DEC 2008: Role of investment banker in the primary market (IPO, FPO, RIGHT SHARE) DEC 2008: ROLE

OF SEBI as regulator in Financial Market. DEC 2008: Methods of Corporate valuation: (Please write on valuation process studied in merger and Acquisition) DEC 2009: Explain P/E approach and Adjusted Book value Approach to Corporate Valuation DEC 2008 DEC 2010: Various Financing options in respect of infrastructure projects/ Important sources in which the company can obtained Long term Finance (FPO, IPO, Right issue, Debenture , Bond) DEC 2008: Financial intermediaries include : Banks, Financial institution, Mutual fund, Merchant banker, underwriter, Registrar.

DEC 2009 :Soucrces of Foreign funds ADR, GDR and FCCBS

American depository Receipts Depositary receipts More generally, depositary receipts (DRs) are negotiable securities that represent the underlying securities of foreign companies that trade in a domestic market. DRs enable domestic investors to buy the securities of a foreign company without the accompanying risks or inconveniences of cross-border and cross-currency transactions. Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. In the case of companies domiciled in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depositary banks have various responsibilities to DR holders and to the issuing foreign company the DR represents. An American depositary receipt (ADR) is a negotiable security that represents the underlying securities of a non-U.S. company that trades in the US financial markets. Individual shares of the securities of the foreign company represented by an ADR are called American depositary shares (ADSs).

The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs are denominated, and pay dividends, in US dollars, and may be traded like shares of stock of US-domiciled companies. The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges. There are currently four major commercial banks that provide depositary bank services: BNY Mellon, J.P. Morgan, Citi, and Deutsche Bank. Unsponsored ADRs Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued in accordance with market demand, and the foreign company has no formal agreement with a depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each depositary services only the ADRs it has issued. Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both sponsored and unsponsored, hundreds of new ADRs have been issued since the rule came into effect in October 2008. The majority of these were unsponsored Level I ADRs, and now approximately half of all ADR programs in existence are unsponsored. Sponsored Level I ADRs Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When a company issues sponsored ADRs, it has one designated depositary who also acts as its transfer agent. A majority of American depositary receipt programs currently trading are issued through a Level 1 program. This is the most convenient way for a foreign company to have its equity traded in the United States. Level 1 shares can only be traded on the OTC market and the company has minimal reporting requirements with the U.S. Securities and Exchange Commission (SEC). The company is not required to issue quarterly or annual reports in compliance with U.S. GAAP. However, the company must have a security listed on one or more stock exchange in a foreign jurisdiction and must publish in English on its website its annual report in the form required by the laws of the country of incorporation, organization or domicile. Companies with shares trading under a Level 1 program may decide to upgrade their program to a Level 2 or Level 3 program for better exposure in the United States markets. Sponsored Level II ADRs ("Listing" facility) Level 2 depositary receipt programs are more complicated for a foreign company. When a foreign company wants to set up a Level 2 program, it must file a registration statement with the U.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F annually. Form 20-F is the basic equivalent of an annual report (Form 10-K) for a U.S. company.

In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by the IASB. The advantage that the company has by upgrading their program to Level 2 is that the shares can be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange (NYSE), NASDAQ, and the American Stock Exchange (AMEX). While listed on these exchanges, the company must meet the exchanges listing requirements. If it fails to do so, it may be delisted and forced to downgrade its ADR program. Sponsored Level III ADRs ("offering" facility) A Level 3 American Depositary Receipt program is the highest level a foreign company can sponsor. Because of this distinction, the company is required to adhere to stricter rules that are similar to those followed by U.S. companies. Setting up a Level 3 program means that the foreign company is not only taking steps to permit shares from its home market to be deposited into an ADR program and traded in the U.S.; it is actually issuing shares to raise capital. In accordance with this offering, the company is required to file a Form F-1, which is the format for an Offering Prospectus for the shares. They also must file a Form 20-F annually and must adhere to U.S. GAAP standards or IFRS as published by the IASB. In addition, any material information given to shareholders in the home market, must be filed with the SEC through Form 6K. Foreign companies with Level 3 programs will often issue materials that are more informative and are more accommodating to their U.S. shareholders because they rely on them for capital. Overall, foreign companies with a Level 3 program set up are the easiest on which to find information. Examples include the British telecommunications company Vodafone (VOD), the Brazilian oil company Petrobras (PBR), and the Chinese technology company China Information Technology, Inc. (CNIT). Restricted Programs Foreign companies that want their stock to be limited to being traded by only certain individuals may set up a restricted program. There are two SEC rules that allow this type of issuance of shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2 rules make up approximately 30% of all issued ADRs. Foreign Currency Convertible Bonds Foreign Currency Convertible Bonds commonly referred to as FCCB's are a special category of bonds. FCCB's are issued in currencies different from the issuing company's domestic currency. Corporates issue FCCB's to raise money in foreign currencies. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers.

These bonds assume great importance for multi-nationals and in the current business scenario of globalisation where companies are constantly dealing in foreign currencies. FCCB's are quasi-debt instruments and tradable on the stock exchange. Investors are hedge-fund arbitrators or foreign nationals. FCCB's appear on the liabilities side of the issuing company's balance-sheet Under IFRS provisions, a company must mark-to-market the amount of its outstanding bonds The relevant provisions for FCCB accounting are International Accounting Standards: IAS 39, IAS 32 and IFRS 7 Foreign Currency Convertible Bonds (FCCB) Foreign currency convertible bond (FCCB) is a convertible bond issued by a country in a currency different than the its own currency. This is the powerful instrument by which the country raises the money in the form of a foreign currency. The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. Foreign Currency Convertible Bond Policy in India Ministry of Finance government of India defines FCCB. According to it: "Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; " What is the criteria for issuing FCCBs? Any company who wish to raise the foreign funds by issuing FCCB, require prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India. The company issuing the FCCB should have the consistent track record for a minimum period of three years The Foreign Currency Convertible Bonds shall be denominated in any freely convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian rupees The issuing company should deliver the ordinary shares or bonds to a Domestic Custodian Bank as per regulation. The custodian bank on the other hand instructs the Overseas Depositary Bank to issue Global Depositary Receipt or Certificate to non-resident investors against the shares or bonds held by the Domestic Custodian Bank.

DEC 2008, 2009 Explain the procedure IPO Entry Norms There any entry requirements for an issuer to make an issue / offer to public.

