typically a lease can run anywhere from one to five years. Most equipment necessary in commercial businesses today, including technical equipment, can be leased. Some leases provide an option to then purchase the equipment at substantially less money when at the end of the term of the lease. By leasing equipment, if structured properly, you can maintain your credit availability, as the lease debt does not have to be considered a direct liability on your financial statements. This is advantageous, as it does not limit your ability to borrow from lending sources. Advantages of lease financing:
y y

It offers fixed rate financing; you pay at the same rate monthly. Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. (In addition, the lease is not connected to the success of the business. Therefore, no matter how well the business does, the lease rate never changes.)

There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.

Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it.

y y

There is typically an option to buy equipment at end of lease term. You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.

y y

Typically, it is easier to obtain lease financing than loans from commercial lenders. It offers potential tax benefits depending on how the lease is structured.

One of the reasons for the popularity of leasing is the steady stream of new and improved technology. By the end of a calendar year, much of your technology will be deemed

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"dinosaurs." The cost of continually buying new equipment to meet changing and growing business needs can be difficult for most small businesses. For this reason leasing is very advantageous. Leasing can also help you enhance your status to the lending community by improving your debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ways in which a lease can be structured. This provides greater flexibility so that the lease is structured to best accommodate the individual cash flow requirements of a specific business. For example, you may have balloon payments, step up or step down payments, deferred payments or even seasonal payments. Disadvantages of lease financing: Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type of industry and type of equipment required also need to be considered. Tax implications also need to be compared between leasing and purchasing equipment.
y

You have an obligation to continue making payments. Typically, leases may not be terminated before the original term is completed. Therefore, the renter is responsible for paying off the lease. This can pose a major financial problem for the owners of a business experiences a downturn.

You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly.

Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Failure to do so can prove costly.

FINANCIAL VALUATIONS
Lease transactions would have accounting and financial implications for both the lessors and lesses as detailed below: a. For lessee Tax shield on lease rentals is available as business expenditure Depreciation tax shield is not available
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Tax shield on lease rentals represents a cash in flow Tax shield on depreciation represents cash outflow

b. For Lessor Depreciation tax shield is available Tax shield on lease rentals is not available as business expenditure Tax shield on depreciation represents cash outflow Tax shield on lease rentals represents a cash in flow Net salvage value of an equipment is treated as a post tax cash flow

IMPLICATIONS UNDER SALES TAX

On purchase of Equipment On lease rentals Sale of asset

FINANCIAL IMPLICATIONS
The financial implication of sales tax levy will be realm of lease related cash flow and lease rentals. This is to the extent of tax impact on the lease.  Funding aspects of leasing  Deposits  Bank borrowing  Maximum limit  Nature of facility

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HIREPURCHASE
Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now found in China, Japan, Malaysia, India, Australia, and New Zealand. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own. Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract. If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the different balance and taxation treatment of hire-purchased goods beneficial to their taxable income. The need for HP is reduced when consumers have collateral or other forms of credit readily available. Standard provisions To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort: 1. a clear description of the goods 2. the cash price for the goods 3. the HP price, i.e., the total sum that must be paid to hire and then purchase the goods
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4. the deposit 5. the monthly installments (most states require that the applicable interest rate is disclosed and regulate the rates and charges that can be applied in HP transactions) and 6. a reasonably comprehensive statement of the parties' rights (sometimes including the right to cancel the agreement during a "cooling-off" period). 7. The right of the hirer to terminate the contract when he feels like doing so with a valid reason. The seller and the owner If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. Suppose that the seller makes false claims as to the quality and reliability of the goods that induce the buyer to "buy". In a conventional contract of sale, the seller will be liable to the buyer if these representations prove false. But, in this instance, the seller who makes the representation is not the owner who sells the goods to the buyer only after all the installments have been paid. To combat this, some jurisdictions, including Ireland, make the seller and the finance house jointly and severally liable to answer for breaches of the purchase contract. Implied warranties and conditions to protect the hirer The extent to which buyers are protected varies from jurisdiction to jurisdiction, but the following are usually present: 1. the hirer will be allowed to enjoy quiet possession of the goods, i.e. no-one will interfere with the hirer's possession during the term of this contract 2. the owner will be able to pass title to, or ownership of, the goods when the contract requires it

