Introduction to Indian Financial System What does a Financial System do????

Functions of the Financial System: 1. Provision of Liquidity

- What is liquidity? Role of RBI & Commercial banks

2. Mobilization of Savings Savings -> Investment & Consumption Facilitated by financial intermediaries

Financial Asset: What is it?

Classification of Financial Assets: 1. Marketable Assets

2. Non-marketable Assets

Cash Asset - RBI & GOI, commercial banks Debt Asset Fixed repayment schedule

What are the ways to raise debt capital?

Stock Asset What is the purpose? Equity and preference

Financial Intermediaries: What do they do and for whom???

In which sectors they fall???? (1) Capital market intermediaries (2) Money market intermediaries

Financial Markets: What is a financial market???

Where are they located??? 1. Unorganized Markets

2. Organized Markets - Capital Market - Money Market Capital Market: (i) Industrial Securities market - Equity or ordinary shares - Preference shares and - Debentures or Bonds

Subdivided into two: 1. Primary market - Public issue -Rights issue -Private Placement 2. Secondary market All stock exchanges recognized by GOI SCRA 1956 BSE & NSE

(ii) Govt. Securities Mkt - Short term & Long term

Securities issued by whom? Denomination, interest payment and tax exemptions Limited role of brokers major participants are commercial banks why???

-Forms include promissory notes and Bearer bonds which can be discounted. -G secs sold through Public Debt office of RBI while TBs sold through auction -Good source of raising inexpensive finance for GOI

(iii) Long term loans market

Classified into: 1. Term loans mkt -Industrial finance institutions created by GOI at national and regional level

-Duration? -To Whom? -Examples of such institutions -What other help these institutions extend? 2. Mortgages mkt -What is it? -What is a mortgage loan? -What is mortgage? -Types of mortgages First Charge, Second Charge and Sub mortgage

3. Financial guarantees mkt -What is it? - Performance guarantee and Financial guarantee Financial guarantee in India relate to: 1. Deferred payments for imports and exports 2. Medium and long term loans raised abroad Guarantees are provided by commercial banks, development banks, govts both central and state and specialized institutions like ECGC and DICGC Money Market:

1. Call money market

2. Commercial Bills Market

3. Treasury Bills Market

4. Short term Loan Market

Foreign Exchange Market Converting one national currency into another and transferring money from one country to another. Consists of number of dealers, brokers and banks engaged in the business of buying and selling foreign exchange. Also includes Central bank of each country and treasury authorities Controlled by FEMA 1999

Functions of Foreign Exchange Market 1. To make necessary arrangements to transfer purchasing power from one country to another 2. To provide adequate credit facilities for the promotion of foreign trade 3. To cover foreign exchange risks by providing hedging facilities.

In India, foreign exchange business has a three tiered structure consisting of: 1. Trading betn banks and their commercial customers 2. Trading betn banks through authorized brokers 3. Trading with banks abroad.

Apart from authorized dealers, the RBI has permitted licensed hotels and individuals to deal in foreign exchange business. Govt. shops, travel agents, IDBI & EXIM Bank are also permitted to hold foreign currency. The FEMA helps to smoothen the flow of foreign currency and to prevent any misuse of foreign exchange which is a scarce commodity.

Reserve Bank of India ROLES OF RBI 1. Note Issuing Authority The issue of currency notes is one of its basic functions although one rupee coins and note, and coins of smaller denominations are issued by the Government of India, they are put into circulation only through the RBI. The currency notes issued by the Bank are legal tender everywhere in India without any limit. At present the Bank issues notes in the following denominations: Rs 2, 5, 10, 20, 50, 100, 500 & 1000. The responsibility of the Bank is not only to put currency into or withdraw it from circulation but also to exchange notes and coins of one denomination into those of other denominations as demanded by the public. All affairs of the Bank relating to note issue are conducted through its Issue Department. In order to discharge its currency functions, the Bank has 15 full-fledged issue offices and two sub-offices, and 4127 currency chests in which the stock of new and reissuable notes and rupee coins are stored. Of these, 17 chests are with the RBI, 2877 with the SBI and associate banks, 791 with nationalized banks, 423 with treasuries, and 19 with private sector banks. The Bank can issue notes against the security of gold coins, foreign securities, rupee coins, Government of India securities, and such bills of exchange and promissory notes as are eligible for purchase by the Bank. 2. Government Banker The RBI is the banker to the Central and state governments. It provides to the governments all banking services such as acceptance of deposits, withdrawal of funds by cheques, making payments as well as receipts and collection of payments on behalf of the government, transfer of funds, and management of public debt. The issue, management and administration of the public (Central and state governments) debt are among the major functions of the RBI as the banker to the government. The Bank charges a commission from the governments for rendering this service. The Bank receives government deposits free of interest, and it is not entitled to any remuneration for the conduct of the ordinary banking business of the Government. 3. Ways and Means Advances : As a banker to the government, the Bank can make "ways and means advances" (i.e., temporary advances made in order to bridge the temporary gap between receipts

and payments) to both the Central and state governments, the maximum maturity period of these advances is three months. However, in practice, the gap between receipts and payments in respect of the central government used to be met by the issue of ad hoc treasury bills, while the one in respect of the state governments is met by the ways and means advances. The ways and means advances to the state governments are of the following types: (a) Normal or clean advances i.e., advances without any collateral security (b) Secured advances, i.e., those which are secured against the pledge of Central government securities: (c) Special advances, i.e., those granted by the Bank at its discretion 4. Overdrafts Apart from the ways and means advances, the state governments have made heavy use of overdrafts from the RBI. An overdraft refers to withdrawals of credit by the state governments from the RBI in excess of the credit (ways and means advances) limits granted by the RBI. In other words, overdrafts are unauthorized ways and means advances drawn by the state governments on the RBI. At present, overdrafts up to and inclusive of the seventh day are charged at the Bank rate and from the eighth day onwards at 3 per cent above the Bank rate. 5. Bankers' Bank The RBI, like all central banks, can be called a bankers' bank because it has a very special relationship with commercial and co-operative banks, and the major part of its business is with these banks. The Bank controls the volume of reserves of commercial banks and thereby determines the deposits/credit creating ability of the banks. The banks hold a part their reserves with the RBI. Similarly, in times of need, the banks borrow funds from the RBI. It is, therefore, called the bank of last resort or the lender of last resort. On the whole the RBI is the ultimate source of money and credit in India 6. Supervising Authority The RBI has vast powers to supervise and control commercial and co-operative banks in India.

Following are the supervisory powers of RBI: (a) To issue licenses for the establishment of new banks; (b) To issue licenses for the setting up of bank branches; (c) To prescribe minimum requirements regarding paid-up capital and reserves, maintenance of cash reserves and other liquid assets; (d) To inspect the working of banks in India as well as abroad in respect of: organizational set-up, branch expansion, mobilization of deposits, Investments, credit appraisal, region-wise performance, profit planning, manpower planning and training, and so on;

(e) To conduct ad hoc investigations, from time to time, into complaints, irregularities, and frauds in respect of banks; (f) To control methods of operations of banks so that they do not fritter away funds in improper investments and injudicious advances. (g) To control appointment, re-appointment, termination of appointment of the Chairman and chief executive officers of private sector banks; (h) To approve or force amalgamations. Which are the supervising Departments at RBI? In keeping with the recommendations of Narasimham Committee (1991), the RBI function of bank supervision was separated from its traditional central banking function by the creation of a separate Department of Supervision (DOS) from 22 November 1993. The DOS initially took over the inspection of commercial banks from the Department of Banking Operations and Development (DBOD) of the RBI. Since April 1995, it has been taking steps to extend its area of supervision over the all-India financial institutions also.

In July 1995, it took over the supervision of non-banking financial companies (NBFCs), and in November 1995 the registration of these companies, from the Department of Financial Companies (DFCs). Similarly, following the securities scam which showed the glaring weaknesses in the system for monitoring the financial sector, the Board of Financial Supervision (BFS) was set up on 16 November 1994 under the aegis of the RBI to oversee the IFS. The BFS has a full-time vice/ chairman and six other members; the RBI Governor is its chairman. It has powers to supervise and inspect banks, financial institutions, and NBFCs. There is a five-member Advisory Council to render advice to it. The DOS assists the BFS with its operations.

7. Exchange Control (EC) Authority One of the essential functions of the RBI is to maintain the stability of the external value of the rupee. It pursues this objective through its domestic policies and the regulation of the foreign exchange market The task of the RBI has the following dimensions: (a) To administer the 'foreign exchange control'; (b) To choose the exchange rate system and fix or manage the exchange rate between the rupee and other currencies; (c) To manage exchange reserves; and (d) To interact or negotiate with the monetary authorities of other countries, and with international financial institutions such as the IMF, World Bank, and Asian Development Bank. The RBI is the custodian of the country's foreign exchange reserves, and it is vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner. The RBI achieves this through buying and selling of foreign exchange from and to scheduled banks, which are the authorized dealers in the Indian foreign exchange market. The RBI also manages the investment of reserves in the shares and securities issued by foreign governments and international banks or financial institutions.

8. Promoter of the Financial System Apart from performing the functions already mentioned, the RBI has been rendering developmental' or 'promotional' services which have strengthened the country's banking and financial structure. This has helped in mobilizing savings and directing

credit flows to desired channels, thereby helping to achieve the objective of economic development with social justice. As a part of its promotional role, the Bank has been pre-empting credit for certain sectors at concessional rates. 9. Money Market: In the money market, the RBI has continuously worked for the integration of its unorganized and organized sectors by trying to bring indigenous bankers into the mainstream of the banking business. With a view to increasing the strength and viability of the banking system, it carried out a programme of amalgamations and mergers of weak banks with the strong ones. With the help of a statutory provision for licensing the branch expansion of banks, the RBI has been trying to bring about an appropriate geographical distribution of bank branches. In order to ensure the security of deposits with banks the RBI took the initiative in 1962 to create the Deposit Insurance Corporation. 10. Agricultural Sector : The RBI has rendered service in directing and increasing the flow of credit to the agricultural sector. The importance with which the RBI takes this function is reflected in the fact that since 1955, it has appointed a separate deputy governor in charge of rural credit. As a part of its efforts to increase the supply of agricultural credit, the Bank has been working to strengthen co-operative banking structure through the provision of finance, supervision, and inspection. It provides to co-operative banks (through state co-operative banks), short-term finance at a concessional rate for seasonal agricultural operations and marketing of crops. It operates the National Agricultural Credit Funds through which it provides longterm and medium-term finance to co-operative institutions. It established the Agricultural Refinance Cooperation (now known as NABARD) in July 1963 for providing medium-term and long-term finance for agriculture. 11. Industrial Finance: All the special development institutions (SDIs) at the Central and state levels were either created by the Bank on its own or it advised and rendered help in setting up

these institutions. The UTI, for example, was originally an associate institution of the RBI. A number of institutions providing financial and other services such as guarantees, technical consultancy, and so on have come into being on account of the efforts of the RBI. Through these institutions, the RBI has been providing short-term and long-term funds to the small-scale industries, to medium and large industries, and to the export sector. It has helped to develop guarantee services in respect of loans to agriculture, small industry, exports and sick units. It also co-ordinates the efforts of banks, financial institutions and government agencies to rehabilitate sick units. MONETARY POLICY OF THE RBI: Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability of credit. As an instrument of demand management, monetary policy work in two ways: 1. It can affect the cost of credit and, 2. It can influence the credit availability for business firms. Objectives of Monetary Policy of RBI: The objectives of monetary policy in India are: (a) To accelerate economic development in an environment of reasonable price stability, and (b) To develop appropriate institutional set-up to aid this process. The Bank has been directing its attention to ensure that credit expansion takes place in the light of price variations without affecting the industrial output adversely. In other words, the objective has been one of disinflation without deflation. The containment of inflationary pressures without jeopardizing the growth potential has been the main objective of monetary policy.

THE MEASURES/ TECHNIQUES OF CREDIT CONTROL 1. Quantitative credit control 2. Selective credit control

1. Quantitative credit control

1. Open Market Operations: The multiple objective are: (i) To maintain stability in government securities market. (ii) To support government borrowing programmes. (iii) To smoothen the seasonal flow of funds in the bank credit market. 2. Bank Rate and Discretionary Control of Refinance: The bank rate is the basic cost of re-finance and re-discounting facilities. The technique of bank rate and discretionary control of refinance are used to regulate the cost and availability of refinance, and to change the volume of lendable resources of banks. The refinance policy has to take care of seasonal needs for funds. 3. Cash Reserve Ratio: The CRR refers to the cash which banks have to maintain with the RBI as certain percentage of their demand and time liability. The bank has powers to vary these ratios up to a maximum of 20%. The CRR enables bank to impose primary reserve requirements. 4. Statutory Liquidity Ratio: The SLR enables RBI to impose secondary and supplementary reserve requirements, on banking system. There 3 major objective: (i) to restrict expansion of bank credit, (ii) to augment banks investment in government securities, and (iii) to ensure solvency of banks.

2. selective credit control

This is the most actively used technique in India because of seasonal nature of the Indian Economy. SCCs seek to change the composition of credit; they are used to reduce the supply of credit in certain directions and to encourage it in desired directions. The RBI uses SCCs normally for fixation of separate minimum lending rates on credit covered by SCCs and fixation of margin requirements. 1. Rationing of consumer credit: 2. Differential rate of interest: 3. Altering Margin requirements 4. Moral Suasion Marginal Requirement Marginal Requirement of loan = current value of security offered for loan-value of loans granted. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy. e.g.- a person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%.

In case the flow of credit has to be increased, the marginal requirement will be lowered. RBI has been using this method since 1956 Rationing of credit Under this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Moral Suasion This method is also known as Moral Persuasion as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during recession.

SECURITIES AND EXCHANGE BOARD OF INDIA CAPITAL ISSUES (CONTROL) ACT, 1947

The Capital Issues (Control) Act, CICA is only of historical interest now as it was repealed by the Capital Issues (Control) Repeal Act, 1992. But we should know about it because it played an important part in the functioning of the Indian capital market for as many as 45 Years since 1941, and its provisions have now become the powers and functions of the SEBI. It was administered by the Controller of Capital Issues (CCI) in the Ministry of Finance, Department of Economic Affairs, 001. While the SCRA mainly regulates the secondary market, the CICA mostly regulated the primary or new issue market for securities. The objectives of the Act were: (a) to protect the investing public, (b) to ensure that investments by the corporate sector were in accordance with the plans and that they were not wasteful and in nonessential channels, (c) to ensure that the capital structure of companies was sound and in the public interest, (d) to ensure that there was no undue congestion of public issues in any part of the year, and (e) to regulate the volume, terms, and conditions for foreign investment, The Act required companies to obtain prior approval or consent for issues of capital to the public, and for pricing of public and right issues. It empowered the GOI to regulate below matters: Timing of new issues by private sector companies, the composition of securities to be issued, Interest (dividend) rates which can be offered on debentures and preference shares, The timing and frequency of bonus issues, The amount of prior allotment to promoters, floatation costs, and The premium to be charged on securities. It was proved over time that the provisions in the Capital Issues (Control) Act were totally inadequate to regulate the growing dimensions of capital market activity.