SEBI has laid down entry norms for entities making a public issue/ offer. The same are detailed below: Entry Norms: Entry norms are different routes available to an issuer for accessing the capital market. (i) An unlisted issuer making a public issue i.e. (making an IPO) is required to satisfy the following provisions: Entry Norm I (commonly known as Profitability Route) The Issuer Company shall meet the following requirements: (a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years. (b) Distributable profits in atleast three of the immediately preceding five years. (c) Net worth of at least Rs. 1 crore in each of the preceding three full years. (d) If the company has changed its name within the last one year, atleast 50% revenue for the preceding 1 year should be from the activity suggested by the new name. (e) The issue size does not exceed 5 times the pre issue net worth as per the audited balance sheet of the last financial year To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to the companies not satisfying any of the above conditions, for accessing the primary Market, as under: Entry Norm II (Commonly known as QIB Route) (a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). (b) The minimum postissue face value capital shall be Rs. 10 crores or there shall be a compulsory marketmaking for at least 2 years Entry Norm III (commonly known as Appraisal Route) (a) The project is appraised and participated to the extent of 15% by Financial

Institutions / Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). (b) The minimum postissue face value capital shall be Rs. 10 crores or there shall be a compulsory marketmaking for at least 2 years. In addition to satisfying the aforesaid entry norms, the Issuer Company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue. (ii) A listed issuer making a public issue (FPO) is required to satisfy the following requirements: (a) If the company has changed its name within the last one year, atleast 50% revenue for the preceding 1 year should be from the activity suggested by the new name. (b) The issue size does not exceed 5 times the pre issue net worth as per the audited balance sheet of the last financial year THE BOOK BUILDING MECHANISM OF IPO

Pricing of an Issue Indian primary market ushered in an era of free pricing in 1992. SEBI does not play any role in price fixation. The issuer in consultation with the merchant banker on the basis of market demand decides the price. The offer document contains full disclosures of the parameters which are taken in to account by merchant Banker and the issuer for deciding the price. The Parameters include EPS, PE multiple, return on net worth and comparison of these parameters with peer group companies. On the basis of Pricing, an issue can be further classified into Fixed Price issue or Book Built issue. Fixed Price Issue: When the issuer at the outset decides the issue price and mentions it in the Offer Document, it is commonly known as Fixed price issue. Book built Issue: When the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels, it is called Book Built issue.

DEC 2009.WHY BOOK BUILDING?

The abolition of the Capital Issue Control Act, 1947 has brought a new era in the primary capital markets in India. Controls over the pricing of the issues, designing and tenure of the capital issues were abolished. The issuers, at present, are free to make the price of the issues. Before establishment of SEBI in 1992, the quality of disclosures in the offer documents was very poor. SEBI has also formulated and prescribed stringent disclosure norms in conformity to global standards. The main drawback of free pricing was the process of pricing of issues. The issue price was determined around 60-70 days before the opening of the issue and the issuer had no clear idea about the market perception of the price determined. The traditional fixed price method of tapping individual investors suffered from two defects: (a) delays in the IPO process and (b) under-pricing of issue. In fixed price method, public offers do not have any flexibility in terms of price as well as number of issues. From experience it can be stated that a majority of the public issues coming through the fixed price method are either under-priced or over-priced. Individual investors (i.e. retail investors), as such, are unable to distinguish good issues from bad one. This is because the issuer Company and the merchant banker as lead manager do not have the exact idea on the fixed pricing of public issues. Thus it is required to find out a new mechanism for fair price discovery and to help the least informed investors. Thats why, Book Building mechanism, a new process of price discovery, has been introduced to overcome this limitation and determine issue price effectively. Book building is a process of price discovery. The issuer discloses a price band in the Red Herring Prospectus. On the basis of the demands received at various price levels within the price band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with the issuer arrives at a price at which the security offered by the issuer, can be issued.

How is book built in India? The main parties who are directly associated with book building process are the issuer company, the Book Runner Lead Manager (BRLM) and the syndicate members. The Book Runner Lead Manager (i.e. merchant banker) and the syndicate members who are the intermediaries are both eligible to act as underwriters. The steps which are usually followed in the book building process can be summarised below: (1) The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

(2) Initially, the issuer company consults with the BRLM in drawing up a draft prospectus (i.e. offer document) which does not mention the price of the issues, but includes other details about the size of the issue, past history of the company, and a price band. The securities available to the public are separately identified as net offer to the public. (3) The draft prospectus is filed with SEBI which gives it a legal standing. (4) A definite period is fixed as the bid period and BRLM conducts awareness campaigns like advertisement, road shows etc. (5)The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite the issues to the extent of net offer to the public. (6) The BRLM is entitled to remuneration for conducting the Book Building process. (7) The copy of the draft prospectus may be circulated by the BRLM to the institutional investors as well as to the syndicate members. (8) The syndicate members create demand and ask each investor for the number of shares and the offer price. (9) The BRLM receives the feedback about the investors bids through syndicate members. (10) The prospective investors may revise their bids at any time during the bid period. (11) The BRLM on receipts of the feedback from the syndicate members about the bid price and the quantity of shares applied has to build up an order book showing the demand for the shares of the company at various prices. The syndicate members must also maintain a record book for orders received from institutional investors for subscribing to the issue out of the placement portion. (12) On receipts of the above information, the BRLM and the issuer company determine the issue price. This is known as the market-clearing price. (13) The BRLM then closes the book in consultation with the issuer company and determine the issue size of (a) placement portion and (b) public offer portion. (14) Once the final price is determined, the allocation of securities should be made by the BRLM based on prior commitment, investors quality, price aggression, earliness of bids etc. The bid of

an institutional bidder, even if he has paid full amount may be rejected without being assigned any reason as the Book Building portion of institutional investors is left entirely at the discretion of the issuer company and the BRLM. PRIVATE PLACEMENT (QIB and Preferential allotment) QUALIFIED INSTITUTIONAL PLACEMENT A QIB means (1) a public financial institution (PFI) in terms of Section 4-A of the Companies Act, (2) banks, (3) mutual funds, (4) foreign institutional investors (FIIs) registered with the SEBI, (5) multilateral and bilateral development finance institutions, (6) venture capital funds (VCFs) registered with SEBI, (7) state industrial development corporations (SIDCs), (8) insurance companies registered with Insurance Regulatory and Development Authority (IRDA), (9) provident funds with minimum corpus of Rs 25 crore and (10) pension funds with minimum corpus of Rs 25 crore. Market regulator Securities and Exchange Board of India (SEBI) introduced the QIP process in 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital. The QIBs should neither be promoters, nor should they be related to promoters of the issuer directly or indirectly.. The private placement should comply with the requirements of Section 67(3)(a) of the Companies Act. A Minimum of 10 per cent of the securities in each placement should be allotted to mutual funds For each allotment, the would be at least two allottees for an issue size upto Rs 250 crores and five allottees in excess of Rs 250 crores. A maximum of 50 per cent of the issue size can be allotted to one sing l e allottee. The QIBs belonging to the same group/under common control would constitute a single allottee. Investors cannot withdraw their bids/applications after closure of the issue. The aggregate funds that can be raised through QIP in a financial year cannot exceed five times of the net worth of the issuer at the end of the previous financial year.

