management of financial services..kapil

8/3/2019 Management of Financial Services..Kapil

1/86

IT - Iion Support System : Overview, components and classification, steps inructing a dss, role in business, group decision support system.

IT - IImation system for strategic advantage, strategic role for information system,ing business barriers, reengineering business process, improving businessies.

IT - IIImation system analysis and design, information SDLC, hardware and softwaresition, system testing, documentation and its tools, conversion methods.

IT - IVeting IS, Manufacturing IS, Accounting IS, Financial IS.Ard SEMESTER, M.D.U., ROHTAKLLABUSnal Marks : 70: 3 hrs.al Marks : 30

AN AGEM ENT OF FINANC IAL SERVICES


2/86

NIT I AN AGEM ENT OF FINANC IAL SERVICESANCE : SPECIALIZ ATION PAPERS

e Financial Services. Explain its nature and scope.Introduction : Financial services are an important component of the financial system.are four components of financial system.

am : Financial Systeming of Financial Services : The term financial services is broadly understood tode banking, insurance, housing finance, stock broking and investment services. Theces include fund-based as well as fee-based services. Financial services cater to the

of financial institutions, financial markets and financial instruments geared to servedual and institutional investors.cial institutions and financial markets facilitate functioning of the financial systemgh financial instruments. In order to fulfil the tasks assigned, they required a number of ces of financial nature. Financial services are, therefore regarded as the fourth element

financial system. An orderly functioning of the financial system depends to a great deale range of financial services extended by the provider, and their efficiency andiveness.cial services not only to help to raise the required funds but also ensure their efficient

yment. They assist in deciding the financial mix and extend their services up to theof servicing of lenders. In order to ensure an efficient management of funds, servicesas:cialcescial Institutionscial Systemcial Marketcialments


3/86

NAGEMENT OF FINANCIAL SERVICES

Discounting

ring of Debtors

ng of short term funds in the money market

itisation of debts

es of Financial Services :

Exchanges

alised and General Institutions

Banking Finance Companies

diaries of financial Institutions

Insurance Companies.e of Financial Services :cial services differ in nature from other services. Some of the salient features of

cial services are discussed as follows:

mer-Oriented : Financial services are customer-oriented. The providers of services study the needs on the customers in detail to suggest financialgies which give due regard to costs, liquidity and maturity considerations. Theders of financial services remain in constant touch with the market. They designuniversal and firm-specific projects. This is due to the fact that the present dayhappen to be different in terms of:

of Output

s and Labour force.

gibility : Financial services are intangible in nature. Unless the institutionsying them have a good image and confidence of the clients, they may noted. Thus, they have to focus on quality and innovativeness of their services totheir credibility and gain the trust of clients.

arability : the functions of producing and supplying financial services have to bermed simultaneously. This needs a perfect understanding between the financialces firms and their clients.

hability : Financial services like any other services cannot be stored. They havesupplied as required by customers. The providers of financial services have toe a match between demand and supply.

e Based Service : Marketing of financial services is people-intensive andore subject to variability of performance or quality of service. The personnel in

cial services organizations need to be selected on the basis of their suitability.


4/86

mism : Financial services have to be constantly redefined on the basis of socio-mic changes such as disposable income, standard of living and educational

ges related to the various classes of customers. Financial services institutionsevolving new service s could be proactive in visualizing in advance what the

ets want, or reactive to the needs and wants of customers.e or Constituents of Financial Services : Financial services comprise four major ituents:

ments : These includes:

y Instruments

Instruments

d Instruments

c Instruments.

et Players : These includes:

s

cing Institutions

al Funds

hant Bankers

Brokers

ultants

rwriters

et Makers etc.

alised Institutions : These include:

unt Houses

t Rating Agencies

ure Capital Institutions etc.

latory Bodies : These includes

rtment of Banking and Insurance of the Central Government.

ve Bank of India

ities and the Exchange Board of India (SEBI)

d for Industrial and Financial Reconstruction (BIFR)

in the Regulatory Framework for Financial Services.Meaning of Financial Services : Financial services cater to the needs of financialutions, financial markets and financial instruments geared to serve individual andutional investors.


5/86

NAGEMENT OF FINANCIAL SERVICES cial institutions and financial markets facilitate functioning of the financial systemgh financial instruments. In order to fulfil the tasks assigned, they required a number of ces of financial nature. Financial services are, therefore regarded as the fourth element

financial system. An orderly functioning of the financial system depends to a great deale range of financial services extended by the provider, and their efficiency andiveness.rent Level of Regulation on Financial Services :I

rnment of Indiallate Authority and Regulator in Certain CasesII

lation Passed in the Parliamenting Regulation Act,ance Act,n Trust Act, etc.III

utions Under an Act of ParliamentAct,Act,Act, etc.

IV

lators

Vlations Given by the RegulatorsDirections to Commercial BanksC's Directions issued by the RBIRegulations, Guidelines, Notifications, etc.VIRegulationws, Rules and Regulation and Code of Conductd by the various Financial Service Industry

ciations.latory Framework : For the purpose of studying regulatory framework which governnancial services, we can divide the financial services in four different categories:

ing and Financing Services

ance Services

tment Services

hant Banking and other services


6/86

lations on all these services are :

lations on Banking And Financing Services :

ing Institutions : In o rder to develop a sound banking system in thery, the RBI regulates the commercial banking institutions in the following

he licensing authority to sanction the establishment of new bank or

branch.

scribe the

mum capital,

ves and use of profits and reserves

bution of dividends

tenance of minimum cash reserve

liquid assets

the authority to inspect or conduct investigation on the working of the; and

s the power to control the appointment of Chairman and Chief utive Officer of the private Banks and nominate members in thed of Directors.

Banking Financial Companies (NBFCs) : The Banking Laws Act, 1963ntroduced to regulate the NBFCs. The RBI which derives powers under thisegulates the NBFCs as follows:

uires the NBFCs of certain categories to register with it and provide

dical statements on their working.

scribes the types of companies which are eligible to raise funds fromc and its members.

o prescribes the extent to which the funds could be raised and theand condition thereof.

Cs are also required to invest certain percentage of the deposits inproved securities and maintain reserve fund.

o collects periodic reports and has the powers to collect informationny aspect relating to the functioning of the NBFCs , conduct

ction of the books of NBFCs and investigate on any aspects relatingactivities of the NBFCs.

y, it has the powers to imposing penalties or suspending or cancelingcense or registration.


7/86

NAGEMENT OF FINANCIAL SERVICES r Directions:

RBI has issued three major directions to regulate different forms of Non-Bankingcial Companies and other financial institutions. They are:

Banking Financial Companies Directions, 1977

ellaneous Non-Banking Financial Companies Directions, 1977

uary Non-Banking Financial Companies Directions, 1977

lations on Insurance Services : With an objective of reforming the insurancer and allowing private entrants, the Government of India had set up an interimance Regulation Authority (IRA) in January, 1996 and introduced the Insurancelatory Authority Bill, 1996 in December, 1996 to give statutory status. The duties,rs and functions of the IRAas per the Act are:

gulate, promote and ensure orderly growth of the insurance business.

otect the interest of the policyholders in matter concerning assigning of y nomination by policyholders, insurance interest, settlement of insurances, surrender value of the policy and other terms and conditions of contract

ance.

omote efficiency in the conduct of insurance business

ll for information from, undertake inspection and conduct enquires andtigation including audit of the insurers, insurance intermediaries and other ization connected with the insurance business.

gulate investment of funds by insurance companies.

judicate disputes between insurers and intermediaries.

lations on Investment Services : Investment services are primarily fund based

ties. The mutual funds and venture capital funds are directly fall under thetment services. SEBI is emerging as a powerful regulator of various financialces.ities and Exchange Board of India (SEBI) : The SEBI Act, 1992 entrusts thensibility of protecting the interest of investors in securities. They are:

lating the business of stock exchange and any other securities markets.

tering and regulating the working of stock brokers.

tering and regulating the working of collective investment schemesding mutual funds.

oting investors education and training of intermediaries of securitiesets.


