CURRICULUAM & SYLLABI

BA9258 MERCHANT BANKING AND FINANCIAL SERVICES

UNIT – I MERCHANT BANKING 5Introduction – 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 10Leasing and Hire Purchasing – Basics of Leasing and Hire purchasing – Financial Evaluation.

UNIT – V OTHER FUND BASED FINANCIAL SERVICES 8Consumer Credit – Credit Cards – Real Estate Financing – Bills Discounting – Factoring and Forfeiting – Venture Capital.

TEXT BOOKS

1. M.Y.Khan, Financial Services, Tata McGraw-Hill, 11th Edition, 2008

2. Nalini Prava Tripathy, Financial Services, PHI Learning, 2008.

REFERENCES:

1. Machiraju, Indian Financial System, Vikas Publishing House, 2nd Edition, 2002.

2. 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.

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FINANCIAL INTERMEDIARIES

FINANCIAL MARKETS

BORROWERS

(Investable funds)SAVER

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)

Currency and money

Banking systems

Small savings

Insurance funds

Stock markets

Fixed deposits

Govt. securities

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Second phase (organization 1951-1990)

Financial development

Equity culture

Secondary markets

Third phase (policies &Reforms 1991 to…..)

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:

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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. Financial assets

ii. Financial intermediaries

iii. Financial markets

iv. Financial rates of return

v. Financial instruments

vi. Financial guarantee market

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FINANCIAL INTERMEDIAR

Y

FINANCIAL MARKETS

Financial Rate of Return

FINANCIAL INSTRUMENT

S

FINANCIAL ASSETS

FINANCIAL GUARANTEE

MARKET

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.

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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

borrower’s 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.

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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

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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:

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:

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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. Primary market or New issue market

ii. Secondary market or Stock exchange.

Primary Market or New Issue market:

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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:

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 pre- emptive 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 (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

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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:

Term loans market

Mortgages market

Financial guarantees market.

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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 is imperative that one should have some basic

knowledge about the rate of return on financial assets also.

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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.

The interest rates on 364 days treasury bills are determined by auctions and

they are expected to reflect the free market rates.

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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.

Secondary securities

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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.

Some securities enjoy tax status, i.e., investments in these securities

are exempted from Income Tax, Wealth Tax, etc., subject to certain

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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 creditor’s 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.

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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 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.

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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 ECGC-factored export receivables could become the most preferred

export advance portfolio 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

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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 bank’s role lies in encouraging exporter-customers to explore the

possibility of availing of the factoring facility from ECGC. Factoring, being a

high-risk premium 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 exporter’s 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

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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.

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.

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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.

ECGC’s 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 buyer’s failure to accept the goods,

subject to certain conditions/bank’s 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 buyer’s country; new

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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 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.

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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 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 today’s argot

25

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 India’s 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

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 Co-operative 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

26

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 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:

27

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 co-operative 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 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

28

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 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;

29

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 pay-out method).

(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

30

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 half-year 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 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

31

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 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

32

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.

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

33

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

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.

34

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.”

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.

35

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 1980’s 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.

Category Activities & Responsibilities

FIRST (2.5

lakhs paid

annually for

Issue management

Preparation of prospectus

Financial structure

36

first 2 years

commence

from the date

of initial

registration.

1- lakh to

keep the

registration

in force)

Tie –up of financiers

Financial allotment and refund of the subscription

amount

Manager, consultant to an issuer or advisor

Portfolio manager

Underwriter

SECOND (1.5

lakh paid

annually for

first 2 years

commenceme

nt from the

date of initial

registration.5

0000 to keep

the

registration

in force)

Co –manager

Advisor

Consultant

Underwriter

Portfolio manager

Capacities & concerned with an issue

THIRD (1.0

lakhs paid

annually for

first 2 years

commenceme

nt from the

date of initial

registration.2

Underwriter

Advisor

consultant

37

5000 to keep

the

registration

in force)

FOURTH

(5000 paid

annually for

first 2 years

commenceme

nt 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.

SERVICES RENDERED BY MERCHANT BANKER

38

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

FUNCTIONS OF MERCHANT BANKING

Merchant banks in India carry out the following functions:

39

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.

40

MERCHANT BANKERS

LEGAL & REGULATORY FRAMEWORK – RELEVANT

PROVISIONS: COMPANIES ACT, SCRA, SEBIGUIDELINES,

FEMA

41

PUBLIC SECTOR PRIVATE SECTOR INTERNATIONAL BANKS

10

CO.BANKS

24

FIs

6

SIs

4BANKS

10

FINANCE &

INVESTMENT

231

LEASING

INSTITUTIONAL STRUCTURE OF MERCHANT BANKERS

(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.

