Sie sind auf Seite 1von 45


1. Introduction:

According to SEBI Act:“Merchant Banker” means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.” Merchant Banks are issue houses which manage new issues of the companies in the capital market. According to the Banking Commission (1972), merchant banking institutions are to offer services like syndication of financing, promotion of projects, investment management and advisory services to medium and small savers and to provide funds and trusts to various types. In fact, merchant banking implies a wider range of specialist services, such as: (i) Loan syndication, (ii) Financial and management consultancy, (iii) Project counselling, (iv) Portfolio management, (v) Formulation of schemes of rehabilitation, (vi) Guidance on foreign trade financing, (vii) Guidance to non-resident Indians for investment in India. The formal merchant banking services in Indian capital market were initiated in 1967, when Reserve Bank of India granted licence to The National Grindlays Bank to perform the services relating to issue management. The First National City Bank followed Grindlays Bank by opening a ‘Management Consultant Division’ in 1970. Both these banks acted as ‘managers to the issues’. From 1969 to 1992, merchant banks performed the issue management activities under the legislative framework of Capital Issues (Control) Act, 1947. The procedure of the managing capital issue by a merchant banker is divided into pre-and post issue management activities. Presently, public issue management activities of merchant bankers are regulated and monitored by SEBI through the guidelines, clarifications, circulars containing instructions to merchant bankers, stock exchanges and other constituents of the capital market. Under the Capital Issues (Control) Act, 1947, companies were required to obtain prior approval from the Controller of Capital Issues (CCI) for raising capital. CCI’s permission was required with regard to the timing, size of the issue and the determination of price at which the securities were to be issued. CCI norms for pricing often led to extreme under pricing and heavy oversubscription. The extent of under pricing of public issues deterred the firms from going public. So, debt played a major role in financing the projects. With the passing of SEBI Act, 1992, and the repeal of Capital Issues (Control) Act, 1947, the government’s control over the determination of issue size, time and price of securities ceased and the market was allowed to allocate resources on competitive basis.

Under the SEBI (Merchant Bankers) Regulations, 1992, Merchant Bankers were recognized as primary intermediaries in the role of ‘issue manager’ in the capital market. The regulations provided for the compulsory registration, capital adequacy requirements, general obligations and responsibilities and code of conduct for the merchant bankers as also the procedure for inspection of books of accounts, records

and documents of merchant bankers. The initial set of guidelines issued by SEBI allowed almost all firms to freely price their issues and decide on the size of the issue in consultation with lead merchant bankers.

2. Nature of Merchant Banking:

  • i. Advisory in nature ii. Financial Arrangement

iii. Corporate Restructuring iv. Capital Reoprganization

  • v. Capital Issue Management

vi. Special Assistance to Small Scale Industries. vii. Portfolio Management viii. Private Placements ix. Foreign Currency Loans

  • x. Technical Assistance

xi. Investment Advisory Services xii. Revival package for sick units.

3. Scope of Merchant Banking:

Merchant banking activities help in channelizing the financial surplus of the general public into productive investment avenues. They help to coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing the securities market. This being the era where mergers and acquisitions are hot, the scope of merchant banking has grown to a large extent.

Regulations of Merchant Banking: The merchant banking activity in India is governed by SEBI (Merchant Bankers)

Regulations of Merchant Banking:

The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms: i) The applicant should be a corporate body. ii) The applicant should not carry on any business other than those connected with the securities market. iii) The applicant should have necessary infrastructure like office space, equipment, manpower, etc. iv) The applicant must have at least two employees with prior experience in merchant banking. v) Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. vi) The applicant should not have been involved in any securities scam or proved guilt for any offence. vii) The applicant should have a minimum net worth Rs50 million.

An Overview: Q. Is it mandatory for a merchant banker to register with the SEBI? A. Yes. Without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker. Q. Who is eligible to obtain registration as a

merchant banker? A. Only a body corporate other than a non-banking financial company shall be eligible to get registration as merchant banker.

Q. What are the various categories for which registration can be

obtained? A. The categories for which registration may be granted are given below: • Category I – to carry on the activity of issue management and to act as adviser, consultant, manager, underwriter, portfolio manager. • Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager. • Category III - to act as underwriter, adviser or consultant to an issue • Category IV – to act only as adviser or consultant to an issue Q. What is the capital requirement for carrying on activity as merchant banker? A. The capital requirement depends upon the category. The minimum net worth requirement for acting as merchant banker is given below: • Category I – Rs. 5 crores • Category II – Rs, 50 lakhs • Category III – Rs. 20 lakhs • Category IV – Nil Q. What is the procedure for getting registration? A. An application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 992. SEBI shall consider the application and on being satisfied issue a certificate of registration in Form B of the SEBI (Merchant Bankers) Regulations, 1992. Q. What is the registration fee payable to SEBI? A. Rs. 5 lakhs which should be paid within 15 days of date of receipt of intimation regarding grant of certificate. Q. What is the validity period of certificate of registration? A . Three years from the date of issue. Q. How to renew the certificate? A. Three months before the expiry period, an application should be submitted to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the application and on being satisfied renew certificate of registration for a further period of 3 years. Q. What is the renewal fee payable to SEBI? A. Rs.2.5 lakhs which should be paid within 15 days of date of receipt of intimation regarding renewal of certificate. Q. What is the consequence of non-registration or failure to renew registration? A. The person whose registration is not current shall not carry on the activity as merchant banker from the date of expiry of validity period.

Overview of current Indian Merchant Banking Scene:

In India, though the existence of this branch of financial services can be traced to over three decades, investment banking was largely confined to merchant banking services. In India prior to the enactment on Indian Companies Act, 1956, managing agent acted as issue houses for the securities, evaluated project reports, planned capital structure and to some extent provided venture capital for new firms. Few share broking firm also functioned as Merchant Bankers. The need for the specialized Merchant Banking services was felt in India with the rapid growth in thenumber and size of the issues made in the

primary market. The Merchant Banking services were started by foreign banks, namely the National Grindlays Bank in 1967 with licence obtained from RBI followed by the Citi Bank in 1970. The Banking commission in its report in 1972 recommended the setting up of Merchant Banking institutions by commercial banks and Financial institutions. This marked the beginning of specialized merchant banking in India. To begin with, Merchant Banking services were offered with traditional banking services. In the mid-eighties, the Banking Regulations Act was amended permitting commercial banks to offer a wide range of financial services through the subsidiaries rule. The State Bank of India was the first to set up Merchant Banking Division in 1972 and ICICI was the first financial institution to set up its Merchant Banking Division in 1973. This was followed by Bank of India, Central Bank of India, Bank of Baroda, Syndicate Bank, Punjab National Bank, Canara Bank,etc. The later entrant were IFCI and IDBI with the latter setting up its Merchant Banking Division in 1992. Growth Merchant Banking in India was given a shot in the arm with the advent of SEBI in 1992 and subsequent introduction of free pricing of primary market equity issues in 1992. However, post-1992, the merchant banking industry was largely driven by issue management activity which fluctuated with the trends in the primary market. There have been phases of hectic activity followed by a severe setback in business. SEBI started to regulate the merchant banking activity in 1992 and a majority of the merchant bankers who registered with SEBI were either in issue management or associated activity such as underwriting or advisorship. SEBI has four categories of merchant bankers with varying eligibility criteria based on their networth. The highest number of merchant bankers with SEBI was seen in the mid- nineties, but the numbers have reduced since, due to the inactivity in the primary market. The number of registered merchant bankers with SEBI

as at end of March 2003 was 124, from a peak of almost a thousand in the nineties and later on number started reducing.