The shareholders resolution approving QIP would be valid for 12 months. There should be a gap of at least 6 months between each placement in case of multiple placements. The specified securities would be issued on the basis of a placement document containing all material information including the information specified in the Annexure below. The placement document should be provided to select investors and placed on the website of the stock exchange/issuer together with a disclaimer that no offer is made to the public/any other category of investors. A copy should also be filed with the SEBI within 30 days of allotment of specified securities.

The QIP would be managed by SEBI-registered merchant bankers who should exercise due diligence and furnish a due diligence certificate to the stock exchange stating that the issue complies with all the relevant requirements along with the application for seeking in-principle approval and final permission for listing of the specified securities.

The pricing is the average of high or low the last two weeks.

The issuer should furnish to the concerned stock exchange (i) a copy of the placement document, (ii) a certificate that all requirements have been complied with along with application for inprinciple approval for listing, and (ii) the documents /undertakings specified in the listing agreement for in-principle approval and final permission for listing from the stock exchange PREFERENTIAL ALLOTMNET Every firm needs capital for investment. They need capital to meet expenditure like expansion, diversification, modernization, M&A, etc., from time to time. When a listed company doesn't want to go for further public issue and the objective is t raise huge capital by issuing bulk of shares to selected group of people, preferential allotment is a good option. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

Advantages One advantage of raising money via a preferential issue is that it helps save costs and time involved in a public issue. More important, if the concerned company is not doing too well at that point in time but requires capital, then retail investors may not want to participate in an issue. In fact, promoters need such investors in times when the market sentiment is weak and a public issue could fail. Moreover, if promoter is being allotted preferential issue and they acquire more shares in the company, it is a good sign because it shows that the corporate ship is not sinking and they have abiding interest in the company. There is no requirement of filing any offer document / notice to SEBI in case of the preferential allotment and even no eligibility norm for the company for the preferential allotment. In current scenario, where there is lots of takeover in preferential issues, the shares are issued to friendly investors like promoters to ward-off the risk of take over. If shares are issued to public, there is a chance that later they can sell it to a firm which has an intension of take over.

Pitfalls The preferential allotment is often misused by the promoters as they could secure it because of majority holding by them and they consolidate their hold on the company without paying a fair price for it. As per Section 81 (1A) of the Companies Act, it is merely a formality though special resolution need to be passed but only members present in person and through proxy are counted. There is a possibility of insider trading. It was a case with Hindustan Lever (HLL)'s purchase of eight lakh shares in Brooke Bond Lipton India Ltd. (BBLIL) before the public announcement of the merger between HLL and BBLIL in 1998. Because of the fact that HLL as a subsidiary of Unilever knew about merger; they had information and they acquired shares at considerably lower price before announcement of merger. Regulations for Preferential Allotment as per Chapter XIII OF SEBI DIP (Disclosure & Investor Protection) Guidelines, 2000 1. No preferential allotment should me made along with the rights issue. 2. A special resolution needs to be passed, but if just an ordinary resolution is passed, preferential issue of shares may be done provided sanction of the Central Government is obtained. 3. Pricing - In case of a preferential allotment, the price at which the preferential allotment has to be done is the average of six months or two weeks, whichever is higher Relevant date means the date 30 days prior to the date on which general meeting of the shareholders is held. 4. Instruments issued on preferential basis to the promoters are subject to a lock-in of 3 years from the date of allotment, and for other groups, lock-in is 1 year. 5. In case, promoter(s) of a company sells his shares during last six months from the relevant date, he will not be eligible to acquire shares through preferential allotment. CREDIT RATING DEC 2008 DEC 2009: Dec 2010 :RATING METHODOLOGY A large number of variables affect the quality of rating of a debt instrument of an organization. The rating methodology should include these variables. The variables are: history, quality of management, business fundamentals, accounting quality, liquidity management, quality of the assets, profitability, return on equity and investment, capital structure, past performance, effect of normal business cycle, and interest and debt coverage ratios. This section discusses these variables briefly.
1.

H i story: The rat i n g a genc y m ust underst and t he owne rshi p, s i z e,

geographical spread, product spread, and the organizational structure of the issuer. The size of the issuer can have some access to some sources of funds and to some market segments, and thus impact credit quality. The history of the issuer could establish its export in certain product market and thus have a bearing in credit quality.
2.

Accounting quality: The accounting policies followed should strictly adhere to the concepts, principles, and conventions of accounting so as to ascertain a true and fair view of the financial state of affairs of the company. Neither should the accounting methods be manipulated nor there do any chance of doing so in the accounting practices followed by the issuer company. No controversial accounting practices should be followed by it just to portray a good balance sheet. There are certain areas where the issuer has the freedom to adopt different financial policies but such a policy should not be oriented to distort the financial state of affairs of a company with a motive of influencing the quality of rating. Business fundamentals: Under this category the issuer company is assessed in the area of its competitive position as compared to the competitors operating in the similar line. Its strategies, policies, strengths, and weaknesses and goals have to be analyzed as they have some sor t of bearings in measuring the ratings of the organizations. Its diversification activities having a sound track record of profitability in the industry and future projections of demand for output can have an important bearing in rating the debt instruments issued. If the product is export-oriented or importsubstituted, the debt issued for the purpose should obviously influence the rating decision of the rating agency.

3.