 The government realized the necessity of creating a broad based and a more secure environment for the business to grow. This led to the enactment of Companies Act and Securities Contracts (Regulation) Act in 1956. SECURITIES CONTRACTS (REGULATION) ACT IN 1956 The objective of the Securities Contracts (Regulation) Act (SCRA) is to regulate the working of stock exchanges or secondary market with a view to prevent undesirable transactions or speculations in securities, and thereby to build up a healthy and strong investment market in which the public could invest with confidence. It empowers GOI regarding following matters: Recognize and derecognize the stock exchanges, to stipulate laws and by-laws for their functioning, and to make the listing of securities on stock exchanges by Public Limited Companies mandatory. It prohibits securities transactions outside the recognized stock exchanges. It prescribes condition or requirements for listing of securities on the recognized stock exchanges. It lays down that all contracts in securities except spot delivery contracts can be entered into only between and through the members of recognized stock exchanges. It empowers the GOI to: Supercede the governing bodies of stock exchanges, to declare certain contracts illegal and void under certain circumstances, To prohibit contracts in certain cases, To license the security dealers, and To lay down penalties for contravention of the provisions of the Act. It is administered by Ministry of Finance, department of Economic Affairs, and GOI. During the Sixth Five-Year Plan period, many major industrial policy changes like opening up of the economy to outside world and greater role to private sector were initiated hence, India witnessed a phenomenal growth of the securities market. With the growth of securities market, the number of malpractices also increased in both the primary and secondary markets.

MALPRACTICES IN SECURITIES MARKET: Manipulation of Security Prices: Companies issuing securities, often, artificially push up the prices before the issue of securities. This process starts well before a company seeks permission from the government for the issue of further capital. Not only is an attempt to get a higher premium on the basis of prices so manipulated being made but also attempts at manipulating prices continue thereafter to lure investors to subscribe to these further issues. Price-rigging: A common way of pushing up the prices is to resort to circular trading - three or four parties buy and sell stocks among themselves and push the prices up. Insider Trading: Insider trading by agents of companies or brokers caused wide fluctuations in the prices of securities. Many companies have intricate network of brokers, their clients, friends and associates. The insiders who are privy to price sensitive information use such information to their advantage and build up large fortunes. Delay in Settlement: The delay is noticed in giving delivery of shares, making payments to clients and passing contract notes. Delay in listing and commencement of trading in shares was also prevalent.

DEFICIENCIES IN THE INDIAN STOCK MARKET: Lack of Diversity in Financial Instruments Lack of disclosure of Financial Information Preponderance of Speculative Trading Poor Liquidity Lack of Control over Brokers Under these circumstances, the government felt the need for setting up of an apex body to develop and regulate the stock market in India. Eventually, the Securities

and Exchange Board of India (SEBI) was set up on April 12, 1988. To start with, SEBI was set up as a non-statutory body. It took almost four years for the government to bring about a separate legislation in the name of Securities and Exchange Board of India Act, 1992 conferring statutory powers. The Act, charged to SEBI with comprehensive powers over practically all aspects of capital market operations. " The philosophy underlying the creation of the SEBI is that multiple regulatory bodies for securities industry mean that the regulatory system gets divided, causing confusion among market participants as to who is really in command. In a multiple regulatory structure, there is also an overlap of functions of different regulatory bodies. Through the SEBI, the regulation model which is sought to be put in place in India is one in which every aspect of securities market regulation is entrusted to a single highly visible and independent organization, which is backed by a statute, and which is accountable to the Parliament and in which investors can have trust. Constitution of SEBI: SEBI is a body of six members comprising the chairman, two members from amongst the officials of the ministries of the central government dealing with finance and law, two members who are professionals and have experience or special -knowledge relating to securities market, and one member from the RBI. All members, except the RBI member, are appointed by the government. Government also lays down their terms of office; tenure, and conditions of service, and it can also remove any member from office under certain circumstances. The Central government is empowered to supersede the SEBI in public interest, or if, on account of grave emergency, it is unable to discharge its functions or duties, or if it persistently defaults in complying with any direction issued by the government, or if its financial position and administration deteriorates. ORGANIZATION OF SEBI: The work of the SEBI has been organized into five operational departments each of which is headed by an executive director who reports to the Chairman. 1. Primary Market Dept: It looks after all policy matters and regulatory issues in respect of primary market, registration, merchant bankers, investment advisers, underwriters, portfolio management services, etc.

2. Issue Mgt. & Intermediaries Dept. It is responsible for vetting of all prospectuses and letters of offer for public and right issues. It is also responsible for registration, regulation and monitoring of issue-related intermediaries. 3. Secondary Mkt. Dept.: It is responsible for all policy and regulatory issues for secondary market and new investment products. Registration and monitoring of members of stock exchanges, administration of some of the stock exchanges, market surveillance and monitoring of price movements and insider trading. 4. Institutional investment Dept.: It looks after policy, registration, regulation and monitoring of Foreign Institutional Investors (FIls), domestic mutual funds, mergers, International relations etc. 5. Legal & Investigation Depts. The SEBI has regional offices at Calcutta, Chennai and Delhi. It has also formed two non-statutory advisory committees namely, the Primary Market Advisory Committee and Secondary Market Advisory Committee with members from market players, recognized investor associations, and other eminent persons. Objectives Of SEBI: According to the preamble of the SEBI Act, the primary objective of the SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. For this purpose, the SEBI monitors the activities of not only stock exchanges but also merchant bankers etc. The objectives of SEBI are as follows: To protect the interest of investors so that there is a steady flow of savings into the capital market. To regulate the securities market and ensure fair practices by the issuers of securities so that they can raise resources at minimum cost. To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and ,professional.

SCOPE AND POWERS OF SEBI: The scope of operations of the SEBI is very wide; It can frame or issue rules, regulations, directives, guidelines, norms in respect of both the primary and secondary markets, intermediaries operating in these markets, and certain financial institutions. It has powers to regulate : Depositories and participants, FIIs, Insider trading, Merchant bankers, Mutual funds, Portfolio managers, and investment advisers, Registrars to issue and share transfer agents, Stock brokers and sub-brokers, Substantial acquisition of shares and takeovers, Underwriters, Venture capital funds, and Bankers to issues. The SEBI can issue guidelines in respect of : (a) information disclosure, operational transparency, and investor protection, (b) development of financial institutions, (c) pricing of issues, (d) bonus issues, (e) preferential issues, (f)financial instruments, (g) firm allotment and transfer of shares among promoters

The SEBI is empowered to register any agency or intermediary who may be associated with the securities market and none of them shall buy, sell or deal in securities except under and in accordance with the conditions of a certificate of registration issued by the SEBI. However, the GOI is empowered to exempt any person or class of persons from registration with the SEBI. The SEBI can suspend or cancel a certificate of registration issued by it to anyone, after giving him a reasonable opportunity of being heard The SEBI Act lays down the civil and criminal penalties for contravention of the Act; anyone who contravenes or attempts to contravene the provisions of the Act or of any rules or regulations made there under, is punishable with imprisonment or fine or both. SEBI can conduct inquiries into the working of the stock exchanges which have to submit their annual reports to the SEBI and seek its approval for amending their rules and bye laws. It can direct them to amend their bye-laws and rules including reconstitution of their governing boards/councils; It is empowered to license security dealers operating outside their jurisdiction. The SEBI has also been empowered to demand explanations, to summon the attendance and call for documents from all categories of market intermediaries in order to enable it to investigate irregularities, impose penalties, and initiate prosecution. The SEBI has also been empowered now to notify its regulations and file complaints in courts without the prior approval of the GOI However, in the exercise of its powers and in performing its functions, the SEBI is bound by such directions on questions of policy as the GOI may give in writing from time to time. Although it has the opportunity to express its views before any direction is given, the decision of the GOT is final in every case. REGULATION OF SEBI: SEBI regulates: 1. Primary Market 2. Secondary Market 3. Mutual Funds 4. Foreign Institutional Investors.

1. SEBI guidelines for Primary Market: The issues of capital by companies no longer require any consent from any authority either for making the issue or for pricing it. Efforts have been made to raise the standards of disclosure in public issues and enhance their transparency. The offer document is now made public even at the draft stage. For issues above Rs 100 crore, book building requirement has been introduced. Initially, the underwriting of issues to public was made mandatory, but now this stipulation has been removed. Bankers to an issue and portfolio managers have to be registered with the SEBI. Allocation of shares to retail individual investors has been increased from 25 per cent to 35 per cent of the total issue of securities in case of book-built issues In order to ensure faster and hassle-free refunds, it has decided to extend the facility of electronic transfer of funds to public issue refunds. With a view to assisting the investors, particularly the retail investors, SEBI has given in-principle approval for grading of IPOs by the rating agencies at the option of the issuers. SEBI will not certify the assessment made by the rating agencies. SEBI framed guidelines relating to disclosure of grading of the initial public offer (IPO) by issuer companies who may want to opt for grading of their IPOs by the rating agencies. If the issuer companies opt for grading, then they are required to disclose the grades, including the unaccepted ones, in the prospectus. Companies making their first public issue are eligible to do so only if they have three years of dividend-paying track record preceding an issue. Those not meeting this requirement can still make an issue if their projects are appraised by banks or FIs with minimum 10 per cent participation in the equity capital of the issuer, or if their securities are listed on the OTCEI (Over-theCounter Exchange of India). In case of a fixed price issue, a company is required to disclose the issue price or the price band in the offer document filed with SEBI To enable a minimum level of public shareholding, listed companies will now be required to maintain minimum level of public shareholding at 25 per cent of the total shares issued for continued listing on stock exchanges. Further issue of capital by a company, after filing a draft offer document with SEBI, was prohibited till the listing of shares that are referred to in the offer document. In order to facilitate additional resource mobilisation, a company has been permitted to issue further shares, provided full disclosures as regards the total capital to be raised from such further issues are made in the draft offer document

2. SEBI guidelines for secondary market: Computerized or screen-based trading has been achieved on almost all exchanges except some of the smaller ones. Corporate membership of SEs is now allowed, encouraged, and preferred. The Articles of Association of SEs have been amended so as to increase their membership. The Bombay Stock Exchange (BSE) has been asked to reduce trading period or settlement cycle - from 14 to 7 days for B group shares. The SEs have been instructed to set up independent market surveillance departments. Both the brokers and sub-brokers have been brought within the regulatory fold for the first time now; and the concept of the dual registration of stock brokers with the SEBI and the SEs has been introduced. It has been made mandatory for the stock brokers to disclose the transaction price and brokerage separately in the contract notes issued by them to their clients. The SEs have amended their Listing Agreements such that the issuers have now to provide shareholders with cash flow statements in a prescribed format, along with the complete balance sheet and profit and loss statement. Compulsory audit of the brokers' books and filing of the audit reports with the SEBI has now been made mandatory. A system of market making in less liquid scrips on selected SEs has been introduced. Insider trading has been prohibited and such trading has been made a criminal offence punishable in accordance with the provisions of the SEBI Act. In order to simplify the existing framework, the SEBI (Delisting of Securities) guidelines, 2003 were amended, making it possible for stock exchanges to delist the shares of errant companies which are not complying with the Listing Agreement. It is required that the capital of companies to be registered as depositories must be Rs 100 crore. Venture Capital Funds (VCFs) allowed to invest in unlisted companies, to finance turnaround companies, and to provide loans.

The venture capital funds were allowed to invest in securities of foreign companies subject to the conditions stipulated by RBI and SEBI from time to time.

3. SEBI guidelines for Mutual Funds: Pursuant to the announcement made by the Honorable Finance Minister in his budget speech for 2005-06, SEBI appointed a committee for the introduction of Gold Exchange Traded Fund (GETF) in India. Based on the recommendations of the said committee, the SEBI (Mutual Funds) Regulations, 1996 were amended and notification was issued on January 12, 2006 permitting mutual funds to introduce GETFs in India subject to certain investment restrictions. According to the SEBI guidelines dated December 12, 2003, every mutual fund scheme should have a minimum of 20 investors and holding of a single investor should not be more than 25 per cent of the corpus. Mutual funds were permitted to invest in ADRs, GDRs and foreign securities. In case disclosures to this effect were not made in the offer document, all mutual funds were advised to send a written communication to the investors about the proposed investment. In view of the difficulties faced by mutual funds, the time limit for uploading the net asset value (NAV) on the AMFI website was extended from 8 p.m. to 9 p.m. SEBI (Mutual Funds) Regulations, 1996 were amended to permit launch of capital protection oriented schemes. SEBI board approved the draft guidelines for real estate mutual funds (REMFs). REMF means a scheme of a mutual fund which has investment objective to invest directly or indirectly in real estate property and shall be governed by the provisions and guidelines under SEBI (Mutual Funds) Regulations.

4. SEBI guidelines for FIIs: FIIs are also required to be registered with SEBI. The outstanding limit for FII investment in debt securities has been revised upward by the government. While such limit for government securities (including treasury bills) was raised from US$ 1.75 billion to US$ 2.00 billion, the same for the corporate debt had been increased from US$ 0.5 billion to US$ 1.5 billion. The list of eligible investment categories of FIls was enlarged to allow more participation in Indian securities market. Simplification of documentation procedure for FII registration and reduction of registration fee for FIIS.

INVESTOR PROTECTION MEASURES The SEBI has introduced an automated complaints handling system to deal with investor complaints. To create an awareness among the issuers and intermediaries of the need to redress investor grievances quickly, the SEBI has been issuing fortnightly press releases publishing the names of the companies against whom maximum number of complaints have been received. To ensure that no malpractice takes place in the allotment of shares, a representative of the SEBI supervises the allotment process. It has also accorded a recognition to several genuine, active investor associations. It issues advertisements from time to time to guide and enlighten investors on various issues related to the securities market and of their rights and remedies.