42

The objective of the SCRA is to present malpractice in securities transactions

by regulating the business. The act specifies the following instruments as

“securities”

Shares, scrip, stocks bonds, debentures stock or other marketable

securities like a nature in or of any incorporated company or other

body corporate

Government securities

Rights or interests in securities

Derivatives, units or any other instrument issued by collective

investment scheme

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 investor’s rights, prevents malpractices in security trading

43

and promotes healthy growth of the capital markets. It was granted statutory

status in 1992 under the SEBI Act. It has the full 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

44

Enquiry

Action by SEBI

(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;

45

(b) "Appellate Tribunal" means the Appellate Tribunal for Foreign Exchange

established under section 18;

(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 sub-section (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:-

46

(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,

(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 sub-section (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, traveller’s cheques, letters of credit or bills of exchange,

expressed or drawn in Indian currency but payable in any foreign currency,

(iii) Drafts, traveller’s cheques, letters of credit or bills of exchange drawn by

banks, institutions or persons outside India, but payable in Indian currency;

47

(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;

(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,

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(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—

(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,

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(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—

(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;

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(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;

(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;

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(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.

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:

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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;

(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.

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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;

(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.

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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

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

RELATION WITH STOCK EXCHANGES

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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-the-

counter. This is the usual way that derivatives and bonds are traded.

Increasingly, stock exchanges are part of a global market for securities.

ROLE OF STOCK EXCHANGES

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

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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 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

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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

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housing estates by 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. Common, trading platform

ii. Mobilization of savings

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iii. Safety to investors

iv. Distribution of new securities

v. Ready market

vi. Liquidity

vii. Capital formation

viii. Speculative trading

ix. Sound price setting

x. Economic barometer

xi. Dissemination of market data

xii. Perfect market conditions

xiii. Seasoning of securities

xiv. Efficient channeling of savings

xv. Optimal resource allocation

xvi. Platform for public debt

xvii. Clearing house of business information

xviii. Evaluation of securities

xix. True market mechanism

xx. Investor education

xxi. Fair price discrimination

xxii. Industrial financing

xxiii. 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:

Recognition of stock exchange

Listing of securities

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Registration of brokers

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 OTCEI’s

network of members and dealers spanning the length and breadth of India.

OTCEI was promoted by a consortium of financial institutions including:

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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 scrip’s listed on OTCEI.

3. Transparency of Transactions: The investor can view the

quotations on the computer screen at the dealer’s 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.

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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:

Small and medium closely-held companies can go public.

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:

The OTCEI trading counters are easily accessible by any investors.

The OTCEI provides greater confidence to investors because of

complete transparency in deals.

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.

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.

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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 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).

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 registrar’s 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 scrip’s 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

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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 investor’s 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).

“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:

Fast way to get money, as the company does not have to wait for 3-4

months like in regular public issue.

No worry about under-subscription of the issue.

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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:

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 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.

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

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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

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

depicted in

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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

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

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Project selection

Project analysis

Financial Appraisal

Economic Apprisal

Project apprisal

Technical 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 know-

how 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

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.

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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

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.

Cost principle

Control principle

Return principle

Flexibility principle

Timing principle

FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS

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The following factors significantly influence the capital structure decisions of a firm:

Economy characteristics

Industry characteristics

Company characteristics

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:

Qualitative factors

Quantitative factors

The CCI MODEL

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Economic

Business activity stock marketTaxationRegulationsCredit PolicyFinancial Institutions

Industry

Cyclical FluctuationsLevel Of competition

Lifecycle of industry

Company

size of BusinessAge of companyForm Of OrganizationStability of earningsCredit StandingManagement PhilosophyAsset Structure

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.

Safety Net Scheme

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:

Appointment of book – runners

Drafting prospectus

Circulating draft prospectus

Maintaining offer records

Intimation about aggregate orders

Bid analysis

Mandatory underwriting

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Filling with ROC

Bank accounts

Collection of completed applications

Allotment of securities

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:

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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:

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.

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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

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:

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

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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.

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

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Red – herring prospectus

Information Memorandum

Issue of securities

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.

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

Maximum Rate of Underwriting Commission

Nature of Issue On amounts developing on underwriters On amounts subscribed by public

Shares(Equity &

Preference) and

Debentures

2.5% 2.5%

Issue amount up

to Rs.5 lakhs

2.5% 1.5%

Issue amount

exceeding Rs. 5

lakhs

2.0% 1.0%

TYPES OF UNDERWRITERS

A brief description of types of underwriting is outlined below.

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underwriting

Institutional underwriters

IDBIICICI

SBI Capital Market

Non - Institutional underwritrs

Any NBFC

others

Firm Underwriting

SubunderwritingJoint underwritingSyndicateunderwr

iting

BENEFITS / FUNCTIONS OF UNDERWRITING MECHANISMS

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

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Corporate Entity

Under writing agreement

Purchase of securities

Under writer

Sale of securities

Public

Stock Market

UNDERWRITING AGENCIES

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

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BROKERS TO THE ISSUE

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

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OFFER FOR SALE

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.

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GREEN – SHOE OPTION

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

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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.

