MODULE-1 NATURE AND SCOPE OF FINANCIAL SERVICS-

Amit Sharma Business Analyst MBA, PGDM, B.Tech. SAP

A system that aims at establishing and providing a regular, smooth, efficient, and cost effective linkage between depositors and investors is known as financial system An institutional framework existing in a country to enable financial transactions A set of complex and closely connected instructions, agents, markets, transactions, relating to financial aspects of an economy

Main parts

Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance companies, etc.) Financial markets (money market, capital market, forex market, etc.) Financial services ( Leasing , credit cards, factoring, credit rating etc.) Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)

 Financial

viz., 1) Financial institutions -banks, mutual funds, insurance companies 2) Financial markets -money market, debt market,capital market, forex market 3) Financial products -loans, deposits, bonds, equities

Sector consists of three main segments

Regulators

Reserve Bank of India (RBI)

Securities Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDA)

Banks

Capital Markets/ Mutual Funds

Insurance Companies

 provides

a payment system for exchange of goods and services Permits multiple payment mechanisms- cash, cheque, DD, credit card. Supplies a diversified portfolio of financial investments It provides an ideal linkage between depositors and investors facilitates Expansion of financial market Efficient allocation of financial resources Helps for economic development

 Stabilize

the interest rates Undertake matured financial engineering techniques for financial inclusion Perfect financial market knowledge. Encourages direct finance mechanisms Better corporate governance-securities markets impose a discipline..

1.

Fund Raising Financial Services help to raise required fund from a host of investors, individuals, institutes and corporate. Funds Deployment An array (variety/types/collection/group) of financial services are available in the market which helps the players to ensure an effective deployment of the funds raised. Services such as Bills Discounting, Factoring of debtors, parking of short term funds in the money market, credit rating, etc. are provided by financial services firms in order top ensure efficient management of funds.

3.

Specialized services The financial services sector provides specialized services such as credit rating, venture capital financial, lease financing, factoring, mutual funds, merchant banking, credit cards, housing finance, etc. besides banking and insurance. Regulation In India, Agencies such as Securities and Exchange Board of India (SEBI), RBI and the Dept. of Banking and Insurance of the Govt. of India, through a number of legislations regulate the functioning of the financial services institutions.

4.

5 Economic Growth Financial services help in speeding up the process of economics growth and development. This takes place through the mobilization of the savings of a cross section of peoples, for the purpose of channeling then in the productive investments.

Wages, rents, interest, profits

Factor services Household Goods Government Financial markets Personal consumption Other countries
McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Firms (production)

Introduction- housing market segmentationNational housing policy- National Housing Bankhousing finance- PROBLEMS AND ISUES WITH THE HOUSING
FINANCE INDUSTRY IN INDIA-securitization- VENTURE CAPITALTHEORETICAL FRAME WORK-INDIAN VENTURE CAPITAL SCNARIO.

 Housing

market segmentation a) a legal private sector b) public sector housing-for employees& poor c) the unregulated sector-squatter settlements and slums rural & Urban, formal and informal.

 All

financial arrangements that are made available HFCs to meet the requirements of housing is called housing finance. Housing finance Done in two ways* during construction *or at the time of purchase

(i) Creation of adequate housing stock both on rental and ownership basis. (ii) Facilitating accelerated supply of serviced land and housing with particular focus to EWS-(economically weaker section) and LIG categories and taking into account the need for development of supporting infrastructure and basic services to all categories. (iii) Facilitate Up gradation of infrastructure of towns and cities and to make these comparable to the needs of the times. (iv) Ensuring that all dwelling units have easy accessibility to basic sanitation facilities and drinking water.

(v) Promotion of larger flow of funds to meet the revenue requirements of housing and infrastructure using innovative tools. (vi) Providing quality and cost effective housing and shelter options to the citizens, especially the vulnerable group and the poor. (vii) Using technology for modernizing the housing sector to increase efficiency, productivity, energy efficiency and quality. Technology would be particularly harnessed to meet the housing needs of the poor and also specific requirements of `green housing.

 (viii)

Guiding urban and rural settlements so that a planned and balanced growth is achieved with the help of innovative methods such as Provision of Urban Amenities in Rural Areas (PURA) leading to in-situ urbanization. (ix) Development of cities and towns in a manner which provide for a healthy environment, increased use of renewable energy sources and pollution free atmosphere with a concern for solid waste disposal, drainage, etc.

 Using

the housing sector to generate more employment and achieve skill up gradation in housing and building activity, which continue to depend on unskilled and low wage employment to a large extent. (xi) Removing legal, financial and administrative barriers for facilitating access to tenure, land, finance and technology.

 (xii) Progressive shift to a demand driven approach and from a

subsidy based housing scheme to cost recovery-cum-subsidy schemes for housing through a pro-active financing policy including micro-financing, self-help group programmes. (xiii) Facilitating, restructuring and empowering the institutions at state and local governments to mobilize land and planning and financing for housing and basic amenities. (xiv) Forging strong partnerships between private, public and cooperative sectors to enhance the capacity of the construction industry to participate in every sphere of housing and urban infrastructure.

(xv) Meeting the special needs of SC/ST/disabled/freed bonded labourers/ slum dwellers, elderly, women, street vendors and other weaker and vulnerable sections of the society. (xvi) Involving disabled, vulnerable sections of society, women and weaker sections in formulation, design and implementation of the housing schemes. (xvii) Protecting and promoting our cultural heritage, architecture, and traditional skills. 10 (xviii) Establishing a Management Information System in the housing sector to strengthen monitoring of building activity in the country.

 The

National Housing Bank (NHB), a fully-owned subsidiary of the Reserve Bank of India, was set up in 1988 to accelerate housing finance activity in India and to promote the Housing Finance Companies (HFCs) by providing financial support to them. It acts as the apex institution and regulator of the housing finance industry.

 Direct

and regulate the functioning of housing finance institutions for fair practices Provide loans, advances or any other financial assistance to Banks and housing finance institutions for slum improvement Supervise mobilization of resources and extension of credit for housing NHB has the main objective of promoting a network of highly efficient and dedicated housing finance institutions to cater to the finance needs from various regions and income groups. In order to upgrade the housing stock in the country, National Housing Bank undertakes augmentation of supply of buildable land and building materials.

 Mortgage

Credit Guarantee scheme for protection of lenders against any default. Providing Refinance to Housing Finance Institutions National Housing Bank also engages in Project Finance for large-scale housing projects The finance products by NHB include Equity Support and Reverse Mortgage loans along with the above listed services

 Raising

Resources by issuing bonds or debentures, borrowing from reserve bank of India and other financial institutions NHB launched "Swarna Jayanti Rural Housing Finance Scheme" to make housing loans accessible for housing development works in rural India on the golden jubilee of India's Independence Mortgage Backed Securitisation and development of secondary mortgage market in India

 1.Variation

in standards The housing sector is witnessed varying standards and practices among the lending community, be it in origination and documentation or monitoring and supervision. Variation in standards across the industry imposes systematic risks, which can be a potential threat

2.Aggressive approach may lead to defaults Growing competition coupled with reduction in risk weights on housing loans has led the lending institutions to adopt aggressive practices including very high loan has led the lending institutions to adopt aggressive practices including very high loan to value loans, softening of collateral requirements, competitive pricing etc. with such an aggressive approach being followed may lead to increase in the default rates 3. Cost of funds The prevailing interest rate war has resulted in constant downward revision of interest rates. Further, the spreads are increasingly becoming thin as the lending rates are fast nearing the cost of funds. while during 1993-94, the interest rate on housing loans were in the range of 17-18% the same right now are in the range of 7%-8.5%. this may lead to erosion of profitability in the long run

4.Security Deficit due to norms Many primary lending institutions are making terms and conditions of sanction flexible and liberal, thus enabling the borrowers to avail the loans even more than value of security for long tenure of 20 to 25 years. The large quantum of institutional finance in the property transactions may lead to the problem of security deficit. Logically, the RBI has stipulated higher risk weightage of 75% as against 50% in November 2004. 5.Due diligence Issues Increasingly, there have been instances of dilution in due diligence on the part of lenders. Sometimes, loans are sanctioned without strictly complying with laid down rules, systems and procedures. This situation arises primarily out of fierce competitive pressures. It is observed that the growing customer expectations force the PLIs to compromise due to diligence, field verification process and appraisal norms, in a rush to sanction the loan at the earliest.

5.Lack of Uniformity of norms amongst industry players While banks and HFCs are the prominent players, HFCs face few constraints. The regulatory norms stipulate 10% capital adequacy for banks whereas the same is 12% for HFCs. Further, banks have access to lower cost retail funds compared to HFCs. Uniformity in norms and hence a level playing field has to be ensured for a healthy housing finance system. These are newer challenges which need to be addressed and resolved in times to come . 6.Industry Fragmentation The fragmented nature of the housing finance industry is a major impediment for its further growth. Despite this, the industry has managed to grow mainly due to consistent decline in interest rates, tax incentives given by the government and changing income profile of the Indian middle class population. 7.Conflicting Interests While the private housing finance institutions are required to abide by the guidelines of the NHB, the general financial institutions, which include the commercial banks, follow the guidelines set by the RBI. Today, both these sections are competing with each other for the same housing quiche but their functioning and lending practices seem to bear no similarity

7.ALM Asset liability mismatch is one of the biggest risks housing finance institutions are confronted with. Funding of long term loans with short term deposits, leads to a mismatch between assets and liabilities that can be overcome by adopting appropriate asset liability management (ALM) techniques. 8.FDI Constraints FDI guidelines for real estate development have come under a lot of flay. Guidelines requirements such as a minimum capitalization of US$10 million for a wholly owned subsidiary and US$5 million for joint ventures with Indian partners, development of a minimum area of acres, a minimum lock in period of 3 years from completion of minimum capitalization before repatriation of original investment, act as constraints to foreign investors

 Greater

Uniformity of standards Adoption of uniform practice by the housing finance industry relating to matters like appraisal and documentation, prepayment of housing loans, conversion of fixed rate loans into floating rate loans etc. Greater transparency in dealings with the borrowers to enable them to exercise informed choices about products and lending institutions Generate a greater volume of mortgage lending in the Indian market Lower down payment requirements to as low as 5% Broaden the eligibility for mortgages; and Extend mortgage repayment periods up to 25 years.