MAJOR POLICY REFORMS AND DEVELOPMENT: SEBI initiated several structural changes in the securities market and worked assiduously to achieve them. SOME OF THE MAJOR ACCOMPLISHMENTS OF SEBI : Implementation of T + 3 rolling settlement for all listed securities across the exchanges from April 2, 2002 and to move to T + 2 system on April 1, 2003. Introduction of Electronic Data Information Filing and Retrieval (EDIFAR) System to facilitate electronic filing of certain documents/statements by the listed companies and their immediate disclosure to the market participants. Launch of Securities Market Awareness Campaign. Implementation of a comprehensive risk management system for mutual funds. Establishment of inter-depository transfer through on-line connectivity between CDSL and NSDL. Expansion of the derivatives products basket. Introduction of benchmarking of all the mutual funds schemes to facilitate the understanding of the investors about the performance of the funds. Introduction of nomination facility for the unit holders of mutual funds.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY. About IRDA The IRDA (Insurance Regulatory and Development Authority) is the national regulatory body for Insurance industry (both Life and Non-Life Insurance Companies) under the auspices of Government of India, situated at Hyderabad. IRDA was established by an act enacted in Indian Parliament known as IRDA Act 1999 and was amended in 2002 to incorporate some emerging requirements as well as to overcome some deficiencies in the entire process. The mission of IRDA as stated in the act is as follows:1. To protect the interests of the policyholders 2. To promote, regulate and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto 3. Conduction of insurance businesses across India in an ethical manner. Unlike other Indian administrative Regulatory Bodies which are highly proactive, IRDA is perceived as a silent regulator with activities confined to its local existence. Head Office: Insurance Regulatory and Development Authority (IRDA), 3rd Floor, Parisrama Bhavan, Basheer Bagh, Hyderabad 500 004 Ph: (040) 23381100 Fax: (040) 6682 3334 Email:irda@irda.gov.in Branch-Office: Insurance Regulatory and Development Authority Gate No. 3, Jeevan Tara Building, First Floor, Sansad Marg, New Delhi-110001 Ph: (011) 2374 7648 Fax: (011) 2374 3397 Under IRDA Act, two councils have been established for regulation of Life and Non-Life (General) Insurance companies across India as follows: a) Life Insurance Council b) General Insurance Council

Life Insurance Council 4th Floor, Jeevan Seva Annexe Building, Santacruz (West), Mumbai Tel. No: 022 - 26103303/05 /06 Fax No: 022 - 26103304 General Insurance Council Suraksha, 5th Floor, 170, J. Tata Road, Churchgate, Mumbai 400 020 Tel. No.: 022 22867518 Fax. No.: 022 22833209 The composition of IRDA (Insurance Regulatory and Development Authority), under section 4 of IRDA Act, 1999, signifies Authority. The Authority is a 10 member team who are appointed by the government of India. This 10 member team comprises of the following members: (a) Chairman (b) five whole-time members (c) four part-time members The duties, powers and functions of IRDA have been specified under Section 14 of IRDA Act, 1999. The IRDA Authority has the duty to promote, regulate and ensure orderly growth of the insurance and re-insurance businesses across India, subject to the provisions of this Act and any other additional law that is being enforced.

Without prejudice to the generality of the provisions contained in sub-section (1) of IRDA Act, the powers and functions of the Authority shall include: Issuing a certificate of registration to the applicant as well as modify, renew, withdraw, suspend or cancel any such registration that is deemed unfit. Protecting the interests of the policyholders in matters concerning assigning of insurance policy, nomination by policyholders, settlement of insurance claim, insurable interest, surrender value of policy and other terms and conditions based on contracts of insurance.
Promotion of efficiency in the conduct of insurance business.

Promoting and regulating professional organizations connected with the insurance and reinsurance business across India. Levying fees, commission and other charges for carrying out the purposes of this Act. Calling for data or information from, undertaking inspection of, conducting enquiries and investigations, conducting audit of the insurers, insurance intermediaries and other organizations connected with the insurance business. Under section 64U of the Insurance Act, 1938, controlling and regulation of the rates, advantages, terms and conditions etc that may be offered by insurers (or Insurance Companies) in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee. Specifying the manner and form in which books of account shall be maintained and statement of accounts, financial statements etc shall be rendered by insurers and other insurance intermediaries. Keeping a tab, exercising control and regulating investment of funds by insurance companies. Regulating the maintenance of margin of solvency by the Insurers. The solvency margin is a minimum excess on an insurer's assets over its liabilities set by regulators. It can be regarded as similar to capital adequacy requirements for banks. Adjudication of disputes between insurers and insurance intermediaries or with hospitals, healthcare organizations or with customers. To effectively supervise the functioning of the Tariff Advisory Committee. Specifying the percentage of life insurance business and general (or non-life) insurance business to be undertaken by the insurance company in the rural or social sector. Issuing consumer protection guidelines to insurance companies Regulating of product development and their pricing . Publish information about the Insurance industry Prescribe qualification and training needs of agents Monitor the charges for various services provided by insurance companies.

IRDA Initiatives Some of the initiatives of IRDA, by way of subsequent rules framed by it are: IRDA's regulation stipulate that the prospectus issued by the insurer should explicitly state the scope of benefits, conditions, entitlements exceptions, and right to participate in bonus under every plan of insurance.

IRDA has framed regulations regarding advertisement by insurance companies and other intermediaries. They apply to all categories and media employed.

IRDA regulation has laid down the following stipulations as regards settlement of claim: All the requirements needed under death claim are to be sought in one instance Admit or repudiate the claim in 30 days All investigations need to be completed in 6 months Interest at 2 % over bank rate is payable in case of delayed settlement

Grievance Redressal Round one Most insurance companies offer various channels, branch office, phone, and e-mail , to register complaints. You can also approach the company's grievance redressal officer. Insurance companies have to send a written acknowledgement within three working days of receiving the complaint and specify the period within which it is likely to be resolved. If the complaint is resolved within three days, the insurer has to inform the individual along with an acknowledgement. If this is not possible, the company will have to resolve it within two weeks of receiving the complaint and send a final letter of resolution to the aggrieved. If the insurance company decides to reject the complaint, it has to give a reason, along with information on further redressal avenues, that the complainant can pursue. In case you are not satisfied with the insurer's response, you have to inform it within eight weeks, or the company will assume that the complaint has been resolved.

Round two If the above approach doesn't solve your problem, you can contact either Irda's Grievance Redressal Cell or the insurance ombudsman, depending on the nature of the complaint. The ombudsman can make recommendations within one month of the receipt of the complaint and give a verdict within three months. If necessary, he can award compensation to the policyholder. If you are satisfied with the settlement, you have to send your acceptance within 15 days. If the insurance firm does not comply with the order, you can approach consumer forums or civil courts. These offices handle cases dealing with insurance contracts with a value of up to Rs 20 lakh. The ombudsman addresses issues related to rejection or delay in settlement of claims, disputes on premiums, and non-issuance of a document after collecting the premium.

Though this cell does not have the authority to pass orders, complaints addressed to it are taken up with the insurers. These could include delay or lack of response pertaining to policies or claims and complaints about agents' conduct. "Irda's toll-free number, 155255, has been publicised widely to create awareness about the recourses available to policyholders. You can approach the cell directly, and where required, you will be redirected to the ombudsman under whose jurisdiction the complaint falls, You can get in touch with the cell via mail on complaints@irda.gov.in.

Money Market Market for short term loanable funds for a period of not exceeding one year Provides funds for financing current business operations, working capital requirements of industries and short period requirements of Govt. Instruments include BOE, TBs, CPs, CDs etc. Denomination of large amount TB min. of 1 lacks and CD or CP is for 25 lacks. Central bank and Commercial banks are major institutions Do not have secondary Mkt Transactions take place over the phone and there is no formal place Without the help of brokers

Main sub-markets are: 1. Call money Market 2. Commercial Bills Market or discount market 3. Treasury bill market 4. Short term loans market 1. Call money Market - Extremely short period of loans 1 to 14 days - Repayable on demand at the option of lender or borrower -Given to brokers and dealers in stock exchange Commercial banks lend their surplus funds Meet SLR requirements Investment avenue when call rates are high Operations in Call market: Between individual lender and borrower By DFHI Renewals up to 14 days recorded at the back of the deposit receipt by the borrower

Purposes of call loans: 1. To commercial banks to meet large payments, large remittances, to maintain liquidity with the RBI etc. 2. To the stock brokers and speculators to deal in stock exchanges and bullion markets 3. To the bill market for meeting matured bills

4. To DFHI and STCI to activate call market 5. To individuals of very high status for trade purposes to save interest on O.D or cash credit.

Participants: 1. Those permitted to act as both lenders and borrowers of call loans Commercial banks, Co-operative banks, DFHI and STCI 2. Those permitted to act only as lenders in the market. LIC, UTI, GIC, IDBI, NABARD ect.

Advantages: 1. High Liquidity 2. High Profitability 3. Maintenance of SLR 4. Safe and Cheap Why safe? They r not issued by GOI??? And why cheap???

5. Assistance to Central Bank Operations Changes in demand and supply of funds quickly reflected. Monetary policy and Open market operations

Drawbacks: 1. Uneven Development 2. Lack of Integration 3. Volatility in Call Money Rates 2. Commercial Bills market: An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain person or to the bearer of the instrument Self liquidating and negotiable Drawn for a short period ranging between 3 months and 6 months

Types of Bills Demand and Usance Bills Clean bills and Documentary Bills

Inland and Foreign Bills - residency and payment

Export Bills and Import Bills Indigenous Bills Accommodation Bills and Supply Bills

Operations in Bill Market: 1. Discount market - financial intermediaries, credit sales, discount rate, maturity amount from acceptor 2. Acceptance market Acceptance by financial intermediaries why so? Acceptance houses in London No acceptance houses in India Commercial banks undertake

Advantages: 1.Liquidity - How are they liquid for banks???

2. Self liquidating and negotiable asset 3. Certainty of payment Drawn and accepted by business ppl.

4. Ideal Investment Maturity of bills coincide with the maturity of their Fixed deposits. 5. Simple legal remedy 6. High and quick yield for banks Immediate discount rate and is high Drawbacks: 1. Absence of Bill culture -O.D and cash credit preffered

2. Absence of rediscounting among banks RBI has permitted LIC, UTI , GIC and ICICI to rediscount genuine trade bills. 3. Stamp Duty

Stamp papers of required denomination are not available 4. Absence of Secondary Market 5. Difficulty in Ascertaining Genuine trade bills 6. Absence of Acceptance Services 7. Attitude of banks - shy in rediscounting with central bank -hold bills till maturity hence less circulation 3. Treasury Bills Market: - short term borrowing of GOI - Promissory note issued by GOI - Purely a finance Bill - does not require any grading, acceptance or endorsement -issued by RBI for meeting temporary Govt.deficits

Types of Treasury Bills 1. Ordinary - issued to public and Fis. Freely marketable Have secondary mkt also 2. Ad hoc Issued in favor of RBI Not sold through auctions RBI can issue currency notes against them Not marketable in India Replenish cash balances of Central Govt. Govt. can raise finance by issuing ad hocs. - 91 days TBs - 182 days TBs - 364 days TBs 91 days TBs issued at fixed discount rate of 4%. 91 days TBs can be rediscounted with RBI after 14 days of purchase

Operations: 91 days TBs sold throughout the week 364 days TBs sold through auction conducted once in a fortnight press release, Bid submission Display of accepted bids Letter of acceptance and cheque DFHI Role: auctions of TBs, quotes daily buying and selling rates, ensures liquidity, activates secondary market

Participants: RBI & SEBI Commercial banks State govts. DFHI STCI Fis Corporate customers Public

Merits: Safety Liquidity Ideal short term investment Ideal Fund management SLR requirement Source of Short term funds for govt. Non inflationary Monetary tool - absorb excess liquidity Demerits: 1. Poor Yield 2. Absence of competitive bids 3. Absence of active Trading 4. Commercial Papers: Instrument for financing working capital requirements of corporate enterprise Unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at discount on the face value

Participants: Issuers: All pvt. Sector company, public sector unit, NBFC etc. Investors Individuals, banks, corporates and also NRIs. Features: 1. CP is a short term money market instrument comprising usance promissory note with a fixed maturity 2. It is a certificate evidencing an unsecured corporate debt of short term maturity 3. Issued at discount but can be issued in interest bearing form 4. Issuer pledges no assets, only his liquidity and established earning power, to guarantee his promise 5. Issued directly by a company or through banks/merchant bankers Advantages: 1. Simplicity - less documentation 2. Flexibility - Maturities tailored to cash flows of company 3. Diversification -From bank to money mkt. 4. Easy to raise long term capital -Cos. Become famous in financial world 5. High Returns to Investors CASH CREDIT AND OVERDRAFT Both cash credit and overdraft are operating accounts through which a borrower if he or she desire can withdraw funds as and when needed up to the credit limit given by the banker to him or her. Under this the borrower can repay the amount anytime, and interest will be charged on amount borrowed and not on the credit limit sanctioned by the bank to the borrower. This form of borrowing is extremely useful to the borrower because under this borrower can draw the amount as and when required by him and also he has to pay only interest on the amount which he has withdrawn and not on full amount which is sanctioned therefore providing flexibility to the borrower. The difference between cash credit and overdraft is that while under cash credit the security is inventory of the company while under overdraft security is generally the fixed assets of the company (sometimes bank give overdraft facility to the company without any security which is called clean overdraft facility).

Cash credit can of two types, one is key cash credit, in which the possession of goods will be with the banks and other is open cash credit, in which the possession of goods will be with the borrower and not with the bank.

CERTIFICATE OF DEPOSITS: CDs are short term deposit instrument issued by bank and FIs to raise large sums of money. Features: Issued in the form of usance promissory notes. Negotiable by nature. Issued at a discount to the face value. Unsecured Pro notes. Subject to stamp duty like the usance promissory notes. Issued in multiples of Min. 5 lacks , Size of issue is 25 lacks. Issued for Min. 3 months to 1 year. NRIs can subscribe on non repatriation basis. Become freely transferable only after 45 days from the date of issue.

Participants: Issued by commercial banks and FIs. Subscribers: Individuals, corporate, Trusts, associations and NRIs.

Merits: High returns for short term surplus. High liquidity as holder can resell it to other persons. Benefits for bank as no premature withdrawal.

Demerits: Stamp Duty: Costs 0.5% to 1% Non availability of stamps & procedural delays at stamp office. No significant development of secondary market as investors hold them till maturity due to attractive returns. Lock in period of 45 days.

IMPORTANCE OF MONEY MARKET: Development of trade & industry Development of capital market Beneficial for banks for their SLR & CRR requirements Effective central bank control - Pumps in money in Slump & siphons it off in boom. Formulation of suitable monetary policy. Non inflationary source of finance.

CHARACTERISTICS OF A DEVELOPED MONEY MARKET: Highly organized banking system Presence of a central bank Availability of proper credit instruments Existence of Submarkets Existence of secondary market Demand & supply of funds. Other factors REPO MARKET: A repo transaction is defined as a transaction wherein the securities are sold at a particular price by one party (seller) to another (buyer), with a commitment on the sellers part to repurchase the securities from the buyer on a certain date and at a certain price. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate. A repo is economically similar to a secured loan, with the buyer (effectively the lender or investor) receiving securities as collateral to protect him against default by the seller. The party who initially sells the securities is effectively the borrower . Unlike a secured loan, however, legal title to the securities passes from the seller to the buyer. Mechanism: Before entering into the deal, the sale and repurchase price are determined. The buyer gets the securities and the seller gets the cash. After the repo period expires, the seller purchases the securities by returning the money. For the use of money in the intervening period i.e the repo period , the seller pays interest at an agreed rate, which is adjusted in the repurchase price of the security. If the same transaction is considered from the viewpoint of the buyer, it is called a reverse repo transaction. Securities in Repo: Govt. securities such as TBs of all maturities also State govt. securities. Participants: Scheduled banks, primary dealers, financial institutions and mutual funds. Maturity: One day to 14 days. Transaction size: in lots of Rs.5 crores. Benefits: For the Seller: To get funds at a pre set interest rate. To hedge against volatile interest rate. No permanent parting of securities

To meet the temporary cash deficit. For the Buyer: Use of security for SLR requirements Excess funds can be parked with a minimum risk. An otherwise idle fund earns interest.