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3. that the goods are of merchantable quality and fit for their purpose, save that exclusion clauses may, to a greater or lesser extent, limit the Finance Company's liability 4. where the goods are let by reference to a description or to a sample, what is actually supplied must correspond with the description and the sample. The hirer's rights The hirer usually has the following rights: 1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate) 2. To return the goods to the owner this is subject to the payment of a penalty to

reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value 3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost. Basically hirer have following rights- 1-Rights of protection 2-Rights of notice 3-Rights of repossession 4-Rights of Statement 5-Rights of excess amount The hirer's obligations The hirer usually has the following obligations: 1. to pay the hire installments

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2. to take reasonable care of the goods (if the hirer damages the goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value) 3. to inform the owner where the goods will be kept. The owner's rights The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner: 1. to forfeit the deposit 2. to retain the installments already paid and recover the balance due 3. to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) 4. to claim damages for any loss suffered.

DIFFERENCE BETWEEN LEASE & HIRE PURCHASE A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant: "Why own a cow when the milk is so cheap? All you really need is milk and not the cow." Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the

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hire purchase agreement but the ownership or title of the same is transferred only when the last instalment is paid. The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as "an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which: 1) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments 2) The property in the goods is to pass to such person on the payment of the last of such installments, and 3) Such person has a right to terminate the agreement at any time before the property so passes". Hire purchase should be distinguished from installment sale wherein property passes to the purchaser with the payment of the first instilment. But in case of HP (ownership remains with the seller until the last installment is paid) buyer gets ownership after paying the last installment. HP also differs form leasing. Meaning A lease transaction is a commercial arrangement, whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental. While Hire purchase is a type of installment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. In lease financing no option is provided to the lessee (user) to purchase the goods. Where by in Hire purchase option is provided to the hirer (user). Lease rentals paid by the lessee are entirely revenue expenditure of the lessee. While in case of higher purchase only interest element included in the HP installments is revenue expenditure by nature. Components Lease rentals comprise of 2 elements (1) finance charge and (2) capital recovery. HP installments comprise of 3 elements (1) normal trading profit (2) finance charge and (3) recovery of cost of goods/assets.

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ADVANTAGES &DISADVANTAGES OF HIRE PURCHASE THE ADVANTAGES: of Hire Purchase Agreements to the consumers spread the cost of finance. Whilst choosing to pay in cash is preferable, this might not be possible for consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over a pre-specified period of time; Interest-free credit. Some merchants offer customers the opportunity to pay for goods and services on interest free credit. This is particularly common when making a new car purchase or on white goods during an economic downturn; Higher acceptance rates. The rate of acceptance on hire purchase agreements is higher than other forms of unsecured borrowing because the lenders have collateral; Sales. A hire purchase agreement allows a consumer to purchase sale items when they aren't in a position to pay in cash. The discounts secured will save many families money; Debt solutions. Consumers that buy on credit can pursue a debt solution, such as a debt management plan, should they experience money problems further down the line.

The disadvantages: of Hire Purchase Agreements to the consumers Personal debt. A hire purchase agreement is yet another form of personal debt it is monthly repayment commitment that needs to be paid each month; Final payment. A consumer doesn't have legitimate title to the goods until the final monthly repayment has been made; Bad credit. All hire purchase agreements will involve a credit check. Consumers that have a bad credit rating will either be turned down or will be asked to pay a high interest rate; Creditor harassment. Opting to buy on credit can create money problems should a family experience a change of personal circumstances; Repossession rights. A seller is entitled to 'snatch back' any goods when less than a third of the amount has been paid back. Should more than a third of the amount have been paid back, the seller will need a court order or for the buyer to return the item voluntarily.

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UNIT V

OTHER FUND BASED FINANCIAL SERVICES Factoring and

Consumer Credit Credit Cards Real Estate Financing Bills Discounting Forfeiting Venture Capital.

CONSUMER CREDIT
A debt that someone incurs for the purpose of purchasing a good or service. This includes purchases made on credit cards, lines of credit and some loans. Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), and education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts. For example, a mortgage for purchasing a house is not consumer credit.

Consumer debt can be defined as money, goods or services provided to an individual in lieu of payment. Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), retail loans (retail installment loans) and mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England's definition of "Lending to individuals". Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit - such as the one adopted by the Federal Reserve in the US. The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement. Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote truth in lending, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments
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made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation (Finlay 2009).