4. Liquidity management: The issuer's sources and uses of funds in terms of cost and availability have to be studied in relation to debt issue. Volatility trends of these parameters are also studied. The issuer's innovativeness and competitive ability to attract cheaper funds is also analyzed. Foreign exchange and interest rate risks associated with each source and management of such risk are scrutinized to estimate the probable impact of credit quality. To understand the liquidity of the issuer, the maturing match between sources and deployment of funds is studied. The rating agency must understand the quantity and quality of liquid assets, past trends, unutilized refinance limit available, and issuer's standing in the financial market to raise resources quickly. A careful study of the liquidity position of the firm in terms of its current ratio and acid test ratio , the debtors turnover and stock turnover has also some bearing on the rating of the debt instruments. Projected income and expenses statement as well as balance sheet and cash flow statements can be computed to have an idea about the liquidity position of the company which has a bearing on credit quality.

5.

Quality of management: This is judged by the team of executives, human resource policies, organizational structure, and the extent of delegation of authority and responsibility. The support of group companies could also be important in determining their success. The management's attitude towards risk is measured as revealed by the track record in the choice of segments, dividend policy, accounting practices, and funding policies. Systems also play an important role in determining the credit quality of the issuer. The statutory audit report can be studied to detect any systematic deficiencies. The status of reconciliation of subsidiary books and inter-bank accounts is analyzed to determine the efficiency of the system. Quality of assets: Rating agency should analyze the issuer's segment of operation, its competitive environment, and market share in each segment vis-a-vis the risk profile of each segment. The issuer's prudential norms for credit concentration are studied in relation to the past performance to understand their effectiveness. Such credit concentration norms could be fixed for each borrower, each industry, or each geographic area. The extent of non-performing assets in the portfolio and the provisions available to meet any losses from such assets are considered as important indicators of the quality of the asset. The quality of the assets in investments is judged by analyzing the type of investment, the internal system for management of investments, policies in respect of disinvestment, and charging depreciation in the value of the investments. In this connection, fixed assets turnover and fixed assets to net worth ratio and the rate of return on performing assets must be computed to study the fixed assets components as a portion of net worth or to study the earning power of fixed assets of the firm. The more the earning powers of the fixed assets, the more will be the source of funds generated to the company and more will be the positive impacts felt in assessing the quality of the debt instruments.

6.

7. Profitability: Since non-fund based income plays an important role in boosting the earnings of the issuer, the rating agency should determine the probability of continuance of such income in relation to sales, component-wise expenses ratios, operating expenses ratio, and operating net profit ratios determined in the past and budgeted figures in the future would also affect the quality of rating. 8. Return on equity and on investment: Return on equity measures the profitability of equity funds invested in the firm after payment of taxes whereas the return on total investment measures the percentage of earnings remaining after payment of taxes. The total investment comprises creditor's and shareholders' fund, and is a product of net profit ratio and investment turnover ratio. This aspect has an important bearing on credit quality of the company. As a matter of rule of thumb, operating profit as a percentage of total funds employed should not be less than the lending rate of a commercial bank.
9.

Capital structure: The most important indicator in analyzing the capital structure is the capital adequacy ratio. To warrant adequate safety the borrowing of the company as a rule of thumb should not exceed two times its shareholders' funds. This is also an important indicator that determines the quality of rating of debt issues. A lower debt equity ratio indicates a higher degree of protection enjoyed by the creditors and the less is the likelihood of insolvency in future which favourably influence the rating of the debt instruments and vice

versa. Then shareholders' equity to fixed assets ratio for the company is analyzed. If assets are more than the shareholders, equity, it means that a part of the assets has been financed by the borrowed capital and hence, would deteriorate the quality of ratings of debt issues.
10. Past

performance: The increasing trend of revenues, profit after taxes, net worth, and net asset value of the firm, keeping the total investments, constant indicates the financial strength of the firm. These variables are also useful in judging the assignment of ratings to the issuance of debt instrument. These variables linked with cash flow statements will have a favourable bearing on the ratings of the debt instruments. Therefore a rating agency should carefully analyze these indicators prior to assigning any rating to the instruments issued by a company.

11.Effect of normal business cycle: The business activities of the firm can be categorized as normal, recovery, boom, recession, and slump. So the rating agency has to consider the state of economic activity facing the company at the time of assigning rating to the debt instruments. This is one of the important factors which the rating agency cannot ignore prior to deciding the worth of the debt instrument. However, once the company decides to use the rating, the rating agency is obliged to monitor the rating over the life of the debt instrument. A rating, unless changed, is valid for the life time of the debt instrument being rated. If the rated non-convertible debenture is redeemed in the 7th, 8th, and 9th years from the date of its issue, the rating would continue till the end of the 9th year DEC 2008,2009, 2010 : CREDIT RATING AGENCIES IN INDIA CRISIL The Credit Rating Information Services of India Limited (CRISIL) was promoted in 1987 by the ICICI and UTI. Other shareholders include Asian Development Bank, Life Insurance Corporation of India, State Bank of India, Housing Development Finance Corporation Limited, General Insurance Corporation of India, and its subsidiaries, Standard Chartered Bank, Banque Indosuez, Sakura Bank, Bank of Tokyo, Hong Kong and Shanghai Banking Corporation, Citibank, Grindlays Bank, Bank of India, Bank of Baroda, UCO Bank, Allahabad Bank, Canara Bank, Central Bank of India, Indian Overseas Bank and Bank of Madura Ltd. Its principal objective is to rate debt obligation of Indian companies. Its rating provides guide to the investors as to the degree of certainty of timely payment of interest and principal on a particular debt instrument. CRISIL rates debentures, fixed deposit programmes, and short-term instruments like commercial paper, structural obligations, and formance preference shares. CRISIL is the market leader in India and works as a `full service' rating agency. It has the most comprehensive range of rating services. Combining its understanding of risk and the science of building risk frameworks with its strong contextual understanding of business, CRISIL ratings provide the most reliable opinions on risk. The strategic alliance with Standard and Poor's, the world's leading rating agency helps anticipate new market challenges, besides introducing value-added rating methodologies. The Rating Criteria & Product Development C entre, responsible for policy research, new product development, and ratings quality assurance has created new rating methodologies for debt

instruments and innovative structures across sectors. Since its inception till March 31, 1994, CRISIL has rated in all 926 debt instruments issued by 668 companies. It has introduced CRISIL card, CRISIL view, CRISIL ban card, and CRISIL rating digest service. CRISIL has published CRISIL bond yield tables to provide handy reference to investors for determining yield-to-maturity on a debenture, given the price of debenture, its coupon rate, and its maturity period. CRISIL has also published CRISIL RATING Scan containing rating reports on companies whose instruments have been rated by CRISIL during the quarter. CRISIL ratings continue to play a stellar role in the development of the debt markets in India. Till March 31, 2003 it has rated more than 4,438 debt instruments worth over Rs. 4,46,329 crores, for more than 2,000 companies. Table 9.1 illustrates the rating symbols for CRISIL. CRISIL may apply + (plus) or (minus) signs for ratings from pl to p3 to reflect comparatively higher standing within the category. The contexts within parentheses are guides to the pronunciation of the rating symbols.