Examples of Repo & Reverse repo: Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI INDIAN FOREIGN EXCHANGE MARKET: The Indian foreign exchange market consists of the buyers, sellers, market intermediaries and the monetary authority of India. The main center of foreign exchange transactions in India is Mumbai, the commercial capital of the country. There are several other centers for foreign exchange transactions in the country including Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. In past, due to lack of communication facilities all these markets were not linked. But with the development of technologies, all the foreign exchange markets of India are working collectively. The foreign exchange market India is regulated by the reserve bank of India through the Exchange Control Department. At the same time, Foreign Exchange Dealers Association (voluntary association) also provides some help in regulating the market. The Authorized Dealers (Authorized by the RBI) and the accredited brokers are eligible to participate in the foreign Exchange market in India. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the Overseas banks, the brokers have no role to play.

Apart from the Authorized Dealers and brokers, there are some others who are provided with the restricted rights to accept the foreign currency or travelers cheque. Among these, there are the authorized money changers, travel agents, certain hotels and government shops. The IDBI and Exim bank are also permitted conditionally to hold foreign currency. The whole foreign exchange market in India is regulated by the Foreign Exchange Management Act, 1999 or FEMA.

STRUCTURE & TYPE OF BANKING & NBFC WHAT IS A BANK? Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. bank may be defined as an institution which is governed by the Banking Regulation Act, 1949. It also lends money to individuals and business houses that need it. Banks also render many other useful services like collection of bills, payment of foreign bills, safe-keeping of jewellery and other valuable items, certifying the creditworthiness of business, and so on. Interest received on loans and fees charged for services are the main sources of income for banks from which they meet their administrative expenses.

Types of Banks (based on constitution): Scheduled Banks the technical definition of a Scheduled bank is those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. Non scheduled banks: a banking company as defined in clause (c) of section 5 of banking regulation act 1949. Which are some of the scheduled and non scheduled banks in India????

Classification on the basis of Functionality:

a) Central Bank A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. b) Commercial Banks Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. Public Sector Banks (PSBs) : PSBs are those where the Government holds a majority ownership. For example, if there are a 100 shares and the Central Government holds 51, LIC holds 25 and various members of the public hold 24, this will be a PSB. The State Bank of India (SBI) is a PSB and Indias largest bank. Punjab National Bank, Corporation Bank, Vijaya Bank, Central Bank of India are some more examples. Private Banks : Private banks, as the name suggests, are banks owned by private (i.e. nongovernment) Indian entities such as corporate and individuals. ICICI Bank is the second largest bank in India, and is a private bank. HDFC Bank, Axis Bank, Yes Bank are some other examples. Foreign Banks : Foreign Banks are those owned by multi national/non-Indian entities. Citibank India for example, is owned by the US based Citi group. Deutsche Bank India is owned by Deustche Bank headquartered in Germany, and so on. c) Development Banks Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

d) Co-operative Banks People who come together to jointly serve their common interest often form a cooperative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a licence from the Reserve Bank of India before starting banking business.

types of co-operative banks (i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilize funds and help in its proper channelization among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central cooperative banks and the primary credit societies. e) Specialized Banks: 1. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting

Products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. 2. Small Industries Development Bank of India (SIDBI): If you want to establish a small-scale business unit or industry, loan on easy terms can be available through SIDBI.

It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries. 3. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage and village industries handicrafts and allied economic activities in rural areas.

WHAT IS AN NBFC? As per the RBI Act, a 'non-banking financial company' is defined as:- (i) a financial institution which is a company; (ii) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme of arrangement or in any other manner, or lending in any manner; (iii) such other nonbanking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. Non-bank financial companies(NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. An NBFC broadly carries out lending functions and investment functions. It can also accept deposits, though only for a fixed term (they cannot be withdrawn whenever the depositor wants). Hence, they are also less regulated than a bank Banks often establish NBFCs as a separate company, so that they can avail of the lesser regulation e.g. CitiFinancial, an NBFC, is a company wholly owned by Citigroup , which also holds a stake in Citibank. Such a wholly owned company is called a subsidiary.

Working of NBFCs: The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act.

The registration process involves submission of an application by the company in the prescribed format along with the necessary documents for RBI's consideration. If the bank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, it issues a 'Certificate of Registration' to the company. Only those NBFCs holding a valid Certificate of Registration can accept/hold public deposits.

Some of the important regulations relating to acceptance of deposits by the NBFCs are:* They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. * They cannot accept deposits repayable on demand. * They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. * They cannot offer gifts/incentives or any other additional benefit to the depositors. * Their deposits are not insured. * The repayment of deposits by NBFCs is not guaranteed by RBI. TYPES OF NBFCs: (i) Equipment leasing company: they provide equipments on lease to industries or they provide finance to seller for purchase of equipments. In leasing the NBFC buys the equipment for your business and you pay for the asset in regular installments over a fixed period of time. Eg. Shiromani leasing and finance, Merut. (ii) Hire-purchase company- It finances hire purchase requirement of movable & immovable properties of any kind. Eg. Buses, lorries, light commercial vehicles, sheds , aircrafts & consumer durables.In hire purchase the business will own the asset once all the payments are made. Eg. Motor and general finance Ltd, Delhi. H/P and Leasing are required by transport operators, farmers or professionals who find it difficult to offer securities to the lending institutions. (iii) Loan companymeans any company which is a financial institution carrying on as its principal business the providing of finance whether of making loans or advances or otherwise for any activity other then its own (iv) investment company- means any company which is a financial institution carrying on as its principal business the acquisition of securities.

Protect the small investors by collecting their savings & investing them on diversified securities. They also provide investment advises & help investors select sound & liquid security. Eg. UTI. (v) Nidhis.: Enable members to save money, invest their money & secure loans at favorable rates of interest. Inculcate the Idea of thrift & savings among middle & lower class people.

DISTINCTION BETWEEN A BANK & AN NBFC The commercial banks can manufacture credit out of the raw material of deposits by creating claims against themselves. But, NBFCs cannot create credit as commercial banks do. They can lend only out the resources on hand. So, they have limited capacity to create credit. Bank deposits are insured upto Rs. 1 lakh per depositor, by the Deposit Insurance Credit Guarantee Corporation of India (DICGCI). Any deposits accepted by NBFCs (these will be of fixed maturity as explained above) are not insured. An NBFC cannot accept deposits repayable on demand whereas a Bank can An NBFC cannot participate in the payment system. Hence only banks can issue cheques drawn on themselves: i.e., can give their customers a cheque book to use.

Capital Market
Capital Market is a market for long term funds Includes equity and debt and funds raised in India or outside India Aides economic growth by Issuing primary securities Issuing secondary securities Facilitating secondary market transactions

Functions Capital Market

Mobilise savings Provides risk capital Provides liquidity Encourages broader ownership Lowers transaction cost Improves efficiency Dissemination of information Enables valuation of assets Provides insurance against risk Encourages wider participation Provides operational efficiency Develops integration among markets and segments Channelise funds to productive sectors

Primary Market
A market for new issues Nature of fund raising Domestic Equity and debt External Equity (ADR/GDR) and debt (ECB) Other external FDI, FII, NRI

FDI and FII

FDI is an investor which picks up more than 10% stake in a cos equity In the form of fully-owned subsidiary or a joint venture, stable, enhances management quality, transfer of technology and generation of employment. FIIs are in the form of portfolio investments. FIIs can invest up to 24% in a company

Fund raising in Primary Market

Public issue by prospectus Private placement Rights issue Preferential issue

Secondary Market
Market for outst securities Facilitates liquidity and marketability of outst debt and equity instruments Provides instant valuation of securities Creates wealth effect Indian Secondary market segregation Secondary market for corporates and fin Intermediaries Secondary market for Govt securities and pub sector undertaking bonds

History of Indian Capital Market

Under British rule Not organised and developed Post independence Small size and supervised by CCI In 1950s Rampant speculation; Government enacted Securities Contract (Regulations) Act and Companies Act, 1956;Development of Financial Institutions. In 1960s Ban on badla, UTI set up in 1964 In 1970s Badla resumed; Promulgation of the Dividend Restriction Ordinance slump in BSE sensex; FERA issues revive stock markets In 1980s Small investor participation; Introduction of PSU bonds; popularity of convertible debentures. Sensex was launched in 1986 In 1990s Capital Issues (Control) Act repealed. Emergence of SEBI; Free pricing; entry of new players (FIIs permitted in India in 1992) and new trading mechanism; Capital market scams, in 1996 nifty was born

Capital Market Scams

1992 Harshad Mehta Scam

2001 Ketan parekh Scam

Reforms in the Capital Market

Specialised Regulator - SEBI Emergence of specialised intermediaries OTCEI,NSDL, CDSL Entry to FIIs Pricing of securities through book building Access to international markets ADR, GDR, ECB,FCCB Emphasis on corporate governance Screen-based trading system and internet trading Rolling settlement Buyback of shares permitted Dematerialisation of securities Derivatives trading commenced Improved disclosure standards, prudential norms

Money Market
It is a market for overnight to short-term funds and instruments having a maturity period of one or less than one year. It is not a physical location but an activity that is conducted over the telephone.

Characteristics
It is not a single market but a collection of markets for several instruments It is a wholesale market of short-term debt instruments Principal feature is honouring the commitments where the creditworthiness of the participants is important Main players are the RBI, DFHI, NBFCs, MFs, Banks, Corporates, etc It is a need based market wherein the dd and ss of money shape the market

Functions
To provide balancing mechanism To provide focal point for central bank intervention To provide reasonable access to suppliers and users of short term funds Facilitates the market for long term securities Int rates of MM serve as a benchmark for long-term financial instruments

Benefits- Efficient Money Market

Stable source of funds to bank Encourages development of non-bank intermediaries Provide efficient source of long term finance Necessary for development of capital market, foreign exchange market and F&O market Precondition for development of Govt securities market Facilitates Govt market borrowing programme Monetary control through indirect methods is more effective

Money Market Instruments

1. Treasury Bills 3. Commercial Papers 5. Commercial Bills 2. Call money market 4. Certificates of Deposits 6. Collateralised Borrowing and lending Obligation

Treasury Bills Features

Negotiable securities Highly liquid Absence of default risk Assured yield, low transaction cost & eligible for inclusion in securities for SLR purpose Pur & Sale effected through the Subsidiary General Ledger (SGL) account At present 91-day, 182-day and 364-day Tbills in vogue Available for a min amt of Rs 25,000 and in multiples thereof.

T Bills - Types
On-tap bills Could be bought from RBI at any time at an int yield of 4.66% Discontinued from Apr 1, 1997 Ad hoc bills Introduced in 1955 Govt could maintain a min of Rs 50 crores on Fridays and Rs. 4 crores on other days with RBI and whenever the bal went below the min the Govt account would be replenished by the creation of ad hoc bills in favour of RBI Ad hoc 91 day Tbills were created to replenish Govts cash bal with the RBI Discontinued from Apr 1, 1997 System of Ways and Means Advances was developed from Apr 1, 1997 Auctioned T bills Introduced in Apr 1992 Yield is market driven At present RBI issues T-bills for 91days, 182days and 364days

T-bills importance
Vital role in cash mgmt of Govt Yields of diff terms serve as benchmarks Preferred Central Bank tool for market intervention

T-bills - Participants
RBI Banks MFs FIs

Corporates FIIs State Govts

T-bills - Sale Through auction Multiple price auction Uniform price auction (91 day T bill from Nov 6, 1998) Tbill auction module operationalised from Oct 22, 2003 on Public Debt Office Negotiated Dealing System (PDO-NDS) Non competitive bids

Size of T-Bills Market (Rs in Crores)

Commercial Paper
Introduced in India in Jan 1990 It is an unsecured short-term promissory note, negotiable by endorsement and delivery with a fixed maturity period. It is generally issued at a discount by the leading creditworthy and highly rated corporates to meet their working capital requirements. Also known as finance paper, industrial paper or corporate paper Also issued by primary dealers and AIFIs Issued to individuals, banks, cos,other registered Indian bodies, NRIs, FIIs Privately placed and a rating equivalent to P2 of CRISIL is required Attracts stamp duty No prior approval of RBI required Underwriting of issue not mandatory

In India most CPs have been issued by Mfg cos for a maturity period of 3 months or less

Process of issuing a CP
A resolution to be passed by the Board of Directors CP issue to be rated Select an Issuing and Paying Agent fro verification of documents Arrange for dealers for placement of CP Report to the RBI regarding the issue

Guidelines relating to CP
Corporates, Primary dealers and AIFIs eligible to issue CP Min credit rating of P2 of CRISIL or equivalent Maturity period min 7 days and max upto 1 year from the date of issue Min size Rs 5 lacs and in multiples thereof May be issued as a promissory note or in demat form. Demat is preferred Underwriting is not permitted Reporting of all CP deals on Negotiated Dealing System is compulsory

Factors inhibiting growth of CP market

Due to min size being Rs5 lacs retail investors have little scope of investing Involve admini difficulties and complex procedural formalities LIC, UTI, GIC are limited by RBI to invest in MM instruments No active secondary market Levy of stamp duty make it less attractive Min maturity period of 7 days inhibits the growth Borrowing from banks was possible at Sub-PLR rates which is more economical than CP

Commercial Bills
It is a short term, negotiable, and self-liquidating instrument with low risk. When trade bills are accepted by commercial banks they are called commercial bills Usually for a tenure of 30, 60 or 90 days

Types of CB
Demand Bill Usance Bill Clear Bill

Documentary Bill Inland Bill Foreign Bill Hundi Derivative Usance promissory notes

Certificates of Deposit
CDs are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and DFIs. Introduced in June 1989 CDs are in bearer form i.e. transferable and tradable while FDs are not Issued at discount to face value Transaction cost on CDs is lower

Guidelines relating to CDs

Issued by Scheduled CB, select AIFIs Min size Rs 1 lac and in multiples thereof Individuals, corporations, companies, trusts, funds and associations, NRI (NR basis) Banks min 7 days and max upto 1 year FIs Min 1 year and max upto 3 years Issued at a dis to face value. May be issued even at floating rate basis Banks have to maintain CRR and SLR on the issue of CD No lock in period

Factors inhibiting the growth of CDs

Min amt of invest is high Stamp duty No facility of loans against CDs. No premature buyback by bank Secondary market not developed Participants limited Int rates attractive CDs not listed

Call Money Market

Key segment of Indian Money Market Mostly required by banks to maintain CRR

Banks borrow/lend money for a period ranging between 1 and 14 days. No collateral security required Inter bank trading accounts for more than 80% of the total transactions Its is basically an OTC mkt without intermediaries Average daily turnover in March 2005 Rs15294 cr and in March 2006 Rs 18290 cr. Participants:- Sch and non-sch CB, foreign banks , co-op banks,DFHIUTI, LIC, GIC,NABARD Reporting of call money mkt transaction on NDS is mandatory Inverse relationship bet call rates and short term money market instruments. Arbitrage opportunity exists between call money market and foreign exchange market Highly volatile MIBOR

Factors influencing Call Money Mkt rate

Liquidity conditions Reserve requirements Structural factors Invest policy of non bank participants Liquidity changes and gaps in the foreign exchange market

Term Money Market Maturity between 3mths to 1 year Still not developed IDBI, ICICI,IFCI, SIDBI EXIM Bank, NABARD, NHB, IDFC can borrow from this market

Collateralised Borrowing & lending obligation (CBLO)

Launched by Clearing Corporation of India Ltd (CCIL) on Jan 20, 2003 To provide liquidity to non-bank entities Participants banks, Fis, primary dealers, MFs, who are members of NDS Min lot auction Rs. 50 lakhs and in multiples of Rs 5 lakhs Min lot market Rs. 5 lakhs and in multiples of Rs. 5 lakhs No lock in period Tenure 1 day to 1 year

MFs have emerged as the largest supplier of funds and banks & primary dealers are large borrowers Average daily turnover during March 2005 was Rs 9625 crore which increased to Rs 35775 crore in March 2006 Money Market Intermediaries - DFHI Set up in April 1988 -> commenced July 28, 1988 Obj-> deepening & activating the MM Provides two way regular quotes Nov 1995 accredited Primary Dealer Deals in-> TB, CB, CD, CP, short term deposits, call money market, govt securities Money Market Mutual Funds Introduced in Apr1991 Help small investors participate in MM MMMFs earlier under purview of the RBI, now under the purview of SEBI since March 2000 Link bet MM & Monetary policy in India Monetary policy in India is an adjunct to the economic policy Obj of eco policy in India -> growth, price stability and social justice Obj of monetary policy -> price stability and growth Instruments to influence monetary conditions Direct : res requirement, limit on refinance, admini int rate, qualitative and quantative restrictions on credit Indirect : Open market operations, repos Tools for managing liquidity in MM Reserve requirement CRR & SLR Interest rates PLR Bank rate Refinance from Reserve Bank Repos Inter bank repo, RBI repo MM Derivatives Interest Rate Swaps Forward Rate Agreements Interest Rate Futures

Financial Services: Leasing & Hire purchase

INTRODUCTION Financial Services basically mean all those kinds of services provided in financial terms where the essential commodity is money.