8/86

ng for information from, undertaking inspection, conducting inquires andof stock exchanges.

ucting research for t he above purpose

rming some other functions as may be required.

hant Banking and Other Services : There are several intermediaries

iated with management of public and rights issue of capital. While the merchanters is the main intermediary others associated with the issue management arerwriters, Brokers, Advisors and Credit Rating Agencies. The SEBI has issued aed guideline/regulation on many of these intermediaries. They are:

( Merchant Banker) Regulation, 1992

Rules for Underwriters

( Brokers and Sub-brokers) Regulation 1992

Rules for Registrar to an Issue and Share Transfer Agents, 1993

(Debentures Trustees ) Regulations, 1993hic Presentation of Regulation on Financial Services :lation on Financial Services Financial Servicesing andancetment andhant Bankerscingcesased Services

Other Servicescesing

anceities ContractsRegulations,

lation938956

949panies Act, 1956n Trust Act, 1882ve Bankance

Rules for dialatorytrar

oritySharefer Agentsication,lations,Regulations,,elines etc.

tions, etc.


9/86


in the risk involved in Financial Services.Meaning of Financial Services : The term financial services is broadly understood tode banking, insurance, housing finance, stock broking and investment services.ification of Financial Services:- Financial services include fund-based as well as fee-services.

-based Services: In fund based services, the firm raises equity, debt and deposits

nvests in securities or lends to those who are in need of capital.

ased Services: In fee-based services, the financial service firms enable other tocapital from the market.inancial sector is also known for its dynamic character and within a short period, it hasduced several new products and services. Though the sector is growing rapidly all over orld, the financial markets have seen a number of bank and insurance companiese and market crashes. The industry is operating in an environment where the risk ishigh.ng in Risk : There are two types of risk involved in financial services:

nal Risk

nal Risk.

nal Risk : It could be due to changes in interest rate in the market that reducesalue of existing financial claims. As these are events arising outside the company,can be grouped under external sources. The following are few external sources of

utions Providing Direct Finance : There are different types of institutionsable in the financial market providing finance for various requirements.

are many examples:

mercial Banks normally provide finance for short term needs of the

-lending institutions meet the long term funding needs of industriesh are commonly known as project financing.

ing finance companies provide funds to individuals and some times-construction companies for acquisition of house property.

ure capital provides funds in the form of equity to new projects whichve some innovative ideas.nal Risk :

nk may fail to honour the deposit claims of the deposit holders if theerforming assets of the bank are above its net worth.


10/86

her important external reason for the failure of these institutions in theess of lending is the quality of other assets in their total assets. If thetment is made in high-risk debt or equity securities, any adverseopment in the capita l market or the issuing company or agency wille the value of the investments and in this process it may affect thes ability to meet the liability.

ance Services : Insurance services take the risk associated with the

of their clients. The premium collected for this service in turn is either ted in securities or led to outsiders who are in need of money.nal Risk :

surance company may fail to honour its obligation if the investmentshave been made poor.

arly, the quality of assets they have insured may also turn bad.

are two common problems in insurance services namely :

l Hazard : Moral hazard is the tendency of an insured to take greater ecause she/he is insured. For example, a machine owner may run

achine continuously ignoring the normal shut-down requirement tolete an order in less time. Without insurance, the owner may not turn

nit ignoring the normal shut-down requirement.

rse Selection : The adverse selection is the tendency of insuringw quality asset and not insuring high quality assets.

Broking Services : Stock Brokers but and sell on behalf of their clients.collect the securities from the sellers and collect money from the buyer andover the funds to seller after deducting the brokerage for the servicered.nal Risk : Though the activity looks relatively simple, the risk from externales are very high:

in situation where the trades are not guaranteed by the stocknges.

is always a possibility that the client may fail to honour themitment but the broker has to make good the loss.

ng and Hire Purchase : Leasing and Hire Purchase service is very closebanking service. These companies also raise money from the market

gh deposits and other means and lend to industries. Of course, the lendingne not in the form of term loan or working capital loan, but in the form of .


11/86

NAGEMENT OF FINANCIAL SERVICES nal Risk : Leasing and hire purchase companies are also affected by theent changes in the regulations. The recent Reserve Bank of Indiaation is expected to wipe out many of these companies from the market ashas put rigid norms in raising deposits from the public.

utions Offering Fee Based Services : Merchant Banking, Mutual Funds,t Rating , Merger and Acquisition are few examples of fee based servicesd by the financial services companies.

nal Risk :

are major changes in the regulation of merchant banking andal funds which will effectively reduce the number of players in their ctive industry.

nal Risk : Financial Services Company often fails due to their own mistakes.are several internal factors that contribute to the failure of the firms in the

cial services industry. Some of these internal sources of risk for different financialces companies are discussed below:

utions Providing Direct Finance : Banks, term lending institutions andcompanies providing direct finance are exposed to several internal source

k.nal Risks :

and foremost among them is the quality of evaluation of the loansals. Often, the appraising officers fail to consider vital issues thatthe outcome of the project.

are also affected by the asset-liability mismatch and excessiveng in the security market.

her important source of internal risk is the policy of the institution inderivatives in managing their risk. If the bank fails to use the

atives products in hedging the risk, its performance may be affected if

arket moves against the position the bank is holding.

ance Services : As in case of financial services companies which are inusiness of direct lending, insurance companies are also affected by theency in assessing the insurance proposal.nal Risk : Unless, the internal system of evaluating the insurance proposalcient, the company will end up in insuring bad assets.

Broking Service : Though the stock broking is a fee based service, thereany sources of risk attributable to internal factors. Stock broking activityally involves

pt of the order from the clients

ution of the order in the exchange


12/86

pt of documents or cash from the clients and delivery of cash or ments to the clients.nal Risk :

are many fake doc uments in the market

if the stocks delivered are good and genuine, there is no guaranteehey are good for delivery.

Indian stock brokers have also trade on their account and their mity with the trading system does not guarantee profit. On severalions, many big brokers have incurred huge losses on their trading.

ng and Hire Purchase : The business of leasing and hire purchase isy competitive with too many players in the market.nal Risk :

he credit rating information in India is relatively weak and publishednts are not reliable to assess the credit worthiness of the borrowers.

ndly, the competition in the industry allows very little time to take

on on sanctioning the proposals, otherwise, the competitors willway your clients.

her internal problem is on the asset-liability mismatch.

utions Offering Fee Based Services : Institutions offering specializedces are exposed to several internal risks.nal Risk :

erformance of mutual funds directly depends on the ability of themanagers in reading the market and making investmentsdingly.

e other hands, if they freely use the information to their own benefit, itthe performance of the funds. of Risk : In the previous section, the different source of risk for various financial

ces firms have discussed. They could now broadly be classified under the following six:

t Risk : Many of the financial services firms like banking, credit cards, lease andurchase are also involved in fund based business. The credit risk affects the fundactivities of the financial services. The risk arises in evaluating the proposals for

ng. While credit rating, either by credit rating institutions or internally helps toify the risk, the percentage of non-performing assets measurers the impact of risks in the firms.

-Liability Gap Risk : This risk also applies to firms doing fund based services.funds raised from external sources play a major role in the fund based activities,


13/86

NAGEMENT OF FINANCIAL SERVICES uration of the liability is an important variable which needs to be considered whileng. For example, if a firm gives a five year loan against a deposit for two years,is a mismatch between the liability and asset.