The National Housing Bank (NHB) issues the following guidelines to Housing Finance Companies (HFCs)
1.A HFC

who desires to avail of equity participation from NHB (a) be a public limited company; (b) provide long term finance for construction or purchase of houses in India for residential purposes; (c) invest 75% of capital employed by way of long term finance or housing.

2.MINIMUM PAID-UP CAPITAL AND LISTING REQUIREMENTS

HFCs should have a minimum paid up capital of not less than Rupees ten crores inclusive of equity support of NHB or such other amount as may be fixed from time to time by NHB and/or the Securities and Exchange Board of India (SEBI) for listing shares on recognized stock exchanges, whichever is higher. Minimum Guidelines for Extending Equity Support to Housing Finance Companies as amended w.e.f. March 1, 2003

 3.With

a view to enlarge equity base as well as public participation in housing finance activity, it is preferable that HFCs get their shares listed on recognised stock exchange(s) in India at an early date. 4. HFCs should conform and/or obey with all other rules, regulations, instructions, guidelines or orders issued by NHB or any other authority empowered in that behalf. 5.NHB`s participation in equity in any case will not exceed 10% of paid up capital of the HFC.

The process of reimbursing the previous loan by filing an application for another loan from the same or any other lender is known as refinancing. Refinancing any kind of loan has become a widely acknowledged way of reimbursing the previous liabilities and forming new ones

Types of Refinance Calculators India

There can be several types of refinance and hence there can be several types of refinance calculators as well. Mortgage Refinance Calculator Auto Loan Refinance Calculator Bad Credit Refinance Calculator Cash Out Refinance Calculator Commercial Refinance Calculator

In a refinance calculator, you need to provide information on your existing loan and the calculator would return you the refinance details----- two examples
Mortgage Refinance Calculator The calculator would find out every details relating to your refinance including new monthly payment, rate of interest on your current mortgage, rate of interest on refinanced mortgage, and how much you would save through the refinancing etc. Auto Loan Refinance Calculator Auto loan refinance calculator would help you to find out the refinancing details on your existing auto loan and at the same time, would also help you to decide whether refinancing would be fruitful for you or not.

 Be

careful - A person cannot always gain from refinancing. For seeking the advantages from the refinance loan, the borrower has to be sensible enough to calculate the amount he would save by refinancing the home loan Be calculative enough to identify heavy mortgage charges Select a home loan refinance lender that does apply any prepayment penalty .

Securitization is the process of pooling and packaging Financial Assets, usually relatively illiquid, into liquid marketable securities. Conversion of existing or future cash flows into tradable securities that can be sold to investors.( factoring involves transfer of debts- no transformation)

Types:
1) Assets Backed Securitization ( ABS)-current and moveable fixed asset 2)Mortgage Backed Securities (MBS)-immovable fixed assets Securitization in India- problems Lack of appropriate legislation and legal clarity, unclear accounting treatment, High incidence of stamp duties making transactions unviable, lack of understanding of the instrument amongst investors, originators and, till recently, even rating agencies are some of the glaring reasons for the lack of activity in the area of securitization in

Need for Securitization- advantages 1 With the help of securitization transaction, a creator can transfer the credit and other risks associated with the pool of assets securitized. 2.Securitization can provide much needed liquidity to an Originators balance sheet; 3.help the originator mix its portfolio and make room for fresh asset creation; 4.obtain better pricing than through a debtfinancing route; and help the creator in proactively managing its asset portfolio. 5.Securitization allows investors to improve their yields while keeping intact or even improving the quality of investment

 6.Release

of locked- up funds 7.Costs of fund is reduced 8.Improved ratios--- ROA, ROE 9.Increase in capital adequacy ratio-CAR 10.Matching of assets and liabilities 11.Risk eliminated 12.Larger spread

 1.Housing

Development Finance Corporation Limited (HDFC) Housing Development Finance Corporation Ltd (HDFC) is one of the leaders in the Indian housing finance market with almost 37% market share. Serves more than 26 lakh customers across the nation, HDFC also offers customized solutions that fit to the need of the customer. In the FY 2008, it registered a net profit of Rs. 2,282.54 crore. It also registered a net profit of Rs. 663.94 crore in the quarter ended September 30, 2009.

 2.State Bank of India Home Finance (SBI) State Bank of India is another major player in the Indian housing finance market with almost 16% of the market share. The SBI Housing Loan schemes are specifically designed to meet the varied requirements of the customers. It offers home loan for various purposes including new house/flat, purchase of land, renovation/alteration/extension of existing house/flat etc. SBI Home Finance registered a net profit of Rs. 24.63 crore in the year ended March 31, 2009.

 3.LIC Housing Finance Limited LIC Housing Finance is another major player in housing finance sector in India with almost 13% of market share. Promoted by Life Insurance Corporation of India, LICHFL has an extensive distribution network with a strong brand presence. Recently, the company has been awarded Consumer Superbrand 2009/10 Status by Superbrands Council. In the last financial year (ended on March 31, 2009), LICHFL earned a net profit of Rs. 387.19 crore, comparing to Rs. 279.14 in the previous FY. It also registered a net profit of Rs. 171.25 crore in the quarter ended on September 30, 2009

 4.ICICI Home Finance Company Limited ICICI is a leading housing finance company in India with almost 6% market share. It offers various types of home loans for its customers which may have tenure up to 20 years. The home loan interest rate is connected to the ICICI Bank Floating Reference Rate (FRR/PLR). Here it can be added here that, the PLR has been reduced to 14.75% from its previous rate of 15.25% since June 4, 2009. As on January 23, 2009, ICICI HFC has 1416 branches with an asset of Rs. 3,74,410 crore. As on December 31, 2008, the company has a net worth of Rs. 50,035 crore.

5.PNB Housing Finance Limited PNB Housing Finance Limited offers a wide range of loans for purchase/construction of property to resident Indians as well as NRIs. It also offers housing finance for renovations, repairs and enhancement of immovable properties. In the last financial year (ended on March 31, 2009), PNB Housing Finance Limited registered a net profit of Rs. 534.1 million, which is 32% more than the net profit of its previous financial year of Rs. 405.9 million. 6.Dewan Housing Finance Corporation Limited (DHFL) Dewan Housing Finance Corporation Limited is one of the largest housing finance solution providers in India with an extensive network of 74 branches, 78 service centers and 35 camps spread across the nation. The company registered a net profit of Rs. 8,631.83 lacs in 2008-09, comparing to a net profit of Rs. 8,257.74 lacs in the previous financial year. In the quarter ended on September 30, 2009, DHFL earned a profit (after tax) of Rs. 3,751.09 lacs

Through its Niwas scheme, HUDCO offers housing loans for the buying/constructing house/flat. Loans are also offered for renovation/extension/alteration of existing house/flat. In the last financial year (ended on March 31, 2009), HUDCO registered a net profit of Rs. 400.99 crore, comparing to Rs. 373.73 crore of the previous Founded in January 10, 2000, IDBI Homefinance Limited has become one of the major players in the Indian housing finance market. It offers a range of housing financial solutions to its customers including Individual Home Loans, Home Improvement Loan, Home Extension Loan, Home Loans for NRIs, Plot Loans, and Loan Against Home etc. In the financial year 2008-09, IDBI Homefinance Limited registered a profit of Rs. 3209.93 lakhs, comparing to a net profit of Rs. 2988.62 lakhs in the previous financial year.

6.Housing Urban Development Corporation (HUDCO)

7. IDBI Home finance Limited (IHFL)

8.GIC Housing Finance Limited GIC Housing Finance Limited, one of the leading housing finance companies in India, was initially established as GIC Grih Vitta Limited on December 12, 1989. Promoted by General Insurance Corporation of India, GIC Housing Finance Limited offers extensive range of housing finance solutions to its customers through its wide network of 24 Business Centers and 3 Collection Centers across the nation. In the financial year 2008-09, GIC Housing Finance Limited registered a profit (after tax) of Rs. 5714 lakhs. Furthermore, in the last quarter (ended September 30, 2009), it registered a profit of Rs. 1713 lakhs.

9.Can Fin Homes Limited (CFHL) Can Fin Homes Limited is another big player in the Indian housing finance market with an extensive network of 40 branches. It is also the first and one of the biggest bank-sponsored (sponsored by Canara Bank) housing finance companies in India. In the financial year 200809, Can Fin Homes Limited registered a net profit of Rs. 3,152.9 lakhs. It also registered a net profit of Rs. 790.9 lakh in the quarter ended on June 30, 2009

Birla Home Finance Limited BOB Home Loan Canara Bank Home Loan Dewan Housing Home Loan GIC Home Loan HDFC Home Loan HSBC Home Loan ICICI Home Loan IDBI Home Loan LIC Home Loan PNB Home Loan SBI Home Loan Sundaram Home Finance

 EMI:

Equated Monthly Installment Floating Rate of interest Monthly Reducing balance Annual Reducing Balance Fixed rate of interest Processing charge Prepayment Penalties Commitment Fee Miscellaneous Cost

 Venture

capital is a form of financing for a company in which you give up some level of ownership and control of the business in exchange for capital for a limited timeframe, usually 3-5 years. Venture capitalists usually exit through an Initial Public Offering (IPO), a merger, a sale of the business or a buyout An IPO is offering stock to the public on an open market for the first time. Consequently, the alternate term for this process is "going public".