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: 

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

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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

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

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shares. The company took this step because the demand surpassed their share supply by

two-times the initial amount. 

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.

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E- IPO

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.

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.

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.

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

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)

  Tourism Finance Corporation of India (TFCI)

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  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 12-

fold 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:

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:

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.

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:

Indian Mutual fund

Stock trading

Investment advise

De mat account

Tax services

PAN card assistance

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POST – ISSUE ACTIVITIES

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.

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:

Merger through absorption

Merger through consolidation

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

TAKE OVER

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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

PREY FOR TAKEOVERS

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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

Tender offer

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Diversification

ARGUMENTS IN FAVOUR OF M&A

Following are the arguments advanced in favour of M&A

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

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.

RATIONAL MERGERS IN INDIA

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Following are the underlying factors behind the wave of mergers and acquisitions

happening in the Indian companies world in recent times:

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:

Notification

Acquisition limit

Offer to public

Offer price

Disclosure

Offer document

PORTFOLIO MANAGEMENT SERVICES

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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. Risk diversification

ii. Efficient portfolio

iii. Asset allocation

iv. Beta estimation

v. Rebalancing portfolios

SERVICES AND STRATEGIES

A portfolio manager may adopt any of the following strategies as part of an efficient

portfolio management

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:

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 0.5-

1.5percent 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):

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, best-

efforts syndication, and a club deal. The European leveraged syndicated loan market almost

exclusively consists of underwritten deals, whereas the U.S. market contains mostly best-

efforts.

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

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forced 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

flex-language 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

Ascertaining promoter details

Ascertainment of cost detail

Comparison of cost details

Identification of funding sources

Ascertainment of loan details

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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.

Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter

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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:

Professional management and research to select quality securities

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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

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:

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"

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.

Disadvantages of mutual funds

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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.

Income stock

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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:

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:

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.

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.

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.

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

Consumer Credit – Credit Cards – Real Estate Financing – Bills Discounting – Factoring and

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:

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:

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:

Open account

Credit card

Revolving account

Option plan

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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

At present, the fast moving Indian consumer durables industry is experiencing a boom into

consumer financing for the following reasons:

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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. Increasing tie- ups of manufacturers with financiers

j. 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

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

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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.

REAL ESTATE FINANCING

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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 fiancé 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. Archaic Laws

ii. Lack of clear title

iii. High stamp duty

iv. Obsolete Rental Laws

v. Foreclosure Laws

vi. Inadequate building codes and standards

vii. Inadequate development and planning

viii. Inadequate infrastructure

ix. Recognition of housing as an industry

x. Slum clearance and public housing

xi. Land supply

xii. Rent control Act

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xiii. 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 HFC’s 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

institutions, by dint of the authority invested by the National Housing Bank Act. For example,

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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:

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

segments of the society

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:

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)

BILLS DISCOUNTING

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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:

Written instrument

Negotiable instrument

Making a bill of exchange

Discounting a bill

COMMERCIAL BILL DISCOUNTING / FINANCING

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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:

Credit standing

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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 Factoring

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.

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.    

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.

5. Grace periods are far more generous.

6. Only copies of such documents are

necessary.

7. No upfront charges. Finance charges are

levied on only the amount of money

withdrawn. 

Factoring is a financial transaction whereby a 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 firm’s 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 debtor’s 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

firm’s 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

firm’s 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 firm’s 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 firm’s 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 fast-

growing 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 debtor’s becoming bankrupt and thus the invoice not being paid.) The factor is

willing to consider purchasing invoices from all the invoice seller’s 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., non-

notification 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 non-

payment 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/debtor’s 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. Cost savings

ii. Leverage

iii. Enhanced return

iv. Liquidity

v. Credit discipline

vi. Cash flows

vii. Credit certification

viii. Prompt payment

ix. Information flow

x. Infrastructure

xi. Better linkages

xii. Boon to SSI sector

xiii. Efficient production

xiv. Reduced risk

xv. 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.

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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. Commercial contract

ii. Transaction

iii. Notes acceptance

iv. Factoring contract

v. Sale of notes

vi. 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

exporter’s borrowing limits. It does not reflect as debt in exporter’s balance sheet.

It provides fixed rate finance and hence automatically hedges against interest and

exchange rate fluctuation arising from deferred export credit.

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

differenceFactoring Forfaiting

Extent of

Finance

Usually 80% of the value of the invoice is

considered for advance100% Financing

Credit

worthiness

Factor does the credit rating of the counterparty

in case of a non-recourse factoring transaction

The forfaiting bank relies on the

credibility of the availing bank

Services

Provided

Day-to-day administration of sales and other

allied services are providedNo services are provided

Maturity Advances are short-term in natureAdvances are generally medium

term

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

venture capital firm, and the money that it gives is called venture capital. The venture capital

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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 well-

developed 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 manufacturing-

focused 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 1–2 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 fund’s 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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