These services include: leasing, hire purchase, consumer credit, investment banking, commercial banking, venture capital, insurance, credit rating, bill discounting, and mutual funds , stock broking, housing finance, vehicle finance, mortgages and car loans, factoring among other things. Various entities that provide these services are basically categorized into (a) Non Banking Finance Companies (b) Commercial Banks, and (c) Merchant Banks. One of the main entities that offer financial services in India is Non-Banking Finance Companies. These NBFCs registered with Reserve Bank of India mainly perform fund based services to the customer. Fund based services of NBFCs include: leasing, hire-purchase and other asset based services. Fee based services of NBFCs include bill discounting, portfolio management and other advisory services.

LEASING Leasing as financial service is a contractual agreement where the owner (lessor) of equipment transfers the right to use the equipment to the user (lessee) for an agreed period of time in return for a rental. At the end of the lease period the asset reverts back to the lessor unless there is a provision for the renewal of the contract or there is a provision for the transfers of ownership to the lessee. If there is any such provision for transfer of ownership, the deal is treated as hire purchase. Therefore, a lease could be generally defined as A contract where a party being the owner (lessor) of an asset (leased asset) provides the asset for use by the lessee at a consideration (rentals), either fixed or dependent on any variables, for a certain period (lease period), either fixed or flexible, with an understanding that at the end of such period, the asset, subject to the embedded options of the lease, will be either returned to the lessor or disposed off as per the lessor's instructions.

ELEMENTS IN LEASE STRUCTURE 1. The transaction:

The transaction of lease of lease is generically an asset-renting transaction. What distinguishes a lease from a loan is that in the latter, what is lent out is money; in a lease, what is lent out is the asset. 2. Parties to a lease:

There are two parties to a lease: the owner and the user, called the lessor and the lessee. The lessor is the person who owns the asset and gives it on lease. The lessee takes the asset on lease and uses it for the period of the lease. Technically, in order to be a lessor, one does not have to own the asset: one has to have the right to use the asset. Thus, a lessee can be a lessor for a sub-lessee, unless the parent lessor has restricted the right to sub-lease. 3. The leased asset:

The subject of a lease is the asset, article or property to be leased. The asset may be anything - an automobile, aircraft, machine, or consumer durable, land, building, or a factory. Only tangible assets can be leased - one cannot contemplate the leasing of the intangible assets, since one of the essential elements of a lease is handing over of possession, along with the right to use. 4. Lease period:

The term of lease, or lease period, is the period for which the agreement of lease shall be in operation. As an essential element in a lease is redelivery of the asset by the lessee at the end of the lease period, it is necessary to have a certain period of lease. During this certain period, the lessee may be given a right of cancellation, and beyond this period, the lessee may be given a right of renewal, but essentially, a lease should not amount to a sale: that is, the asset being given permanently to the lessee. 5. Lease rentals:

The lease rentals represent the consideration for the lease transaction. This is what the Lessee pays to the Lessor. If it is a financial lease transaction, the rentals will simply be the recovery of the lessor's principal, and a certain rate of return on outstanding principal. In other words, the rentals can be seen as bundled principal repayment and interest. If it is an operating lease transaction, the rentals might include several elements depending upon the costs and risks borne by the Lessor, such as:

1. Interest on the lessor's investment.

2. If the lessor is bearing any repairs, insurance, maintenance or operation costs, them charges for such cost. 3. Servicing charges or packaging charges for providing a package of the above service. 6. End-of-term options: The options allowed to the lessee at the end of the primary lease period are called end-of-term options. Essentially, one, or more, of the following options will be given to the lessee at the end of the lease term: Option to buy (buyout option) at a bargain price or nominal value (typical in a hirepurchase transaction), called bargain buyout option Option to buy at a fair market value or fixed, but substantial value Option to renew the lease at nominal rentals, called bargain renewal option Option to renew the lease at fair market rentals or substantial rentals Option to return the equipment

7. Upfront payments: Lessors may require one or more of the following upfront, that is, instant Payments from a lessee: Initial lease rental or initial hire or down payment Advance lease rental Security deposit The initial lease rent or initial hire (the word hire is more common in case of hirepurchase transactions) is a substitute for a margin or borrower contribution in case of loan transactions. Note that given the nature of a lease or hire-purchase as assetrenting transaction, it is not possible to expect a lessee's contribution to asset cost as such. Hence, the down payment or first lease rent serves the purpose of a margin. Advance rental is normally an advance against the last few rentals. Therefore, the advance rental will remain as a deposit with the lessor to be adjusted against the last few rentals. The security deposit is a proper deposit to secure against the lessee's commitments under the contract - it is generally intended to be refunded at the end of the lease contract.

TYPES OF LEASE The lease agreement can be classified broadly into four categories:

1. Financial Lease A financial lease is also known as Capital lease, Long-term lease, Net lease and Close lease. In a financial lease, the lessee selects the equipments, settles the price and terms of sale and arranges with a leasing company to buy it. He enters into a irrevocable and non-cancellable contractual agreement with the leasing company. The lessee uses the equipment exclusively, maintains it, insures and avails of the after sales service and warranty backing it. He also bears the risk of obsolescence as it stands committed to pay the rental for the entire lease period. Under a financial lease, the rate of lease would be fixed based on the kind of lease, the period of lease, periodicity of rent payment, and the rate of depreciation and other tax benefits available. The leasing company also charges nominal service charges to cover legal and other costs. The financial lease could also be with purchase option, where at the end of the predetermined period, the lessee has the option to buy the equipment at a predetermined value or at a nominal value or at fair market price. The financial lease may also contain a non cancellable clause which means that the lessor transfers the title to the lessee at the end of the lease period. The high cost of equipments such as office equipment, diesel generators, machine tools, textile machinery, containers, locomotives, Air crafts, land and building heavy machinery etc. are leased. 2.OPERATING LEASE An operating lease is also known as Service lease, Short term lease or True lease. In this lease, the contractual period between lessor and lessee is less than the full expected economic life of equipment. This means that the lease is for a limited period, may be a month, six months, a year or few years. The lease is terminable by giving stipulated notice as per the agreement. Normally, the lease rentals will be higher as compared to other leases on account of short period of primary lease. The risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenditure. The lessor also does the services like handling warranty claims, paying taxes, scheduling and performing maintenance and keeping complete records. This type lease is suitable for: Computers, copy machines and other office equipments, vehicles, material handling equipments etc. Which are sensitive to obsolescence and Where the lessee is interested in tiding over temporary problem.

3. LEVERAGE LEASE A leverage lease is used for financing those assets which require huge capital outlay. The outlay for purchase cost of the asset generally varies from Rs. 50 lakhs to Rs. 2 crore and has economic life of 10 years or more. The leverage lease agreement involves three parties, the lessee, the lessor and the lender. The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20% to 50%. The remaining amount is borrowed from the FIs like UTI, insurance companies, commercial banks etc. The lender (also called the loan participant) Obtains the assignment of the lease and the rentals to be paid by the lessee, and a mortgage on the leased asset. The transaction is routed through a trustee who looks after the interests of the lender and the lessor. On receiving the rentals from the lessee, the trustee remits the debtservice component of the rental to the lender and the balance to the lessor. The basic documents involved are participation agreement, which is signed by all parties, the trust agreement and lease agreement. The position of the lessee under a leveraged leasing agreement is the same as in the case of any other type of lease except in some cases the lessee has to act as a guarantor to the debt borrowed from the institutions. In leveraged lease, a wide range of equipments such as rail road, rolling stock, coal mining, electricity generating plants, pipe lines, ships etc. are acquired.

4.SALE AND LEASEBACK In a sale and leaseback transaction, the owner of equipment sells it to a leasing company which in turn leases it back to the erstwhile owner (the lessee). The 'leaseback' arrangement in this transaction can be in the form of a 'finance lease' or an 'operating lease'. A classic example of this type of transaction is the sale and leaseback of safe deposit vaults resorted to by commercial banks. Under this arrangement the bank sells the safe deposit vaults in its custody to a leasing company at a market price which is substantially higher than the book value. The leasing company offers these lockers on a long-term lease to the bank. The advantages to the bank are: a. It is able to unlock its investment in a low income yielding asset. b. It is able to enjoy the uninterrupted use of the lockers (which can be leased to its customers). c. It can invest the sale proceeds (which are not subject to the reserve ratio requirements) in high income yielding commercial loans.

In general, the 'sale and leaseback' arrangement is a readily available source of funds for financing the expansion and diversification programs of a firm. Retail stores, office buildings, multipurpose industrial building and shopping centres are financed under, this method. From the leasing company's angle a sale and leaseback transaction poses certain problems. First, it is difficult to establish a fair market value of the asset being acquired because the secondary market for the asset may not exist; even if it exists, it may lack breadth. Second, the Income Tax Authorities can disallow the claim for depreciation on the fair market value if they perceive the fair market value as not being 'fair'. 5. CROSS BORDER LEASE

Cross border lease is international leasing and is known as transnational leasing. It relates to a lease transaction between a lessor and lessee domiciled in different countries. To illustrate, if a leasing company in USA makes a available an Air bus on lease to Air India, there would be a cross border lease. The cross border lease transactions unlike domestic lease transactions are affected by two additional sources of risk country risk and currency risk.

LEGAL ASPECTS OF LEASING As there is no separate statute for equipment leasing in India, the provisions relating to bailment in the Indian Contract Act govern equipment leasing agreements as well. Since an equipment lease transaction is regarded as a contract of bailment, the obligations of the lessor and the lessee are similar to those of the bailor and the bailee (other than those expressly specified in the least contract) as defined by the provisions of sections 150 and 168 of the Indian Contract Act. Essentially these provisions have the following implications for the lessor and the lessee. 1. The lessor has the duty to deliver the asset to the lessee, to legally authorise the lessee to use the asset, and to leave the asset in peaceful possession of the lessee during the currency of the agreement. 2. The lessee has the obligation to pay the lease rentals as specified in the lease agreement, to protect the lessor's title, to take reasonable care of the asset, and to return the leased asset on the expiry of the lease period.

CONTENTS OF A LEASE AGREEMENT The lease agreement specifies the legal rights and obligations of the lessor. and the lessee. It typically contains terms relating to the following: 1.Description of the lessor, the lessee, and the equipment. 2. Amount, time and place of lease rentals payments. 3. Time and place of equipment delivery. 4. Lessees responsibility for taking delivery and possession of the leased equipment. 5. Lessees responsibility for maintenance, repairs, registration, etc. and the lessors right in case of default by the lessee. 6. Lessees right to enjoy the benefits of the warranties provided by the Equipment manufacturer/supplier. 7. Insurance to be taken by the lessee on behalf of the lessor. 8. Variation in lease rentals if there is a change in certain external factors like bank interest rates, depreciation rates, and fiscal incentives. 9. Options of lease renewal for the lessee. 10. Return of equipment on expiry of the lease period. 11. Arbitration procedure in the event of dispute. INCOME TAX PROVISIONS RELATING TO LEASING The principal income-tax provisions relating to leasing are as follows: The lessee can claim lease rentals as tax-deductible expenses. The lease rentals received by the lessor are taxable under the head of 'Profits and Gains of Business or Profession'. The lessor can claim depreciation on the investment made in leased assets. ACCOUNTING TREATMENT OF LEASE Presently the accounting treatment of lease transactions in India is as follows: 1. The leased asset is shown on the balance sheet of the lessor. 2.Depreciation and other tax shields associated with the leased asset are claimed by the lessor. 3. The entire lease rental is treated as income in the books of the lessor and as expense in the books of the lessee. In nutshell, from the point of view of the lessee, a lease transaction represents an off-the balance-sheet transaction and this appears to be an important advantage associated with leasing. LEASING TO LESEE AND LESSOR Advantages of LEASING to LESSEE There are several extolled advantages of acquiring capital assets on lease: (1) Saving of capital:

A Leasing arrangement provides a firm with the use and control over asset without incurring huge capital expenditure. The firm is required only to make periodical rental payments. It saves considerable funds for alternative uses which would otherwise be tied up in fixed capital. (2) Flexibility And Convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. (3) Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets. (4) Improvement In Liquidity: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique. (5) Shifting of Risk of Obsolescence: The lessee can shift the risk upon lessor by acquiring the use of asset rather than buying the asset. (6) Maintenance And Specialized Services:

In case of special kind of lease arrangement, Lessee can avail specialized services of lessor for maintenance of asset leased. Although lessor charges higher rentals for providing such services, lessees overall administrative and service costs are reduced because of specialized services of the lessor. (7) Off-The-Balance-Sheet-Financing: Leasing provides "off balance sheet" financing for the lessee, in that the lease is recorded neither as an asset nor as a liability. Disadvantages of LEASING to LESSEE (1) Higher Cost: The lease rental include a margin for the lessor as also the cost of risk of obsolescene, it is, thus regarded as a form of financing at higher cost. (2) Risk of being deprived the use of asset in case the leasing company winds up. (3) No Alteration In Asset: Lessee cannot make changes in asset as per his requirement. (4) Penalties On Termination Of Lease: The lessee has to pay penalties in case he has to terminate the lease before expiry of lease period.