Features 1. High degree of risk 2. Equity participation 3. Long term investment 4. Participation in management 5. Achieve social objectives 6. investment is illiquid Types 1.Funds set up by angel investors- high net work individuals 2.Subsidieries of corporations- formed by corporations, commercial banks etc. 3 Private capital firms--

 Venture

capital firms are limited partnerships or closely held corporations that invest in early-stage, risk-oriented business endeavors. Most firms usually have a general manager who serves as the fund manager with the investors serving as limited partners. The limited partners put up 99% of the money, while the general partner does all the sourcing, due attentiveness, investing and monitoring

 The

participants in venture capital firms can be institutional investors like pension funds, insurance companies, foundations, corporations or individuals Venture firms generally are looking for a return of five to ten times the original investment Funding Options Venture capital firms usually focus their funding by geographic location, industry or stage. Stages of a company's growth are delineated in a number of ways, but some of

 Strong

management team A viable idea Business plan Project cost and returns Future market prospects Existing technology Miscellaneous factors

Stages of financing A. Early Stages of financing i. seed capital and R&D project ii. Start ups iii. Second round Later Stages of financing i. development capital ii. Expansion finance iii replacement capital iv. Buyouts v. turn around

Early Stages of financing

i.seed capital and R&D project
These funds are to help the entrepreneurs prove that an invention or concept works. The money usually pays for product development and market research ii. Start-up financing -for initial marketing and product production.
iii. Second round financing- already been launched in the market but needs additional funds- time scale-3 to 7 years

Later stage financing

i.

financial support- time 1 to 3 yrs ii. Expansion finance- for new product, market , factories- time 1 to 3 yrs Buyouts- transfer of management control iv. Replacement capital- for the purchase of existing shares of owners
.
iii.

Development capital have profits but cannot go public- need

v.

Turn arounds- buying a sick company

Let experienced business people read and critique your plan, testing it for clarity and reasonableness. Make a full disclosure of the possible pitfalls as well as the strengths. Proofread carefully to make certain there are no errors in grammar or math. Put together a strong management team. Remember this is a long term relationship. Research the investment criteria of the venture capitalists to ensure that what you offer is what they are looking for. Take time to study and understand competitors, addressing their strengths and weaknesses. Widen your network of contacts to give you more avenues of approach

 Base

the projections on realistic assumptions. Be concise, but complete. Be positive and enthusiastic about your company and product/service. Clearly explain the opportunity. Document how the products are different and better than what is available. Keep trying. Know your minimum deal and be prepared to walk away, if necessary.

Avoid answering questions. Focus on the technology (leaving out mention of the market, the competition, the customers) Give up. Have any types, errors, repetition, junky charts. Make exaggerated claims about the product or the management. Predict you will capture "2% of a billion-dollar market..." Press for immediate decisions. Send the first draft of your business plan to the venture capitalists. Use four significant digits anywhere

 Finding

Venture Capital Venture capital firms can be found worldwide The National Venture Capital Association provides a wide variety of resources for finding venture capital firms. Venture capital can also be found through bankers, insurance companies, and business association

Preparation is a critical factor in funding. Allocate plenty of time and energy to it. Make certain all your financial records are in order. Identify professional references who can support your reliability and the need for your product. Prepare a well thought out, comprehensive business plan. Write a business summary covering the main points of the business plan. This will be the first introduction of your business. Getting past the first cut will depend on how well you sell your business in this summary. Identify venture capital firms that specialize in your type of business. Learn as much as possible about the funding process for each of the firms.

How is the capital going to be used? If possible, talk with businesses that have been funded by each of the firms. Write a brief, but compelling cover letter for submitting your information to the firms. Select 8-10 venture capital firms that you definitely wish to approach. modify submission information to fit the preference of each firm, including reformatting the business plan if needed. Submit your applications. About 2 weeks after applying, call to request an in-person visit Do not be afraid to continue to keep in touch. Do not be a pest, but also do not be afraid to ask when you might know something and if they mind you checking in occasionally

 In

India the Venture Capital plays a vital role in the development and growth of innovative entrepreneurships. Venture Capital activity in the past was possibly done by the developmental financial institutions like IDBI, ICICI and State Financial Corporations. These institutions promoted entities in the private sector with debt as an instrument of funding. VC financing really started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) promoted by ICICI and UTI.

Types of Venture Capital Funds in India Generally there are three types of organised or institutional venture capital funds: venture capital funds set up by angel investors, that is, high net worth individual investors; venture capital subsidiaries of corporations and private venture capital firms/ funds. Venture capital subsidiaries are established by major corporations, commercial bank holding companies and other financial institutions.
Venture funds in India can be classified on the basis of the type of promoters. 1 . VCFs promoted by the Central govt. controlled development financial institutions such as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI.

2. VCFs promoted by the state governmentcontrolled development finance institutions such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat Industrial Investment Corporation (GIIC) 3. VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by State Bank of India. 4. VCFs promoted by the foreign banks or private sector companies and financial institutions such as Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India Development Fund.

Methods of Venture Financing Venture capital is typically available in three forms in India, they are: 1.Equity : All VCFs in India provide equity but generally their contribution does not exceed 49 percent of the total equity capital. Thus, the effective control and majority ownership of the firm remains with the entrepreneur. They buy shares of an enterprise with an intention to ultimately sell them off to make capital gains.

2.Conditional Loan: It is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation period, cost-flow patterns, riskiness and other factors of the enterprise. 3.Income Note : It is a hybrid security which combines the features of both conventional loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at substantially low rates. Other Financing Methods: A few venture capitalists, particularly in the private sector, have started introducing innovative financial securities like participating debentures, introduced by TCFC is an example.

Module-4 Issue management-intermediariesactivities- procedures-pre issue &post issue obligations-merchant bankerscredit rating agencies-process& methodology .

 The

management of securities of the corporate sector offered to the public on a regular basis, and existing shareholders on a rights basis, is known as public issue management . The management of issues for raising funds though various types of instruments by companies is known as Issue management .

Categories of Securities issue: Corporate enterprises use several sources for raising funds from the capital market. Issue of securities constitutes an important mode of raising such finances. Security takes the following forms: 1. Public Issue 2. Right Issue 3. Private Placements

1.Public Issue
When capital funds are raised through the issue of a prospectus, it is called public issue of securities. It is the most common method of raising funds in the capital market. A security issue may take place either at par, or at a premium or at a discount. The prospectus has to disclose all the essential facts about the company to the prospective purchasers of the shares. Further, the prospectus must conform to the format set out in Schedule II of the Companies Act 1956, besides taking into the account SEBI guidelines. SEBI insists on the adequacy of disclosure of information that should serve as the basis for investors take a decision about the investment of their money

2.Rights Issue:
When shares are issued to the existing shareholders of a company on a privileged basis, it is called as Rights Issue. The existing shareholders have a pre-emptive to subscribe to the new issue of shares. Rights shares are offered as additional issues by corporate to mop up further capital funds. Such shares are offered in proportion to the capital paid up on the shares held by them at the time of the offer.

3.Private Placements:

When the issuing company sells securities directly to the investors especially institutional investors, it takes the form of private placement. In this case no prospectus is issued since it is presumed that the inverts have sufficient knowledge and experience and are capable of evaluating of the risk of the investment. Private placement covers shares, preference shares and debentures. The role of the financial intermediary such as the merchant Bankers and lead managers assumes greater significance in private placement. They involve themselves in the task of preparing a offer memorandum and negotiating it investors.

They consist of brokers, sub-brokers, Trading and Clearing Members, portfolio managers, Bankers to Issue, merchant bankers, registrars, underwriters and credit rating agencies. They all provide a basket of services to the investors to less on risk and make transaction earlier and smooth. They are all registered with SEBI and act under the regulation of SAEBI abiding by the Code of Conduct prescribed for each of them governing their respective roles

When a company launches an IPO inviting the public to buy its shares, it has to appoint various intermediate people who will enable them t successfully complete the issue process. They are: 1. a).Book Running Lead Managers (BRLMs) b). co- managers 2. Bankers for the Issue 3. Underwriters 4. Registrars 5.Brokers 6. Auditors 7.Cunsultents

A financial institution or intermediary who carry out the activities connected with issue management. The institution should register with SEBI and follow the regulations and guideline The major function of Merchant Banker

1.

2.

3.
4.

Category I MB who act as Issue manager, advisor, consultant, underwriter and portfolio manager Category II MB who act as advisor, consultant, underwriter and portfolio manager Category III MB who act as advisor, consultant and underwriter Category IV MB who act as advisor or consultant.

The functions are Distribution of application forms of the issue Collection of application money Collection and co-ordination of application forms and monitor the same to the registrar and issue managers

Functions Collect application form from banker and scrutinise the same Finalise the basis of allotment Issue the allotment letter Issue share certificate and refund orders within the stipulated time Satisfy the listing requirements and get the sharers listed in SE

performed by the issue manager in order to raise money from the capital market

Pre-Issue

Activities

1 . Signing of MoU: Signing of MoU between the client company and the merchant banker-issue management activities marks the award of the contract.. 2. Obtaining appraisal note: An appraisal note containing he details of the proposed capital outlay of the project and the sources of funding is either prepared in-house or is obtained from external appraising agencies viz., financial institutions/banks etc. 3. Optimum capital structure: The level of capital that would maximize the shareholders value and minimize the overall cost of capital has to be determined. This has to be done considering the nature and size of the project. Equity funding is preferable especially when the project is capital intensive.