6. Structure of Merchant Banking Industry:

Initially Merchant Bankers were classified into 4 categories with regard to their nature and range of activities and their responsibilities to SEBI, investors and issuers of securities. Since September 1997 only a single category exists. The requirements are as under: There are four different categories of merchant bankers. Only category 1 merchant bankers are allowed to act as lead managers to the issue: Category 1: Those merchant bankers who can conduct all above mentioned activities, relating to management of issues. They may, if they so choose, act only in an advisory capacity or as co-manager, underwriter or as portfolio manager. Category 2: Those merchant bankers who can act as consultant, advisor,

portfolio manager and co-manager. Category 3: Those merchant bankers

who can act as underwriter, advisor and consultant. Category 4: Those merchant bankers who can act only as advisor or consultant to an issue. Different types of organizations in India which provide merchant baking services:

  • i. Commercial Banks

ii. All India Financial Institutions

iii. Private Consultancy Firms iv. Technical Consultancy Organizations.

7. Professional Ethics and Code of Conduct:


Members/Associates of AMBI are custodians of confidence and a bridge between investors and investees. The role includes reporting obligations which have in essence a legal requirement for meeting certain specific objectives. Accordingly, various Government agencies on the local, state and federal level may require the filing of numerous records and reports which are designed to safeguard public interest. Members/Associates of AMBI are expected to adhere to the Code of Conduct, regulations, guidelines, clarifications, rules, circulars and press releases issued by SEBI from time to time. Special care must be taken to ensure that all reporting to any branch or agency of the government is done with the utmost accuracy and promptness. No attempt should be made to distort or disguise the true nature of any procedure or transaction. ii. CONFIDENTIALITY: Members/Associates may obtain financial and other “price sensitive” information, information about their client and/or competitors. The success of a Merchant Banker depends on the confidence of the client that its Merchant Banker would maintain confidentiality of the information obtained by it and the assurance that it would be utilized by the Merchant Banker in a proper manner. It goes with assurance that such information shall never be used for gain. The Member/Associate shall: Request its clients, other members and others for only such information as may be statutorily required or such information, as may be properly considered as necessary for rendering professional service as a Merchant Banker. Restrict the use of the information, knowledge, secrets only for the purpose of discharging its functions as Merchant Banker. Ensure that access to the information about the client and/or its competitors is accessed only by authorized employees/representatives of the Merchant Bankers. Ensure that the files contained only pertinent data used for advising the client. Ensure that access to all sensitive or privileged information is denied to others unless for good cause and/or reason and in discharge of their duties.

iii. ACCURATE RECORDS, REPORTING AND FINANCIAL RECORD KEEPING: Merchant Bankers are required by law to maintain financial and other records that will accurately present its activities and transactions. All supporting documents, including agreements, invoices, cheque requests and expense reports, are likewise required to fairly and accurately reflect the information contained therein. No false or misleading entries should be made in any books or records of the Members/Associates for any reason; either in its accounts or in accounts maintained for and on behalf of clients and no fund, asset or account of the company should be established for any purpose unless it is accurately and fairly recorded in the books and records of the company. All errors and adjustments should be promptly corrected and recorded when discovered. Accounting information should be prepared in conformity with the prescribed accounting standards and generally accepted accounting practices. In the event of the adherence causing any hardship the Members/Associates could refer such situations to AMBI to enable it to examine the same. No entries should be made which will conceal or differently portray the essence of a transaction. The need for accurate and proper recording of information is not restricted to the accounting and financial functions of the Members/Associates. Members/Associates are also expected to maintain detailed records of all transactions, correspondence, meetings etc., with their clients/prospective clients. In an evolving regulatory environment, the attempt should be to lay down standards which will stand the test of time and avoid concealing the essence of a transaction behind the legalities of compliance regulations. CONFLICT OF INTEREST : Members/Associates shall always endeavour to avoid conflict of interest in performance of its service as a Merchant Banker. Conflict of interest may be actual or apparent. All situations which leads to a conflict of interest should be avoided. This would apply in relation to other Members/Associates, clients, employees, group companies and dealings with other regulatory authorities. Before accepting a new assignment from a prospective client, a merchant banker is expected to conduct its own Due Diligence with the prospective clients’ bankers, merchant bankers and other capital market intermediaries with a view to arrive at a decision whether to accept or reject the assignment. v. ETHICS IN CONDUCTING BUSINES :Members/Associates shall in dealings with other members, clients, investors, institutions, the public, employees and others comply with all applicable laws, rules and regulations both in letter and in spirit. Where there appears any difficulty in interpretation of any law, rules, regulation, the Members/Associates may refer such issues to AMBI.


Members/Associates may, on its absolute sole discretion make political donations and participate in any political activity that are legally permitted. When expressing views on political issues the Member/Associate should make it clear that the views expressed are those of concerned Member/ Associate and not of AMBI. vii. COMMUNICATION: Members/Associates are required to communicate with the Regulatory Authority, Government departments and Agencies, Public etc. The Member/Associates shall communicate accurately in a manner which would ensure that the communication is truthful and accurate. All communication by a member to the investor at the instance of a client or based on information available with the client, should be made only if the member is fully aware of the facts and contents of the matter. Members/Associate would acknowledge the fact that they are an important link between the listed companies and the investment public. Opinions and recommendations required for from a Merchant Banker regarding any matter within his professional scope of work may be provided by him. The merchant banker shall be free to charge such fees for such professional services as he may deem fit. No incorrect or misleading information should be given. Information regarding advisable investments and update on investments should be given in a professional manner and should not be based on any extraneous motive or consideration. viii. PUBLIC DISCLOSURE AND REPORTING: Reporting of financial information to the investing stockholders, the SEBI and the financial institutions requires the highest standard of fairness and honesty. Much harm can be caused due to incorrect or fraudulent or misleading reporting. All advice which suppresses or does not wholly disclose the material nature of a transaction should be avoided as being prohibited. ix. DISPARAGEMENT OF COMPETITORS:

Competition among Merchant Bankers is increasing day after day which is welcome as public interest is best served by free and open competition. Any activity or conduct that reduces or eliminates competition in the market place is not in the interest of the development of a vibrant security market and investors. No Member/Associate shall undertake any activity which tends to or is likely to result in any restrictive trade practice or an unfair trade practice. One may choose not discuss fees, costs, commissions etc. earned/incurred by him with a competitor as this may lead to an unlawful agreement to determine price or restrain competition. However, a member is discouraged from entertaining client solely on the ground of fees when matters may have reached advanced stages of negotiation with other members.

In the ordinary course of business one may require information about a competitor, his clients etc. However, a Merchant Banker shall not acquire or seek to acquire information through improper means such as industrial espionage, hiring an employee of the competitor etc. Should any such instance come to light the same should be reported to the SEBI & AMBI. x. MARKETING & SALES :Members/Associates are encouraged to compete in the market place solely based on merits and competitive positioning. Abiding by generally accepted practices and norms of fair competition and providing clients with accurate, adequate and prompt information is expected. Business should be obtained on merits, avoiding compromising the loyalty of a customer’s employee in an effort to make a sale through misuse of business courtesies. xi. DISCRIMINATION: No Member/Associate shall discriminate in favour of or against any of its competing customers. No client company shall by an agreement or otherwise be coerced into resorting to the services of a particular Merchant Banker. While AMBI recognizes that collective co-operation strengthens the position of Merchant Banker generally, it should in no circumstances be considered as being a tool adverse to the interest of any client. xii. CONTRACTS WITH CLIENTS: All agreements with clients shall be in writing and contain detailed scope of services to be rendered by the Members/Associates. The agreement shall include the amount of fees to be charged and the manner of payment thereof. The agreement between the Member/Associate and the client shall be entered into before any service is rendered by the Member/Associate. A Member/Associate before accepting any assignment from the client / prospective client shall obtain information as to whether the client / prospective client has already entered into an MOU / Agreement with any other Merchant Banker in respect of the same assignment and its status thereof. Member/Associate shall ensure that their clients follow rules, regulations, guidelines etc. issued by SEBI and other regulatory authorities from time to time. A Merchant Banker shall exercise Due Diligence to ensure fair and true disclosures in the offer document so that the investors are in a position to take well informed investment decisions. Apart from informing SEBI, Members/ Associates shall keep AMBI informed about the non-compliance, if any, concerning such matters as reflect the interaction of the clients with the member. Members/Associates shall also keep AMBI informed about the non payment of fees etc. by the client as agreed. xiii. EXPENSES REIMBURSEMENT: It is customary for a client to reimburse its Merchant Banker for all reasonable and necessary expenses actually incurred in the conduct of the client’s business.