Advantages of LEASING to LESSOR (1) Higher profits & Quick Returns: By leasing the asset, the Lessor can get High profits & quick returns than investing in other projects of long gestation period. (2) Tax Benefits: The lessor being owner of asset can claim various tax benefits such as depreciation. Disadvantages of LEASING to LESSOR (1) High Risk of Obsolescence: The lessor has to bear the risk of obsolescence as there are rapid technology changes. (2) Price Level Changes: In case of inflation, the prices of asset rises but the lease rentals remain fixed. (3) Long term Investment: Leasing requires the long term investment in purchase of an asset, and takes long time to cover the cost of that asset

PROBLEMS OF LEASING 1. Unhealthy Competition: The market for leasing has not grown with the same pace as the number of lessors. As a result, there is over supply of lessors leading to competitor. With the leasing business becoming more competitive, the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3 percent. Bank subsidiaries and financial institutions have the competitive edge over the private sector concerns because of cheap source of finance. 2. Lack of Qualified Personnel: Leasing is a specialized business and persons constituting its top management should have expertise in accounting, finance, legal and decision areas. In India, the concept of leasing business is of recent one and hence it is difficult to get right man to deal with leasing business. 3. Tax Considerations: Taxes like sales tax, wealth tax, additional tax, surcharge etc. add to the cost of leasing. Thus leasing becomes more expensive form of financing than conventional mode of finance such as hire purchase. 4. Stamp Duty: A heavy stamp duty is levied on lease documents. This adds to the burden of leasing industry. 5. Delayed Payment and Bad Debts: The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor does not take into consideration this aspect while fixing the rentals at the time of lease agreement. These problems would disturb prospects of leasing business.

HIRE PURCHASE Hire purchase is a method of selling goods. In a hire purchase transaction the goods are let out on hire by a finance company (creditor) to the hire purchase customer(hirer). The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with creditor and passes on to hirer on the payment of last instalment. LEGAL POSITION The hire Purchase Act, 1972 defines a hire purchase agreement 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 agreement under which: Payment is to be made in instalments over a specified period. The possession is delivered to the purchaser at the time of entering into a contract. The property in the goods passes to the purchaser on payment of the last instalment. Each instalment is treated as hire charge so that if default is made in payment of any one instalment, the seller is entitled to take away the goods. The hirer/purchaser is free to return the goods without being required to pay any further instalments falling due after the return. However, he can not recover the sums already paid as such sums legally represent hire charge on the goods in question. HIRE PURCHASE AGREEMENT There is no prescribed form for a hire purchase agreement, but it has to be in writing and signed by both parties to the agreement. A hire purchase agreement must contain the following particulars: The description of goods in a manner sufficient to identify them. The hire purchase price of the goods. The date of commencement of the agreement. The number of instalments in which hire purchase price is to be paid, the amount, and due date. HIRE PURCHASE AND LEASING Hire purchase is also different from leasing. Ownership In a contract of lease, the ownership rests with the lessor throughout and the lessee (hirer) has no option to purchase the goods. Method of Financing Leasing is a method of financing business assets whereas hire purchase is a method of financing both business assets and consumer articles. Depreciation In leasing, depreciation and investment allowance can not be claimed by the lessor, In hire purchase, deprecation and investment allowance can be claimed by the hirer.

Tax Benefits The entire lease rental is tax deductible expense. Only the interest component of the hire purchase installment is tax deductible. Salvage Value The lessee, not being the owner of the asset, does not enjoy the salvage value of the asset. The hirer, in purchase,- being the owner of the asset, enjoys salvage value of the asset. Deposit Lessee is not required to make any deposit whereas 20% deposit is required in hire purchase. Rent-Purchase With lease, we rent and with hire purchase we buy the goods. Maintenance The cost of maintenance of the hired asset is to be borne by the hirer himself. In case of finance lease only, the maintenance of leased asset is the responsibility of the lessee. Reporting The asset on hire purchase is shown in the balance sheet of the hirer. The leased assets are shown by way of foot note only.

Bill Discounting, Factoring & Forfeiting

INTRODUCTION In India, the financial services sector is developing at a faster rate so as to meet the emerging needs of the economy. Many innovative schemes have been introduced by this sector and one such area wherein it has been introduced is book debt financing. Financial institutions try to extend their financial assistance to a larger cross-section of the trading community through book debt financing. A kind of book debt financing is already practiced in India by the commercial banks. It is nothing but bill financing. This type of financing is done either by way of direct purchase of bills of customers or discounting them.

DISCOUNTING Generally, a trade bill arises out of a genuine credit trade transaction. The supplier of goods draws a bill on the purchaser for the invoice price of the goods sold on credit. It is drawn for a short period of 3 to 6 months and in some cases for 9 months. The buyer of goods accepts the same and binds himself liable to pay the amount on the due date. In such a case, the supplier of goods has to wait for the expiry of the bill to get back the cost of the goods sold. It involves locking up of his working capital which is very much needed for the smooth running of the business or for carrying on the normal production process. It is where the commercial banks enter into as a financier The commercial banks provide immediate cash by discounting genuine trade bills. They deduct a certain charge as discount charges from the amount of the bill and the balance is credited to the customer's account and thus, the customer is able to enjoy credit facilities against the discounting of bills. This discount charges include interest for the unexpired period of the bill plus some service charges. Bill financing is the most liquid one from the banker's point of view since, in time of emergencies, they can take those bills to the Reserve Bank of India for rediscounting purposes. First of all, it offers high liquidity, in the sense, funds could be recycled promptly and quickly through rediscounting. It offers quick and high yield. The banker gets income in the form of discount charges at the time of discounting the bills. Again, there is every opportunity to earn the spread between the rates of discount and rediscount. Moreover, bills drawn by high profile business people would never be dishonored. Even if the bill is dishonored, there is a simple legal remedy. The banker-has to simply note and protest the bill and debit the customer's account. Bills are always drawn with recourse and hence, all the parties on the instrument are liable till the bill is finally discharged.

Above all, these bills would be very much useful as a base for the maintenance of reserve requirements like CRR and SLR. It is for these reasons, the Reserve Bank of India has been trying its best to develop a good bill market in India. The Reserve Bank of India introduced a Bill Market Scheme as early as 1952 itself and thereafter, with some modifications, It has lowered the effective rate of interest on bill finance by 1% below the cash credit rate. Despite many efforts of the Reserve Bank of India to promote and develop a good bill market, bill financing forms barely 5% of the total credit extended by banks. The latest step of the Reserve Bank of India to promote the bill market is the launching of the factoring service organisations. FACTOR MEANING The word 'Factor' has been derived from the Latin word 'Factor' which means 'to make or to do'. In other words, it means 'to get things done'. According to the Webster Dictionary 'Factor' is an agent, as a banking or insurance company, engaged in financing the operations of certain companies or in financing wholesale or retail trade sales, through the purchase of account receivables. factoring is nothing but financing through purchase of account receivables. Thus, factoring is a method of financing whereby a company sells its trade debts at a discount to a financial institution. In other words, factoring is a continuous arrangement between a financial institution, (namely the factor) and a company (namely the client) which sells goods and services to trade customers on credit. As per this arrangement, the factor purchases the client's trade debts including accounts receivables either with or without recourse to the client, and thus, exercises control over the credit extended to the customers and administers the sales ledger of his client. The client is immediately paid 80 per cent of the trade debts taken over and when the trade customers repay their dues, the factor will make the remaining 20 percent payment. To put it in a layman's language, a factor is an agent who collects the dues of his client for a certain fee. What is the need for FACTORING? Collection of debts, especially for the small-scale and medium- scale companies is the biggest problem. It is found that over 60% of the total sales of the SSI sector and over 50% of total sales of the medium and large scale sector are made on credit sales. The average collection period of debts has been on the increase. Delays in collection process in turn lead to liquidity problems and consequently to delay in production and supplies. The peculiar situation in India is that a number of small scale units are catering to the requirements of a single large buyer. This large buyer is always known for his

procrastination in paying his small suppliers. The crux of the problem is not so much the failure to pay altogether as the failure to pay on time. As a result, the interest cost of financing book debts is quite heavy. This increase in cost of capital reduces profit and competitiveness of a company particularly the small ones in the market. Ultimately, the small unit may become even sick. To overcome this situation, the factoring service has been conceived. Under Factoring, this collection work of debts for sellers is completely taken up by the factoring organization, leaving the client to concentrate on production alone. This is an important service rendered by a factor to his client. The cost of collection is also cut down as a result of the professional expertise of a factor.

The process : The main function of factoring is the realization of credit sales. Once the sales transaction is completed between the firm and the buyer, the factor starts realizing the sale proceeds. The seller/business entity enters into an agreement with a factor whereby the factor provides the facility of debt collection. Sometimes the sellers bank is also involved in the factoring business. The seller hands over the duly signed copy of invoice to the factor. Generally, 80% of the invoice value is given as advance by the factor. The remaining 20% is paid against the realization. The factor collects service charge and discount charge (comparable to bank interest rate) from the seller/Client. The factor furnishes periodical statement to both, the seller/client and buyer/customer. The maximum debt period permitted under factoring is 150 days inclusive of a maximum grace period of 60 days The Buyer A buyer buys the material in accordance with the negotiated terms from the business entity or firm. He receives the delivery of goods with the invoice and an instruction to settle the amount to the factor. If he is not able to settle the amount, he has to get an extension of time from the factor. However, in the case of default, legal action is taken by the factor. The Seller A seller enters into an MoU with the buyer. He sells the goods to the buyer as per the MoU. After the delivery of goods, he sends copies of the invoice, delivery challan, MoU and the instruction to make payment to the factor. The seller receives advance payment from the factor for selling the receivables. Normally, this ranges from 80% to 90% of the invoice amount. The remaining is settled as per the agreement. The Factor A client/Seller sends the business name, address and amount he wants to factor for a particular business client/buyer. Credit is verified and limits are established for the business client/buyer.

There is no charge of credit validation. The seller and the factor enter into an agreement for availing the factoring service. The factor after reviewing the invoice and other documents makes payment to the seller. The factor receives payments from the buyer on due dates and gives the remaining amount due to the seller after deducting his service charges.

Factoring In India Some of the companies providing factoring services are given below: SBI Factors and Commercial services (SBI FACS) Ltd. It was the first factoring company which started functioning in April 1991. It was promoted by jointly by SBI, Union Bank of India and SIDBI. CanBank Factors Ltd., was jointly promoted by the Canara Bank, Andhra Bank and SIDBI in August 1992. Foremost Factors Ltd. Was set up as a joint venture with the National Bank of America in 1997. Global Trade Finance Ltd. Was promoted jointly by Export Import Bank of India, International Finance Corporation and West LB, Germany. FUNCTIONS As stated earlier the term 'factoring' simply refers to the process of selling trade debts of a company to a financial institution. But, in practice, it is more than that. Factoring involves the following functions: Purchase and collection of debts. Sales ledger management. Assumption of credit risk Credit analysis of the customer Financing trade debts Providing advisory services 1. Purchase and collection of debts Factoring envisages the sale of trade debts to the factor by the company, i.e., the client. It is where factoring differs from discounting. Under discounting, the financier simply discounts the debts backed by account receivables of the client. He does so as an agent of the client. But, under factoring, the factor purchases the entire trade debts and thus, he becomes a holder for value and not an agent. When payment is due from the customer, the factor undertakes the responsibility of collecting the money. The factor has trained manpower and well equipped infrastructure facilities for collection of debt. With a proper follow up of a buyer and appropriate strategy, he can reduce the bad debts. Entrusting the collection work in the hands of a factor saves manpower, time and effort for the client/seller. Hence, the client/seller can focus on other financial and functional areas of the finance.

2. Sales ledger management. Sales ledger management function is a very important one in factoring. Once the factoring relationship is established, it becomes the factor's responsibility to take care of all the functions relating to the maintenance of sales ledger. The factor has to credit the buyer account whenever payment is received, send monthly statements to the buyers and to maintain liaison with the seller and the buyer to resolve all possible disputes. He has to inform the sellers about the balances in the account, the overdue period, the financial standing of the buyers, etc. Buyer-wise record of payments over a period is also maintained to identify the defaulting accounts. Weekly or fortnightly reports are provided to the sellers depending on the volume of transaction. 3. Assumption of credit risk A factor undertakes the risk if factoring is done without recourse. The credit limit is fixed by the factor after consulting the seller. Within these limits the factor buys all the accounts receivables. When it buys the account receivables, the risk of default by the buyers falls on it. This relieves the seller from the work of collection of account receivables. 4. Credit analysis of the Buyer Factors with their vast source of information advise the sellers on the creditworthiness of potential buyers. Thus, they help them have a better credit control. The factor defines the monthly sales turnover for each buyer, which will be covered by the approved credit limit. For example, if the approved limit for a buyer is Rs. 6 lacks and average collection period is 60 days, sales up to Rs. 3 lacks per month will be automatically covered. The factor collects the necessary information from the credit rating reports, bank reports and trade references. The financial statements of the buyer is also analyzed with the help of various ratios. 5. Financing trade debts Factoring provides short term finance to the clients. The factor purchases the book debt and gives full credit protection against any bad debts in case the debt is factored without recourse. Extending cash in advance against the book debts provides financial assistance. The maximum advance given by the factor is equal to the amount of the factored receivables after deducting (a) Factoring commision (b) interest on advance and (c ) reserve to cover bad debts losses. The reserve ranges from 5 to 20% depending on the quality of the book debt. 6. Providing advisory services A factor provides the following financial consultancy services to the clients.