TYPESOF CONSUMER CREDIT There is several types of credit facility available to consumers. They are briefly discussed below: y y y y y Revolving credit Fixed credit Cash Loan Secured finance Unsecured finance

Sources of consumer finance The various sources of consumer finance available to people are discussed below: y y y y y y y y Traders Commercial banks Credit card Institutions NBFCs Credit unions Middlemen Other sources savings and loan associations Mutual savings banks

Modes of consumer finance Consumer finance is available through several way as shown below: y y y Open account Credit card Revolving account
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y y y

Option plan Installment account Cash loan

DEMAND FOR CONSUMER FINANCE Factors Several factors work in favor of making consumer finance popular form of finance. Following are some of the factors that have contributed to the growth of consumer finance: Increase in consumer disposal income Enhancement in the real income of consumers Convenient size of the installment payments Growth in nuclear families leading to spurt in number of house holds Lower charges Down payment and credit contract. TERMS OF FINANCE The terms and conditions for consumer financing are as follows: Eligibility Guarantee Tenure Rate of interest Other charges Credit evaluation Pricing of consumer finance Marketing

BOOM IN CONSUMER FINANCING

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At present, the fast moving Indian consumer durables industry is experiencing a boom into consumer financing for the following reasons: a. Fall in the average age of the consumer for large ticket like housing, etc b. Cheaper rate of interest on borrowings c. Flexible interest rate structure d. Increase in the start up salary levels of people e. Aspiration changes in lifestyle f. The DNK (double income no kid) factor g. The credit card advantage h. Spurt in the number of financial service institutions thus increasing competition i. j. Increasing tie- ups of manufacturers with financiers Thriving market for used cars

k. The lure of Zero interest scheme l. Attractive terms of lending by financial institutions.

BENEFITS DERIVED FROM CREDIT CARD The following persons derive benefits from credit card system. Customer Seller Wholesaler Manufacturer Commercial banks Central bank Government Economy DIFFERENCE BETWEEN CREDIT CARD AND DEBIT CARD

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Debit cards and credit cards are accepted at the same places. Debit cards all carry the symbol of one of the major types of credit cards on them, and can be used anywhere that credit cards are accepted. They both offer convenience. The fundamental difference between a debit card and a credit card account is where the cards pull the money. A debit card takes it from you banking account and a credit card charges it to your line of credit. Debit cards offer the convenience of a credit but work in a different way. Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank and it is transferred to the merchants account. It can take a few days for this to happen, and the hold may drop off before the transaction goes through. For this reason it is important to keep a running balance of your checking account to make sure you do not accidentally overdraw your account. It is possible to do that with a debit card. A credit card is a card that allows you to borrow money in small amounts at local merchants. The credit card company then charges interest on purchases, though there is generally a grace period of approximately thirty days before interest is charged In the past many people felt that you needed a credit card to complete certain transactions such as rent a car or to purchase items online. They also felt that it was safer and easier to travel with a credit card rather than carrying cash or trying to use your checkbook. However debit cards offer the same convenience without making you borrow the money to complete the transactions.

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REAL ESTATE FINANCING

A set of all financial arrangement that are made available by housing finance institutions to meet the requirements of housing called real estate financing. Housing finance institutions include banks, housing fianc companies, special housing finance institutions, etc. MODELS OF HOUSING PROJECTS The popular models of land and housing developments are as follows: Town planning schemes Development authority projects Housing board projects Cooperative society Private Real estate Public private partnership Slum board projects Government employee housing Government programmes REAL ESTATE FINANCING MAJOR ISSUES The major issues facing the Indian real estate financial sector are discussed below: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Archaic Laws Lack of clear title High stamp duty Obsolete Rental Laws Foreclosure Laws Inadequate building codes and standards Inadequate development and planning Inadequate infrastructure Recognition of housing as an industry Slum clearance and public housing Land supply
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xii. xiii.

Rent control Act Real estate Mortgages

FACTORS AFFECTING REAL ESTATE FINANCING (A) Growth Factor Budgetary support New dynamics Distinguishing service Access to resources Changing contours (b) Assistance factor Loan amount Tenure Administrative and processing costs Pre- payment charges Services Value addition Sources of finance like HFCs and Banks EMI calculation methods REAL ESTATE FINANCE INSTITUTIONS A number of institutions exist in the real estate financing service sector. A brief account of the more dominant of them is presented below: The National Housing Bank The National Housing Bank has been set up under the National Housing Bank Act of 1987, which was passed on 9th July, 1988. It is wholly owned by the Reserve bank of India and was established to encourage housing- finance institutions and provide them with financial support.