Diligence Risk : Merchant banking companies and other financial services firmsh are offering fee based services like merger and acquisition have to exercise duence in their operations. This due diligence may have to be provided to theatory agencies or to their clients. For example, the SEBI regulation on Merchant

ing requires the lead manager to provide a due diligence certificate in theribed form before the public or rights issue opens for subscriptions. In the eventy lapse or mistake noticed in the due diligence subsequently, it will affect thecial services firm which has provided the due-diligence certificate in different

st Rate Risk : This risk affects the firms which are in fund based activities. Thest rate risk arises when there are frequent changes in the interest rates in theet.

et Risk : Financial services firms which are in the investment business or ting a part of the funds in securities are exposed to the market risk. This riskon account of changes in the economy and all securities are affected.

ncy Risk : Firms which are dealing in foreign exchange currencies are exposeds source of risk. Bank, financial institutions and money changers are few financialces firms which are normally affected by this source of risk. This risk arisesse of changes in the currency values which in turn was determined by themental economic strength of the two countries and short run demand and supply

These firms are affected by currency risk when they hold currencies or liabilitiesform of either forward contract or interest/principal payment.

n the Rupee depreciates, it affects those who are holding foreign currencyties.

n the Rupee appreciates, if affects those who are holding foreign currency.

in how you can manage the risk involved in Financial Services.Introduction : It may not be feasible to start any venture without taking risk. Risk is anal part of any business and the reward or profit is directly proportional to the risktaken. In the case of financial services industry, the firms deals with financial claims

h are by nature risk products. We will now discuss different strategies available toge these risks:gement of Risk :

ging Credit Risk : The first step in the process of managing the credit risk is theification of credit risk the firm is exposed. The quantification is done throughrating. The firm can adopt the following strategy in managing the credit risk. The

involved in this strategy are:


14/86

able Loan Portfolio : The starting point could be to develop a desirablemix which consists of different categories of the borrowers.

nuous Monitoring : This is more important in managing the credit risk.continuous monitoring requires flow of information from the borrowers androm the market and the firm has to develop necessary mechanism toct such information from the borrowers and the market intelligence system.

the performance of the borrowers deteriorate over a period, the

oring system in force should give early warning and thus assumes aal role in the credit risk management.

n on Doubtful and Bad Debts : The moment the monitoring systemsome doubts about the loan account, action need to be initiated to

er the loans. The steps are:

hings that need to be done is to check the assets, movable or vable, that are given as a security to avail the loan.

asset value is found is to be inadequate, then demand is to be madeditional security. Along with this process, it is also useful to offer adiscount to motivate the borrowers to prepay the loan.

ging Asset-Liability Gap Risk : This risk also applies to firms doing fund basedces. Since funds raised from external sources play a major role in the fund basedties, the duration of the liability is an important variable which needs to bedered while lending. For example, if a firm gives a five year loan against ait for two years, there is a mismatch between the liability and asset. Theiques of management are:

Management: The first job in the ALM is to measure gap. There are twoin which the gap can be measured. If the gap is measured at a macro level,limited use. It given an idea about the level of risk involved in the firm. Thed method which is useful in ALM is to get a detailed break up of 'Gap'. Theas to be necessarily closed or managed.

ging Due-Diligence Risk : The professional efficiency and ethics followed byrm determine this source of risk. Since the financial services firm is giving aication to either the regulating agencies or its client on the completion of requiredalities, they are expected to perform efficiently with thigh ethical standards. Thisould be managed by bringing in more professional an creating right environmentn the organization.

ging Interest Rate Risk : Interest rates in the economy play a major role in thecial markets. For managing interest rate risk interest rate swap is adopted.st Rate Swap : Interest rate swap involves the exchange of interest payments.ally occurs when a person or a firm needs fixed rate funds but is only able to get


15/86

NAGEMENT OF FINANCIAL SERVICES ng rate funds. It finds another party who needs any floating rate loan but is able toxed rate funds. The two, known as counter parties, exchange the interestents and the loans according to their own choice. It is the swap dealer, usually athat brings together the two counter-parties for the swap.

ging Market Risk : This is the minimum risk that investors in the market areed. Firms which are investing in the securities have to manage the market risk.are several ways through which the market risk is managed. Some firms take a

on the market and switch over the funds from one market to another in order tomize the risk.

ging Currency Risk : Firms dealing in foreign exchange are exposed toncy risk. Non-banking entities, such as traders, that use the foreign exchangeet for the purpose of hedging their foreign exchange exposure on account of ges in the exchange rate. They are known as hedgers.


16/86

NIT II AN AGEM ENT OF FINANC IAL SERVICESANCE : SPECIALIZ ATION PAPERS

in the Operations of Indian Stock Market.Meaning of Stock Exchange : Stock exchange means an organized market whereities issued by companies, government organizations and semi-organizations are sold

urchased. Securities include:s

ntures

s etc.ition of Stock Exchange :rding to Pyle :k Exchange are market places where securities that have been listed thereon,

be bought and sold for either investment or speculation.res of Stock Exchange : The main features of stock exchange are as follows:

nised Market : Stock Exchange is an organized market. Every stock exchangemanagement committee, which has all the rights related to management andol of exchange. All the transactions taking place in the stock exchange are done

the prescribed procedure under the guidance of management committee.

ng in Securities issued by various concerns : Only those securities ared in the stock exchanges which are listed there. After fulfilling certain terms andtions, a company gets it security listed on stock exchange.

ng only through Authorized Members : Investors can sale and purchaseities in stock exchange only through authorized members. Stock exchange is afied market place where only the authorized members can go. Investor has toheir help to sale and purchase.

ssary to obey the Rules and Bye-Laws : While transacting in stock exchange,ecessary to obey the rules and bye-laws determined by stock exchange.ions of Stock Exchange : The main functions performed b stock exchange are as

ws:


17/86


ding Liquidity and Marketability to existing securities : Stock exchange is aet place where previously issued securities are traded. Various types of ities are traded here on regular basis. Whenever required, investor can invest hisy through this market into securities and can reconvert this investment into cash.

ng of Securities : Astock exchange provides platform to deal in securities. Thes of demand and supply work freely in the stock exchange. In this way, prices of

ities are determined.

y of Transactions : Stock exchanges are organized markets. The fully protectterest of investors. Each stock exchange has its own laws and be-laws. Eachber of stock exchange has to follow them and any member found violating them,embership is cancelled.

ibutes to Economic Growth : Stock exchange provides liquidity to securities.gives the investor a double benefit-first, the benefit of the change in the marketof securities and secondly, n case of need for money they can be sold at theng market price at any time.

ding Equity Cult : Share market collects every types of information in respect

listed companies. Generally this information is published or otherwise n case of anybody can get it from the stock exchange free of any cost. In this way, the stocknge guides the investors by providing various types of information.]

ding Scope for Speculation : When securities are purchased with a view tog profit as a result of change in their market price, it s called speculation. It ised or permitted under the provisions of the relevant Act. It is accepted that into provide liquidity to securities, some scope for speculation must be allowed.hare market provides this facility.Exchange in India : There are 24 stock exchanges functioning currently in India. The

s are given below:

bai Stock Exchange OR

hubaneswar Stock Exchangebay Stock Exchange-BSEochin Stock Exchange

nal Stock Exchange (NSE)oimbatore Stock Exchange

the Counter Exchange ouwahati Stock Exchange(OTCEI)ipur Stock Exchange

tta Stock Exchange(CSE)

anpur Stock Exchange

Stock Exchange (DSE)udhiana Stock Exchange

nai Stock Exchangeangalore Stock Exchange

edabad Stock Exchangeeerut Stock Exchange

rabad Stock Exchangeatna Stock Exchange

alore Stock Exchangeune Stock Exchange


18/86

dore Stock Exchangeajkot Stock Exchange

da Stock Exchangeapital Stock Exchange Kerala Ltd.


19/86

are the main features of NSEI? Explain the trading process of NSEINational Stock Exchange of India (NSEI) : The NSEI has been established in theof a traditional competitor stock exchange. It is an exchange where business is carriedthe securities of the m edium & large-sized companies & the government securities.stock exchange is fully computerized.NSEI was established in the form of a public limited company in Nov., 1992. Itsoters are like this:

ndustrial Development Bank of India (IDBI).

ndustrial Finance Corporation of India (IFCI).

ndustrial Credit & Investment Corporation of India (ICICI).

ife Insurance Corporation of India (LIC).

General Insurance Corporation of India (GIC).

BI Capital Market Limited.

tock Holding Corporation of India Ltd.

nfrastructure Leasing & Financial Services Ltd.res or Nature of NSEI : The Chief features of the NSEI are following:

l Exchange : The NSEI is the first stock exchange of its kind. The system of action of securities is very efficient and transparent. It is, therefore called a modelnge.

less : In the NSEI there is no special importance of trading. The terminals of thehave been established almost throughout the country.

Segments : On the basis of the transactions of securities done on the NSEI, ite divided into two parts:

esale Debt Market (WDM): This can be called money market segment. Itnly concerns the government securities,s of public sector takings, treasury bills, commercial papers, certificates of deposits, etc.

al Market Segment: Its concern is with the shares and debentures of anies.