The si gn (+) or ( ) ma y be used after the rating s ym bol to indicat e the comparative position of the company within the group covered by symbol. A letter 'p' in parentheses after the rating symbol would indicate that the debt instrument is being issued to raise resources by a new company for financing a new project and the rating assumes successful completion of the project. ICRA: This Rating Agencies of India is sponsored by IFCI jointly with the other leading financial institutions and banks and has become operational in September 1991 with the objective of providing guidance to the investors or creditors in determining the credit risk associated with a debt instrument or credit obligation. The ICAR rated debentures, bonds preference shares, fixed deposits, and short-term instruments like commercial paper, etc. of several companies. Since its time of inception till March 1995, ICRA rated 485 debt instruments involving Rs. 17,638 crores. In addition, ICRA provides "general assessment report on different aspects of the company's operations

management". ICRA is an independent and professional company providing investment information and credit rating services. As the growth and globalization of Indian Capital Markets have led to an exponential surge in demand for professional credit risk analysis, ICRA has actively responded to this need by executing assignments including credit ratings, equity grading, and mandated studies spanning diverse industrial sectors. ICRA presently offers its services under three banners, namely, (a) rating services, (b) information services, and (c) advisory services. The following depicts various rating symbols of ICRA.

CARE Credit Anal ysi s and Research Limited (CARE) sponsored b y the Industri al Development Bank of India jointly with Canara Bank, UTI, private sector banks, and financial service companies to offer credit rating information and equity research services to Indian industry and institutions. CARE was incorporated on April 21, 1993, and commenced its operations in October, 1993. It undertakes rating of all types of debt instruments like commercial paper, fixed deposits, bonds, debentures, and structural obligations, involving an independent and professional assessment of debt servicing capabilities of companies. Since its inception till the end of March 1995, CARE has rated 249 debt instruments covering a total debt volume of Rs. 9,729 crores. ONICRA A private company, Onida Individual Credit Rating Agency (ONICRA) has been set up by Onida Finance. It undertakes rating for credit cards, leasing, hire/purchase transactions, housing finance, and bank finance. The main objective of these agencies is primarily to restore the confidence in the capital market and to provide unbiased assessment of the credit worthiness of the companies issuing debt instruments. It also provides information about the credit worthiness of corporates to the investors at low cost. In addition to this, it provides a sound basis for proper risk return structure. It also assists the institutional investment regarding framing of public policy guidelines.

However ONICRA has been abolished in latter part.

DPCR Duff Phelps Credit Rating (DPCR) India Pvt. Ltd. is another private sector credit rating agency set up in 1996. It has already rated a number of companies. But SERI has started giving guidelines to them with a view to regulate them as one of the capital market institutions Fitch Ratings Fitch Ratings India Ltd. is the latest agency to do credit rating from the foreign sector. It is a 100% subsidiary of its parent company abroad, operating in India DEC 2010 DERIVATIVES A derivative instrument is a contract between two parties that specifies conditionsin particular, dates and the resulting values of the underlying variablesunder which payments, or payoffs, are to be made between the parties.[1][2] The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. A Forward Contract is a way for a buyer or a seller to lock in a purchasing or selling price for an asset, with the transaction set to occur in the future. In essence, it is a financial contract obligating the buyer to buy, and the seller to sell a given asset at a predetermined price and date in the future. No cash or assets are exchanged until expiry, or the delivery date of the contract. On the delivery date, forward contracts can be settled by physical delivery of the asset or cash settlement In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange. The party agreeing to buy the underlying asset in the future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties -- the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short).

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to sell at a certain price, so the buyer would want the stock to go down.

Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security. For example, because the option writer will need to provide the underlying shares in the event that the stock's market price will exceed the strike, an option writer that sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he or she will reap maximum profit. This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower price and then sell it for a profit

CAPITAL STRUCTURE: Capital structure is concerned in what proportion own funds and debt funds would be raised. Capital structure consists of: Owned Funds: Owned funds include share capital, reserves and surplus Borrowed Funds: Borrowed funds are represented by debentures, bonds and long term loans provided by banks and term lending institutions. 'The main objectives to be considered while designing a capital structure is that the cost and the risk both should be minimum. The optimum capital structure is obtained when the market value of equity share is the maximum. While designing the

capital structure the finance manager has to keep in mind that an ideal capital structure should minimise the cost of capital and maximise the value of company's shares.

DEC 2008: Factors to be taken into account with determining the capital structure:

1. Profitability aspect: The primary objective of financial management is to maximize the market value of the firm. Any source of finance should be selected which maximses the EPS and MPS. 2. Control Another consideration in planning the types of funds to use is the attitude of the management towards control. Lenders have no direct voice in the management of a company. They may, of course, place certain restrictions in the loan agreement on the managements activities. So long as there is no default in the payment of interest or the repayment of the principal, there is little that they can do legally against the company. Likewise, preference shareholders do not have voting rights except for those matters which affect their interest. The power to choose the management in most cases rests with the equity-holders. Accordingly, if the main object of the management is to maintain control, they will like to have a greater weightage for debt and preference shares than equity shares. 3. Leverage ratios for other firms in the industry: Yet another approach to the capital structure decisions is to make a comparison with the debt-equity ratios of companies belonging to the same industry, having a similar business risk. 4. Nature OF Business: Those Business which are assured of stability and growth, may go for borrowed funds as they can withstand the pressure of payment and interest and redemption of securities. If the business is cyclical in nature as in case of capital goods industry, then such companies find it difficult to service debts during recession. Such companies find if difficult to service debt during recession such companies may go for more equity and debt financing 5. Consultation with investment bankers and lenders: Another useful approach in deciding the proportion of various securities in a firm's structure is to seek the opinion of investment analysts, institutional investors, investment bankers and lenders. The analysts, having been in business for a considerable period of time, acquire expertise and have access to information regarding securities of a large number of companies and know how the market evaluates them.