4. Convening meeting: A meeting of the board of directors of the issuing company is convened. The purpose of these meetings is to decide the various aspects related to the issue of securities. 5. Appointment financial Intermediary: Financial intermediaries such as Underwriters, Registrars, etc. have to be appointed.

6.Preparing documents: As part of the issue management procedure the documents to be prepared are initial applications of submission to those stock exchanges where the issuing company intends to get its securities listed. MoU with the registrar, with bankers to the issue, with advisors to the issue and co-managers to the issue, agreement for purchase of properties etc. This has to be sent for inclusion in the prospectus.

7. Due diligence certificate: The lead manager issue a due diligence certificate which certifies that the company has meticulously followed all legal requirements has exercised utmost care while preparing the offer document and has made a true fair and adequate disclosures in the draft offer document 8. Submission of offer document: The draft offer document along with the due diligence certificate is filed with SEBI. The SEBI in turn makes necessary corrections in the offer document and returns the same with relevant observations, if any within 21 days from the receipt of the offer document

. Finalization of collection centers: In order to collect the issue application forms from the prospective investors to lead manager finalizes the collection centers. 10. Filing with RoC: The offer document completed in all respects after incorporating SEBI observation is filed with Registrar of Companies (RoC) to obtain acknowledgement. 11. Launching the issue: The process of marketing the issue starts once legal formalities are completed and statutory permission for issue of capital is obtained. The lead manager has to arrange for the distribution of public issue stationary to various collecting banks, brokers, investors etc The announcement regarding opening of issue is also required to be made through advertising in newspapers, 10 days before the opening of the public issue.
9

12. Promoters contribution: A certificate to the effect that the required contribution of the promoters has been raised before opening the issue, has to be obtained from a Chartered Accountant, and duly filed with SEBI. 13. Issue closure: An announcement regarding the closure of the issue should be made in the newspaper

 POST-ISSUE

OBLIGATIONS

1. 2. 3. 4. 5. 6. 7. 8. 9.

To associate with allotment procedure Post issue monitoring reports 3-day post issue monitoring report Final post issue monitoring report (78 days) Redresses of investors grievances Coordination with intermediaries Post-issue advertisements Basis of allotment in over-subscribed issues Other responsibilities

 13th

Century merchant bankers were traders of commodities and acted as bankers to the kings of European states. They Financed the continental wars and coastal trades. They lent their names to lesser known traders by accepting bills through which they guaranteed that the holder of the bill would receive full payment.

 Advise

issue. Pricing Assessing and appraisal of project report. Appointment of bankers, underwriters, brokers, registrars, printers and advertisement agents. Holding brokers-Underwriters,

on the capital structure, instrument of

 Press

and investor conferences. Deciding the pattern of advertisement. Deciding the collection branches where application can be received or collected. Deciding on the dates of opening and closing of the subscription list. Obtain daily report of the applications and amounts collected at branches. Obtaining subscription to the issue. Obtain consent of the Stock Exchange and get basis of allotment approved.

 Track

record of the company. Track record of the promoters. Professional management. Financial strength of the promoters and the company. Economic viability of the project.

 Providing

long term funds to the projects or companies. Project counseling- loan syndication, project appraisal and arrangement of Working capital. Deciding the capital structure. Portfolio Management Underwriting Corporate advisory & issue mgmt.

 Code

of Conduct for MB Observe high standards of integrity and fairness in all his dealings. Render high standard of service, exercise due diligence, proper care, exercise independent judgment & disclose conflict of interest while providing unbiased service.

Not

make any statement or become privy to any act, practice or unfair competition, likely to harm the interest of other MB or is likely to place such other MB in a disadvantageous position in relation to the MB, while competing for or executing any assignment. (Harmful statement while solicitation & execution)

Not

make exaggerated statements, written or oral, to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients. Render best possible advice to the client having regard to the clients needs and the environment and his own professional skill; Ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.

MB shall not divulge to other clients, press or any other party any confidential information about his client, which has come to his knowledge. Deal in securities of the client company without making disclosure to the board as required under the regulation and also to the Board of Directors of the client company. Provide investors with true and adequate information without making any misguiding or

exaggerated claims and are aware of attendant risks before any investment decisions are made. Ensure copies of prospectus, memorandum and related literature are made available to investors. Fair allotment of securities and refund of application money without delay. Investor complaints are adequately dealt with.

 The

MB shall not generally and particularly in respect of issue of any securities be party to
Creation

of false market Price rigging or manipulation Passing of price sensitive information or take any other action which is unethical or unfair to the investors. A MB shall stand for by the provisions of the Act, rules and regulations which may be applicable and relevant to the activities carried on by the merchant banker.

Leadership Aggressive action Co-operative and friendliness Contacts Attitude towards problem solving curiosity for new skills, information and knowledge

 1)

SBI CAPITAL MARKET LTD. 2) BOI FINANCE LTD. 3) PNB CAPITAL SERVICES LTD. 4) BOB CAPITAL MARKET DIVISIONS 5) CANBANK FINANCIAL SERVICES LTD.

 The

formal beginning of the merchant banking services in India began in 1967 when the Reserve Bank of India provided license to the Grindlays Bank. The Grindlays Bank was engaged in capital issue management and it provided diverse financial services to the emerging section of entrepreneurs, especially those belonging to the small and medium enterprise sector.

The need of merchant banking services in India arises from the fact that high level industrialization is taking place in the country. So, there is need for skilled professionals who can take care of various finance-related needs of the advanced industrial sectors. These specialist services are also of great importance for the small and medium sized enterprises to help them operate smoothly. Most of the rural areas still lack industrial advancement and the main reasons for this include lack of funds and information. The merchant banking services help the entrepreneurs to come up with industrial setups in these areas. Besides, the merchant banks help the entrepreneurs to explore the joint venture opportunities in the foreign markets

 According

to the Ministry of Finance in India, a merchant banker is a person or body engaged in selling, buying and subscribing to securities or in advising the corporations on issue management. To learn more about the merchant banking setup in India, you should go through the following discussion.
Citibank started the merchant banking services in 1970 and the State Bank of India followed the same in 1972. After few years, the national merchant banks started collaborating with their counterparts in different countries to start their merchant banking divisions abroad

According to Credit Rating Information Services of India Ltd. (CRISIL) Credit rating is an unbiased, objective and independent opinion as to issuers capacity to meet its financial obligations. It does not constitute a recommendation to buy/sell or hold a particular Security To enable the investors to take informed decisions, Credit Rating has emerged as one of the most important financial services.

HISTORY
The concept of credit rating dates back to 1840s

Mercantile Credit Agency (MCA) was set up in New York after the financial crisis of 1837. The agency (MCA) rated the ability of merchants to pay their financial obligations. The first rating guide was published in 1859. In 1909, John Moody founded Moodys Investors Agency, which gave a new direction to the concept of credit rating. In 1970, Penn Central, the then largest Railroad company in the world went bankrupt with just under $100 million in outstanding commercial paper.

This forced the investors to ask for rating for commercial papers
Today, almost 100% of the commercial paper and 99% of the corporate bond are rated in the U.S.A

1.The increasing role of capital and money markets 2.Increase in corporate borrowing and lending 3.The continuing growth of Information Technology 4 .The growth of confidence in the efficiency of the market functioning

BENEFITS OF CREDIT RATING 1. Low cost information 2. Quick investment decision 3. Independent investment decision 4. Investors protection

1. 2. 3. 4. 5. 6. 7. 8. 9.

Sources of additional certification Increase the investors population fore-warn risks Encourages financial discipline Merchant bankers job made easy Foreign collaboration made easy Benefits the industry as a whole Low cost of borrowing Rating as a marketing tool

The stupendous growth of Indian Capital Market necessitated setting up of Credit rating agencies in India

This growth led the establishment of 1. Credit Rating Information Services of India Limited (CRISIL) in 1987. 2. Investment Information and Credit Rating Agency of India (ICRA) in 1991 3.Credit Analysis and Research Limited (CARE) in 1993.

CRISIL

It is the first credit agency started on January 1,1988

It was started jointly by ICICI and UTI with an Equity Capitalof Rs.4 crores It is the most important rating agency in the country.
Its major objective is to rate the debt obligations of Indian Companies Apart from rating debentures, commercial papers, LPG/Kerosene dealers, its rating services also extend to preference shares, real estate developers/builders, banks, etc.

Its rating guides investors about the risk of timely payment of interest and principal on particular debt instrument.
It has used its information base and expertise in credit rating to provide counselling to governments, banks, financial institutions on aspects such as privatization of PSUs, credit evaluation and so on.

ICRA

It was set up by IFCI on 16th Jan1991 It focuses on rating of instruments for which credit rating is mandatory, suhc as debentures/bonds, commercial papers, Kerosene/LPG dealers. It also rates banks It also provides credit assessment and general assessment services During 1994-95, ICRA rates 212 debt instruments covering a debt volume of Rs.5,343 crores. The cumulative number of instruments rated since its inception till March 1995 has been 485 covering a total debt volume of Rs.17,638 crores.

CARE

It is credit rating and information services company promoted by IDBI jointly with

investment institutions, banks, and fianance companies.

It commenced its credit rating operation in October1993. CARE is offering a wide range of products & services in the fields of credit information and equity research. CARE confines to normal rating business only and has not diversified its operations the instruments credit-rated by CARE are debentures, Fixed deposits, Commercial papers, etc CARE also undertakes general credit analysis of companies for the use of bankers, other lenders and business counterparties CAREs rating methodology and rating process are much similar to CRISIL Since its inception till the end of March 1995, CARE has rated249 instruments covering a total debt volume of Rs.9,729 crores.