Access : It being a special floorless stock exchange, every bigmalltor can easily approach it.

parency in Transactions : Anybody can visit the local terminal of SEIave a look at various transactions of the securities. Therefore is no possibility of aud in transactions.

petition : The NSEI has removed the shortcomings of the traditional shareets and it has attempted to provide better facilities to the investors. Thats why thening share markets are nervous at its success. Now, they are also trying tode good facilitate to the investors. In this way, there is a competition between twoof share markets. The investors are getting the benefits of this competition.


20/86


Price : Under the traditional system, the shares of a company could haveent rates in different share markets but at the NSEI all the shares have the samein all the towns.

g of other Stock Exchange : The securities of those companies which have notlisted on other share markets can be traded on the NSEI.

sclosed Identity of Participants : Information about any individual trading onerminal of the NSEI cannot be passed on to any other person. In this way, thecy about the identity of the investors is maintained.

Driven System : The NSEI is a stock exchange based on the order drivenm. It means that the sellers and buyers first place the order about the type of ity, its number, rate and time when they are ready to buy or sell them. On thept of this order on the computer, the process of order matching starts. Theent a good matching takes place, its information appears on the computer n.oses of NSEI :hief aims of the establishment of the NSEI are the following:

e Stock Exchange at National Level : It was decided by a Shri M.J. Pherwanihere should be a single stock exchange at the National level so that thedence of the investors in the capital market increases.

asing Numbers of Transactions : For the last few decades, there has been anase in the numbers of investors while the stock exchange system continues to ben such a situation the transactions cannot be settled easily. The purpose of theishment of the NSEI is to solve this problem.

asing Transaction Costs : The transaction costs increase because of thence between the stock exchange and the investors. Through the medium of , an effort bas been made to reduce these costs.

easing Liquidity : There is a decline in the liquidity of the securities under them of local stock exchange because the people doing transaction on a singleexchange are limited in number. On the contrary, through the medium of NSEIvestors from the entire country can trade simultaneously at a single stocknge. This increase the liquidity of securities. Therefore, the purpose of the NSEIheck the decreasing liquidity of securities.

loping a Debt Market : The purpose of the NSEI is to develop a debt Market. Inaditional share market, transactions are mostly in shares and no attention is paidbentures. Now the NSEI has divided the market in two parts-Debt market andal Market. Therefore, this division is helpful in the development of debt market.


21/86

orming to International Standard : Many modern share markets are beingished at the International Level. In India also, there is a dire need of establishingk exchange of international level. The NSEI is a modern stock exchange based

e international stand ards.

ated Settlement System : In the traditional share markets, the system of ment of transactions had become old. It was getting difficult to control the ever asing number of transactions under this system. Under the NSEI, provision has

made to settle the transaction very quickly.ng Process on NSEI : The selling and buying process of securities on the NSEI is as:

ng the Order : First of all the person buying or selling securities places an order.s order, he tells the name of the company whose security he is ready to buy or sellat price, in what quantity and for what period of time.

eying the Message to Computer : The moment the terminal operator receivesder from the customer, he feeds it in the computer.

ng of Matching Process : The moment the computer receives orders, it startsocess of matching. During the process of matching orders, the best matching of

lling or buying order is sought to be found out.

pting the Order : As soon as the best matching of the buying and selling ordersablished during the process of matching orders, its list is immediately obtained onomputer screen. This information tells us at what rate, time. All the terminals of the

established throughout the country go on feeding their computers continent withparty your order has been transacted.

ery and Payment : After the transaction has been settled, the delivery andent are made according to the rules of the NSEI.

are the main features of OTCEI? Explain the trading process of OTCEI .Over the Counter Exchange of India (OTCEI) : The OTCEI is a completely

uterized and special ringless stock exchange which is different from the traditionalexchange and on which the buying and selling of securities is absolutely transparentmoves at a great speed. Its counters are spread all over the country where transactions

ade with the help of telephone.OTCEI was established under section 25 of the Companies Act, 1956 in October, 1990.romoters of the OTCEI are the following financial and other institutions:

Unit Trust of India

ndustrial Credit and Investment Corporation of India.

ndustrial Development Bank of India


22/86


ndustrial Finance Corporation of India

ife Insurance Corporation of India

General Insurance Corporation of India

BI Capital Market Limited

Canbank Financial Services Limited.res or Nature of OTCEI : The main features of the OTCEI are the following:

ess Trading : There s no particular place for transacting business in securitiesthe OTCEI. This exchange has its counters/offices throughout the country. Anyor seller of securities can go the counter/officer and have transaction through

edium of the operator.

n Network : The OTCEI has its network all over the country. All the counters ared with the central terminal through the medium of computers. Therefore, they of nationwide listing is available here. In other words by listing on onenge, one can have transactions with all the counters in the whole country.

sive List of Companies : On the OTCEI only those companies are listed whosed capital is 30 lakhs or more. In the old share markets this amount used to be tens on the BSE and three crores on the other exchanges and hence, listing was notble in case the issued capital was less than three crores. Those companiesh have been listed on the old share markets cannot be listed on the OTCEI.

Computerized : This exchange is fully computerized. It means that all theactions done on this exchange are done through the medium of computers.

sorship : In order to get listed on the OTCEI, a company has to find a member toor it. The main job of a sponsor is market making. T means a sponsor has to beo buy or sell the shares of that company at least for a period of 18 months. In this

a sponsor creates liquidity in securities.

tors Registration : All the investors doing transactions on the OTCEI have gotgister themselves compulsorily. Registration can be got done b giving ancation at an counter. The registration is called the INVESTOTC CARD. On theof this card, one can do transactions of securities at any counter throughout thery.

er Liquidity : There is greater liquidity in securities because of the sponsors jobrket making.

parency in Transactions : All the transactions are done in the presence of thetor. The rates of buying and selling can be seen on the computer screen. The

tor cannot do any fraud or mischief with the transactions.

r Delivery and Payment : On the OTCEI, delivery in case of buying andent in case of selling are both very fast. The work of delivery and payment in caseed securities and permitted securities is completed within seven days and 15

respectively.


23/86

ways of Public Offer : Acompany listed on the OTCEI can issue security in twoFirstly, the company can go directly to the public. This is called Direct Offer

m. Secondly, the company sells its securities to the sponsor at a particular price.the sponsor sells th em to the public. This is called Indirect Offer System.

Access : In the big cities the counters of the OTCEI can be seen like ordinary. Any body can go the counter and do buying and selling of securities.ng Process : One can trade in securities b going to any counter of the OTCEI. All the

ers are linked with the central computer at the OTCEI headquarter. This office is inbai. There can be three types of trading on the OTCEI:

l Allotment : When an investor is allotted shares through the medium of OTCEI,given a receipt which is called counter receipt-CR. This receipt is just like thecertificate. Selling and buying can be done through the medium of this receipt.

ng in the Secondary Market : For the purpose of buying shares listed on theEI, a person has to get himself registered (if he is not already registered). After he informs the counter operator about the number of the shares to be purchased.ounter operator displays the rates on the screen. After getting himself satisfiedhe rate, the investor hands over the cheque to the operator. On the encashmentcheque, the CR is handed over to the investor. This procedure takes about a

g in the Secondary Market : An investor who has purchased shares from theEI can sell his shares at any counter of the OTCEI. After getting himself satisfiedhe rate displayed on the screen, the investor hands over the Counter Receipt andansfer Deed to the Operator. The operator prepares the Sales Confirmation Slip) and a copy of it is handed over to the seller. The operator sends the CR, TD ando the Registrar for confirmation. After confirming every detail the Registrar sendsback to the counter operator. In the end the operator issues a cheque to the seller eceives back the SCS from the seller.oses of OTCEI : The objects of the establishment of the OTCEI may be described as:

dity : The first object for the establishment of the OTCEI is o maintain liquidity incurities of the small companies. The sponsor has got to do the job of marketng.

parency : The second aim of this share market is to maintain transparency of actions. Here all the transactions are made on the computer screen. Thisnates any chance of fraud.

tors Grievances : An important aim of the establishment of the OTCEI is thesolution of the problems of the investors.