The National Housing Bank also provides several other channels of support for housing-finance
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institutions, by dint of the authority invested by the National Housing Bank Act. For example, the National Housing Bank can give directions to the housing finance institutions to ensure that their growth takes along appropriate tracks. Besides, the National Housing Bank also makes advances and gives loans to scheduled banks and formulates schemes that lead to the proper use of resources for housing projects.

The various objectives of the National housing bank are:

y

To encourage healthy system for housing finance and which meets the needs of all the segments of the society

y y y

To encourage housing finance institutions To gather resources and distribute them for housing projects To make affordable the credit taken for housing

The places where National housing bank have offices are:

y y y

Head office in New Delhi Regional office in Hyderabad Regional office in Mumbai The National Bank for Housing gives registration certification to companies so that they can carry out the business of financing houses. The National Housing Bank also has a training division, besides its lending operations. This division trains officials who are working in the housing finance and housing areas in order to improve their management capabilities. The National housing bank has helped enormously in the growth of the housing sector in India. It needs to work in close coordination with the Reserve Bank of India and the Indian government to ensure the upkeep and feasibility of housing projects in India.

HDFC (HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED)

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BILLS DISCOUNTING
Bills of exchange that are used in the course of normal trade and commercial activities are called commercial bills. Bill financing is an ideal mode of short term financing available to business concerns. It imparts flexibility to the money market, besides providing liquidity within the banking system. It also contributes towards effectiveness of the monetary policy of the central bank of a country.

According to the Indian Negotiable Instruments Act 1881, Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only, or to the order of a certain person, or to the bearer of that instrument. the bill of exchange is essentially a trade related instrument, and it is used for financing genuine transactions.

BILL FINANCING A method of financing trade related activities through bills of exchange is known as bill financing. It is also called bill discounting. Bills financing involve parties such as the drawer (seller), the buyer (buyer and the financier (banker) Features Commercial bills are considered to be the cornerstone of a well developed and active money market. Following are the salient features of a commercial bill of exchange: y y y y Written instrument Negotiable instrument Making a bill of exchange Discounting a bill

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COMMERCIAL BILL DISCOUNTING / FINANCING When the seller deposits genuine commercial bills and obtains financial accommodation from a bank or financial institution. It is known as bill discounting. The seller instead of discounting the bill immediately may choose to wait till the date of maturity. Commercially, the option of discounting will be advantageous because the seller obtains ready cash which can be used for meeting immediate business requirements. However, in the process, the seller may lose a little by way of discount charged by the discounting banker. Features Following are the salient features of bill discounting financing: Discount charge Maturity Ready finance Discounting and purchasing Advantages The various benefits of bill discounting financing are as follows: Easy access Safety of funds Certainty of payment Profitability Smooth liquidity Higher yield Ideal investment Facility of refinancing Relative stability of prices Precautions by banker In order to reap the maximum benefits, a banker is expected to take the following precautions while discounting and purchasing bills of a customer:
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Credit standing Complete bills Genuine trade bills Proper documentation Credit appraisal Safeguarding on bills Goods Noting and protesting

STEPS IN DISCOUNTING AND PURCHASING Following the steps are involved in the discounting and purchasing of commercial bills of exchange:  Examination of bill  Crediting customer account  Control over accounts  Sending bills for collection  Dishonor BILLS SYSTEM There are essentially two systems of bills, the drawer bill system and the drawee bill system which are explained below:  Drawer bills system  Drawee bills system Acceptance credit, bills discounting system - assured payment, buying advantage, safety of funds

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Comparison between Bill Discounting and Factoring. Bill Discounting 1. Individual Transaction 2. Each bill has to be individually accepted by the drawee which takes time. 3. Stamp duty is charged on certain usance bills together with bank charges. It proves very expensive. Factoring 1. Whole turnover basis. This also gives the client the liberty to draw desired finance only. 2. A one time notification is taken from the customer at the commencement of the facility. 3. No stamp duty is charged on the invoices. No charges other than the usual finance and service charge. 4. No such paperwork is involved. 4. More paperwork is involved. 5. Grace period for payment is usually 3 days. 6. Original documents like MTR, RR, and Bill of Lading are to be submitted. 7. Charges are normally up front. 7. No upfront charges. Finance charges are levied on only the amount of money withdrawn. 5. Grace periods are far more generous. 6. Only copies of such documents are necessary.