Members / Associates are expected to incur such expenditure as would normally have been incurred by them in the discharge of their duties. Without making it mandatory in any manner, Members / Associates are encourage to confirm with clients the particulars of expenses they would be incurring including the nature and class of travel, particulars regarding stay and expected duration etc. xiv. GIFTS, ENTERTAINMENT, FAVOURS AND OTHER ITEMS OF VALUE: Members / Associates shall not accept or give any gift which may deem to influence the making of any commercial decision by the recipient of the gift. A gift may take various forms including money, tangible property, services free of cost or at concessional rate, discount, credit etc. Member / Associates are required by needs of the profession to interact with a cross section of the society. Members/Associates shall not make any illegal payment either directly or indirectly to any person irrespective of the reason or motive. Even reasonable gifts, be they received or given, should be avoided if to a reasonable observer, it might appear to influence a decision. PROCUREMENT / PURCHASING:

AMBI may, from time to time, indicate minimum fees for the services to be rendered by members in certain select areas of merchant banking activities, eg. Lead Managers/Joint Managers/ Co-Managers fees. While indicating such fees, AMBI shall keep in mind the cost expected to be incurred in rendering such services. No undercutting should be resorted to in any circumstances much less in a manner which may not be easily detected in the course of discharging

responsibilities. Similarly all deals for procuring investments, either short, medium or long term should not be structured in a manner as not to be in keeping with the spirit and essence of this code. xvi. INSIDE INFORMATION: A Merchant Banker will be considered as an “insider” in accordance with the meaning of the term as per the Securities and Exchange Board of India (Insider Trading) Regulations,


A Member/Associate shall not : Either on his behalf, or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information. Communicate any unpublished price sensitive information to any person except as may be necessary to carry on the business ordinarily on or under any law; Give advice, suggestions, recommendations, to any person to deal in securities of any company on the basis of unpublished price sensitive information. No Members/Associates or any of their employees shall indulge in “insider trading”. This may require the Members/Associates to obtain from its employees, existing as well as to be employed in their organization in future to give suitable declarations that he/she shall not act on any unpublished price sensitive information.

There should be mechanism by which the Members/ Associates are in a position to monitor the compliance. Employees should make periodic disclosure of transactions in securities entered into by them and their dependent relatives. Each Merchant Banker shall fix its own internal limit for transactions above which it would be obligatory for the employees to disclose the same to his employers. The Board/Management Committee should take note of these disclosures for proper monitoring. Every Member/Associate shall co-operate in adopting such regulatory procedure as AMBI may impose for ensuring that the Code of Conduct, Articles of Association of AMBI and other regulatory mandates issued by SEBI and AMBI from time to time are complied with, both in letter and in spirit. xvii. TRADE SECRETS: During the course of employment, employees may work with innovative derivatives or other tools for financial management. They may also learn valuable information and gather materials relating to the business of the Member / Associate that are not otherwise known or available outside. This information and materials are of great importance in the present day highly competitive business; and to retain their value they must be kept confidential. Any person taking up employment with a Member / Associate accepts a continuing moral and legal obligation not to disclose any trade secrets to anybody including an earlier or subsequent employer. The obligation to protect the secrets would continue, even after ceasing employment for any reason. xviii. COMPLIANCE RESPONSIBILITY: Every Member/Associate is expected to be responsible for the conduct of its employees and will be reasonable for his or her compliance with this Code of Conduct. If there be any questions of interpretation they should be directed to AMBI. xix. POWER OF AMBI TO CALL FOR CERTAIN INFORMATION:

AMBI may call for such information from members as it may feel necessary or appropriate. 1. Current Development The first merchant bank was set up in 1969 by Grind lays Bank. Initially they were issue mangers looking after the issue of shares and raising capital for the company. But subsequently they expanded their activities such as working capital management; syndication of project finance, global loans, mergers, capital restructuring, etc., initially the merchant banker in India was in the form of management of public issue and providing financial consultancy for foreign banks. In 1973, SBI started the merchant banking and it was followed by ICICI. SBI capital market was set up in August 1986 as a full fledged merchant banker. Between 1974 and 1985, the merchant banker has promoted lot of companies. However they were brought under the control of SEBI in 1992. Recent Developments in Merchant Banking and Challenges Ahead: The

recent developments in Merchant banking are due to certain contributory

factors in India. They are

  • i. The Merchant Banking was at its best during 1985-1992 being when

there were many new issues. It is expected that 2010 that it is going to be party time for merchant banks, as many new issue are coming up.

ii. The foreign investors – both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant bankers in many ways. iii. Disinvestment in the government sector in the country gives a big scope to the merchant banks to function as consultants. iv. New financial instruments are introduced in the market time and again. This basically provides more and more opportunity to the merchant banks.

  • v. The mergers and corporate restructuring along with MOU and MOA

are giving immense opportunity to the merchant bankers for consultancy jobs.

However the challenges faced by merchant bankers in India are:

  • i. SEBI guideline has restricted their operations to Issue Management and

Portfolio Management to some extent. So, the scope of work is limited. ii. In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble without any fault of their own. iii. The net worth requirement is very high in categories I and II specially, so many professionally experienced person/ organizations cannot come into the picture. iv. Poor New issues market in India is drying up the business of the merchant bankers. Thus the merchant bankers are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing. The activities of the merchant banking in India is very vast in the nature of 1.The management of the customers securities 2.The management of the portfolio

3.The management of projects and counseling as well as appraisal

  • 4. The management of underwriting of shares and debentures

  • 5. The circumvention of the syndication of loans

  • 6. Management of the interest and dividend etc

Thus, Indian Financial consists of following: 1. Financial markets 2. Financial institutions/intermediaries 3. Financial assets/instruments

Financial markets can be further divided into: 1. Organized sector 2. Unorganized sector Organized sector markets can be further divided into:

  • 1. Money Market 2. Capital Market (Primary Market & Secondary

Market) Financial institutions / Intermediaries can also be divided into :


Regulatory Bodies – Key regulatory bodies are : - RBI - Securities &

Exchange Board of India (SEBI) - Insurance Regulatory & Development Authority (IRDA) - Govt. of India (Dept. of Banking & Insurance,

Ministry of Finance) 2. Intermediaries – Which may be : - Money Market Intermediaries. - Capital market intermediaries


  • 1. Meaning, Definition and Concept:

Financial Services – In general, all types of activities which are of a financial nature can be brought under the term “financial services”. In broad sense, it means “mobilizing and allocating savings”. Thus it involves all activities involved in the transformation of savings into investment. It can also be called financial intermediation which is a process by which funds are mobilized by large number of sectors and make them available to all those who are in need particularly corporate customers. Thus financial service sector is a key area and is vital for industrial development. Financial service help not only to raise required funds but also ensure their efficient deployment. In order to ensure efficient management of funds, services such as bill discounting, factoring, parking of short term funds in money market, securitization of debt are provided by financial service firms. Besides banking and insurance, this sector provides specialized services such as credit rating, venture capital financing, lease financing, merchant banking, credit cards, housing finance etc. Hence, in brief, these are the services rendered by financial institutions and intermediaries operating in the market. Financial services cover a wide range of activities. They can be broadly classified into two: (i) Traditional activities (ii) Modern activities. Traditional activities can be further classified as: (i) Fund based activities/services (ii) Fee based activities /services Fund based activities / services are those where funds of financial institutions are involved such as:

 Underwriting of investments in shares, debentures. Advancing different types of loans (short term, medium term, long term) and in the form of clean loan, pledge, hypothecation, housing, education, consumption loan etc. Investing / participating in money market instruments like CPs, CDs bill discounting, treasury bills etc. Providing finance like leasing, hire purchase, venture capital, seed capital etc.