Provides information regarding the market trends of the clients products, marketing strategies and competition and helps the client to assess the creditworthiness of the buyers. Makes systematic analysis to monitor and manage the credit recovery. Audits the procedures for invoicing, delivery and dealings with sales return. Provides facility for opening letters of credit by the client. TYPES OF FACTORING The type of factoring services varies on the basis of the nature of transactions between the client and the factor, the nature and volume of client's business, the nature of factor's security etc. In general, the factoring services can be classified as follows: Full service Factoring Under this type, a factor provides all kinds of services discussed above. Thus, a factor provides finance, administers the sales ledger, collects the debts at his risk and renders consultancy service. This type of factoring is a standard one. If the debtors fail to repay the debts, the entire responsibility falls on the shoulders of the factor since he assumes the credit risk. He can not pass on this responsibility to his client. This is the reason because of which a high commission charge is collected by a factor. Since a factor assumes the risk, he actively participates in the process of grant of credit to the customer by the client. The extension of credit line is also evaluated by a factor. With Recourse Factoring As the very name suggests, under this type, the factor does not assume the credit risk. In other words, if the debtors do not repay their dues in time and if their debts are outstanding beyond a fixed period, say 60 to 90 days from the due date, such debts are automatically assigned back to the client. The client has to take up the work of collection of overdue account by himself. If the client wants the factor to go on with the collection work of overdue accounts, the client has to pay extra charges called 'Refactoring Charges'. Maturity Factoring Under this type, the factor does not provide immediate cash payment to the client at the time of assignment of debts. He undertakes to pay cash as and when collections are made from the debtors. The entire amount collected less factoring fees is paid to the client immediately. Hence it is also called 'collection Factoring'. In fact, under this type, no financing is involved. But all other services are available. Disclosed Factoring Under this type, the factor provides finance after disclosing the fact of assignment of debts to the debtors concerned. This type of factoring is resorted to when the factor is not fully satisfied with the financial condition of the client. The work relating to sales ledger administration, credit control, collection work etc., has to be

done by the client himself. Since the notification has been made, the factor simply collects the debts on behalf of the client. This is also called as "Notified Factoring". Undisclosed Factoring Undisclosed factoring differs from other types of factoring services in terms of disclosure of information about the factoring agreement between a factor and client. In case of undisclosed factoring, a clients customers are not aware of the factoring agreement between the client and the factor. They continue to make payment to the client. A client takes up the responsibility of making payment to the factors on the due date irrespective of whether a customer makes the payment or not. The commission charged by a factor depends on the nature of risk involved in the factoring services. Companies of high repute and sound financial base are considered for this type of factoring. Agency Factoring Under this type, the factor and the client share the work between themselves as follows: The client has to look after the sales ledger administration and collection work and The factor has to provide finance and assume the credit risk. International Factoring Under this type, the services of a factor in a domestic business are simply extended to international business. Factoring is done purely on the basis of the invoice prepared by the exporter. Thus, the exporter is able to get immediate cash to the extent of 80% of the export invoice under international factoring. Limited Factoring Under this type, the factor does not take up all the invoices of a client. He discounts only selected invoices on merit basis and converts credit bills into cash in respect of those bills only. Costs and Benefits of Factoring There are two types of cost involved in factoring viz., (i) factoring Fees and (ii) interest on advances given to the factor. (i) Factoring Fees This is charged mainly as administrative expenses for providing various services to the clients namely: Sales ledger administration. Credit control administration. Bad debts administration. This fees is normally computed with reference to the projected sales turnover of the client during the next twelve months. It is always quoted as a per cent of projected sales turnover. Generally, this charge varies between 1% and 2.5% of the projected turnover. In fact, the quantum of levy actually depends on several factors as given below: Reputation of the client as well as the debtors.

Nature of the industry to which the client belongs. Volume of sales per annum. Terms of sales. Average invoice value. Security available to the factor. Type of factoring service offered. Profit margin (ii) The interest on advances ranges between 18 and 22 per cent. The benefits of factoring to the business are savings in cost of credit administration and cost of bad debt. A business concern has to evaluate the cost and benefit to arrive at a decision before using the factoring service.

BENEFITS Factoring offers a number of benefits to the clients. Some of the important benefits are: Provision of Expertised Sales Ledger Management Service Administration of sales ledger is purely an accounting function which can be performed efficiently only by a few. Infact, the success of any organization depends upon the efficiency with which the sales ledger is managed. It requires a specialised knowledge which the client may not possess. But, the client can receive services like maintenance of accounting records, monthly sales analysis, overdue invoice analysis and customer payment statement from the factor Besides, a factor maintains contact with customers to ensure that they repay their dues promptly. Thus, it becomes the factor's responsibility to take care of all the functions relating to the maintenance of sales ledger. Thus, factoring offers an excellent credit control for the client. Financial Service Many of the manufacturers and traders find their working capital being locked up in the form of trade debts. This has been a great handicap to the small and medium scale manufacturers because they have to wait for 3 months to 9 months to realize their debts. In the meantime, the business may suffer due to want of funds. In fact, many business concerns fail more as a result of inadequate cash flow than anything else. The key to successful working capital management lies in the ability of an enterprise to convert sales into cash flow and the speed at which it is done. One of the major benefit of the factoring service is that the clients will be able to convert their trade debts into cash upto 80% immediately as soon as the credit sales are over. They need not wait for months together to get cash for recycling. Another major advantage is that there are no constrains by way of fixed limits as in the case of cash credit or O.D. As sales grow, the financial assistance also grows and both are directly proportional to each other

Collection Service In credit sales collection of debts becomes an important internal credit management and it requires more and more time. So, industrialists cannot concentrate on production. Delay in collection process often leads to delay in production and supplies Moreover, the interest cost of financing book debts is also on the increase. Ultimately, it affects the profitability of the company. Now, this collection work is completely taken up by the factoring organization, leaving the client to concentrate on production alone This is an important service rendered by a factor to his client. The cost of collection is also cut down as a result of the professional expertise of a factor. 'Credit risk' Service In the absence of a factor, the entire credit risk has to be borne by the client himself. Bad debts eat away the profits of a concern and in some cases it may lead to the closure of a business. But, once the factoring relationship is established, the client need not bother about the loss due to bad debts. The factor assumes the risk of default in payment by customers and thus, the client is assured of complete realization of his book debts. Even if the customer fails to pay the debt, it becomes the responsibility of the factor to pay that amount to the client. It is the greatest advantage of factoring. Consultancy Service Factors are professionals in offering management services like consultancy. They collect information regarding the credit worthiness of the customers of their clients, ascertain their track record, quality of portfolio turnover, average size of inventory etc., and pass on the same to their clients. It helps the clients avoid poor quality and risky customers. They also advise their clients on important financial matters. Generally, no time is available to the client for investigating his customer's credit standing. Now, the factor takes up this work on behalf of his client. Economy in Servicing Factors are able to render very economic service to their clients because their overhead cost is spread over a number of clients. Moreover, their service charges are also reasonable. Factoring is a cheap source of finance to the client because the interest rate is charged only on the amount actually provided, to the client, say, for instance, 80% of his total invoices and not on the total amount of the invoices. Thus, clients are able to get factoring services at economic rates. Trade Benefits Availability of ready cash against bills enables the supplier to negotiate better prices for the inputs and also offer finer terms to customers.

It ensures a steady flow of inputs on the one hand and-better market prospects on the other. Again, factoring enables the supplier to concentrate on production and materials management without bothering about the financial management. Factoring enables clients to offer longer credit facilities to their customers and thus to attract more business. Thus many trade benefits are available under factoring. Invoice Processing: A factor handles much of the work associated with processing invoices, including mailing them to customer (addressing envelopes, stuffing them, paying for postage), posting invoices to a computer system, depositing cheques, entering payments on the computer and producing regular reports. Again, this can greatly reduce the current overhead cost associated with these tasks. Invoices are paid faster Many people do not realize that some debtors pay factored invoices faster than non factored invoices. The reason is that factors may report default experiences to other credit agencies, most clients do not. A debtor who is aware of this knows that he may impair his credit rating by paying a factor slowly, where as paying the client slowly may not affect his credit rating at all. Off-Balance Sheet Financing Factoring is an off-balance sheet means of financing. When the factor purchases the book debts of the client, these debts no longer exist on the current asset side of the balance sheet. It. leads to reduction in debts and less collection problems. The client can utilise the money so received to reduce his current liabilities. It means an improved current ratio.

Scope of Factoring in India There is a good scope for factoring business in India. However, to succeed in the business, the factor has to take into account the following: A factor has to adopt credit appraisal skills of a very high order in India. He has to develop a very strong MIS on the basis of day-to-day transactions of debtors. He should follow an efficient monitoring mechanism for receivables and debtors. He should computerize all his operations, maintain incisive record of collection experience and build a good credit library of debtors. Above all, he must pay attention to the commercial viability of the deal, and the assets of his client. He must ascertain whether his client is a man of high integrity and his debtors command good respect in the financial market. FACTORING Vs. DISCOUNTING Under factoring, the factor purchases the trade debt and thus becomes a holder for value. But, under discounting the financier acts simply as an agent of his customer

and he does not become the owner. In other words, discounting is a kind of advance against bills whereas factoring is an outright purchase of trade debts The factors may extend credit without any recourse to the client in the event of non payment by customers. But, discounting is always made with recourse to the client. Account receivables under discount are subject to rediscounting whereas it is not possible under factoring. Factoring involves purchase and collection of debts, management of sales ledger, assumption of credit risk, provision of finance and rendering of consultancy services. But, discounting involves only the provision of finance. Bill discounting finance is a specific one in the sense that it is based on an individual bill arising out of an individual transaction only. On the other hand, factoring is based on the 'whole turnover', i.e., a bulk finance is provided against a number of unpaid invoices. Under discounting, the drawee is always aware of the bank's charge on receivables. But, under undisclosed factoring everything is kept highly confidential. Bill financing under bill discounting limit requires registration of charges with the Registrar of Companies. Factoring does not require such registration. Discounting is always a kind of "in-balance sheet financing". That is, both the amount of receivables and bank credit are shown in the balance sheet itself due to its 'with recourse' nature. But, factoring is always "off - balance sheet financing."

Forfaiting: Forfaiting is another source of financing against receivables like factoring. This technique is mostly employed to help an exporter for financing goods exported on a medium term deferred basis. The term 'a forfait' is a French word denoting 'to give something' or 'give up one's rights' or 'relinquish rights to something'. In fact, under forfaiting scheme, the exporter gives up his right to receive payments in future under an export bill for immediate cash payments by the forfaitor. This right to receive payment on the due date passes on to the forfaitor, since, the exporter has already surrendered his right to the forfaitor. Thus, the exporter is able to get 100% of the amount of the bill minus discount charges immediately and get the benefits of cash sale. Thus, it is a unique medium which can convert a credit sale into a cash sale for an exporter. The entire responsibility of recovering the amount from the importer rests with the forfaitor. Forfaiting is done without any recourse to the exporter, i.e., in case the importer makes a default, the forfaitor cannot go back to the exporter for the recovery of the money.

Definition Forfaiting has been defined as "the non-recourse purchase by a bank or any other financial institution, of receivables arising from an export of goods and services." Forfeiting is generally suitable for high value exports like heavy machinery, capital goods, consumer durables, Vehicles, bulk commodities, consultancy and construction contracts. However, not many exporters have adopted this option because the major deterrent is that the minimum amount of transaction prescribed by foreign banks offering this service is $2,50,000. This amount is too high for an average exporter in India. There fore, this has been reduced. London based West Merchant Bank, which is the front runner in providing forfaiting service in India, has fixed the minimum amount of transaction at $1,00,000 Working of Forfaiting In a forfaiting transaction, the exporter is 'the client' and the financial institution is called 'the forfaitor' and the importer is 'the debtor'. When an exporter intends to export goods and services, he approaches a forfaitor and gives him the full details of his likely export dealing such as the name of the importer, the country to which he belongs, the currency in which the export of goods would be invoiced, the price of the goods and services etc. He discusses with him the terms and conditions of finance. If it is acceptable, a sale contract is signed between the exporter and the importer on condition that the payment should be made by the importer to the forfaitor. As usual, bills or promissory notes are signed by the importer. Such notes are guaranteed by the importer's bank and forwarded to the exporter's bank. Generally, such notes would be released to the exporter only against shipping documents. When goods are exported, the shipping documents are handed over to the exporter's bank. The exporter's bank, then forwards the shipping documents to the importer's bank after releasing the notes/bills to the exporter. These documents finally reach the hands of the importer through his bank. Thereafter, the exporter takes these notes to the forfaitor who purchases them and gives ready cash after deducting discount charges. Cost of Forfaiting The cost of forfaiting finance is always at a fixed rate of interest which is usually included in the face value of the bills or notes. But it varies depending upon the arrangements duration, credit worthiness of the party, the country where the importer is staying, the denomination of the currency in which the export deal is to be done and the overall political, economic and monetary conditions prevailing in the importer's country. Factoring Vs. Forfaiting Both factoring and forfeiting are used as tools of financing. But there are some differences

Factoring is always used as a tool for short term financing whereas forfaiting is for medium term financing at a fixed rate of interest. Factoring is generally employed to finance both the domestic and export business. But, forfaiting is invariably employed in export business only. The central theme of factoring is the purchase of the invoice of the client whereas it is only the purchase of the export bill under forfaiting. Factoring is much broader in the sense it includes the administration of the sales ledger, assumption of credit risk, recovery of debts and rendering of consultancy services. On the other hand, forfaiting mainly concentrates on financing aspects only and that too in respect of a particular export bill. Under factoring, the client is able to get only 80% of the total invoice as 'credit facility' whereas the 100% of the value of the export bill (of course deducting service charges) is given as credit under forfaiting. Forfaiting is done without recourse to the client whereas it may or may not be so under factoring. The bills under forfaiting may be held by the forfaitor till the due date or they can be sold in the secondary market or to any investor for cash. Such a possibility does not exist under factoring. Forfaiting is a specific one in the sense that it is based on a single export bill arising out of an individual transaction only. But, factoring is based on the "whole turnover", i.e., a bulk finance is provided against a number of unpaid invoices.

Benefits of Forfaiting Profitable and Liquid: From the forfeiter's point of view, it is very advantageous because he not only gets immediate income in the form of discount charges, but also, can sell them in the secondary market or to any investor for cash. Simple and Flexible : It is also beneficial to the exporter. However, the greatest advantage is its simplicity and flexibility. It can be adequated to any export transaction and the exact structure of finance can also be determined according to the needs of the exporter, importer and the forfaitor. Avoids Export Credit Risks : The exporter is completely free from many export credit risks that may arise due to the possibility of interest rate fluctuations or exchange rates fluctuations or any political upheaval that may affect the collection of bills. Forfaiting acts as an insurance against all these risks. Avoids Export Credit Insurance : In the absence of forfaiting, the exporter has to go for export credit insurance. It is very costly and at the same time it involves very cumbersome procedures. Hence, if an exporter goes for forfaiting, he need not purchase any export credit insurance. Confidential and Speedy : International trade transactions can be carried out very quickly through a forfaitor. It does not involve much documentary procedures. Above all, it is very confidential.

The speed and confidentiality with which deals are made are very beneficial for both the parties namely the exporter and the importer. No banking relationship with the forfaitor is necessary, since, it is a one time transaction only. Suitable to all Kinds of Export Deal : It is suitable to any kind of goods - whether capital goods exports or commodity exports. Any export deal can be subject to forfaiting. Cent per cent Finance: The exporter is able to convert his deferred transaction into cash transaction through a forfaitor. He is able to get 100 per cent finance against export receivables.

Drawbacks Forfaiting is highly suitable to only medium term deferred payments. Forfaitors do not come forward to undertake forfeit financing for long periods, since, it involves much credit risks. Similarly, it cannot be used for contracts involving small amounts because they do not give rise to any bills or notes. Non-availability for Financially weak Countries : Similarly, forfaitors generally do not come forward to undertake any forfeit financing deal involving an importer from a financially weak country. Generally, the forfaitor has a full grasp of the financial and political situation prevailing in different countries, and hence, he would not accept a deal if the importer stays in a risky country. In exceptional cases, it can be undertaken at a higher price. In India, forfaiting is slowly emerging as a new product in the liberalised financial market. It was approved by the Union Government only in January, 1994. The existing scheme available for exporters like concessional finance by commercial banks, insurance cover against export credit risks by ECGC etc. are available mainly to large and well established exporters. In this context, forfaiting may be a real boon to the small, as well as, new exporters. In India, forfaiting is done by the EXIM Bank. The minimum value of a forfaiting transaction is Rs. 5,00,000/-. A special form of pronote/Bill has to be used for forfaiting transactions. An Indian exporter who wants to avail of this service has to approach the EXIM bank through his bank. The EXIM Bank would obtain the forfaiting quotation from the forfaiting agency . Based on this, the exporter would work out his price to be quoted to the importer. If the importer accepts the price and the payment terms, the contract would be finalised and executed. The exporter would then get cash through forfaiting arrangements for which he has to enter into a separate contract with the forfaitor through the EXIM bank. However, in order to encourage forfaiting finance business, it is necessary to designate export contracts in leading international currencies. In the wake of economic liberalisation and opening of our economy to the global market, there are

good prospects for forfaiting business in India. To promote forfaiting business, it is essential that we should denominate our trade contracts in foreign currencies rather than in Indian rupees.. Now, since the rupee has gained strength, it is time for us to denominate our trade obligations in foreign currencies so that the pace of forfaiting business may be accelerated mainly to boost our export trade.