RATING PROCESS

The credit rating process adopted by leading credit rating agencies in India and the world over is depicted below 1. Contract between Rater and Client 2. Sending expert team to clients Place 3. Data collection 4. Data analysis 5. Discussion 6. Credit report preparation 7. Submission to grading committee 8. Grade communication to client

RATING METHODOLOGY In India, the rating exercise starts at the request of the company the process of obtaining a rating is quite lengthy and time consuming. Ratings are assigned after an in-depth study of various factors related to Business, Financial Management, and so on. The analytical framework for rating consists of the following four broad areas.

1. 2. 3. 4.

Business Analysis Financial Analysis Management Evaluation Fundamental Analysis

Debt instruments should yield two types of cash flows for the investor a. payment of interest b. repayment of principal Rating is an indication of how these two flows are. short term ratings short term ratings of CRISIL are P1+, P1, P2 long term

AAA- Excellent AA- Highest safety A- adequate safety only BBB- Satisfactory- moderate safety

ICRA- LAAA,LAA+, LAA, LAA-, LA+, LA, LA-...

The ratings lie on a spectrum ranging between highest credit quality on one end and default or "junk" on the other. Longterm credit ratings are denoted with a letter: a triple A (AAA) is the highest credit quality, and C or D (depending on the agency issuing the rating) is the lowest or junk quality. Within this spectrum there are different degrees of each rating, which are, depending on the agency, sometimes denoted by a plus or negative sign or a number

five point scale adopted by ICRA and CARE Grade 5- strong fundamentals Grade 4- above average Grade 3- average Grade 2- below average Grade 1- poor fundamentals MUTUAL FUNDS mf AAA- Highest security mf AA -Second mf A -average risk mfBBB, mf BB, mf B, mf C, mf C, mf D- LOW QUALITY

 Short

term debt funds mf A1-Highest quality mf A2- above average mfA3- Moderate mfA4- High risk mfA5-Lowest quality SMALL AND MEDIUM ENTERPRISE-SMEs SME1- High performance SME2SME3.SME8- defaulty

STOCK MARKT-STOCK BROKING-TRADING SYSTEM DEPOSITARY SERVICES- ROLE OF DEPOSITARIES- NSDIL-CSDLSEBI-REGIULATIONSREGULATERY BODIES

Structure of Capital Market in India

Market Segments
Primary and Secondary

Regulators
SEBI, RBI, DCA, DEA

Legislations
Capital Issues (Control) Act,1947 SEBI Act, 1992; Depositories Act,1996 Securities Contract Regulation Act 1956 Companies Act, 1956

Participants
Issuers, Intermediaries, Investors

 Stocks

or Shares represent the ownership of a company in proportion to stocks or shares held

represents a claim on the company's Assets , Earnings and have Voting Rights a company's stock means that you are one of the many owners

Stock

Holding

 Entitled

to a portion of the companys profits and have a claim on assets

Claim on profit Dividend, if paid out Claim on Asset Residual claim if business is liquidated

Limited

liability

Liability limited to amount paid to buy stocks

Tradability

Stock are tradable at recognised stock exchanges through its members (Stock Brokers)

 The

primary market is where securities are created (by means of an IPO)

the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies we talk about markets we refer to secondary market

In

When

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers Interactive ,Information driven and Volume driven Stocks are held and traded in Demat form Tech savvy & Screen based trading Expanding product range Advanced settlement and regulatory mechanism in place Major Stock Exchanges are BSE NSE

 Normal

working hours 9.55 am to 3.30 pm, Monday to Friday

and Selling of stocks during this period moves price up or down we talk about markets are up or down we refer to market indices

Buying

When

Bank A/c

DEMAT

BUYER

BROKER
STOCK EXCHANG E

SELLER

BROKER

Cash Bank A/c DEMAT Shares

 The

term depository is defined as a central location for keeping securities on deposit. It is also defined as a facility for holding securities, either in certificated or un certificated form to enable book entry transfer of securities. It is understood from the above two definitions that the depository is a place where securities are stored, recorded in the books on behalf of the investors Therefore, a depository can be defined as, an institution which transfers the ownership of securities in electronic mode on behalf of its members

OBJECTIVES Reduce the time for transfer of securities. Avoid the risk of settlement of securities. Enhance liquidity and efficiency Reduce cost of transaction for the investor. Create a system for the central handling of all securities. Promote the countrys competitiveness by complying with global standards. Provide service infrastructure in a capital market

BENEFITS TO INVESTORS
This system will eliminate paper work as the book entry system does not need physical movement of certificates for transfer process. The risk of bad deliveries, fraud and misplaced and lost share certificates will not exist. The electronic media will shorten settlement time and hence the investor can save time and increase the velocity of security movement. Investor will be able to change portfolio more frequently. The distribution of dividend, interest and other benefits will be speedier as the ownership can be easily identifiable. The cost of transfer is less as the share transfers are exempt from stamp duty. Faster payment in case of sale

of shares.

A short form of saying Dematerialized Account is a type of banking account which dematerializes the paper based physical shares. It can be considered as another form of a personal account where people keep shares instead of money and cheque. A savings account holds your money electronically and a demat account holds your stocks electronically. A demat account can be opened with no balance of shares.

 As

per Securities and Exchange Board of India rules, one can purchase shares up to 500 in physical form. But it mandates demat account for share trading above 500. Demat account allows you to buy or sell and transact shares in safe, secure and convenient way without making any delay and paperwork.

The Depositary Participants are the agents governed by Depositories through which one can operate the demat account. Depository participants are mainly banks and brokers. There are over a 100 DPs in India. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the sub secton 1A of Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depositoryrelated services only after obtaining a certificate of registration from SEBI

 a)

Dematerialisation, i.e. getting physical securities converted into electronic form. b) Rematerialisation, i.e. getting electronic securities balances held in a BO account converted into physical form. c) To maintain record of holdings in the electronic form. d) Settlement of trades by delivering / receiving underlying securities from / in BO accounts.

e) Settlement of off-market trades i.e. transactions between BOs entered outside the Stock Exchange. f) Providing electronic credit in respect of securities allotted by issuers under IPO or otherwise. g) Receiving on behalf of demat account holders noncash corporate benefits, such as, allotment of bonus and rights shares in electronic form or securities resulting upon consolidation, stock split or merger / amalgamation of companies. h) Pledging of dematerialised securities & facilitating loans against shares. i) Freezing of the demat account for debits, credits, or both.

Demat account holders need not pay stamp duty posted in case of physical shares. It enables quick ownership of securities resulting in increased liquidity and makes the processes like pledging and hypothecation of shares much easier. Demat account holds portfolio of shares in electronic form and obviate the need to hold shares in physical form. This account is very safe, secure and convenient for trading and investments. This makes a speed-e transactions in stock trading. Demat account eliminates the risk of loss, forged transfer, bad delivery and fake certificates in the share transaction. Nomination facility is available

 Shares

held in Demutualization form.

in electronics forms.

Transferred Two

types of depositories.

NSDL CDSL

The enactment of Depositories Act in August 1996 paved the way for establishment of National Securities Depository Limited (NSDL), the first depository in India. This depository. NSDL aims at ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk and reduce costs. NSDL plays a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry

 NSDL

provides various services to investors and other participants in the capital market .

Services.
clearing members, stock exchanges, banks and issuers of securities. These include basic facilities like account maintenance, materialization, dematerialization, settlement of trades through market transfers, off market transfers & interdepository transfers, distribution of non-cash corporate actions and nomination/ transmission .

Dematerialization is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the dematerialization request to the DP with whom he has an account. The DP enters the request in its system which blocks the client's holdings to that extent automatically

Features: A client can rematerialise his dematerialised holdings at any point of time. The rematerialisation process is completed within 30 days. The securities sent for rematerialisation cannot be traded

Trading in dematerialized securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the same is affected through account transfers. Features: Delivery of securities to or from a clearing member are called "Market Trades" in the depository system. A simple way of determining whether a trade is a market trade is that, either source or target in a transfer instrument is a CM account; such a transfer is a "Market Trade"

 Trades

which are not settled through the Clearing Corporation/ Clearing House of an exchange are classified as "Off Market Trades". Delivery of securities to or from sub brokers, delivery for trade-for-trade transactions, by this definition are offmarket trades

 Transfer

of securities from an account in one depository to an account in another depository is termed as an inter-depository transfer. This facility is quite similar to the account transfers within NSDL. It can be done only for securities that are available for dematerialisation on both the depositories

5.Transmission
The

word 'transmission' means devolution of title to shares otherwise than by transfer, for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc. While transfer of shares is brought about by delivery of a proper instrument of transfer (viz, transfer deed) duly stamped and executed, transmission of shares is done by forwarding the necessary documents (such as a notarised copy of death certificate) to the company

 Features:

Corporate actions are benefits given by a company to its investors. These may be either monetary benefits like dividend, interest or non-monetary benefits like bonus, rights, etc. NSDL facilitates distribution of corporate benefits. 6.1.Monetary benefits (dividends etc): NSDL will give the beneficiary ownership details to the Issuer/R & T Agent. The Issuer/R & T Agent will carry out the necessary processing and the distribution of such benefits will be outside the system. 6.2.Non-monetary benefits (rights bonus etc): NSDL will give the beneficiary ownership details to the Issuer/ R & T Agent. The Issuer/R & T Agent will carry out the necessary processing and upload the beneficiary ownership details to NSDL. NSDL will then credit the beneficiary owners' accounts by downloading the data to the DPs

The Issuer will execute an agreement with NSDL for the purpose of dividend distribution and furnish to NSDL details of the dividend payment. The Issuer will write to the shareholders holding demat shares intimating them that NSDL's Dividend Distribution Scheme for direct distribution of dividend will be used and give them an opportunity to update their bank details with the DP. This should happen atleast one month before the dividend distribution so that modifications/ corrections will get updated in the beneficiary position (benpos) of the record date. The bank details given by the beneficial owners to their DPs at the time of account opening or as updated later, will be used for crediting the dividend.