24/86


k Settlement : In the traditional share markets both the delivery and paymentime. This problem has been overcome with the help of the OTCEI.

g of Small Companies : Small companies remain deprived of being listedse they are unable to fulfil the conditions laid down by the old share markets.

ss : This stock exchange is of the ringless type and therefore, has its counters all

he country.

brief notes on the concept of mutual funds. Also explain theizational functions of mutual funds.Meaning of Mutual Fund : A mutual fund is essentially a mechanism of poolingher the savings of a large number of small investors for collective investment, with aned objective of attractive yields and capital appreciation, holding the safety and liquidityme parameters.ual fund is a trust that pools the savings of a number of investors who share a commoncial goal. The money, thus, collected is then invested in capital market instruments suchares, debentures and other securities. The income earned through these investmentshe capital appreciation realized are share by its unit holders in proportion to the number ts owned by them.

ing of a Mutual Fund : The flow chart below describes broadly the working of aal fund :nsd back toratestorsheir y with

ger t inities


25/86

al Fund Organisation : There are many entities involved and the diagram belowates the organization set up of a mutual fund:

nisation of a Mutual Fundual fund can be constituted either as a corporate entity or as a trust. In India, UTI wasas a corporation un der an Act of parliament in 1964. Indian banks when permitted to

te mutual funds, were asked to create trusts to run these funds. Atrust has to work onf of its trustees. Indian banks operating mutual funds had made a convincing pleae the government to allow their mutual funds to constitute them as Asset Managementpanies. The department of Company Affairs, Ministry of Law, Justice and Company

rs has issued guidelines in respect of registration of Assets Management CompaniesCs) in consultation with SEBI, as follows:

oval of AMC by SEBI : As per guidelines, AMC shall be authorized for businessEBI on the basis of certain criteria and the Memorandum and Articles of ciation of the AMC would have to be approved by SEBI.

orised Capital of AMC : The primary objective of setting up of an AMC is toge the assets of the mutual funds and other activities, which it can carry out, suchnancial services consultancy, which do not conflict with the fund managementty and are only secondary and incidental. Many players who help in running aal fund are as follows:

Holderssorsees

Mutual Funddian

er Agent


26/86


ters and Transfer Agents : The major responsibilities are:

ving and processing the application form of a mutual fund

ng of unit/share certificate on behalf of mutual fund

tain detailed records of unit holders transactions

asing, selling, transferring and redeeming the Unit/Share certificate

ng of income /dividend, broker cheques etc.

rtiser : Major responsibilities of an adviser include:

ng mutual funds organizers to prepare a media plan for marketingnd.

ng/buying the space in newspapers and other electronic media for tising the various features of a fund.

ging or hoardings at public places.

sor/ Manager : It is generally a corporate entity that does the following

ssional advice on the funds investments

ce on asset management services.

ees : Trustees provide the overall management services and chargegement fee.

dian : Acustodian is again a corporate body that carries out the followingons:

s Securities

ves and delivers securities

cts income/interest/dividends on the securities

s and processes cash

Players : Besides the above, other players are as under:

Administrator

Accounting Services

Advisors.

Officers

rwriters/Distributors

are the advantages of investing in mutual funds? Also explain thebacks of mutual funds.Meaning of Mutual Fund : A mutual fund is essentially a mechanism of pooling

her the savings of a large number of small investors for collective investment, with aned objective of attractive yields and capital appreciation, holding the safety and liquidityme parameters.


27/86


28/86

ntages of Investing in Mutual Funds : The advantages of investing in mutual funds

ssional Management : Most mutual funds pay top-flight professionals toge their investments . These managers decide what securities the fund will buyell.

latory Oversight : Mutual funds are subject to many government regulationsrotect investors from fraud.

dity : Its easy to get your money out of a mutual fund. Write a cheques, make and youve got the cash.

enience : You can usually buy mutual fund shares by mail, phone or over thenet.

Cost : Mutual fund expenses are often no more 1.5 % of your investment.

tment variety and spread in different industries.

al Appreciation

mpulsive decision-making regarding purchase or sale of share/securities, sincends are managed by expert, professional fund managers who have access totest detailed information regarding the stock market.

the smallest dividend or capital gain gets reinvested, thus enhancing theive return.

om from paperwork.

parency

bility

ce of Schemes

enefits on invested amounts/returns/capital gains

regulatedbacks of Mutual Fund : Mutual funds have their drawbacks:

uarantees : No investment is risk-free. If the entire stock market declines in, the value of mutual fund shares will go down as well.

and Commissions : All funds charge administrative fees to cover their day-to-xpenses. Some funds also charge sales commissions or loads to compensaters, financial consultants, or financial planners.

: During a typical year, most actively managed mutual funds sell anywhere from70% of the securities in their portfolios. If your fund makes a profit on its sales,

will pay taxes on the income you receive, even if you reinvest the money you


29/86


gement Risk : When you invest in a mutual fund, you depend on the fundsger to make the right decisions regarding the funds portfolio. If the manager not perform as well as you had hoped, you might not make as much money onnvestment as you expected.

are the different types of mutual funds schemes? Also explain the types of al fund schemes in India.

Meaning of Mutual Fund : A mutual fund is essentially a mechanism of poolingher the savings of a large number of small investors for collective investment, with aned objective of attractive yields and capital appreciation, holding the safety and liquidityme parameters. of Mutual Fund Schemes : Awide variety of mutual fund schemes exists to cater to

eeds such as financial position, risk tolerance and return expectations etc. of Mutual Fund SchemesructurevestmentSchemes

ctives-ended Fundsth Funds

aving Funds-ended Fundsme Fundsal Fundsced FundsFunds

ructure : On the basis of structure, there are two types of mutual fund schemes:

-ended Funds : In open-ended funds, there is not limit to the size of funds.tors can invest as and when they like.

-ended funds : These funds are fixed in size as regards the corpus of the

and the number of shares. In close-ended funds, no fresh units are createdhe original officer of the scheme expires.

vestment Objectives : On the basis of investment objectives there are four of mutual funds schemes:

th Funds : These funds do not offer fixed regular returns but provideantial capital appreciation in the long run. The pattern of investment inal is oriented towards shares of high growth companies.


30/86

me Funds : These funds offer a return much higher than the bank depositsith less capital appreciation. The emphasis being on regular returns, then of investment in general is oriented towards fixed income-yieldingities like non-convert ible debentures of consistently good dividend payinganies etc.

ce Schemes or Income and Growth-Oriented Funds : These offer aof immediate average returns and reasonable capital appreciation in the

un.

Funds : These are funds that are raised on other countries for providings to foreign investors. The India Growth Fund and the India Fund raised inS and UK respectively are examples of area funds.

Schemes :

aving Funds : These funds are raised for providing tax relief to thosetors whose income comes under taxable limits.

al Funds : These funds are invested in a particular industry like cement,jute, power or textile etc. These funds carry high risks with them as the

fund is exposed to a particular industry. of Mutual Fund Schemes in India :

th Funds : There are the following features:

ctive : Generating substantial capital appreciation

tment Pattern : Nearly all in equity shares

ion : Seven Years

tment Risk : High risk in reinvestment schemes

ns : No assured return but high returns are expected

dity : No repurchase facility except at the end of the scheme

fer of units is allowedExamples of Growth Schemes : Schemes issued by

er Share, Master share plus, Master Gain, UGS-200Trust of India

um Express, Magnum Multiplier Mutual Fund

hare, Canstar Cap, Cangrowth, Canbonusank Mutual Fund

atna, Ind Sagar, Ind Motink Mutual Fund

me Funds : The Income funds are the following features:

ctive : Assured minimum income and safety of capital

ion : 5-7 years

tment Pattern : Bulk of funds invested in fixed income securities like

nment bonds, company debentures, etc. and rest in equity shares.