Factoring is

a financial

transaction whereby

business

sells

its accounts

receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset)[1], not the firms credit worthiness. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

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It is different from the forfaiting in the sense that forfaiting is a transaction based operation while factoring is a firm-based operation - meaning, in factoring, a firm sells all its receivables while in forfaiting, the firm sells one of its transactions. Factoring is a word often misused synonymously with invoice discounting - factoring is the sale of receivables whereas invoice discounting is borrowing where the receivable is used as collateral. The three parties directly involved are: the one who sells the receivable, the debtor, and the factor. Thereceivable is essentially a financial asset associated with the debtors liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks associated with the receivables.[2]Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. Critical to the factoring transaction, the seller should never collect the payments made by the account debtor, otherwise the seller could potentially risk further advances from the factor. There are three principal parts to the factoring transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller upon submission, b.) the reserve, the remainder of the total invoice amount held until the payment by the account debtor is made and c.) the fee, the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller. Sometimes the factor charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment. American Accounting considers the receivables sold when the buyer has "no recourse", or when the financial is substantially a transfer of all of the rights associated with the receivables and the seller's monetary Liability under any "recourse" provision is well established at the time of the
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sale.[5] Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.

Reason Factoring is a method used by a firm to obtain Cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts. The use of Factoring to obtain the Cash needed to accommodate the firms immediate Cash needs will allow the firm to maintain a smaller ongoing Cash Balance. By reducing the size of its Cash Balances, more money is made available for investment in the firms growth. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." Accordingly, Factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with Factoring the Receivables. Therefore, the trade off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of Cash the firm holds on hand. Many businesses have Cash Flow that varies. A business might have a relatively large Cash Flow in one period, and might have a relatively small Cash Flow in another period. Because of this, firms find it necessary to both maintain a Cash Balance on hand, and to use such methods as Factoring, in order to enable them to cover their Short Term cash needs in those periods in which these needs exceed the Cash Flow. Each business must then decide how much it wants to depend on Factoring to cover short falls in Cash, and how large a Cash Balance it wants to maintain in order to ensure it has enough Cash on hand during periods of low Cash Flow. Generally, the variability in the cash flow will determine the size of the Cash Balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as Factoring. Cash flow variability is directly related to 2 factors: 1. The extent Cash Flow can change, 2. The length of time Cash Flow can remain at a below average level.

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If cash flow can decrease drastically, the business will find it needs large amounts of cash from either existing Cash Balances or from a Factor to cover its obligations during this period of time. Likewise, the longer a relatively low cash flow can last, the more cash is needed from another source (Cash Balances or a Factor) to cover its obligations during this time. As indicated, the business must balance the opportunity cost of losing a return on the Cash that it could otherwise invest, against the costs associated with the use of Factoring. The Cash Balance a business holds is essentially a Demand for Transactions Money. As stated, the size of the Cash Balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a Factor to finance its short term cash needs. The problem faced by the business in deciding the size of the Cash Balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. In this situation, the business must balance the cost of obtaining cash proceeds from a Factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business The solution to the problem is:

where
 CB is the Cash Balance  nCF is the average Negative Cash Flow in a given period  i is the [Discount Rate] that cover the Factoring Costs  r is the rate of return on the firms assets
[8]

Differences from bank loans Factors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the borrower, not that of its customers. While bank lending is cheaper than factoring, the key terms and conditions under which the small firm must operate differ significantly.