Advantages:
Issuer will be giving a single cheque to NSDL. Savings in administrative cost for printing of paper instruments in MICR format and dispatching by registered post. Loss of instrument in-transit and fraudulent encashment thereof can be totally eliminated. Effortless receipt for investor - no need to visit the bank for depositing the warrant. Reconciliation will be smooth. Investor grievances will be handled by NSDL.

Issuer can ensure better investor service.

Investors have an option to seek allotment of public issues in electronic form. As per SEBI guidelines trades in shares issued through public issue shall be settled only in demat form. Therefore, it is advisable that investors seek allotment in demat form. Features: NSDL depository system provides facility for allotments of securities directly in to the depository account of the investors in the dematerialised form

Warehouse receipts are title documents issued by warehouses to depositors against the commodities deposited in the warehouses. Warehouses, that have entered into an agreement with NSDL and multi-commodity exchange, will issue depository eligible warehouse receipts. At present, NSDL has agreements with two multi-commodity exchanges viz., National Commodity & Derivatives Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX) and about 20 warehouses that hold Thirty Five commodities in their custody. An accountholder who wants warehouse receipt balances in its demat account, will have to quote the demat account number specifically opened for this purpose. Warehouse will credit warehouse receipts in the demat account using "corporate action" facility offered by NSD

 In

August 2009, number of Demat accounts held with NSDL crossed one crore. NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the largest development bank of India, Unit Trust of India (UTI) - the largest mutual fund in India and National Stock Exchange of India Limited (NSE) - the largest stock exchange in India.[2] Some of the prominent banks in the country have taken a stake in NSDL

 As

on March 31, 2010 Number of certificates eliminated (Approx.) : 702 Crore Number of companies in which more than 75% shares are dematted : 2670 Average number of accounts opened per day since November 1996 : 3646

FEATURES

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank.
CDSL received the certificate of commencement of business from SEBI in February, 1999.
Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of CDSL on July 15, 1999.

Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing house of BSE, started in July 1999.

 All

leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with CDSL. As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system.

CSDL. .
Wide

DP Network: CDSL has a wide network of DPs, operating from over 6000 sites, across the country, offering convenience for an investor to select a DP based on his location. On-line DP Services:The DPs are directly connected to CDSL thereby providing on-line and efficient depository service to investors.

CSDL.
Wide Spectrum of Securities Available for Demat:The equity shares of almost all A, B1 & B2 group companies are available for dematerialisation on CDSL, consisting of Public (listed & unlisted) Limited and Private Limited companies Competitive Fees Structure: CDSL has kept its tariffs very competitive to provide affordable depository services to investors. Internet Access:A DP, which registers itself with CDSL for Internet access, can in turn provide demat account holders with access to their account on the Internet

Computer Systems: All data held at CDSL and is automatically mirrored at the Disaster Recovery site and is also backed up and stored in fireproof cabinets at the main and disaster recovery site. Unique BO Account Number:: Every BO in CDSL is allotted a unique account number, which prevents any erroneous entry or transfer of securities. If the transferor's account number is wrongly entered, the transaction will not go through the CDSL system, unless corrected. Data Security: All data and communications between CDSL and its users is encrypted to ensure its security and integrity. Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DP will have no access to the holdings of the BO. Insurance Cover: CDSL has an insurance cover in the unlikely event of loss to a BO due to the negligence of CDSL or its DPs.

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI

OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading

provide capital formation opportunities for young companies without a track record be national in order to reach and service entrepreneurs and investors enable access to a wide spectrum of financial intermediaries be cost effective for issuers provide an exit route to venture capital & private equity funds for their investments adopt state of art trading systems and practices in tune with international norms be well regulated to promote transparent and fair market practices

ICICI Bank Limited

Administrator of Specified Undertaking of Unit Trust of India

IDBI Bank Limited. SBI Capital Markets Limited IFCI Limited

Life Insurance Corporation of India

Canbank Financial Services Limited General Insurance Corporation of India The New India Assurance Company Limited

The Oriental Insurance Company Limited

United India Insurance Company Limited National Insurance Company Limited

Small and medium closely-held companies can go public. The OTCEI encourages entrepreneurship. Companies can get the money before the issue in cases of Bought-out-deals. It is more cost-effective to come with an issue of OTCEI. Small companies can get listing benefits. Easy issue marketing by using the nation-wide OTCEI dealer network. Nation-wide trading by listing at just one exchange

The OTCEI trading counters are easily accessible by any investors. The OTCEI provides greater confidence to investors because of complete transparency in deals. At the OTCEl, the transactions are fast and are completed quickly. The OTCEI ensures security, liquidity by offering twoway quotes. The OTCEI is an investor friendly exchange with Single Window Clearance for all investor requests

It is fully computerised set-up where trading takes place through a network of computers at the member/dealer end which in turn are connected to a central computer at OTCEI, Mumbai.

Initial Allotment:.

The investor who has been allotted a share

on OTCEI would be receiving an Initial Counter Receipt.

Buying Process in the Secondary Market:

first get himself registered at any of the counters if he has not already registered himself. Then he can approach any of the counters of OTCEI. When the transaction takes place, the investor is given a Permanent Counter Receipt (PCR).

Selling Process in the Secondary Market:

The investor has to surrender the PCR + Transfer Deed (TD The counter makes payment to the investor after registrars validation of the signatures on the PCR.) to the counter

India is an ` informationally ' weak market

Boosting capital market demands restoring the confidence of lay investors who have been beaten down by repeated scams Progressively softening interest rates and an under performing economy have eroded investment options, and require enhanced investing skills.

To increase the information available to investors:

To ensure the soundness of financial intermediaries (and the overall financial system):

Restrictions on entry Disclosure Restrictions on Assets and Activities (e.g. Basel II) Deposit Insurance Limits on Competition Restrictions on Interest Rates

Ministry of Finance

SEBI
Stock Exchange Broker Advisor

Securities & Exchange Board of India (SEBI) formed under the SEBI Act, 1992 with the prime objective of
Protecting

the interests of investors in

securities, Promoting the development of, and Regulating, the securities market and for matters connected therewith or incidental thereto.

Section 11 of the Securities and Exchange Board of India Act.

Regulation Of Business In The Stock Exchanges

A review of the market operations, organizational structure and administrative control of the exchange All stock exchanges are required to be Body

Corporate The exchange provides a fair, equitable and growing market to investors. The exchanges organisation, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956

B) Registration And Regulation Of The Working Of Intermediaries

Primary Market

Secondary Market

Merchant Bankers
Underwriters

Stock brokers
Sub- Brokers

Portfolio Managers
egulates the working of the depositories [participants], custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries

C) Registration And Regulation Of Mutual Funds, Venture Funds & Collective Investment Schemes

Capital

AMFI-Self Regulatory Organization-'promoting and protecting the interest of mutual funds and their unitholders, increasing public awareness of mutual funds, and serving the investors' interest by defining and maintaining high ethical and professional standards in the mutual funds industry'. Every mutual fund must be registered with SEBI and registration is granted only where SEBI is satisfied with the background of the fund. SEBI has the authority to inspect the books of accounts, records and documents of a mutual fund, its trustees, AMC and custodian where it deems it necessary

 SEBI

(Mutual Funds) Regulations, 1996 lays down the provisions for the appointment of the trustees and their obligations
new scheme launched by a mutual fund needs to be filed with SEBI and SEBI reviews the document in regard to the disclosures contained in such documents. have been laid down regarding listing of funds, refund procedures, transfer procedures, disclosures, guaranteeing returns etc

Every

Regulations

 SEBI

has also laid down advertisement code to be followed by a mutual fund in making any publicity regarding a scheme and its performance has prescribed norms / restrictions for investment management with a view to minimize / reduce undue investment risks. also has the authority to initiate penal actions against an erring MF. case of a change in the controlling interest of an asset management company, investors should be given at least 30 days time to exercise their exit option.

SEBI

SEBI

In

D) Promoting

& Regulating Self Regulatory Organizations In order for the SRO to effectively execute its responsibilities, it would be required to be structured, organized, managed and controlled such that it retains its independence, while continuing to perform a genuine market development role

E) Prohibiting Fraudulent And Unfair Trade Practices In The Securities Market SEBI is vested with powers to take action against these practices relating to securities market manipulation and misleading statements to induce sale/purchase of securities.

F] Prohibition Of Insider Trading Stock Watch System, which has been put in place, surveillance over insider trading would be further strengthened. G] Investor Education And The Training Of Intermediaries SEBI distributed the booklet titled A Quick Reference Guide for Investors to the investors SEBI also issued a series of advertisement /public notices in national as well as regional newspapers to educate and caution the investors about the risks associated with the investments in collective investment schemes SEBI has also issued messages in the interest of investors on National Channel and Regional Stations on Doordarshan.

H)

Inspection And Inquiries Regulating Substantial Acquisition Of Shares And Take-overs

I)

J)

Performing Such Functions And Exercising Such Powers Under The Provisions Of The Securities Contracts (Regulation) Act, 1956 As May Be Delegated To It By The Central Government; Levying Fees Or Other Charges For Carrying Out The Purposes Of This Section
Conducting Research For The Above Purposes

K)
L)

A company cannot come out with public issue unless Draft Prospectus is filed with SEBI. Prospectus is a document by way of which the investor gets all the information pertaining to the company in which they are going to invest. It gives the detailed information about the Company, Promoter / Directors, group companies, Capital Structure, Terms of the present issue etc. A company cannot file prospectus directly with SEBI. It has to be filed through a merchant banker. After the preparation of prospectus, the merchant banker along with the due diligence certificates and other compliances and sends the same to SEBI for inspection. SEBI on receiving the same scrutinizes it and may suggest changes within 21 days of receipt of prospectus

The company can come out with a public issue any time within 180 days from the date of the letter from SEBI If the issue size is upto Rs. 20 crores then the merchant bankers are required to file prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated. If the issue size is more than Rs. 20 crores, merchant bankers are required to file prospectus at SEBI, Mumbai office.