31/86


tment Risk : Absolute Safety

n : 14.75% p.a. upwards-payable monthly or quarterly plus mid schemes and end of the scheme appreciation.

dity : No listing on stock exchange and units are not transferable.examples of Income Funds :

Scheme of 1964, Growing Income Unit Scheme of 1987rust of India

um Monthly Income SchemesMutual Fund

g Monthly Income SchemesMutual Fund

ce Funds : The main features are:

ctive : Income and growth with reasonable safety

ion : Seven Years

tment pattern : About 50% in equity and the rest in debenture etc.

ns : No assured returns, but steady income due to annual contribution of mum of 80% of the Trustincome by way of dividends, interest etc.

dity : Repurchase facility after initial lock-in period of three years

sting of stock exchange

fer of units permitted

Units can be pledged to banks for loans

lanning Schemes : The investment made under these schemes are deductiblethe taxable income up to certain limits, thus providing substantial tax relief to thetors.ples of tax planning schemes:

0CC and Canstar 80Lof Canbank Mutual Fund

8Aof Indbank Mutual Fund

Schemes : These include schemes of 10-15 years duration, which offer ple benefits. For example:

o.mefits

Linked Insurance

ibution eligible for tax deduction of of UTI

ance cover up to target amount

onable income by way of dividend

dity


32/86

y Of Capital

araksha,e offer some or all of the followingsahyog,its :


33/86

avridhi

nsurance cover

dent Insurance Cover mes of LIC

vestment of annu al dividends of al Fund

nable dividend

y of capital

onable capital appreciation

dity

are not transferable, but bankacility is available

xemption on dividend

in the Merchant Banking Services.Merchant Bankers : Amerchant banker is any person who is engaged in the businesssue management either by making arrangements regarding selling, buying or ribing to securities or acting as manager/consultant/advisors or rendering corporateory service in relation to such issue management. Issues mean an offer for urchase of securities by any body corporate/other person or group of persons throughchant banker. The importance of merchant bankers as sponsors of capital issues isted in their major services such as, determining the composition of capital structure,of prospects and application forms, listing of securities and so on. In view of thertance of merchant bankers in the process of capital issues, it is now mandatory that allc issues should be managed by merchant bankers functioning as the lead managers. Inse of right issues not exceeding Rs. 50 lakh, such as appointments may not besary.

ces provided by the Merchant Bankers :

ct Management : Right from planning to commissioning of project, projecteling and preparation of project reports, feasibility reports, preparation of loan

cation form, government clearances for the project from various agencies,gn collaboration, etc.

Management :

valuation of the clients fund requirements and evolution of a suitablece package.

design of instrument such as equity, convertible debentures, non-

ertible debentures etc.

cations covering consents from institutions/banks and audited certificates,

intment of agencies such as printers, advertising agencies, registrars,writers, and brokers to the issue.

ration of prospectus


34/86


olio Management Services : Portfolio management schemes are promoted byhant bankers and other finance companies to handle funds of investors at a fee.

selling : Corporate counseling basically means the advice a merchant banker to a corporate unit to ensure better performance in terms of growth and survival.

Syndication : Loan syndication refers to the services rendered by merchant

er in arranging and procuring credit from financial institutions, banks and other ng institutions.

is Issue Management. Explain various types of issues.Issue Management : Issue management refers to management of securitiesngs of the corporate sector to public and existing shareholders on rights basis. Issuegers in capital market are known as Merchant Banker or Lead Managers. Although themerchant banking, in generic terms, covers a wide range of services, but issuegement constitutes perhaps the most important function within it.r SEBI Guidelines, each public issue and rights issue of more than Rs. 50 lacs isred to be managed by merchant banker, registered with SEBI. of Issues : Existing as well as new companies raise funds through various sources

mplementing projects:

c Issue : The most common method of raising funds through issues is throughectus. Public issue is made by a company through prospectus for a fixed number

ares at a stated price which may be at par or premium and any person can applye shares of the company.

s Issue : Right issues are issues of new shares in which existing shareholdersven preemptive rights to subscribe to new issue of shares. Such further sharesfered in proportion to the capital paid-up on the shares help by them at the date of offer. The shareholders to whom the offer is made are not under any legalation to accept the offer.

te Placement : The direct sale of securities by a company to investors is called

e placement. In private placement, no prospectus is issued. Private placements shares, preference, shares and debentures.

ss briefly the pre-issue and post-issue obligations of merchant bankers .Introduction : raising money from the capital market needs planning the activities anding out a marketing strategy. It is, therefore, essential to make an nalaytical study of us sources, the quantum, the appropriate time, the cost of raising capital and theble impact of such resources on the overall capital structure besides the low governingsue. There are various activities required for raising funds from the capital markets.e can be broadly divided into pre-issue and post-issue activities.


35/86

sue Activities :

ng of MoU : Issue management activities begin with the signing of orandum of Underst anding between the client company and the Merchanter. The MoU clearly specifies the role and responsibility of the Merchant banker,vis, that of the Issuing Company.

ning Appraisal Note : After the contract is awarded, an appraisal note is

red either-in-house or is obtained from outside appraising agencies viz.,cial institutions/banks etc. The appraisal not thus prepared throws light on thesed capital outlay on the project and the sources of funding it.

mination of Optimum Capital Structure : Optimum capital structure ismined considering the nature and size of the project. If the project is capitalsive, funding is generally biased in favour of equity funding.

intment of Underwriters, Registrars etc . : For ensuring subscription to theunderwriting arrangement are also made with various functionaries. This is

wed by appointment of registrars to an issue for handling share allotment relatedappointment of Bankers to an issue for handling collection of application at

us centres, printers for bulk printing of issue related stationery, legal advisors and

tising agency.

ration of Documents : Thereafter, initial application are submitted to thoseexchange where the listing company intends to get its securities listed. Leadgers also prepares the list of material documents viz., MoU with Registrar, withers to an issue, with advisor to the issue, co-managers to issue, agreement for ase of properties, etc., to be sent for inclusion of prospectus.

Diligence : The lead manager while preparing the offer document is required toise utmost due diligence and to ensure that the disclosures made in the draftdocument are true, fair and adequate.

ission of Offer Document to SEBI : The draft document thus prepared is filed

SEBI along with a due diligence certificate to obtain their observations. SEBI isred to give its observations on the offer document within 21 days from the receiptoffer document.

sation of Collection Centres : Lead Manager finalises collection centres atus places for collection of issue application from the prospective investors.

g with RoC : After incorporating SEBI observations in the offer document, thelete

ment

withtrar

panies ton

wledgment.

ching of a Public Issue : The observation letter issued by SEBI is valid for ad of 365 days from the date of its issuance within which the issue can open for


36/86

NAGEMENT OF FINANCIAL SERVICES ription. Once the legal formalities and statutory permission for issue of capitalmplete, the process of marketing the issue starts. Lead manager has to arrangestribution of public issue stationery to various collecting banks, brokers, investor ,he announcement regarding opening of issue in the newspapers is alos requiredmade by advertising in newspapers 10 days before of the issue opens.

oters Contribution : Acertificate to this effect that the required contribution of omoters has been raised before opening of the issue obtained from a chartered

ntant is also required to be filed with SEBI.

ng of the Issue : During the currency of the issue, collection figures are alsoned on daily basis from Bankers to the issue. These figures are to be filed in a 3report with SEBI. Another announcement through the newspapers is also madeding the closure of the issue.

Issue Activities : After the closures of the issue, lead manager has to manageost-issue activities pertaining to the issue. Certificate of 90% subscription fromtrar as well as final collection certificate from Bankers are obtained.

sation of Basis of Allotment : In case of a public offering, if the issue isribed more than five times, association of SEBI nominated public representative

uired to participate in the finalization of Basis of allotment (BoA).

atch of Share Certificate : Then follows dispatch of share certificates to thessful allotees and refund order to unsuccessful applicants.

of Advertisement in Newspapers : An announcement in the newspaper ismade regarding BoA, no. of applications received and the date of despatch of certificates and refund orders etc.


37/86

NIT III AN AGEM ENT OF FINANC IAL SERVICESANCE : SPECIALIZ ATION PAPERS

e Leasing. What are its essential elements? Discuss briefly theicance and limitations of leasing.Meaning of Leasing : Conceptually, a lease may be defined as a contractual

gement in which a party owing an asset (lessor) provides the asset for use to another e) over a certain/for an agreed period of time for consideration in form of periodicent. At the end of the period of contract, the asset reverts back to the lessor unlessis a provision for the renewal of the contract. Leasing is a process by which a firmn the use of a certain fixed asset for which it must make a series of contractual periodiceductible payments (lease rentals).tial Elements : The essential elements of leasing are:

s to the Contract :are essentially two parties to a contract of lease

cing, namely:

Owner called the lessor

User called the lesseers as well as lessees may be individuals, partnerships, joint stock companies,rations or financial institutions. Sometime there may be jointly lessors or joint

es.es, there may be a lease-broker who acts as an intermediary inging lease deals. They charge certain percentage of fees for their services,ng between 0.5 to 1 percent.