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From a combined cost and availability of funds and services perspective, factoring creates wealth for some but not all small businesses. For small businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firms choice is between seeking venture capital (i.e., equity) or the lower cost of selling invoices to finance their growth. The latter is also easier to access and can be obtained in a matter of a week or two, whereas securing funds from venture capitalists can typically take up to six months. Factoring is also used as bridge financing while the firm pursues venture capital and in conjunction with venture capital to provide a lower average cost of funds than equity financing alone. Firms can also combine the three types of financing, angel/venture, factoring and bank line of credit to further reduce their total cost of funds whilst at the same time improving cash flow. As with any technique, factoring solves some problems but not all. Businesses with a small spread between the revenue from a sale and the cost of a sale, should limit their use of factoring to sales above their breakeven sales level where the revenue less the direct cost of the sale plus the cost of factoring is positive. While factoring is an attractive alternative to raising equity for small innovative fastgrowing firms, the same financial technique can be used to turn around a fundamentally good business whose management has encountered a perfect storm or made significant business mistakes which have made it impossible for the firm to work within the constraints of their bank covenants. The value of using factoring for this purpose is that it provides management time to implement the changes required to turn the business around. The firm is paying to have the option of a future the owners control. The association of factoring with troubled situations accounts for the half truth of it being labeled 'last resort' financing. However, use of the technique when there is only a modest spread between the revenue from a sale and its cost is not advisable for turnarounds. Nor are turnarounds usually able to recreate wealth for the owners in this situation. Large firms use the technique without any negative connotations to show cash on their balance sheet rather than an account receivable entry, money owed from their customers, particularly when these show payments being due for extended periods of time beyond the North American norm of 60 days or less.
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Invoice sellers The invoice seller presents recently generated invoices to the factor in exchange for an amount that is less than the value of the invoice(s) by an agreed upon discount and a reserve. A reserve is a provision to cover short payments, payment of less than the full amount of the invoice by the debtor, or a payment received later than expected. The result is an initial payment followed by a second one equal to the amount of the reserve if the invoice is paid in full and on time or a credit to the account of the seller with the factor. In an ongoing relationship the invoice seller will get their funds one or two days after the factor receives the invoices. Astute invoice sellers can use a combination of techniques to cover the range of 1% to 5% plus cost of factoring for invoices paid within 50 to 60 days or more. In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. In effect the customer is willing to pay the supplier to be their bank and reduce the equity the customer needs to run their business. To counter this it is a widespread practice to offer a prompt payment discount on the invoice. This is commonly set out on an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be relied upon to systematically take the discount, particularly for low value invoices - under $100,000 - so cash inflow estimates are highly variable and thus not a reliable basis upon which to make commitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10% (depending on the industry standard) in return for prompt payment. Large firms also use the technique of factoring at the end of reporting periods to dress their balance sheet by showing cash instead of accounts receivable. There are a number of varieties of factoring arrangements offered to invoice sellers depending upon their specific requirements. The basic ones are described under the heading Factors below. Factors When initially contacted by a prospective invoice seller, the factor first establishes whether or not a basic condition exists, does the potential debtor(s) have a history of paying their bills on time? That is, are they creditworthy? (A factor may actually obtain insurance against the debtors becoming bankrupt and thus the invoice not being paid.) The factor is willing to consider purchasing invoices from all the invoice sellers creditworthy debtors. The classic arrangement which suits most small firms, particularly new ones, is full service
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factoring where the debtor is notified to pay the factor (notification) who also takes responsibility for collection of payments from the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent, non recourse factoring. This traditional method of factoring puts the risk of non-payment fully on the factor. If the debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with and the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process because the factor assumes a greater risk and provides credit checking and payment collection services as part of the overall package. For firms with formal management structures such as a Board of Directors (with outside members), and a Controller (with a professional designation), debtors may not be notified (i.e., nonnotification factoring). The invoice seller may not retain the credit control function. If they do then it is likely that the factor will insist on recourse against the seller if the invoice is not paid after an agreed upon elapse of time, typically 60 or 90 days. In the event of nonpayment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is typically the lowest cost for the seller because they retain the bad debt risk, which makes the arrangement less risky for the factor. Despite the fact that most large organizations have in place processes to deal with suppliers who use third party financing arrangements incorporating direct contact with them, many entrepreneurs remain very concerned about notification of their clients. It is a part of the invoice selling process that benefits from salesmanship on the part of the factor and their client in its conduct. Even so, in some industries there is a perception that a business that factors its debts is in financial distress. There are two methods of factoring: recourse and non-recourse. Under recourse factoring, the client is not protected against the risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse factoring i.e., full amount of invoice is paid to the client in the event of the debt becoming bad. Invoice payers (debtors) Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor following receipt of
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notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds. Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer/debtors processes. Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed however, it is a matter of indifference who is paid. For example, General Electric has clear processes to be followed which distinguish between their work and payment sensitivities. Contracts direct with US Government require an Assignment of Claims which is an amendment to the contract allowing for payments to third parties (factors). Risks The most important risks of a factor are:
 Counter party credit risk related to clients and risk covered debtors. Risk covered debtors

can be reinsured, which limit the risks of a factor. Trade receivables are a fairly low risk asset due to their short duration.
 External fraud by clients: fake invoicing, mis-directed payments, pre-invoicing, not

assigned credit notes, etc. A fraud insurance policy and subjecting the client to audit could limit the risks.
 Legal, compliance and tax risks: large number of applicable laws and regulations in

different countries.
 Operational risks, such as contractual disputes.  Uniform Commercial Code (UCC-1) securing rights to assets.  IRS liens associated with payroll taxes etc.  ICT risks: complicated, integrated factoring system, extensive data exchange with client.