1,Enhancing disclosures

In most case only the minimum information required under the Companies Act is made available The manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted. valuation reports are made available for inspection, but access is not easy for all investors.

SEBI could initiate prosecution proceedings on insider trading only in one case and seven cases on fraudulent and unfair practices. Only in seven of the 181 cases, SEBI resorted to cancellation of registration during the last four years.

Though SEBI has the power to impose a penalty of Rs 1.50 lakhs every time a person fails to furnish the requisite

information, but rarely has this power has been exercised by it.

The provision for mandatory punishment of imprisonment in addition to award for penalty has scarcely has been used.

What is worrying is the poor rate of assurance in major cases. Virtually every SEBI decision involving major cases such as Sterlite, BPL, Videocon, Anand Rathi and Associates and Hindustan Lever has been reversed by the appeals process (or the Securities Appellate Tribunal).

4.Accounting, audit quality

The surplus of inter-corporate investments, intracompany and intra-group transactions, guarantees and conditional liabilities are areas where there is room for considerable concern.

Price manipulation, informed trading and insider trading with key operators/investors is now routine. This is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI has taken action on such price manipulation in just two cases (Bayer ABS and Amara Raja Batteries). Here, too, the penal action has hardly been stringent

6.Enticing ads and investor risk

Advertisement lacking indication of performance by mutual funds has continued regardless of the SEBI guidelines on this. The Securities and Exchange Board of India (Sebi) is being blamed for lack of alertness and poor risk-management measures with regard to the automated lending and borrowing mechanism.

Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities Provides a market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities

Provides a physical location for buying and selling securities that have been listed for trading on that exchange Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules The exchange itself does not buy or sell the securities, nor does it set prices for them

Role and Functions of a stock exchange contd

Fair The exchange assures that no investor will have an undue advantage over other market participants Efficient market This means that orders are executed and transactions are settled in the fastest possible way Transparency Investor make informed and intelligent decision about the particular stock based on information

Listed companies must disclose information in timely, complete and accurate manner to the Exchange and the public on a regular basis

Visibility Market support Investors confidence

Increased

demand for products and services Overall increase in profitability

Stock exchange can delist companies for a number of reasons including :

Merger with another company Solvency problems Name change company asked to be removed Failure to comply with exchange rules

 Liquidity Ability to sell an asset quickly at a fairly known price Low transactions costs Availability of information Market efficiency Prices react quickly to new information Small price fluctuations Narrow price spread

Transaction fees paid by members for each order executed Fees paid by firms when their securities are originally listed Annual fees by firms Entrance fees from new members sale of historic trading and market information

 Second

fastest growing economies after China with an average annual growth rate of more than 8 per cent in the last three years Indias growth rate has surpassed some of the developed economies GDP at current market prices is over US $778 billion

1.auction market - an auction market model where a

potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.

2.the broker dealer marketA firm that functions both as a broker by bringing buyers and sellers together and as a dealer by taking positions of its own in selected securities. Many firms that are commonly called brokers or brokerage firms are actually broker-dealers.

One of the fastest growing in the world Consumption growth fuelling economic growth consumption

expenditure forming 78% of GDP

Services sector contributing over 60% to GDP Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses

Where forces of competition are at work Innovation driving enterprises Economic reforms well on course entering second phase

 9040

brokers in cash segment and 1064 in derivative segment of the market 122 investment bankers in the market 58 under writers to support primary issues 34 foreign venture capital funds 120 Portfolio managers

 Business

Week says that of 100 emerging market firms which are rapidly globalising 21 are Indian firms Economists project India to become the third largest economy in the world by 2040 Indian capital market regulator has acquired international credibility in the least possible time

 India

has a disclosure based regime of regulation Disclosure and Investor Protection guidelines available Indias accounting standards are closer to international standards India has a well laid down legal framework

 India

has T+2 rolling settlement as opposed to T+3 in NYSE. In India the transactions are totally electronic on a real time basis. India has several protective safeguards for the retail investor such as grading system of public offering, retail quota at 25 per cent etc.

 As

an integral part of risk management trading and exposure limits, various margins and mark to market margins are in vogue Clearing houses in place Almost 100 per cent risk free electronic settlement through depository system SEBI has a surveillance and enforcement system in place

Indian Economy and Capital Market at a Glance

India - one of 10 fastest-growing population of HNWIs globally

There are at least 23 Indian citizens amongst the richest people on the planet

Non Resident Indians can invest in all Indian Asset

Classes
Salary increases in India 13.9% is the highest in the world

Increasing Investment avenues Art, Realty Funds, Commodities

The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE. Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.

Indian Equities Long term prospects are Unharmed-- WHY ?

Demographics
Half the population below 25 yrs

Consumerism
Retail credit, low interest rates, changing aspirations

Infrastructure
Development of roads, ports, telecom

Reforms
FDI, Tax reforms

Sustained GDP Growth

Global competitiveness

Exports Outsourcing

High GDP Growth Growth Gap Over The World

Module-2
Factoring

& ForfeitingTheoretical frame workfactoring in India bills discounting- bill marketMutual funds- meaning types- major players

Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client

 It

is the outright purchase of credit approved accounts receivables with the factor assuming bad debt losses. Factoring provides sales accounting service, use of finance and protection against bad debts. Factoring is a process of invoice discounting by which a capital market agency purchases all trade debts and offers resources against them.

 The

term factor has its origin from the Latin word, Faceremeaning to get things done. The dictionary defines a factor as an agent particularly a mercantile agent. Factoring has a long fascinating history which traces back through several centuries. In the early stages factors were itinerant merchants who were entrusted with merchandise belonging to others.

Debt administration: The factor manages the sales ledger of the client company. The client will be saved of the administrative cost of book keeping, invoicing, credit control and debt collection. The factor uses his computer system to render the sales ledger administration services.

 Credit

Information: Factors provide credit intelligence to their client and supply periodic information with various customer-wise analysis. Credit Protection: Some factors also insure against bad debts and provide without recourse financing. Invoice Discounting or Financing : Factors advance 75% to 80% against the invoice of their clients. The clients mark a copy of the invoice to the factors as and when they raise the invoice on their customers.

 Basically

there are three parties to the factoring services as depicted below:

Buyer Client customer

factor

So, a Factor is,

a)

b)
c)

A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:a) b) c)

Supplier or Seller (Client) Buyer or Debtor (Customer) Financial Intermediary (Factor)

 Client

forwards invoice/copy to factor along with receipted delivery challans. Factor provides credit to client to the extent of 80% of the invoice value and also notifies to the customer Factor periodically follows with the customer When the customer pays the amount of the invoice the balance of 20% of the invoice value is passed to the client recovering necessary interest and other charges. If the customer does not pay, the factor takes recourse to the client.

 The

client will be relieved of the work relating to sales ledger administration and debt collection The client can therefore concentrate more on planning production and sales. The charges paid to a factor which will be marginally high at 1 to 1.5% than the bank charges will be more than compensated by reductions in administrative expenditure. This will also improve the current ratio of the client and consequently his credit rating.

 The

subsidiaries of the various banks have been rendering the factoring services. The factoring service is more comprehensive in nature than the book debt or receivable financing by the bankers.

Client concludes a credit sale with a customer.

Client sells the customers account to the Factor and notifies the customer.

Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance.
Factor maintains the customers account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor. The Factor, after scrutiny of these papers, allows payment (,usually upto 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve. The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts. Once the invoice is honoured by the buyer on due date, the Retention Money credited to the Clients Account.

Till the payment of bills, the Factor follows up the payment and sends regular

Recourse Factoring
Non-recourse Factoring

Maturity Factoring
Cross-border Factoring

Upto 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of collection.

Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client.
Credit Risk is with the Client. Factor does not participate in the credit sanction process. In India, factoring is done with recourse.

Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be nonrecoverable.
Credit risk is with the Factor. Higher commission is charged. Factor participates in credit sanction process and approves credit limit given by the Client to the Customer. In USA/UK, factoring is commonly done without recourse.

Factor does not make any advance payment to the Client.

Pays on guaranteed payment date or on collection of Receivables. Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. Nominal Commission is charged. No risk to Factor.

It is similar to domestic factoring except that there are four parties, viz., a) Exporter, b) Export Factor, c) Import Factor, and d) Importer. It is also called two-factor system of factoring. Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor. Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, Factor covers exchange risk also.

BILL DISCOUNTING
1.

Bill is separately examined and discounted.

1.

FACTORING Pre-payment made against all unpaid and not due invoices purchased by Factor. Factor has responsibility of Sales Ledger Administration and collection of Debts.

2.

Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts. No notice of assignment provided to customers of the Client.

2.

3.

3.

Notice of assignment is provided to customers of the Client.

BILLS DISCOUNTING
4.

FACTORING
4.

Bills discounting is usually done with recourse.

Factoring can be done without or without recourse to client. In India, it is done with recourse.

5.

Financial Institution can get the bills re-discounted before they mature for payment.

5.

Factor cannot re-discount the receivable purchased under advanced factoring arrangement.

Factoring transactions in India are governed by the following Acts:Indian Contract Act Sale of Goods Act Transfer of Property Act

a)

b)

c)

d)

Banking Regulation Act.

Foreign Exchange Regulation Act.

e)

Banks reluctance to provide factoring services

Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.