: The asset, property or equipment to be leased is the subject matter of aact of lease financing. The asset may be an automobile, plant & machineryment, land & building and so on. The asset must, however, be of the lessee'se suitable for his business needs.

ership separated from User : The essence of a lease financing contract is thatg the lease-tenure, ownership of the asset vests with the lessor and its use ised to the lessee. On the expiry of the lease tenure, the asset reverts to the lessor.

of Lease : the term of lease is the period for which the agreement of leasens in operation. Each lease should have a definite period otherwise it will bey inoperative.


38/86


Rentals : The consideration which the lessee pays to the lessor for the leaseaction is the lease rental.

s of Terminating Lease : The lease is terminated at the end of the lease periodarious courses are possible, namely,

ease is renewed on a perpetual basis for a definite period, or

sset reverts to the lessor, or

sset reverts to the lessor and the lessor sells it to a third party, or

essor sells the asset to the lessee.ntage/Significance of Leasing : The advantages are:

ntage to the Lessee : Lease financing has following advantage to the lessee:

cing of Capital Goods : Lease financing enables the lessee to have finance for investments in land, building, plant, machinery, heavy equipments and so on,100 percent, without requiring any immediate down payment.

ional Source of Finance : leasing facilitates the acquisition of equipment, plantchinery without necessary capital outlay, and thus, has a competitive advantagebilizing the scare financial resources of the business enterprise.

Costly : Leasing, as a method of financing, is less costly than other alternativesable.

ership Preserved : Leasing provides finance without diluting the ownership or ol of the promoters.

bility in Structuring of Rentals : The lease rentals can be structured tommodate the cash flow position of the lessee, making the payment of rentals

enient to him.

licity : A lease finance arrangement is simple to negotiate and free fromersome procedure with faster and simple documentation.

enefits : By suitable structuring of lease rentals, a lot of tax advantage can beed. If the lessee is in a tax paying position, the rental may be increased to lower xable income. If the lessor is in tax paying position, the rentals may be lowered toon a part of the tax benefit to the lessee. Thus, the rentals can be adjustedbly for postponement of taxes.

lescence Risk is averted : In a lease arrangement, the lessor being the owner the risk of obsolescence and the lessee is always free to replace the asset with

technology.

ntage to the Lessor : Alessor has the following advantage:

ecurity : The lessor's interest is fully secured since he is always the owner of thed asset and can take repossession of the asset if the lessee defaults.


39/86

Benefit : The greatest advantage for the lessor is the tax relief by way of ciation. If the lessor is in high tax bracket, he can assets high depreciation ratesthus reduce his tax liability substantially.

Profitability : The le asing business is highly profitable since the rate of return isthan what the lessor pays on his borrowings.

Growth Potential : The leasing industry has a high growth potential. Lease

cing enables the lessees to acquire equipment and machinery even during ad of depression, since they do not have to invest any capital. Leasing, thus,ains the economic growth even during recessionary period.ations of Leasing : Lease financing suffers from certain limitations too:

ictions on Use of Equipment : A lease arrangement may impose certainctions on use of the equipment, or require compulsory insurance, and so on.es, the lessee is not free to make additions or alterations t the leased asset to suitquirement.

of Residual Value : The lessee never becomes the owner of the leased asset.he is deprived of the residual value of the asset and is not even entitled to any

ovement done by the lessee or caused by inflation or otherwise, such as

ciation in value of leasehold land.

equences of Default : If the lessee defaults are complying with any terms andtions of the lease contract, the lessor may terminate the lease and take over thession of the leased asset.

rstatement of Lessee's Asset : Since the leased assets do not form part of e's assets, there is an effective understatement of his assets.

le Sales-tax : With the amendment of sale-tax law of various states, a leasecing transaction may be charged to sales-tax twice- once when the lessor ases the equipment and again when it is leaded to the lessee.

e Lease. Give the Classification of Lease.Meaning of Leasing : Conceptually, a lease may be defined as a contractualgement in which a party owing an asset (lessor) provides the asset for use to another e) over a certain/for an agreed period of time for consideration in form of periodicent. At the end of the period of contract, the asset reverts back to the lessor unlessis a provision for the renewal of the contract. Leasing is a process by which a firmn the use of a certain fixed asset for which it must make a series of contractual periodiceductible payments (lease rentals).ification of Lease : Leasing can be classified into the following types:


40/86


ce Lease and Operating Lease :

ce Lease : According to International Accounting Standards (IAS-17), in financethe lessor transfers to the lessee, substantially all the risks and rewards

ental to the ownership of the asset. It involves payment of rentals over anatory non-cancellable lease period, sufficient in total to amortise the capital outlaylessor and leave some profit. In such leases, the lessor is only a financier and is

ly not interested in the assets. Types of assets included, under such lease, arelands, buildings, heavy machinery diesel generating sets and so on.

ating Lease : According to the IAS-17, an operating lease is one which is not ace lease. In an operating lease, the lessor does not transfer all the risks andds incidental to the ownership of the asset and the cost of the asset is not fullyised during primary lease period. The lessor provides services attached to the

d asset, such as maintenance, repair and technical advice. Operating lease isally used for computers, office equipments, automobiles, trucks, some other ments, and so on.

and Lease Back and Direct Lease :

and Lease Back : In a way, it is an indirect form of leasing. The owner of an assett to a leasing company (lessor) which leases it back to the owner (lessee).

t Lease : In direct lease, the lessee, and the owner of the asset are two differentes. Adirect lease can be of two types:

tite Lease : There are two parties in the lease transaction, namely (i) Assetier-cum-lessor and (ii) Lessee

rtite Lease : Such type of lease involves three different parties in the leasement: supplier, lessor and lessee.

e Investor Lease and Leveraged Lease :

e Investor Lease : There are only two parties to the lease transaction- the lessor he lessee. The leasing company (lessor) funds the entire investment by anpriate mix of debt and equity funds.

aged Lease : There are three parties to the transaction- (i) Lessor, (ii) Lender essee. In such type of lease, the leasing company buys the asset through

antial borrowing.

estic Lease and International Lease :

estic Lease : A lease transaction is classified as domestic if all parties to thement, namely, equipment supplier, lessor and the lessee, are domiciled in the

country.


41/86

national Lease : If the parties to the lease transaction are domiciled in differentries, it is known as international lease. This type of lease if further sub-classified

rt Lease : In an imp ort lease, the lessor and the lessee are domiciled in thecountry but the equipment supplier is located in a different country. Theimports the asset and leases it to the lessee.

-border Lease : When the lessor and the lessee are domiciled in differentries, the lease is classified as cross-border lease. The domicile of theier is immaterial.

are the regulations and directions for lease?RBI NBFCs Directions : With a view to coordinate, regulate and control theoning of all non-banking financial companies, the RBI issues directions from time to

under the RBI Act. They apply to leasing and hire-purchase companies as well.

Acts /Laws : The other acts/laws applicable to the NBFCs are:

r Vehicles Act : the lessor is regarded as a dealer and although the legalrship vests in the lessor, the lessee is regarded as the owner for purposes

istration of the vehicle under the Act and so on. In case of vehicle financedlease, the lessor is treated as a financier.

n Stamp Act : The Act requires payment of stamp duty on allments/documents creating a right/liability in monetary terms. Theacts for equipment leasing are subject to stamp duty which varies fromo state.

Documentation and Agreement : Lease transactions involve a number of alities and various documents. The lease agreements have to be properlymented to formalize the deal between the parties concerned and to bind them.urposes and essential requirements of lease documentations are:

ocumentation of lease agreements is significant as it provides evidenceability and enforceability of security, brings to sharp focus the terms andtions agreed between the borrower and the lenders and enables theg company to take appropriate legal action in case of default.

ssential requirements of documentation of lease agreements are that thens:

uting the document should have the legal capacity to do

ocuments should be in the prescribed format, should be properlyed, witnessed, and the duly executed and stamped documentsd be registered where necessary, with appropriate authorities.

es in Lease Agreement : There is no standardized lease agreement. Thents differ from case to case. A typical lease agreement has the followinges:


42/86


e of the Lease : This clause specifies whether the lease is anting lease, a financing lease or a leveraged lease.

iption : The clause specifies the detailed description of equipment,ual condition, size, components, estimated useful life, and so on.

ery and Re-Delivery : The clause specifies when and how the

ment would be delivered to the lessee and re-delivered to the lessor piry of the lease contract.

d : This clause specifies that the lessee has to take the equipmentis use on lease on the terms specified in the schedule to thement. It also includes an option clause to the lessee to renew theof the equipment.