Characteristics The characteristics of Factoring are as follows:

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 The nature  The form  The assignment  Fiduciary position  Professionalism  Credit realizations  Less dependence  Recourse Factoring  Compensation  Factoring and off balance sheet financing Types of Factoring Besides the normal function of collection of receivables and sales ledger administration factors take different forms, depending upon the type of special features attached to them. Following are the important forms of factoring arrangements that are currently in vogue: Domestic Disclosed un disclosed Discount Export Cross border Modus operandi export, Import, delivery, Credit Information, payment Full service factoring With recourse factoring Without recourse Advance and maturity factoring Bank participation Collection / maturing Advantages & Dis advantages of Factoring Factoring, as an innovative financial service, commands the following advantages and dis advantages:
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i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv.

Cost savings Leverage Enhanced return Liquidity Credit discipline Cash flows Credit certification Prompt payment Information flow Infrastructure Better linkages Boon to SSI sector Efficient production Reduced risk Export promotion FACTORING PLAYERS The players of factoring are: The buyer The seller The factor

FUNCTIONS OF A FACTOR The various functions that are performed by a factor are described below: Sales ledger administration Provision of collection facility Financing trade debts Credit control and protection Advisory services Factoring cost commission, interest charges
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FORFEITING
In trade finance, forfeiting involves the purchasing of receivables from exporters. The forfeiter takes on all risks involved with the receivables. It is different from the factoring operation in the sense that forfeiting is a transaction-based operation while factoring is a firm-based operation: In factoring, a firm sells all its receivables while in forfeiting, the firm sells one of its transactions. The characteristics of a forfeiting transaction are:
    

Credit is extended to the exporter for a period ranging between 180 days to seven years. Minimum bill size is normally US$ 250,000, although $500,000 is preferred. The payment is normally receivable in any major convertible currency. A letter of credit or a guarantee is made by a bank, usually in the importer's country. The contract can be for either goods or for services.

At its simplest the receivables should be evidenced by a promissory note, a bill of exchange, a deferred-payment letter of credit, or a letter of guarantee. Three elements relate to the pricing of a forfeiting transaction:
 

Discount rate, the interest element, usually quoted as a margin over LIBOR. Days of grace, added to the actual number of days until maturity for the purpose of covering the number of days normally experienced in the transfer of payment, applicable to the country of risk.

Commitment fee, applied from the date the forfeiter is committed to undertake the financing, until the date of discounting.

The benefits to the exporter from forfeiting include eliminating political, transfer, and commercial risks and improving cash flows. The benefit to the forfeiter is the extra margin on the loan to the exporter.

The purchasing of an exporter's receivables (the amount importers owe the exporter) at a discount by paying cash. The forfeiter, the purchaser of the receivables, becomes the entity to whom the importer is obliged to pay its debt. 161

By purchasing these receivables - which are usually guaranteed by the importer's bank - the forfeiter frees the exporter from credit and from the risk of not receiving payment from the importer who purchased the goods on credit. While giving the exporter a cash payment, forfeiting allows the importer to buy goods for which it cannot immediately pay in full. The receivables, becoming a form of debt instrument that can be sold on the secondary market, are represented by bills of exchange or promissory notes, which are unconditional and easily transferred debt instruments.

Modus operandi Following the salient steps in forfeiting: i. ii. iii. iv. v. vi.
y y

Commercial contract Transaction Notes acceptance Factoring contract Sale of notes Payment

CHARACTERISTICS OF FORFAITING It converts deferred payment exports into a cash transaction, improving liquidity and cash flow.

It absolves exporter from cross-border political or commercial risk associated with export receivable.

It finances upto 100% of the export value as compared to 80-85% financing available under conventional export credit.

It acts as an additional source of funding and hence does not have any impact on the exporters borrowing limits. It does not reflect as debt in exporters balance sheet.

It provides fixed rate finance and hence automatically hedges against interest and exchange rate fluctuation arising from deferred export credit.

y y

Exporter is freed from credit administration. It enables exporter to extend credit to the importer for more than 6 months (say upto 1-2 years) which under normal condition is not possible and thus can act as a marketing edge.
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It saves on insurance costs as the need for export credit insurance viz. ECGC is eliminated.