Non-Fund based activities/services are those where funds are not involved and financial institution gets income in the form of fee such as:

Commission on demand draft. Guarantee/Letter of credit Managing capital issue (pre-issue & post issue management services) Advisory/Consultancy services Project preparation/appraisal/arranging finance through projects from financial institutions Assisting in the process of getting clearances from Govt/Govt bodies.

Modern activities/services provided by financial institutions are like advisory role in corporate restructuring, acting as trustees for debentures, rehabilitation and restructuring sick units, portfolio management of large corporate risk management services, hedging of risks, guiding management in cost minimization efforts, safe custody of securities etc.

Role in financial system:

i. Financial Services are fundamental to economic growth and Development; ii. Banking, savings and investment, and debt and equity financing, all help us to save our money, guard against uncertainty, and build credit, while enabling our businesses to start up, expand, -increase efficiency, - and compete in local and international markets; iii. They provide the payment services; iv. Matching savers and investors; v. Generating and distributing of crucial information, vi. Allocation of credits efficiently; vii. Pricing, pooling and trading risks; viii. Increasing of asset liquidity. ix. Accelerate the rate of economic development x. Allocation of resources to different investment channels. xi. Catalyst for economic development xii. Lowers risk and helps in diversification. xiii. Expert Knowledge and professional guidance xiv. Fosters industrial development xv. Revival of sick units xvi. Investor’s education.




  • 3. Evolution

  • 4. Merits

  • 5. Demerits.

  • 6. Dematerialization

  • 7. Process of Dematerialization.

  • 8. NSDL

  • 9. CDSL

  • 1. Meaning:

A depository is an institution that facilitates the investors in holding securities in a book entry form, which is maintained electronically. It is similar to a bank where one can deposit cash and can be withdrawn and/or transferred to anybody at your instruction by issuing a cheque.

Similarly your investment can be sold in the stock exchange or transferred to anybody at your instruction through a Depository Participant (DP). On the simplest level, depository is used to refer to any place where something is deposited for storage or security purposes. More specifically, it can refer to a company, bank or an institution that holds and facilitates the exchange of securities. Or a depository can refer to a depository institution that is allowed to accept monetary deposits from customers. Central security depositories allow brokers and other financial companies to deposit securities where book entry and other services can be performed, like clearance, settlement and securities borrowing and lending.

Basics of Depository

Depository is an institution or a kind of organization which holds securities with it, in which trading is done among shares, debentures, mutual funds, derivatives, F&O and commodities. The intermediaries perform their actions in variety of securities at Depository on behalf of their clients. These intermediaries are known as Depositories Participants. Fundamentally, There are two sorts of depositories in India. One is the National Securities Depository Limited(NSDL) and the other is the Central Depository Service (India) Limited(CDSL). Every Depository Participant (DP) needs to be registered under this Depository before it begins its operation or trade in the market.



Explain what merchant banking is. Its functions & Scope. ( Page 1 to 5)

  • 2. Explain current challenges by Indian merchant bankers

( page 8)

  • 3. Explain Financial services & activities under taken by them. ( Page 10)


The joint stock company has to issue shares to the public for getting funds for business. This is done in form of shares, debentures etc. There is a laid down procedure for issue of shares as under

  • 1. IPO 2. Private placement 3. Right issues method 4.Bonus shares method 5. Book building method 6. Stock option method 7. Bought out method. All the above methods can be used for issue of shares by which the companies capital shall increase. For doing so the companies have to issue prospectus to the public. Prospectus is a document by which the company can give details of Categories of Issue Managers: SEBI has classified Issue Managers into four categories as follows: a)Category l: Merchant banker who I s authorized to act as issue manager, advisor, consultant, underwriter and portfolio manager.

    • b) Category II: Merchant banker who is authorized to act only as

advisor, consultant, underwriter and portfolio manager.

c)CategoryIll: Merchant banker who is authorized to act as underwriter, advisor and consultant to an issue.

d)CategoryIV:Merchant banker who is authorized to act only as advisor or consultant to an issue.

Duties of Merchant Banker .

a)Easy Floatation: An issue manager acts as an indispensable pilot facilitating a public/rights issue.

  • b) Financial Consultant: An issue manager essentially acts as a

financial architect, by providing advice relating to capital structuring,

capital gearing and financial planning for the company.

  • c) Underwriting: An issue manager allows for underwriting the issues of

securities made by corporate enterprises.

  • d) Market Makers: Merchant bankers, as issue managers often act as the

market makers for the issues lead-managed by them.

  • e) Due Diligence: The issue manager has to comply with SEBI

guidelines. The merchant banker will carry out activities with due diligence and furnish a Due Diligence Certificate to SEBI.

  • f) Co-ordination: The issue manager is required to coordinate with a

large number of institutions and agencies while managing an issue in

order to make it successful.

  • g) Liaison with SEBI: The issue manager, as a part of merchant banking

activities, should register with SEBI ..

h )Due Diligence Certificate i. Submission of Offer Document:

2.1 Public Issue Management

  • 1. Signing of MOU

  • 2. Obtaining Appraisal Note

  • 3. Optimum Capital Structure

  • 4. Converting meeting

  • 5. Appointment of Financial Intermediary

  • 6. Preparing Documents

  • 7. Due Diligence Certificate (All Legal formalities Followed Certificate)

  • 8. Submission of offer documents

  • 9. Finalization of collection centers.

    • 10. Filling with registrar of companies

    • 11. Issue launch

    • 12. Promoters Contribution

    • 13. Issue closure.

New Issue Market refers to the set-up which helps the industry to raise the funds by issuing different types of securities.

A) Various Methods of Marketing of New Issues:



1) Pure Prospectus Method 2) Offer for Sale Method 3) Private Placement Method 4) Initial Public Offers(IPOs)Method 5) Rights Issue Method 6) Bonus Issue Method 7) Book-building Method 8) Stock Option Method

9) Bought-out Deals Method

2.2 Marketing of New Issue

For marketing of shares as per SEBI guide lines the following steps are to be followed.

  • 1. Approval

  • 2. Maximum Limit

  • 3. Minimum Period

  • 4. Superintendence

  • 5. Eligibility

  • 6. Director’s report

  • 7. IPO

  • 8. Issue at discount PROSPECTUS A prospectus is required to be issued by a public company to the public only when it wants to raise funds from the public in the form of shares or debentures. In case the public company is interested in raising its funds not from the public but from other sources ,it will not be required to issue a prospectus but will have to deliver to the Registrar of Companies a ‘statement in lieu of prospectus’ (SLP).A private company is not required to prepare any of the two documents.

A) Meaning:

A document through which public are solicited to subscribe to

the share capital of a corporate entity is called ‘Prospectus‘.


Section2(36)defines prospectus as follows:

Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in ,or debentures of, a body corporate. In respect of offer of shares and debentures made to the general public, the contents of the prospectus shall take the following forms: 1)Regular Prospectus: The contents of a regular prospectus are presented in three parts as follows: a)PART I:PartI of the prospectus should contain details about the specific information about the company. Following are the details furnished in this regard: i)General Information: The prospectus in its pan I shall contain such information as the following:

•Name and address of the registered office of the company. •Consent of the Central Government (SEBI) for the present issue and declaration of Central Government (SEBI) about non-responsibility for

financial soundness or correctness of statements and letter of intent/industrial license. •Names of regional stock exchanges and other stock exchanges where application has been made for listing of present issue. •Provisions of sub-section(1) of Section68A of the Companies Act relating to punishment for fictitious applications. •Statement/declaration about refund of the issue if minimum subscription of 90percent is not received within 90days of closure of the issue. •Declaration about the issue of allotment letters/refunds within a period of 10weeks and interest in case of any delay in refund at the prescribed rate.