6. Timing of the issue: Public offering should be made at a time when the state of economy as well as capital market is ideal to provide to funds. The monetary policy and fiscal policy that are pursued by the govt are also important in this regard. During recession the investors are not inclined towards equity and prefer bonds and debt instrument 7. Charactertics of the company: Small companies must rely, to a considerable degree, upon the owner's funds for their financing; they find it very difficult to obtain long-term debts. In the minds of investors, generally, small firms are considered to be more risky than large firms. In contrast, very large companies are compelled to make use of different sources of raising funds as no single source can cater to their total requirements of funds. Firms enjoying a high credit standing among investors/lenders in the capital market are in a better position to get funds from the sources of their choice. If the credit standing is poor, the firm's choice of obtaining funds is rather limited. 8. Tax planning: Finally, tax planning is likely to have a significant bearing on capital structure decisions. Under the Income Tax Act, 1961, while interest on borrowed funds is allowed as a deduction under Section 36(1) (iii), dividend on shares is not deductible from the operating profits of a company. Sec 115 O the company has to pay dividend distribution tax at 15%. 9. Flexibility: Refers to the ability of a firm to raise capital from any source it wishes to tap. If the firm has an ability to raise capital from any source, then it would advisable to go for borrowed funds rather than equity capital. This will not result in dilution of equity. However the firm must able to bear the pressure of payment of interest and installment. 10. Period of finance: If the funds are required for short period then company should go for public deposits, term loan, debenture but if the funds are required for longer purpose than the money should be raised through equity. 11. Cost of financing: The Company must collect the funds at lowest possible cost to the company. Generally cost of raising money with help of debenture and bond is less as compared the money with help of equity, the cost of raising money with help equity is generally 7% of the issue size. FACTORS AFFECTING DIVIDENED POLICY OF THE COMAPNY Profitability of the company: For instance a high profitable company raises less amount of money with help of borrowed funds since most of the funds can be done through internal accruals

Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods. 2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend. 3. Liquidity of Funds. Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. 4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companies retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits. 6. Trade Cycles. Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up. 7. Government Policies. The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies. Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises.

8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of paid-up capital are subject to dividend tax at 7.5 %. 9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any case. Likewise, contractual obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend. 10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation. 11. Ability to Borrow. Well established and large firms have better access to the capital market than the new Companies and may borrow funds from the external sources if there arises any need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programmes of the existing management. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances.

15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend equalization Fund

DEC 2008 2009:Functions of Investment banker: 1. Corporate Counselling: Corporate counselling covers the entire field of merchant banking activities for better corporate performance, terms of image building among investors, steady growth through good working, and appreciation in market value of equity shares. The scope of corporate counselling is wide enough to include all activities such as project counselling, capital restructuring, portfolio management, and full range of financial services including venture capital, public issue management, loan syndication, working capital, fixed deposit, lease finacing etc. However, the counselling is limited to only opinion and suggestions and any detailed analysis would form part of a specific group. 2. Project Counselling: Project counselling includes preparation of project reports, deciding upon the finacing of the project and appraising project report with the financial institutions or banks. Project reports are prepared to obtain government approval, get financial assistance from institutions and plan for public issue. 3. Issue Management: The procedure of managing a public issue by merchant bankers can be divided into 2 phases: (A) Pre-issue management (B) Post issue management. (A) Pre-issue management: Steps required to be taken to manage pre-issue activity is as follows: 1. Obtaining stock exchange approvals to memorandum and articles of association. 2. Taking action as per SEBI guidelines. 3. Finalising the appointments of the following agencies: a. Co-managers/ Advisers to the issue. b. Underwriters to the issue. c. Brokers to the issue. d. Bankers to the issue e. Advertising agency f. Registrar of the issue. 4. Advise the company to appoint auditors, legal advisers and broad base board of directors. 5. Drafting the prospectus. 6. Obtaining the approval of Draft prospectus.

7. Obtaining approvals of draft prospectus from the companys legal advisers, underwriting financial institution / banks. 8. Obtaining consent from the parties and agencies acting for the issue to be enclosed with prospectus. 9. Approval of prospectus from SEBI 10. Filing of the Prospectus with ROC. 11. Making an application for enlistment with stock exchange along with copy of prospectus. 12. Publicity of the issue with advertisement and conferences. 13. Open subscription list. (B) Post-issue management: Steps involved in post-issue management are: 1. To verify and confirm that issue is subscribed to the extent of 90% including devolvement from underwriters in case of under subscription. 2. To supervise and co-ordinate the allotment procedure of registrar to the issue as per prescribed stock exchanges. 3. To ensure issue of refund order, allotment letters, certificate within the prescribed time limit of 10 weeks after the closure of subscription list. 4. To report periodically to SEBI about the progress in the matters related to allotment and refunds. 5. To ensure the listing of securities at stock exchanges. 6. To attend the investors grievances regarding the public issue. 4. Underwriting of Public issue: Underwriting is a guarantee given by the underwriter that in the event of under subscription the amount underwritten would be subscribed by him. As per sec 76 of companies Act , UW commission should not be more than 2.5 % in case of debenture and 5 % incase of shares subject to provision in the articles of association. As per SEBI guidelines should have a networth of Rs 20 Lacs and his total obligation should not exceed 20 times its net worth. 5. Portfolio Management: Portfolio refers to investment in different kind of securities such as shares, debentures or bonds issued by different companies and securities issued by government. Portfolio management refers to maintaining proper combinations of securities in amanner that they give maximum return with minimum risk. 6. Merger and Acquisitions: For merchant bankers merger and acquisition is a promising new business. ICICI-Securities, Kotak Mahindra, J.M. Financial are actively involved in bringing together buyers and sellers. They have already set up separate teams of professional for this purpose. They are all in process of building a database where by they will constantly monitoring the companies deal for takeovers.