Exporters are liquidating pre-shipment finance from export proceeds received from Forfaiting Agency.

Advantages and Disadvantages of forfeiting: Advantages to the forfaiter 1. Again, documentation is simple and quickly compiled: there are no 30-page loan agreements as in commercial lending. 2. The assets purchased are easily transferable as to title so that trading them in the secondary market is possible. 3. Although the higher margins associated with a forfeit finance are a disadvantage to the exporter and importer, they are naturally attractive to the forfaiter. Disadvantages to the forfaiter 1. The forfaiter has no recourse to anyone else in the event of a default in repayment. 2. As is the case for the exporter, the forfaiter must know the laws and regulations governing the validity of bills of exchange, promissory notes, guarantees or avails in the various countries with whom his exporter clients will be conducting business. Chapter to consider the legal position of the forfaiter who fails to obtain valid bills or notes validly guaranteed or availed. 3. The forfaiter also bears the responsibility of checking the creditworthiness of the guarantor. 4. The forfaiter cannot accelerate payment of bills or notes which have yet to mature merely because a bill or note of the series which has matured has not been paid. Such acceleration clauses are a standard feature of ordinary commercial loan agreements, but the legal position of bills and notes virtually precludes similar treatment for them.

5. The forfeiter bears all funding and interest-rate risks exist during the opinion and
commitment periods as well as during the periods to maturity of the bills or notes. This is

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far more significant an exposure than is the case in commercial lending because most commercial lending today bears a variable interest rate.

Factoring Vs.Forfaiting
The processes of factoring and forfaiting are similar in some ways. But there are also certain differences between the two. Let us take a look at these differences: Basis of difference Extent of Finance Credit

Factoring Usually 80% of the value of the invoice is considered for advance Factor does the credit rating of the counterparty

Forfaiting

100% Financing The forfaiting bank relies on the credibility of the availing bank No services are provided Advances are generally medium term

worthiness in case of a non-recourse factoring transaction Services Provided Maturity Day-to-day administration of sales and other allied services are provided Advances are short-term in nature

VENTURE CAPITAL
Venture capital (also known as VC or Venture) is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. To put it simply, an investment firm will give money to a growing company. The growing company will then use this money to advertise, do research, build infrastructure, develop products etc. The investment firm is called a

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venture capital firm, and the money that it gives is called venture capital. The venture capital firm makes money by owning a stake in the firm it invests in. The firms that a venture capital firm will invest in usually have a novel technology or business model. Venture capital investments are generally made in cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and IT (Information Technology). Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy out private equity which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital is also associated with job creation, the knowledge economy and used as a proxy measure of innovation within an economic sector or geography.

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In addition to angel investing and other seed funding options, Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Young companies wishing to raise venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, a welldeveloped business model, and an impressive management team. VCs typically reject 98% of opportunities presented to them reflecting the rarity of this combination.

Venture capital firms and funds

Structure of Venture Capital Firms Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability
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companies, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, universityfinancial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds. Types of Venture Capital Firms Depending on your business type, the venture capital firm you approach will differ.[17] For instance, if you're a startup internet company, funding requests from a more manufacturingfocused firm will not be effective. Doing some initial research on which firms to approach will save time and effort. When approaching a VC firm, consider their portfolio:
     

Business Cycle: Do they invest in budding or established businesses? Industry: What is their industry focus? Investment: Is their typical investment sufficient for your needs? Location: Are they regional, national or international? Return: What is their expected return on investment? Involvement: What is their involvement level?

Roles within Venture Capital Firms Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience. Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

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Venture partners - Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved.

Entrepreneur-in-residence (EIR) - EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR's move on to executive positions within a portfolio company.

Principal - This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as banking or management consulting.

Associate - This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for 12 years in another field such as investment banking or management consulting.

Structure of the funds Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product. In such a fund, the investors have a fixed commitment to the fund that is initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a Limited Partner (or investor) that fails to participate in a capital call.

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It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison.. Compensation Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement):


Management fees an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations.[19] In a typical venture capital fund, the general partners receive an annual management fee equal to up to 2% of the committed capital.

Carried interest - a share of the profits of the fund (typically 20%), paid to the private equity funds management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors. Strong Limited Partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 25-30% on their funds.

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