•Date of opening and closing of the issue, and date, of earliest closing of the issue. ii) Capital Structure: Information about the company’s capital structure such as authorized, issued, subscribed, and paid-up capital should be furnished

iii) Terms of Issue:

iv) Particulars of the Issue v) Company ,Management and Project vi)Disclosure of Public Issues made by the Company vii)Disclosure of Outstanding Litigation, Criminal Prosecution and Defaults

b) PARTII: The information to be included under this part of the prospectus are as follows:

i) General Information consent of directors, auditors, solicitors managers to issue, registrar of issue, bankers to the company, bankers to the issue, and experts and their opinions if any obtained. •Change, if any, in directors and auditors during the last three years and reasons thereof. •Authority for the issue and details of resolutions passed for the issue. ii)Financial Information: Under this category report-based information relating to financial matters are to be shown. •Minimum subscription. • Expenses •Issue made previously for cash. •Previous public or rights issue, if any (during last five years). •Date of allotment; closing date; date of refunds; date of listing on the stock exchange. c)PARTIII: Made by a qualified practicing chartered accountant. i) Declaration: declaration by the directors that all the relevant provisions of the Companies Act, l956 and guidelines issued by the Government have been complied with. ii)Application with Prospectus: Under Section56(3) of the CompaniesAct,1956 any issue for shares or debentures must necessarily

be accompanied by a memorandum containing such salient features of prospectus as may be prescribed. No prospectus if •offer is made in connection with an underwriting agreement with respect to the shares or debentures. •Where the offer of shares or debentures is not made to the public.

Abridged Prospectus:

A memorandum containing such salient features of a prospectus as may be prescribed is called ‘Abridged Prospectus’. The concept of abridged prospectus was introduced by the Companies Act of 1988 with a view to make the public issue of shares an inexpensive proposition.

General Information Capital Structure Terms of Issue:

Issue Particulars:

Company, Management and Project Financial Performance Refunds and Interest Companies Under the Same Management Risk Factors Importance of Prospectus:

The prospectus includes very important information like the historical performance of the company in the previous years, the current owners of the company, the amount of shares that they are offering to the public, what they intend to do with the money after the I.P.O amongst other things D) Disclosures In Prospectus: Consequent to the acceptance of the recommendations of the Malegam Committee, the following disclosures are made mandatory by the SEBI to be made by issuing companies with effect from November1995. 1)An index: to the contents of the prospectus. 2)Project Cost: Details of actual expenditure incurred on the project within a period of 2months of filing the prospectus with the SEBI or Registrar Of Companies(ROC),whichever is later. 3) Turnover 4) Assets and Liabilities 5) Major Expansion 6) Future Projections 7) Directors Statement


Definition: The

term ‘promoter' in relation to securities offered to the

public for subscription means and includes the following:

a)The person or persons who are in overall control of the company. The following are to be disclosed in Prospecturs 1) Promoters Shareholdings 2) Share Price


4)Management Discussion and Analysis


6) Major Shareholders:

7) No Responsibility Statement:

8) Qualified Notes 9) Information about Ventures Promoted 10) Risk Factors 11) Tax Benefits 12) Basis for Issue Price 13) Ratios 14) Other Disclosures:

In addition to the above, the following also need to be disclosed:

•Sale or purchase between companies in the promoter group where such sales or purchases exceed 10percent of the total sales or purchases of the issuer. •Material items of income or expenditure arising out of transactions in the promoter group.

•A forecast of the estimated profits of the financial year ending immediately before the date of the offer document (if such information is not already given in the other document).

•A capitalization statement showing total debt and net worth, and the debt/equity ratios before and after the issue is made. Types of prospectus:

1) Red-herring Prospectus: According to sub-sections (2), (3) and (4) of section 60 B of the Companies Act, 1956. "A prospectus which does not have complete particulars on the price of securities offered and the quantum of securities offered is known as Red- herring prospectus. "Such a prospectus is issued where a company offers it securities through the ‘book-building mode'. 2)Information Memorandum: a)Definition:

According to Section2(19B) of the Companies Amendment Act of 2000, ‘Information Memorandum 'is defined as ‘a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities is assessed by means of a notice, circular, advertisement or document. c)ShelfProspectus: i)Definition: ‘Shelf

prospectus’ means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.’ Underwriting It is the activities connected with the management of the public issues of corporate securities, viz., equity shares, preference shares, and debentures or bonds, and are aimed at mobilization of money from the capital market Under writing is a guarantee given by ‘underwriters’, the financial market

intermediary to take up a whole or a part of the issue of securities not subscribed by the public. It is a marketing technique whereby corporate enterprises are able to sell their securities to the public and thereby achieve success in the public issue. A)Activities in Post issue: The major activities covered are:

1)Finalization of basis of allotment: If the public issue is oversubscribed to the extent of greater than five times, a SEBI-nominated public representative is required to participate in the finalization of Basis of Allotment(BOA). In case of rights issue that is over subscribed greater than two times, a SEBI-nominated public representative is required to participate in the finalization of BOA. lf it is under-subscribed, information regarding accepted applications is formalized, and Regional Stock Exchanges are approached for finalization of `BOA. 2) Dispatch of share certificates: Immediately after finalizing the BOA, share certificates are dispatched to the eligible allotees, and refund orders made to unsuccessful applicants. In addition, a 78 days report is to be filed with SEBI. Permission for listing of securities is also obtained from the stock exchange. 3)Advertisement: An announcement in the newspaper has to be made regarding the basis of allotment, the number of applications received and the date of dispatch of share certificates and refund orders, etc.

1) Net Asset Value: NAV=Total Net worth/total no of shares out- standing. Where, Total Net worth=[Equity Capital+ Free reserves – Contingent Liability] +Fresh Capital 2) Profit Earning Capacity Value (PECV)

prospectus’ means a prospectus issued by any financial institution or bank for one or more issues

2) Average Market Price: In this method, the fair price of the share is determined as an average of the NAV and PECV. The average market

price is kept in the background, as a relevant factor while settling the fair value.

Questions of chapter 2

  • 1. What are different sources by which funds can be raised in J.S.C ( page


  • 2. Duties of merchant banker. (page 16)

  • 3. Write detailed note on Public issue management ( page 17)

  • 4. Explain various methods of marketing issues & SEBI guidelines for the same (page 17 & 18 )

  • 5. Explain contents in Prospectors & its disclosures ( page 19,20,21)

  • 6. Explain pre& post issue activities in an issue ( page 23 & 24) CHAPTER -III BANKERS


1) Merger:

Merger is absorption of one or more companies by a single existing company. Merger is an act or process of purchasing equity shares of one or more companies by a single existing company. Merger is a technique of business growth. It is not treated as a business combination. Merger is done on a permanent basis. Generally, it is done between two companies. However, it can also be done among more than two companies. During merger, an acquiring company and acquired company comes together to decide and execute a merger agreement between them.

2) Acquisition:

Acquisition refers to a situation where one firm acquires another and the

latter ceases to exist. An acquisition occurs when one company takes controlling interest in another firm or its legal subsidiary or selected assets of another firm.

3) Amalgamation:

Amalgamation is the blending of two or more companies into one, the

share holders of each blending company becoming substantially the shareholders of the other company which holds blended companies.

4) Takeover:

In a takeover, a seller‘s management may oppose the acquisition or

merger but the buyer makes a direct bid to the seller‘s shareholders to acquire seller‘s shares and thus gain control of the seller‘s company. Takeover is a market route for the acquisition of a company.