Rentals : This clause specifies the procedure for paying leases by the lessee to the lessor at the rates specified in the schedule to

greement.

This clause enjoins upon the lessee the responsibility for proper andl usage.

identification and ownership of equipment.

rs and Maintenance: This clause specifies the responsibility for s and maintenance, insurance and so on.

ation : It specifies that no alteration to the leased equipment may bewithout the written consent of the lessor.

ges : This clause specifies clearly which party to the agreementd bear the delivery, re-delivery, customs, income tax, sales tax andance charges.

ction : It gives the lessor or his representative a right to enter thee's premises for the purpose of confirming the existence, conditionroper maintenance of the equipment.

bition of Sub-leasing : This clause prohibits the lessee from theeasing or selling the equipment to third parties.

sfault and

dies :clause

fies

quences of defaults by the lessee and recourse available to the. This clause may also specify other remedies, if any.

cable Law : This clause specifies the country whose laws wouldil in case of a dispute.

in the accounting treatment for finance and operating leases by a lessor y a lessee and their disclosures in financial statements.Accounting Treatment for Leasing : Accounting treatment for leasing is divided intoarts:


43/86

unting for Leases by a Lessee

unting for Leases by a Lessor

unting for Leases by a Lessee : Accounting for finance and operating leasesessee and disclosures in their financial statements are given below:

ce Lease : Afinance lease should be reflected in the balance sheet of a lessee

cording an asset and a liability at amount equal at the inception of the lease to thealue of the leased assets net of grants and tax credits receivable by the lessor; if , at the present value of the minimum lease payments. In calculating the presentof the minimum lease payments the lease factor is the interest implicit in theif this is practicable to determine.

ance lease gives rise to a depreciation charge for the asset as well as financee for each accounting period. The depreciation policy for leased assets shouldnsistent with that for depreciable assets which are owned and the depreciatione should be calculated on the basis set out in the 'IAS-4:Depreciationunting'.

ating Lease : The charge to income under an operating lease should be theexpenses for the accounting period, recognized on a systematic basis that is

sentative of the time pattern of the user's benefit.osure in Financial Statements of Lessees: Disclosure should be made of thent of the assets that are subject to finance lease at each balance sheet date.lities related to these leased assets should be shown separately from other ties, differentiating between the current and the long-term portions.

unting for Leases by Lessors : Accounting for finance, and operating leasessors and disclosure in their financial statements are given below:

ce Lease : An asset held under a finance lease should be recorded in thece sheet not as property, plant & equipment but as a receivable, at an anountto the net investment in the lease.

ating Lease : Assets held for operating leases should be recorded as property,& equipment in the balance sheet of the lessor.epreciation of leased assets should be on a basis consistent with the lessor'sal depreciation policy for similar assets and the depreciation charge should belated on the basis set out in IAS-4: Depreciation Accounting.osure in the Financial Statements of Lessors: Disclosures should be made atbalance sheet date of the gross investment in leases reported as finance leases,he related unearned finance income and unguaranteed residual values of thed assets.


44/86


in the Tax aspects of Leasing.Tax Aspects of Leasing : The tax aspects of leasing pertain to both income-tax andtax.

me Tax Aspects

Tax Aspects

me Tax Aspects : Leasing , as a finance device, has tax implications for, andtax benefits both to, the lessor and the lessee.

essor : The main attraction of leasing device to the lessor is the deduction of ciation from his taxable income. The relevant provisions applicable to theutation of the lessor's income, the tax rates and so on are summarized as

ws:

bility of Lease Rentals : the computation of taxable income of ansee under the provisions of the Income Tax Act, 1961 involvesutation under various heads of income which are aggregated and thened by certain deductions. Calculation of Computation of Income are:

putation of Total Income :

me from Salary---

me from House Property---

me from Business or Profession---

me from Capital Gain---

me from Other Sources---

________ Total Income----Deductions---

_________ ble Income-----e leasing constitutes the business/main activity of the assessee (lessor), income fromrental is taxable under the head Income from Business or Profession. In other cases,

come from lease is taxed as Income from Other Sources.

ctibility of Expenses :e computing the income of lessor fromg, certain expenses are allowed as a deduction to determine the taxable

me. These include:

eciation

taxes, repairs and insurance of the leased asset where suchnditure is borne by the lessor.


45/86

tisation of certain preliminary expenses, such as expenditure for ration of project report, market survey and so on.

st on borrowed Cap ital

Debts

tainment expenses subject to prescribed limits.

l Expenses as per approved norms.ng the allowable deductions, depreciation and interest are the most importantnses for the lessor in the computation of his taxable income.

essee : The income tax considerations for the lessee are:

wability of Lease Rentals : Lease rentals are allowed by the Income Taxs a normal business expenditure of the lessee for assessment purposeded the expense is not

apital Nature

sonal Expense.

ctibility of Incidental Expenses : The lessee is normally required to bear nses associated with the leased asset such as repairs and maintenance,ce charge and so on. These incidental expenses to the lease are allowededuction by the Income Tax Act from taxable income of the lessee.

Tax Aspects : The legislative framework governing levy of sales tax consists of

al Sales Tax Act, 1957(CST): The CSTdeals with the levy and collection of tax on the inter-state sale of goods only.

Tax Acts: The tax on sale of goods within a state (Intra-state sale) isned by the provisions of the respective STAs.e normally has three important elements from the viewpoint of sales tax:

ase of Equipment : When purchase of an equipment by a lesser involves inter-sale, the transactions attracts the provisions of the CST according to which theal rate of sales tax (10 per cent) or the appropriate rate applicable to intra-statease/sale of goods in the respective state, whichever is higher, is imposed.

Rentals : Before 1982, there was no sales tax on lease rentals. The incidencees tax on them was introduced by the Constitution Act, 1982. The provisions are:

tax is payable on the annual taxable turnover (aggregate lease rentals) of ssor. The rates of tax vary between a minimum and maximum; they alsofrom state to state.

dition, in several states, surcharge, additional surcharge, additional salesn turnover exceeding a specified limit/turnover tax are also levied on therentals.


46/86


of Asset : Second sale exemptions available for the normal second saleaction within the state are usually not available for lease transaction. For ple, a leasing company buys and equipment from a supplier and lease it to ae, both within the same state. The transaction between the leasing company andquipment supplier is called the first sale; it will attract local sales tax. Theaction between the lessor and the lessee being a deemed sale is called secondNormally second sale of some specified goods is exempted from levy of sales

ut thie exemption is usually not available in lease transactions.

e Debt Securitization. Explain its process.Meaning of Debt Securitization : Securitization is the process of pooling andkaging of homogeneous illiquid financial assets into marketable securities that can beo investors. In other words, securitization is the process of transforming assets intoities. The process leads to the creation of financial instruments that representrship interest in, or are secured by a segregated income producing asset or pool, of . The pool of assets collateralizes securities. These assets are generally secured bynal or real property such as automobiles, real estate, or equipment loans but in someare unsecured for example, credit card debt and consumer loans.itization Process : The securitization process is listed below:

are originated through receivables, leases, housing loans or any other form of by a company and funded on its balance sheet. The company is normally referredhe "originator".

a suitably large portfolio of assets has been originated, the assets are analysedortfolio and then sold or assigned to a third party, which is normally a specialse vehicle company ("SPV") formed for the specific purpose of funding the. It issues debt and purchases receivables from the originator.

dministration of the asset is then subcontracted back to the originator by theIt is responsible for collecting interest and principal payments on the loans in thelying poolt of assets and transfer to the SPV.

PV issues tradable securities to fund the purchase of assets. The performancese securities is directly linked to the performance of the assets and there is norce back to the originator.

nvestors purchase the securities because they are satisfied that the securitiesd be paid in full and on time from the cash flows available in the asset pool. Theeds from the sale of securities are used to pay the originator.

PV agrees to pay any surpluses which, may arise during its funding of the, back to the originator. Thus, the originator, for all practical purposes, retains itsng relationship with the borrowers and all of the economies of funding the assets.

sh flow arise on the assets, these are used by the SPV to repay funds to the