7. Equipment Leasing and Hire purchase: The financial services of equipment and hire purchase are offered by most of the merchant bankers. Leasing and hire purchase constitute a major portion of total income generation at present day merchant banking organisations. The lease rental/ installments provide a return of about 20% and in addition provide tax shield. 8. Off shore finance: The merchant bankers help their clients in following area of foreign currency. (a) Long term foreign currency loans. (b) Joint venture abroad. (c) Financing exports and imports. (d) Foreign collaboration arrangements. 9. Non-resident: The services of merchant bankers include investment advisory services to NRI in terms of identification of suitable investment opportunities. selection of securities investment management etc They also take care of the operational details like purchase and sale of securities securing necessary clearance from RBI for repatriation of interest and dividend. 10.Loan syndication; Loan syndication refers to assistance rendered by merchant bank to get mainly term loans for projects . Such loans may be obtained from a single financial institution or a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans from commercial banks. Merchant bankers help corporate clients to raise syndicated loans from commercial banks. Merchant banks help clients approach financial institutions for term loans DEC 2008: Due Diligence The basic function of due diligence is to assess the benefits and the costs of a proposed acquisition by inquiring into all relevant aspects of the past, present and the predictable future of a business to be purchased. Due diligence is of vital importance to prevent unpleasant surprises after completing the acquisition. The due diligence should be thorough and extensive. Both the parties to the transaction should conduct their own due diligence to get the accurate assessment of potential risks and rewards. Generally, it is a process of enquiry and investigation about proposed merger deal. It is a judgment process of the deal. The due diligence consists of five strands, viz., The verification of assets and liabilities. The identification and quantification of risks. The protection needed against such risks which will in turn feed into the negotiations. The identification of synergy benefits.

 Post-acquisition planning. Due Diligence Topics and-their Focus on Enquiry Due Diligence Topics Financial Historical records, review management and systems. of Confirms underlying profits. Provides basis for valuation. Focus of Enquiries Expected Results

Legal

Various contractual Acts in the Warranties and indemnities, country. validation of all existing contracts, sale and purchase agreement. Market conditions, competitive Sustainability of future profits, position and targets commercial planning, decision on strategy to be prospects. adopted for the combined business. Existing tax levels, liabilities and Avoid any unforeseen tax arrangements. liabilities, opportunities to optimize position of combined business. Management organizational structure quality, Identification of key integration issues, outline of new structure for the combined business.

Commercial

Tax

Management

Loan syndication - the sources of funds Loan syndication in the case of domestic borrowings is undertaken with the institutional lenders and the banks. Amongst institutional lenders , the following institutions are the main suppliers of long and medium term funds with which the merchant bankers contact liaison and arrange loans , working for and on behalf of the clients. A. Some of the All India Financial Institutions include: i) ii) iii) Industrial Finance Corporation of India (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit and Investment Corp. of India (ICICI)

iv)

Industrial Reconstruction Bank of India (IRBI)

B. State financial institutions like : i) ii) iii) state financial Corporations(SFCs) State industrial development corporations(SIDCs) State Industrial and Investment Corp. (SIICs)

are also approached by the merchant bankers C. All India level investment institutions also help in the process . They include ; i) ii) iii) Life Insurance Corp. of India Unit Trust of India General Insurance Corp. of India an its subsidiaries.

D. Commercial Banks Commercial banks join consortium financing with All India financial institutions to provide medium term loans to industrial projects , otherwise they cater to the needs of working capital requirements . Loan Syndication - the process Project details and estimated capital requirements The service of loan syndication fixes up the responsibility upon the merchant bankers to help the company in availing the credit finance. Hence the merchant bankers should have correct assessment of the projects , products, promoters, project cost and profitability projections based on sales forecasts. In this direction the merchant baker has to take the following steps : a) Initial discussions with promoters

The initial discussion should be devoted to know the following aspects : b) background of the promoters in detail promoters contribution to the project details about the project report and progress of the project.

assessment of project

An estimate of the capital cost of the project should be worked out to find out its long term feasibility and whether the merchant bankers should actually go in for the project. Locating sources of funds The choice for sources of funds will depend upon the following :i) ii) nature of the project quantum of the project costs

Sources of funds can be divide into three categories : i) short term finance where the funds are required upto a period of 1 year. Such finance is require dot meet the working capital requirements or special seasonal needs. These are available from commercial banks , trade credit , public deposits , business finance companies and also from customers. ii) medium term finance where the funds are needed for a period of 1-5 years. Such finance is needed to provide funds for permanent working capital , expansion or replacement of assets etc. These are available from SFCs , commercial banks and All India Financial Institutions through special schemes.

iii)

long term finance where the funds are needed for a period of more than 5 years. One term funds could be borrowed from international institutions where merchant bankers an play a constructive role through loan syndication services.

Preliminary discussions with the lenders During the preliminary discussions , the merchant bankers should have clarifications from lenders on the following questions whether the particular industry is in a priority framework of the development finance institutions. Concessional finance and benefits available : The acceptable Debt-Equity ratio Promoters contribution and background Project particulars.

Preparation of the loan application and follow-up Before filing the loan application the merchant bankers must ensure that the client company has complied with the following formalities so that appraisal of the application is not delayed. In the case of consortium approach or joint financing of the project , the application will be filed with one development finance institution and the company or the merchant banker will deal with only one institution termed as lead institution . The project will be appraised and sanctioned under single window concept method of dispension of credit. Rendering assistance in project appraisal The project is appraise from different angles viz. technical, financial, managerial , economical and social. Obtaining letter of intent from the lending institution or bank The merchant bankers has to follow up closely the sanction of the loan amount by the lender . The appraising institution takes the matter to its board of directors or the appraising office may put up the proposal with full appraisal note before the sanctioning authority for according

necessary sanction. Then the financial institution informs the applicant borrower of such sanction along with the detailed terms and conditional and arrangements of any with other lending FI s in case of consortium financing. The sanction letter mainly covers the following : amount of loan interest commitment charge security for the loan conversion option repayment of loan

Loan Syndication - the instruments There are several main groups of instruments on offer in the syndicated loan market : Term loan : This type of loan is fully drawn and is either repaid in full at maturity (bullet payment) or repayments may start before the final maturity (staged repayment). The borrower has a right to call all or part of the loan at any time without paying penalty, but it cannot redraw any part it has canceled. Revolving credit facility : A revolving credit facility gives the borrower more flexibility about how much principal can be outstanding during the loans life. Evergreen facility : A loan that can be extended after pre-set periods. For example, a five year evergreen loan could be extendible every year for another five years. Back-stop facility : A back-stop facility protects a company against liquidity crunch; it is a loan designed to be drawn only as the last resort. Many borrowers regard back-stop as an insurance policy in case they suffer temporary shortfalls in funds or a failure of one of their normal funding

sources. Most back-stops also include a swingline facility, which gives the borrowers the "same day money". . DEC 2008: FIPB and Joint venture: Joint Venture companies are the most preferred form of corporate entities for Doing Business in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint Venture may be any of the business entities available in India. Click here for Types of companies and corporations in India. A typical Joint Venture is where: 1. Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash. 2. The above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business. 3. Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash. Some practical aspects of formation of joint venture companies in India and the prerequisites which the parties should take into account are enumerated herein after. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office. Government Approvals for Joint Ventures ... All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. Please see Foreign Investment in India - Sector wise Guide for sectorwise guidelines under automatic route. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities.

Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.

How to Enter into a Joint Venture Agreement? Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting lawyers well versed in international laws and multi-jurisdictional laws and procedures. Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. Before signing a Joint Venture Agreement the following must be properly addressed:

Dispute resolution agreements Applicable law. Force Majeure

Holding shares Transfer of shares Board of Directors General meeting. CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. Change of control Non-Compete Confidentiality Indemnity Assignment. Break of deadlock Termination.

The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period. DEC 2010 :DEC2008: An interest rate swap is a popular and highly liquid financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another.[1] Interest rate swaps are commonly used for both hedging and speculating.

Structure

Party A is currently paying floating rate, but wants to pay fixed rate. Party B is currently paying fixed rate, but wants to pay floating rate. By entering into an interest rate swap, the net result is that each party can 'swap' their existing obligation for their desired obligation. In an interest rate swap, each counterparty agrees to pay either a fixed or floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate is multiplied by a notional principal amount (say, USD 1 million). This notional amount is typically not exchanged between counterparties, but is used only for calculating the size of cashflows to be exchanged. The most common interest rate swap is one where one counterparty A pays a fixed rate (the swap rate) to counterparty B, while receiving a floating rate indexed to a reference rate (such as LIBOR). By market convention, the counterparty paying the fixed rate is called the "payer" (while receiving the floating rate), and the counterparty receiving the fixed rate is called the "receiver" (while paying the floating rate). A pays fixed rate to B (A receives variable rate) B pays floating rate to A (B receives fixed rate) Currently, A borrows from Market @ LIBOR +1.5%. B borrows from Market @ 8.5%. Consider the following swap in which Party A agrees to pay Party B periodic fixed interest rate payments of 8.65%, in exchange for periodic variable interest rate payments of LIBOR + 70 bps (0.70%). Note that there is no exchange of the principal amounts and that the interest rates are on a "notional" (i.e. imaginary) principal amount. Also note that the interest payments are settled in net (e.g. Party A pays (LIBOR + 1.50%)+8.65% - (LIBOR+0.70%) = 9.45% net). The fixed rate (8.65% in this example) is referred to as the swap rate.[2] At the point of initiation of the swap, the swap is priced so that it has a net present value of zero. If one party wants to pay 50 bps above the par swap rate, the other party has to pay approximately 50 bps over LIBOR to compensate for this

Loan syndication for domestic borrowings - the current scenario The Reserve Bank of India announced, in April 1997, a series of measures to free banks from the shackles of norms and other restrictive rules large advances. One of the measures was to remove the requirement of consortium lending and, as further gratuitous, it said, ``as an alternative to sole/multiple banking/consortium, banks are free to adopt the syndication route irrespective of quantum of credit involved, if the arrangement suits the borrower and financing banks''. Syndicated lending for working capital, as advised by RBI, has not yet made its debut in India, although 15 months have elapsed since it made the suggestion. Some of the reasons for this are as follows. Dispute over Interest Rate setting : The vast majority of such loans the world- over carry a uniform interest rate, viz., the borrower pays the same interest to all the banks participating in a syndicated loan. Under Indian conditions, this could prove to be a major stumbling block. Different banks have different prime lending rates (PLR) and prime term lending rates (PTLR), with big public sector banks having the lowest PLR/PTLR and private sector/foreign banks having the highest PLR/PTLR. . If a blue chip borrower were to seek a syndicated loan at the PLR of a big public sector bank, all the smaller private/foreign banks would be shut out of the loan; they cannot obviously lend below their PLR, which would be higher than the rate paid by the borrower. The one possibility is to treat such loans as being outside the purview of PLR. But then, the very sanctity of PLR would be lost. Dispute over Overall Responsibility : Secondly, the syndicated form of lending pre-supposes that the main bank or the leader bank assumes the overall responsibility for the appraisal and supervision of the loan. Currently, in multiple or consortium lending, all member banks individually appraise the loan and are also supposed to monitor the end-use, value of security, the general health of the borrower etc., periodically. In syndicated lending, it is unlikely that the Government and RBI officers sitting on

the boards of various public sector banks would permit the officers of the member banks in a syndicated loan to rely solely or even primarily on the leader bank for regular appraisal and monitoring of the loan. They would expect these officers to do a complete due diligence exercise for the loan, as if it is solely granted by the member bank. This would defeat the purpose behind syndication. Lack of Marketing Skills : Last of the peripheral reasons is that syndicated lending calls for active, if not aggressive marketing by the leader bank. Indian banks, primarily in the public sector, do not possess this skill or if they did possess the skill, it has been kept under wraps for so long as to be ineffective. The main reason, of course, is that nowhere in the world has anybody attempted syndicated lending for working capital (short- term) advances. Two of the prerequisites for a syndicated loan are that the period of the loan is for a few years and the security is a fixed charge on the assets of the borrower, unless it is on an unsecured basis. Both these are not met in a short-term working capital advance. The period of such an advance is contractually short, not exceeding one year. The security for working capital loans is invariably a floating charge on assets created with the loan, i.e., current assets on hypothecation basis. The value the security comprising current assets will be constantly changing and this kind of security is totally unsuited for a syndicated loan. Therefore, syndicated loans are not for short-term working capital advances, for which RBI had recommended that system to all banks.

TYBFM: MARKS: 20: TIME : 40 MIN Attempt any two question Q1)Shankar has been considering investment in stock X or Y. He has estimated the following distribution of returns of stock X and Stock Y. Return on stock X Return on stock Y Probability -10 05 10 0 10 25 10 15 40 20 20 20 30 25 05 Advise which stock the investor should buy. Q2) Explain the exchange rate risk ? Explain how the same can be hedged. Q3) As alternative investment strategy explain private equity and hedge fund. ===================================

TYBFM: MARKS: 20: TIME : 40 MIN Attempt any two question Q1) The common stocks of Bajaj and TVS have expected returns of 15% and 20% respectively, while the standard deviations are 20% and 40%. The excepted correlation coefficient between the two stocks is 0.36. What is the excepted value of return and the standard deviation of a portfolio consisting of 40% Bajaj and 60% TVS. Q2) Distinguish between mutual fund and hedge fund. Q3) What is credit Risk? Explain the techniques to hedge credit risk. ===================================