B) Types of Merger Horizontal Merger Vertical Merger Diagonal Merger Forward Merger Reverse Merger Forward Triangular Merger Reverse Triangular Merger Conglomerate Merger A Congeneric Merger Negotiated Merge Arranged Merger Agreed Merger Unopposed Merger Defended Merger Competitive Merger Tender Offer

Advantages of Merger and Acquisition:



Growth through Acquisitions Economies of Scale Early-mover Benefit Tax Advantages Regulatory Considerations Size Synergy Diversifying Risk Good Price Creating Shareholder Value Better Corporate Governance Better Portfolio Investor's Perspective


Memorandum of Association Board Meeting Application to the Court Person Entitled to Apply Copy to Regional Director Order of High Court Notice of the Meeting Advertisement of Notice of Meeting Notice to Stock Exchange

Filing of Affidavit for the Compliance

Formalities for amalgamation

General Meeting Reporting Of Result Of The Meeting

Formalities with ROC Petition

Sanction of the Scheme Stamp Duty Filing with ROC Copy of Order to be annexed Allotment of shares

Hostile Takeover/Merger:

a) Meaning:

Normally acquisitions are

made friendly, however when the process of

acquisition is unfriendly (hostile) such acquisition is referred to as takeover. Hostile takeover arises when the Board of Directors of the acquiring company decide to approach the shareholders of the target company directly through a Public Announcement (Tender Offer) to buy

their shares consequent to the rejection of the offer made to the Board of Directors of the target company.

b) Take Over Strategies:

Street Sweep , Strategic Alliance, Bear hug , Brand Power

Financing Techniques in Merger

Ordinary Shares Financing Debt and Preference Shares Financing Deferred Payment Plan Tender Offer

A) Concept of Buy-back of Shares: Buy- back is an excellent tool for financial reengineering. Buy-back of shares relates to the company buying back its shares which it has issued earlier from the market. When a company elects to purchase outstanding shares of its own stock it can accomplish this through one of two ways:

The company can tender an offer to existing stockholders. A tender offer invites share holders to sell their stock, generally at a price above the market price, within a certain period of time.

ii. The company can purchase shares of its stock in the open market, similar to the way individuals would. In this case, the company would simply pay market price.

Delisting is a process by which the name of a company is removed from the list of securities of companies which are permitted to be traded in the stock exchanges. Delisting disables the process of trading of shares in the stock exchanges. The delisting can be voluntary delisting or compulsory delisting.

Voluntary Delisting:

Under voluntary delisting, a company can request for delisting its shares from one or more recognized stock exchanges, where their shares are listed.

Formalities for Delisting the Shares

  • 1. Prior approval from the Board of Directors. ii. Prior approval of the share holders through a special resolution iii. Submit an application for delisting of the shares in the prescribed form to the recognized stock exchange iv. Within one year of passing the special resolution make the final application to the concerned recognized stock exchange v. An audit report covering the period of six months from the date of application should accompany the application submitted to recognized exchange/s.

  • 2. Application for Delisting of Shares 3. Furnish Proof: The Company is required to furnish proof of the exit opportunity available to shareholders together with the final application to the recognized stock exchange/s.

B) Compulsory Delisting: The recognized stock exchange can delist the

equity shares of a listed company, after giving a reasonable opportunity to the company to be heard.

SEBI Guidelines for Compulsory Delisting:

SEBI has introduced the following guidelines for compulsory delisting of shares from any recognized stock exchange:

1) The recognized stock exchange shall take all reasonable steps to trace the promoters of a company whose equity shares are proposed to be delisted, with a view to ensuring compliance with regard to the acquisition of

delisted shares. 2) The recognized stock exchange shall consider the nature and extent of the alleged non-compliance of the company and the number and percentage of share holders who may be affected by such non- compliance.

  • 3. The recognized stock exchange shall take reasonable effort to verify the status of compliance of the company with the office of the concerned Registrar of Companies. 4) The names of the companies, whose equity shares are to be delisted shall be displayed in a separate section on the website of the recognized stock exchange for a brief period of time. 5) The recognized stock exchange shall inappropriate cases, file prosecutions under relevant provisions of the Securities Contracts (Regulation) Act, 1956, or any other law for the time being in force against identifiable promoters and directors of the company for the alleged non-compliances.

Meaning of Debentures:

A debenture is a medium to long-term debt format that is used by large companies to borrow money. Debentures are the most common

form of long-term loans that can be taken by a company. Debentures are usually loans that are re payable on a fixed date, but some debentures are irredeemable securities.

SEBI Guidelines for Issue of Debentures:

1) Issue of FCDs having a conversion period more than 36 months will

not be permissible 2)Premium amount on conversion, the conversion period, in stages, if any, shall be pre-determined and stated in the prospectus.

3) The interest rate for above debentures will be freely determinable by the issuer.

4) Issue of debenture with maturity of 18 months or less are exempt from the requirement of appointing Debenture Trustees or creating a Debenture Redemption Reserve (DRR). 5) In other cases, the names of the debenture trustees must be stated in the prospectus and DRR will be created in accordance with guidelines laid down by SEBI. 6) The trust deed shall be executed within six months of the closure of the issue. 7) Any conversion in part or whole of the debenture will be optional at the hands of the debenture holder, if the conversion takes place at or after 18months from the date of allotment, but before 36 months. 8) In case of NCDs /PCDs credit rating is compulsory where maturity exceeds 18months. 9) Premium amount at the time of conversion for the PCD, redemption amount, period of maturity, yield on redemption for the PCDs /NCDs shall be indicated in the prospectus. 10) The discount on the non-convertible portion of the PCD in case they are traded and procedure for their purchase on spot trading basis must be disclosed in the prospectus. 11) In case, the non-convertible portions of PCD /NCD are to be rolled over, a compulsory option should be given to those debenture holders who want to with draw and en cash from the debenture programme.

Portfolio Management:

A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, and cash and soon depending on the investor‘s income, budget and convenient time frame. So the art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is called as portfolio management.


  • 1. Conversion & evaluation of fund

  • 2. Regulation as per SEBI

  • 3. RBI regulations and others

  • 4. Portfolio strategy

  • 5. Performance measurement & revision. Portfolio Manager: Portfolio Manager is a professional who manages the portfolio of an investor with the objective of profitability, growth and risk minimization.

1) Discretionary Portfolio Manager:

A Portfolio Manager is called a discretionary portfolio manager if he exercises or may exercise any degree of discretion as to management of portfolio of securities or funds of the client.

2) Non-Discretionary Portfolio Manager:

A Portfolio Manager other than a discretionary Portfolio manager is called a non-discretionary portfolio manager. So, such a port folio manager has to build and manage the portfolio in accordance with the guidelines of the client.

Registration Procedure

Application for Grant of Certificate Conformance to Requirements Furnishing of Further Information, etc Consideration of Application Capital Adequacy Requirement Procedure for Registration Renewal of Certificate Procedure where registration is not granted Effect of Refusal to Grant Certificate Payment of Fees No Person to Act as Portfolio Manager without Certificate Conditions for Grant or Renewal of Certificate to Portfolio Manager Period of Validity of the Certificate

Duties of portfolio manager

  • 1. Reporting

  • 2. Compliance

  • 3. Growth and Performance

  • 4. Wealth Protection

  • 5. Hiring, Outsourcing and Oversight

Responsibilities of portfolio manager

Responsibilities relating to Contract with Clients Maintenance of Books of Accounts/Records Audit of Accounts General Responsibilities of a Portfolio Manager

Rights of portfolio Manager

Right of Inspection by the Board Right to Receive Notice before Inspection


Syndicated Loan' is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. The borrower could be a corporation, a large project, or sovereignty (such as a government).

Types of Syndicated loans:

Traditional Syndicated Bank Loans

Syndicated Bank Loan Revolving Credit Standby Facility Multi-option Facilities (MOF ) Underwritten Deal Club Deal

Best-Efforts Syndication Deal

Questions Chapter 3

  • 1. Explain mergers its types & advantages ( page 26 &27)

  • 2. Explain meaning & consequences of hostile merger ( page 29)

  • 3. Explain financing techniques in merger (page 30)

  • 4. Explain delisting, its types (page 30 &31)

  • 5. Explain debenture issues & SEBI guide lines in this regard ( page 32)

  • 6. Explain portfolio management, types & registration procedure.(page 33&34)

  • 7. Explain meaning of syndicate its types & loans given ( page 35 & 36)



Financial services constitute an important component of the financial system. Financial services, through the net work of elements such as financial institutions, financial markets and financial instruments, serve the needs of individuals, institutions and corporate. It is through these elements that the functioning of the financial system is facilitated. Considering its nature and importance, financial services are regarded as the fourth element of the financial system. In fact, an orderly functioning of the financial system depends, to a great

deal, on the range and the quality of financial services extended by a host of providers. Services that are offered by financial companies connote ‘financial services. Financial companies include both Asset Management Companies and Liability Management Companies. Asset Management Companies include leasing companies, mutual funds, merchant bankers

and issue /portfolio.