Venture Capital
Meaning of Venture Capital Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pool their resources including managerial abilities to assist new entrepreneurs in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Definition of a Venture Capital Company A venture capital company is defined as "a financing institution which joins an entrepreneur as a co-promoter in a project and shares the risks and rewards of the enterprise.",

Features of Venture Capital Some of the features of venture capital financing are as under Venture capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan. Investment is made only in high risk but high growth potential projects. Venture capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking, financial services, agency or liaison work . Venture capitalist joins the entrepreneur as a co-promoter in projects and share the risks and rewards of the enterprise. There is continuous involvement in business after making an investment by the VCFs. Once the venture has reached the full potential the venture capitalist disinvests his holdings either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestment. Venture capital is not just injection of money but also an input needed to set-up the firm, design its marketing strategy and organize and manage it. Investment is usually made in small and medium scale enterprises.

HELION VENTURES: ABOUT US Helion Ventures Partners is a $350 Million India-focused, early to mid-stage venture fund, investing in technology-powered and consumer service businesses in sectors like Outsourcing, Internet, Mobile, Technology Products, Retail Services, Education and Financial Services. Our mission is Partnering with entrepreneurs to build world-class companies. We believe that companies are fundamentally built from inside, but as Board members we play an active role. Typically we help companies in making strategic

choices and in building an organization that can execute on strategy. We have access to world-class executives that we can bring to our portfolio companies. We also help in building a high quality Board of Directors / Advisors. We also team with the management and provide operational value add in the area of finance, HR, technology, marketing and operations. In helping manage rapid growth, we participate in future rounds of financing in syndication with other venture partners. Our prior experience in M&A is also available to entrepreneurs in driving inorganic growth. Most of all, we act as a sounding board to the CEOs as they navigate challenges of building world-class organizations. How does the VC industry work ? Venture capital firms typically source the majority of their funding from large investment institutions such as fund of funds, financial institutions, endowments, pension funds and banks. These institutions typically invest in a venture capital fund for a period of up to ten years. To compensate for the long term commitment and lack of both security and liquidity, investment institutions expect to receive very high returns on their investment. Therefore venture capitalists invest in either companies with high growth potential where they are able to exit through either an IPO or a merger/acquisition. Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gains when they eventually sell their shares in the company, typically between three to five years after the investment. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.

What do VC's look for? Venture capitalists are higher risk investors and, in accepting these risks, they desire a higher return on their investment. The venture capitalist manages the risk/reward ratio by only investing in businesses which fit their investment criteria and after having completed extensive due diligence. Venture capitalists look for companies with superior products or services targeted at large, fast growing or untapped markets with a defensible strategic position such as intellectual property or patents. Quality and Depth of Management: Venture capitalists must be confident that the firm has the quality and depth in the management team to achieve its aspirations. Venture capitalists seldom seek

managerial control, rather they want to add value to the investment where they have particular skills including fund raising, mergers and acquisitions, international marketing, product development, and networks. Appropriate Investment Structure As well as the requirement of being an attractive business opportunity, the venture capitalist will also seek to structure a deal to produce the anticipated financial returns to investors. This includes making an investment at a reasonable price per share . Exit Opportunity Lastly, venture capitalists look for the clear exit opportunity for their investment such as public listing or a third party acquisition of the investee company.

Steps to be followed by New Entrepreneurs: Once a short list of appropriate venture capitalists has been selected, the entrepreneur can proceed to identify which investors match their funding requirements. At this point, the entrepreneur should contact the venture capital firm and identify an investment manager as an initial contact point. The venture capital firm will ask prospective investee companies for information concerning the product or service, the market analysis, how the company operates, the investment required and how it is to be used, financial projections, and importantly questions about the management team. In reality, all of the above questions should be answered in the Business Plan. Assuming the venture capitalist expresses interest in the investment opportunity, a good business plan is a pre-requisite. The Business Plan Venture capitalists view hundreds of business plans every year. The business plan must therefore convince the venture capitalist that the company and the management team have the ability to achieve the goals of the company within the specified time. Essential areas to cover in your business plan Executive Summary This is the most important section and is often best written last. It summarizes your business plan and is placed at the front of the document. It is vital to give this summary significant thought and time, as it may well determine the amount of consideration the venture capital investor will give to your detailed proposal. 1. Background on the company 2. The product or service Explain the company's product or service. This is especially important if the product or service is technically orientated. A non-specialist must be able to understand the plan.

Emphasise the product or service's competitive edge or unique selling point. Describe the stage of development of the product or service (seed, early stage, expansion). Is there an opportunity to develop a second-generation product in due course? Is the product or service vulnerable to technological redundancy? If relevant, explain what legal protection you have on the product, such as patents attained, pending or required. Assess the impact of legal protection on the marketability of the product. 3. Market analysis The entrepreneur needs to convince the venture capital firm that there is a real commercial opportunity for the business and its products and services. Provide the reader a combination of clear description and analysis, including a realistic "SWOT" (strengths, weaknesses, opportunities and threats) analysis. 4. Marketing Having defined the relevant market and its opportunities, it is necessary to address how the prospective business will exploit these opportunities. 5. The management team Demonstrate that the company has the quality of management to be able to turn the business plan into reality. 6. Financial projections 7. Amount and use of finance required and exit opportunities State how much finance is required by your business and from what sources (i.e. management, venture capital, banks and others) and explain the purpose for which it will be applied. Consider how the venture capital investors will exit the investment and make a return. Possible exit strategies for the investors may include floating the company on a stock exchange or selling the company to a trade buyer. Types of Venture Capital Funds (VCFs) Companies Promoted by all India FIs Venture Capital Division of IDBI Risk Capital and Technology Finance Corporation Ltd. (RCTC) (Subsidiary of IFCI) Technology Development and Information Company of India Ltd. (TDICI), (promoted by ICICI & UTI). Companies Promoted by State Gujarat Venture Finance Ltd. Andhra Pradesh Industrial Development Corporation Venture Capital Ltd.

Companies Promoted by Banks: Can Bank Venture Capital Fund (promoted by Canara Bank) SBI Venture Capital Fund (promoted by SBI caps) Indian Investment Fund (promoted by Grindlays Bank) Infrastructure Leasing (promoted by Central Bank of India) Companies in Private Sector Indus Venture Capital Fund (promoted by Mafatlals and Hindustan Lever) Credit Capital Venture Fund (India) Ltd. 20th Century Venture Capital Corporation Ltd. Offshore funds Barings, TCW, HSBC, etc.

Disinvest Mechanism The objective of venture capitalist is to sell of the investment made by him at substantial capital gains. The disinvestment options available in developed countries are: Promoter's buy back Public issue Sale to other venture capital Funds Sale in OTC market and Management buy outs. In India, the most popular investment route is promoter's buy back. This permits the ownership and control of the promoter in tact. In India, the most popular investment route is promoter's buy back. This permits the ownership and control of the promoter in tact. The Risk capital and Technology Finance Corporation, CAN -VCF etc., in India allow promoters to buy back equity of their enterprise. The public issue would be difficult and expensive since first generation entrepreneurs are not known in the capital market. The option involves high transaction cost and also less feasible for small ventures on account of high listing requirements of the stock exchange.

The OTC Exchange in India has been set up in 1992. It is hoped that OTCEI would provide disinvestment opportunities to venture capital firms.

Methods of Venture Financing Venture capital is available in four forms in India: Equity Participation Conventional Loan Conditional Loan Income Notes. Equity Participation : Venture Capital Firms participate in equity through direct purchase of shares but their stake does not exceed 49%. These shares are retained by them till the assisted projects making profit. These shares are sold either to the promoter at negotiated price under buy back agreement or to the public in the secondary market at a profit. Conventional Loan : Under this form of assistance, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement. Conditional Loan: Under this form of finance, an interest free loan, is provided during the implementation period but it has to pay royalty on sales. The loan has to be repaid according to a pre determined schedule as soon as the company is able to generate sales and income. Income Notes It is a combination of conventional and conditional loans. Both interest and royalty are payable at much lower rates than in case of conditional loans. VENTURE CAPITAL FINANCING Venture capital fund finances the proposed venture in one, two or more identifiable stages of corporate growth. The stages of investment differ from one another In terms of time scale, risk perceptions and return. Early Stage Finance This can be classified as follows: 1. Development of an Idea Seed Capital 2. Implementation Stage - Start up Finance 3. Fledging Stage - Additional Finance Later Stage Financing: It can be classified as follows: 1. Expansion Finance 2. Turnarounds 3. Buy -outs 4. Buy- ins

1. Development of an Idea Seed Capital In the initial stage venture capitalists provide seed capital for translating an idea into business proposition. The concepts and ideas of the entrepreneur are the basis for the precommercialization of the research project. The projects are associated with university linked science parks and the Indian Institute of Technology. The risk involved here is that the research may or may not lead to commercial production of the product. The successful outcome of the product is uncertain. The entrepreneur should be aware of the market opportunity and the competition that could arise from substitute products. Since the risk perceptions are high, the venture capital funds generally consider the following aspects to safeguard investments: Entrepreneurs' track record, previous experience in similar products, technology, and market Managerial and production efficiency and Realistic future projections of the present plan 2. Implementation Stage - Start up Finance: When the firm is set up to manufacture a product or provide a service, start up finance is provided by the venture capitalists. At this stage, the entrepreneur needs finance for product development and market penetration. The essence of this stage is that the product or service is commercialized for the first time in association with the concerned venture capital entrepreneur. there is an indication of good market potential for the product. The enterprise instead of being controlled by a single Individual, takes the form of a limited company. At this stage VCFs are very serious in assessing the managerial ability and capacity of the entrepreneur before making any financial investment. Likewise the entrepreneurs would also like to choose a VCF, which provides finance, managerial skills, experience, competence and continuous efforts to make the venture a success. In reality, the market risk perception of the product or service prevents many of the venture capital funds from participating in the start up stage finance. 3. Fledging Stage - Additional Finance At this stage, the product has been launched, but business has not become profitable to attract new funds. The entrepreneur may need second round finance either because of negative or positive reasons. The negative reasons, because of which funds are required are: There Is an over-run of time and cost Negative earnings In the start up stage

 Debt is greater than the equity Difficulty In finding new investors to provide funds The positive reason is: Growing business and fund is required for business expansion VCFs have to shoulder more risk if the enterprise requires funds due to negative reasons. They have to be extra cautious and monitor the enterprise closely to avoid losses. In the case of fund requirement because of positive reasons, VCFs are willing to invest in the business. The successful implementation of the project and the profitability of the business attract them. In general, VCFs provide larger funds at this stage than at earlier stages of financing. Later Stage Financing The need for later stage financing arises when the business of the venture capitalist becomes established, but requires additional credit support for working capital and expansion of the business. Capital Is required for expansion, turnarounds, buy ins and buyouts. The later stage requirement of funds differs from one another. Some may need funds for expansion or development and others may avail funds for turnaround or buyouts. (a) Expansion finance At this stage venture capitalist needs finance to: Purchase new equipment or plant Diversify the product Expand the market Strengthening the distributing channels Funds for the above mentioned factors result in organic growth of the enterprise. Sometimes the venture capitalist requires funds for acquisition or takeover of other businesses. The time period involved in the expansion finance is short, ranging from one to three years. The risk is also medium. Most of the venture capital funds are interested in investing at this stage. (b) Turnarounds Turnaround financing is provided to an entrepreneur for acquiring a viable nonperforming company and strengthening Its operation. Buying a sick unit needs monetary and managerial Input. A sick unit is In need of funds for sustenance and key management skills to monitor its operations. These factors have to be provided by the venture capitalist. A new venture capitalist acquires majority control. He plays a vital role In resetting the management and decision making of the enterprise to overcome the present crisis.

Once the turnaround happens, the venture capitalist can get back his funds by listing the company in the stock exchange or by sale of the shares in the Over the Counter Exchange of India. The scope for capital gain is high in turnaround finance within a short period of six months to two years. But there is always a risk of dead loss and the enterprise may not revive or recover. Hence, the venture capitalist has to undertake a thorough study of the capital structure, management and market potential for the product. (c ) Buy-outs Means Purchase of a firm (or one of its divisions) by the existing management, with the venture capital financing. buy-outs are popular because of the following reasons: The new company will have a highly motivated management team, who are not only eager to make a profit but also have a deep knowledge of the business they will be running. In buy-out finance VCFs, bankers and management work in close cooperation leading to the success of the enterprise. Even though the buy-outs are popular, the success of the buy-outs Is determined by: commitment of the management technical and financial expertise co-operation of trade union, and capacity to generate cash and liquid assets to meet the borrowing cost and earn profit. In general, the risk perception in the buy-outs Is low and the time frame involved Is also short. (d) Buy-ins In management buy-Ins, an outside group of managers is provided with funds to buy an ongoing company. Here, three parties are involved, a management team, a target company and the VCF. The buy-ins are more risky because the outside team of managers finds It difficult to analyze and assess a new company. Usually sick units and weak performing units are targeted for buy-ins.

Advantages to the Entrepreneurs: The entrepreneur for the success of public issue is required to convince tens of underwriters, brokers and thousands of investors but to obtain venture capital assistance, he will be required to sell his idea to justify the officials of the venture fund. Public issue of equity shares has to be preceded by a lot of efforts viz, necessary statutory sanctions, underwriting and brokers arrangement, publicity of issue etc. Also the cost of Public issue is very high for Smaller Firms who are anyway in shortage of finance. Assists the entrepreneurs to recruit professionally qualified and skilled personnel to carry out production and management smoothly. To the investors The risk of the new venture Is borne by the venture capital fund. The funds download their shares only after profitable functioning of the companies. Since the investors invest only after the company starts earning profit, the risk Is less and It ensures a healthy growth of the capital market.

To the economy

A developed venture capital institutional set-up reduces the time lag between a technological innovation and its commercial exploitation. It helps in developing new processes /products in conducive atmosphere, free from the dead weight of corporate bureaucracy, which helps in exploiting full potential. Venture capital acts as a cushion to support business borrowings, as bankers and investors will not lend money with inadequate margin of equity capital. Promotes technological development, generates employment and helps the economy to solve the problem of unemployment, seed capital and term financing. The economy with well developed venture capital network induces the entry of large number of technocrats in industry, helps in stabilizing industries and in creating a new set of trained technocrats to build and manage medium and large industries, resulting in faster industrial development. A venture capital firm serves as an intermediary between investors looking for high returns for their money and entrepreneurs in search of needed capital for their start ups.