Financial services refer to services provided by the financial institutions

in a financial system. The finance industry encompasses abroad range of organizations that deal with the management of money. Among these organizations are Asset Management Companies like leasing companies ,merchant bankers and Liability Management Companies like discounting houses and acceptance houses.

Scope of Financial Services

Tradition Activities & Modern Activities

1) Traditional Activities: These are activities which comprise of both

capital and money market. They come under two categories:

  • a) Fund Based Activities: The traditional services which come

underfund based are the following: i) Underwriting of investment in

shares, debentures, bonds etc. ii) Dealing in secondary market activities. ii) Participating in money market instruments like commercial papers iv) Involving in equipment leasing, hire purchase, venture capital, seed capital etc. v)Dealing in foreign exchange market activities.

  • b) Non-Fund Based Activities: They are following: i) managing the

capital issues.

ii) Making arrangements for the placement of capital

and debt instruments with investment institutions.


Modern Activities: Besides the above traditional services, the financial intermediaries render in numerable services in recent times. Most of them

are of the non-fund based activity. They are also referred to as new financial products and services.

  • b) Non-Fund Based Activities: Managing the capital issues. ii) Making

arrangements for the placement of capital and debt instruments with

investment institutions.

1)Equipment Leasing/Lease Financing 2)Hire Purchase and Consumer Credit 3) Bill Discounting 4)Venture Capital 5)Housing Finance 6)Insurance Services


8)Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is a non-recourse purchase by a banker or any other financial institution of receivables arising from export of goods and services.

9) Mutual Fund 10)Credit Rating 11)Credit Cards 12)Consumer Finance


Leasing industry plays an important role in the economic development of

a country by providing money incentives to lessee.


Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets.

Lease is of different types. 1) Financial Lease 2) Operational Lease 3)Sale and Lease Back 4)Leveraged Leasing 5)Direct Leasing 6)First Amendment Lease

PROCESS in leasing 1.Lease Selection 2.Order & Delivery 3.Lease Contract 4.Lease Period

Advantages •Stable Business •Wider Distribution •Sale of Supplies

•Second-hand Market •Tax Benefits Absorbing Obsolescence Risks •Fillip to Capital Market •Easy Finance

Advantages to Leases

i)Efficient Use of Funds ii)Cheaper Source iii)Flexible Source iv)Enhanced Borrowing Capacity v)Off-balance Sheet Financing vi)Tax Benefits vii)Favorable Terms viii)Guards Against Obsolescence ix)Avoidance of Initial Cash Outlay x)Better Liquidly

Financial Implications

Lease transactions would have accounting and financial implications for both the lessor and the lessees as detailed below:

  • a) For Lessee:

  • i) Tax shield on lease rentals is available as business expenditure

ii) Depreciation tax shield is not available

iii) Tax shield on lease rentals represents a cash inflow

iv) Tax shield on depreciation represents cash outflow (cash inflow foregone)

  • a) For Lessor:

  • i) Depreciation tax shield is available

ii) Tax shield on lease rentals is not available as business expenditure

iii) Tax shield on depreciation represents cash inflow

iv) Tax shield on lease rentals represent a cash outflow

  • V) Net salvage value of an equipment is treated as a post-tax cash flow

Hire purchase

Hire/purchaseisanagreementtothesaleofanassetsubjecttothefollowingcondi tions:thegoodsaredeliveredatthebeginningoftheagreementonthebasisthatth ehirerwillpayanagreedamountinperiodicalinstalmentsmutuallyagreedupon ;afterthelastinstalmentispaid,thetitleofownershipwillpasstothehirer;thehire rcanterminatetheagreementbypayingall the balance instalments and taking the title of the asset.

Hire purchase



Thehirerofthegoodsnotbeco mesownertillthepaymentofs pecifiedinstalments.

In lease, ownership rests with the lessor throughout.

Method of financing

HP is financing both business and non-business assets.

Leasing is a method of financing business assets.


In HP, depreciation and IA can be claimed by the hirer.

In leasing, depreciation and investment allowances cannot e claimed by the lessee

Tax benefits

Only the interest component of the HP installment is tax

The entire leaser entails tax deductible expense.

Salvage value

deductible. The hirer, in HP, being the owner of the asset, enjoys salvage value of the asset.

The lessee, not being the owner of the asset, doesn’t enjoy the salvage value of the asset.


20% deposit is required in HP.

Lessee is not required to make any deposit. Since it is

Extent of Finance

HP requires 20 to 25%

required down payment In lease financing is 100%


down payment. Cost of maintenance hired assets is borne by hirer.

financing, Cost of maintenance of the leased asset is borne by the lessor.

Rate of Interest :

The type of interest rates popularly used in hire purchase financing is as follows:

  • i) Add-on Rate of Interest ii)Flat Rate of Interest iii)Effective Rate of Interest Effective rate of Interest= Trial rate at which NPV of future HP installments is Zero

Methods of Interest Calculation Straight line method , Effective rate method, sum of digits method.


Business enterprises are always looking for selling the debtors for cash, even at higher interest. This is possible through a financial service. 1)Meaning: Like securitization factoring also is a financial innovation. Factoring provides resources to finance receivables. It also facilitates the collection of receivables. The word factor is derived from the Latin word facere.

Scope of factoring

i)Administration of Sales Ledger ii)Collection of Receivables iii)Provision of Finance iv)Protection Against Risk v)Advisory Services vi)Credit Management Advantages i)Cost Savings ii)Leverage iii)Enhanced Return iv)Liquidly v)Credit Discipline vi)Cash Flows vii)Credit Certification viii)Prompt Payment ix)Information Flow x)Infrastructure

B) Forfaiting: Generally there is a delay in getting payment by the exporter from the importer. This makes it difficult for the exporter to expand his export business. 1) Meaning of Forfaiting: The term ‘forfait ’is a French word. It means ‘to surrender something’. Thus forfeiting means giving up the right of exporter to the forfeit or to receive payment in future from the importer. Advantage of forfaiting: The following are the benefits of forfaiting:

i)The exporter gets the full export value from the forfaitor

ii)It improves the liquidity of the exporter .It converts a credit transaction into a cash transaction.

iii)It is simple and flexible. It can be used to finance any export transaction. The structure of finance can be determined according to the needs of the exporter, importer, and the forfaitor. iv) The exporter is free from many export credit risks such as interest rate risk, exchange rate risk, political risk, commercial risk etc. v) The exporter need not carry the receivables into his balance sheet.

Bill discounting is book debt financing. This is done by commercial banks 1)Meaning of Bills Discounting: When goods are sold on credit, the receivables or book debts are created. The supplier or seller of goods draws a bill of exchange on the buyer or debtor for the invoice price of

the goods sold on credit. It is drawn for a short period of 3 to 6 months

After drawing the bill, the seller hands over the bill to the



means he binds himself liable to pay the amount on the maturity of the bill. Now the bill is with the drawer. He uses the alternative to discount with the bank & get funds.


Insurance is a contract between two parties. One party is the insured and the other party is the insurer. Insured is the person whose life or property is insured with the insurer. Insurer is the insurance company to whom risk is transferred by the insured. Thus insurance is a contract between insurer and insured. against. Life Insurance includes ordinary life, annuities and pensions. The risks of death due to any reason both natural and unnatural are covered during the policy period.


Chapter 4.

  • 1. Explain financial services its meaning & scope (page 37 )

  • 2. Explain various activities in financial services ( page 38)

  • 3. Explain leasing types , process & advantages ( page 39)

  • 4. Explain financial implications of leasing on lessor & lessee (page 40)

  • 5. Explain hire purchase & its difference from leasing ( page 41)

  • 6. Explain factoring its scope & advantages ( page 42 )


  • 1. Social, political, economic and institutional factors create a complex context in which financial services organizations (FSOs) and their customers interact, and, of course, these in turn may vary considerably across countries.

2. All to often, discussions of marketing practice fail

to recognize the importance of explaining and understanding these

contextual influences.

The purpose of this current chapter is to provide an overview of the context in which financial services are marketed and to explain the economic significance of the sector.

Merchant banks, in essence, are financial Institutions providing specialist services which generally include the acceptance of bills of exchange, corporate finance, port folio management and other banking services. Consumer finance This refers to the segment of the financial services industry that provides credit to consumers who are unable to directly borrow from a bank or a financial institution. Consumer finance is the highest growing segment in the Indian financial services sector .It has

become big ticket business in the last decade and a number of well- known names have entered this area. Consumer finance mainly refers to the division of retail banking that deals with lending money to


Types of Consumer


1) Revolving Credit 2) Fixed Credit 3) Cash Loan 4) Secured

Finance 5) Unsecured Finance

Players in Finance

•Traders •Commercial Banks •Credit Card Institutions •NBFC's •Credit Unions


Role of Consumer Finance in Economy:

1) Consumer finance stimulates demand and consumption 2) Key is the maintenance of the critical balance between savings, investment, and borrowers' debt-servicing ability. 3) The consumer are softer targets for loan pricing.

4) They are more likely to borrow at higher rates a convenience no longer available on lending to industrial and commercial borrowers who insist on fine loan rates.

Housing Finance

A set of all financial arrangements that are made available by Housing Finance Companies (HFCs) to meet the requirements of housing is called ‘housing finance'. Types 1.Contract system 2.Savings bank system 3. Mortgage bank. Major players 1. National housing bank 2.HDFC 3.LIC 4.HUDC. Advantages of Housing Finance: 1)The asset it finances, housing, is a significant part of wealth and the fixed capital stock, as documented in Goldsmith’s seminal works on Comparative National Balance Sheets (1984) 2) Housing also represent a large proportion of most household’s consumption. 3) In much the same way, housing remains mostly self- financed by households’ equity in many emerging economies. Frequently, the only alternative is finance provided by developers through deferred installment sales.

Credit rating: Credit rating originated in USA when John Moody issued his first rating in 1909. Presently rating agencies exist in Canada, Australia ,Japan, UK, France, Sweden, Portugal, South Korea, Philippines, Spain and Chile. The history of credit rating in India is very short. It started with the establishment of the Credit Rating Information Services of India Ltd. (CRISIL) in January 1998. Investment information and Credit Rating Agency of India (IICRA) promoted by the Industrial Finance Corporation of India (IFCI). In 1993 , the Credit Analysis and Research (CARE) was established as a subsidiary of IDBI.

Advantages of credit rating a) To Investors: 1) Information service 2) Systematic risk evaluation 3) Professional competency. 4) Easy to understand 5) Low cost 6) Efficient portfolio management 7) Other benefits

  • b) To issuers 1.Index of faith 2. Wider investor base 3. Bench mark

  • c) To Intermediaries: 1. Efficient practice 2.Effective monitoring

  • d) To Regulators


•Moody's investor service •Standard A Poor's corporation (s & P)

•Duff and Phelps Credit Rating •Japan credit rating agency (JCR) •IBCA ltd •Thomson bank watch

  • b) Indian Credit Raters

Scope in India:


1) Restricted to debt instruments.


2) In developed countries like the USA and the UK equity shares are also rated.

3) In present environment the CR has become an obligation. 4) The corporate sector entirely depends upon public for project finance. The capital market is dominated by share brokers and the other intermediaries.

5) It is necessary for the safety of the investors to rate the debt instruments in the market.

6) lf the CR does not exist in the market, the investors may fall in dilemma and there will be chance to cheat the innocent investors.

Functions of CIBIL:

1) CIBIL caters to both commercial and consumer segments.

2) Consumer Credit Bureau covers credit availed by individuals. Commercial Credit Bureau covers credit availed by non-individuals 3)Aim of ClBIL's Commercial Credit Bureau minimize instances of concurrent and serial defaults 4. CIBIL maintains a central data base of information as received from its members.

Mutual fund It is an investment that enables investors to pool their money together into one professionally managed investment. Mutual

funds can invest in stocks, bonds, cash and /or other assets. These under lying security types ,called holdings combine to form one mutual fund, also called as portfolio.


Operational Classification Return-based Classification Investment-based

Evaluating Mutual Funds:

  • 1. Treynor Model Performance measure is calculated as follows: PM= ( Ari- ARf )/Bi Where, ARi=Average rate of return for portfolio ‘i’ during a period ARf=Average rate of return on a risk free investment during the period Bi=Slope of portfolio . ‘I’character is ticline which represents the portfolios relative volatility and its systematic risk. PM=The Treynor portfolio performance measure for the period. A positive measure shows a superior ,risk adjusted performance of a fund. 2.Sharpe Model

William F. Sharpe developed this model in 1966. It

measures the total risk, not merely systematic risk (as in Treynor model). The relevant performance measure is computed as follows:


where, Ni = Standard deviation of rate of returns for the portfolio for the period. The positive performance measure value is indicative of good performance.

Venture Capital

1) Meaning: The term venture capital comprises of two words, namely, ‘venture’ and ‘capital’. The term ‘venture’ literally means a ‘course’ or ‘proceeding’, the outcome of which is uncertain (i.e.,involving risk). The term capital refers to there source to start the enterprise. Thus venture capital refers to capital investment in an risky business enterprise. Money is invested in such enterprises because these have high growth potential. A high risk capital is provided by venture capital funds in the form of

long term equity finance with the hope of earning a high rate of return primarily in the form of capital gain. In fact, the venture capitalist acts as a partner with the entrepreneur.

2) Characteristics of Venture Capital:

1)It is basically equity finance. 2)It is a long term investment in growth-oriented small or medium firms. 3)Investment is made only in high risk projects with the objective of earning a high rate of return.

4) In addition to providing capital, venture capital funds take an active interest in the management of the assisted firm. 5) The venture capital funds have a continuous involvement in business after making the investment. 6) Once the venture has reached the full potential, the venture capitalist sells his holdings at a high premium.

Advantages of Venture Capital 1)Business Consultations 2)Management Consultations

Questions chapter 5

  • 1. Explain consumer finance its types & players involved (page 46&47)

  • 2. Write notes on housing finance explain need, importance & major players involved ( page 47)

  • 3. Credit rating types, players involved. ( page 48)

  • 4. Explain mutual funds & importance in economic growth ( page 49)

  • 5. Explain venture capital, its meaning& importance ( page 50 & 51)


Q.1 What do you mean by Factoring? Explain advantages and

disadvantages of Factoring. Explain the role and functions of Stock Exchanges of India. Explain the duties and responsibilities of portfolio manager. What do you mean by financial services? Explain scope and evolution




of financial services. What do you mean by Consumer Finance? Explain in detail Player in


the Market and types of consumer finance. Explain the players in the Indian money market. Explain the reform in


Indian money market.


Explain Define Merchant Banking. Explain its scope.

Explain the regulation of stock exchanges of India.


What do you mean by Public Issue Management? Explain the

Mechanism of Public Issue Management in detail.


What do you mean by hostile takeover/ merger? State the defensive

tactics or strategies to avoid hostile merger.

Q.10 What do you mean by forfaiting? Explain advantages and disadvantages of forfaiting.

Q.11 Explain in detail equity ratings and scope of Credit ratings.

Q.12 Explain advantages and disadvantages of venture capital.