 Canbank

Factors Limited: SBI Factors and Commercial Services Pvt. Ltd: The Hongkong and Shanghai Banking Corporation Ltd: Foremost Factors Limited: Global Trade Finance Limited: Export Credit Guarantee Corporation of India Ltd: Citibank NA, India Small Industries Development Bank of India (SIDBI): Standard Chartered Bank:

Forfaiting is a mechanism by which the right for export receivables of an exporter(Client) is purchased by a Financial Intermediary (Forfeiter) without recourse to him.

 The

forfaiting owes its origin to a French term forfait which means to forfeit (or surrender) ones rights on something to some one else. It is a trade finance extended by a forfaiter to an exporter/seller for an export/sale transaction involving deferred payment terms over a long period at a firm rate of discount. Forfaiting is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms.

 The

exporter has option to forfaiting usually in cases where the credit is extended for long durations but there is no prohibition for extending the facility where the credits are maturing in periods less than one year. Credits for commodities or consumer goods is generally for shorter duration within one year. Forfaiting services are extended in such cases as well.


1. 2. 3. 4. 5.

There are five parties in a transaction of forfaiting. These are : Exporter Exporters bank Importer Importers bank and Forfaiter

 The

exporter and importer negotiate the proposed export sale contract. These are the preliminary discussions. Based on these discussions the exporter approaches the forfaiter to ascertain the terms for forfeiting. The forfaiter collects from exporter all the relevant details of the proposed transaction, viz., details about the importer, supply and credit terms, documentation, etc., in order to ascertain the country risk and credit risk involved in the transaction..

 Depending

upon the nature and extent of these risks the forfaiter quotes the discount rate. The exporter has now to take care that the discount rate is reasonable and would be acceptable to his buyer. He will then quote a contract price to the overseas buyer by loading the discount rate, commitment fee, etc., on the sale price of the goods to be exported. If the deals go through, the exporter and forfaiter sign a contract.

 Export

takes place against documents guaranteed by the importers bank. The exporter discounts the bill with the forfaiter and the forfaiter presents the same to the importer for payment on due date or even can sell it in secondary market.

EXPORTER

IMPORTER

FORFAITER

AVALLING BANK

HELD TILL MATURITY SELL TO GROUPS OF INVESTORS TRADE IN SECONDARY MARKET

Exporter to extend credit to Customers for periods above 6 months. Exporter to raise Bill of Exchange covering deferred receivables from 6 months to 5 years.

Repayment of debts will have to be avallised or guaranteed by another Bank, unless the Exporter is a Government Agency or a Multi National Company.
Co-acceptance acts as the yard stick for the Forefaiter to credit quality and marketability of instruments accepted.

IN FORFAITING: Promissory notes are sent for avalling to the Importers Bank. Avalled notes are returned to the Importer. Avalled notes sent to Exporter. Avalled notes sold at a discount to a Forefaiter on a NON-RECOURSE

basis.
Exporter obtains finance. Forfaiter holds the notes till maturity or securitises

these notes and sells the Short Term Paper either to a group of investors or to investors at large in the secondary market.

Converts Deferred Payment Exports into cash transactions, providing liquidity and cash flow to Exporter.

release Exporter from Cross-border political or conversion risk associated with Export Receivables.
Finance available upto 100% (as against 75-80% under conventional credit) without recourse. Acts as additional source of funding and hence does not have impact on Exporters borrowing limits. It does not reflect as debt in Exporters Balance Sheet. Provides Fixed Rate Finance and hence risk of interest rate fluctuation does not arise.

Exporter is freed from credit administration. Provides long term credit unlike other forms of bank credit. Simple Documentation as finance is available against bills. Forfait financer is responsible for each of the Exporters trade transactions. Hence, no need to commit all of his business or significant part of business. Forfait transactions are confidential.

 Forfaiting

transaction is usually covered either by a promissory note or bill of exchange. In either case it has to be guaranteed by a bank or, bill of exchange may be avalled by the importer bank. The Aval is an endorsement made on bill of exchange or promissory note by the guaranteeing bank by writing per aval on these documents under proper authentication. The forfeiting cost for a transaction will be in the form of commitment fee, discount fee and documentation fee.

 Commitment

Fee:- Payable to Forfaiter by Exporter in consideration of forefaiting services. Ranges from 0.5% to 1.5% per annum.

Commission:-

Discount

Fee:- Discount rate based on the period concerned. Fee:- where elaborate legal formalities are involved. Charges:- payable to Exim Bank.

Documentation

Service

POINTS OF DIFFERENCE Extent of Finance

FACTORING Usually 75 80% of the value of the invoice Factor does the credit rating in case of non-recourse factoring transaction Day-to-day administration of sales and other allied services

FORFAITING 100% of Invoice value

Credit Worthiness

The Forfaiting Bank relies on the creditability of the Avalling Bank. No services are provided

Services provided

Recourse

With or without recourse

Always without recourse

Sales

By Turnover

By Bills

BILLS DISCOUNTED 1. Scrutiny 2. Extent of Finance Individual Sale Transaction Upto 75 80%

FACTORING Service of Sale Transaction Upto 80%

FORFAITING Individual Sale Transaction Upto 100%

3. Recourse
4. Sales Administration

With Recourse
Not Done

With or Without Recourse

Done

Without Recourse
Not Done

5. Term

Short Term

Short Term
Assignment

Medium Term
Assignment

6. Charge Creation Hypothecation

Relatively new concept in India. Depreciating Rupee No ECGC Cover High cost of funds High minimum cost of transactions (USD 250,000/-) RBI Guidelines are vague. Very few institutions offer the services in India. Exim Bank alone does. Long term advances are not favoured by Banks as hedging becomes difficult. Lack of awareness.

Export-Import Bank of India, (EXIM Bank) has started with a scheme to the Indian exporters by working out an intermediary between the exporter and the forfaiter. The scheme takes place in the following stages: 1.Negotiations being between exporter and importer with regard to contract price, period of credit, rate of interest, etc. 2.Exporter approaches EXIM Bank with all the relevant details for an indicative discount quote. 3.EXIM Bank approaches an overseas forfaiter, obtain the quote and gets back to exporter with the offer.

4.Exporter and importer finalise the term of contract. All costs levied by a forfaiter are to be transferred to the overseas buyer. As such discount and other charges are loaded in the basic contract value. 5. Exporter approaches EXIM Bank and it in turn the forfaiter for the firm quote. The exporter confirm the acceptance of the arrangement. 6. Export takes place shipping documents along with bill of exchange, promissory note have to be in the prescribed format.

7.Importers bank delivers shipping documents to importer against acceptance of bill of exchange or on receipt of promissory note from the importer as the case may be and send these to exporters bank with its guarantee. 8. Exporters bank gets bill of exchange/promissory note endorsed with the words Without Recourse from the exporter and present the document(s) to EXIM Bank who in turn send it to the

9. Forfaiter discounts the documents at the pre-determined rate and passes on funds to EXIM Bank for onward disbursement to exporters bank nostro account of exporters bank. 10.Exporters bank credits the amount to the exporter. 11.Forfaiter presents the documents on due date to the importers bank and receives the dues. 12.Exporters bank recovers the amount from the importer.

1.Suitable for ongoing open account sales, not backed by LC or accepted bills or exchange. 2.Usually provides financing for shortterm credit period of upto 180 days.

1.

Oriented towards single transactions backed by LC or bank guarantee. 2.Financing is usually for medium to longterm credit periods from 180 days upto 7 years though shorterm credit of 30 180 days is also available for large transactions.

3.Requires a continuous arrangements between factor and client, whereby all sales are routed through the factor. 4.Factor assumes responsibility for collection, helps client to reduce his own overheads.

3. Seller need not route or commit other business to the forfaiter. Deals are concluded transaction-wise. 4.Forfaiters responsibility extends to collection of forfeited debt only. Existing financing lines remains unaffected.

5. Separate charges are applied for financing collection administration credit protection and provision of information.

5.

Single discount charges is applied which depend on guaranteeing bank and country risk, credit period involved and currency of debt. Only additional charges is commitment fee, if firm commitment is required prior to draw down during delivery period.

6. Service is avDIailable for domestic and export receivables. 7. Financing can be with or without recourse; the credit protection collection and administration services may also be provided

6. Usually available for export receivables only denominated in any freely convertible currency. 7. It is always without recourse and essentially a financing product.

8. Usually no restriction on minimum size of transactions that can be covered by factoring . 9.Factor can assist with completing import formalities in the buyers country and provide ongoing contract with buyers.

8. Transactions should be of a minimum value of USD 250,000. 9.Forfaiting will accept only clean documentation in conformity with all regulations in the exporting/importing countries

According to section 5 of Negotiable Instrument Act,

A Bill Of Exchange is an instrument in writing containing an unconditional order, signed by the maker , directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument

JAMMU 27th Nov. 2006

Three months after due date, pay XYZ or order, the

Sum of Rs 1000(one thousand only) for value received. To, M/S ABC Gandhi Nagar Jammu Stamp

Date
Term

Amount
Stamp Parties

1. 2. 3. 4. 5. 6. 7.

A Bill Of Exchange is an instrument in writing It must be signed by the maker It contains an unconditional order The order must be to pay money and money only The sum payable must be specific The amount must be paid within a stipulated time The name of the drawee must be clearly mentioned It must be dated and stamped

Drawer
The person who draws or writes the Bill Of Exchange is called the Drawer. The Drawer must be the seller or creditor to whom the money is owing

The

Drawee is the person on whom the bill is drawn. He is the purchaser or debtor who is ordered by the Drawer to pay the amount

The

person who has the right to receive the amount of the bill is called the Payee, the Payee may be a third person or the Drawer himself

1.
2.

3.
4. 5.

A Bill of Exchange is used in settlement of debts It fixes the date of payment It is a written and signed acknowledgement of debt A debtor enjoys full period of credit A drawer can convert the bill into cash by getting it discounted with the bank

Mutual Fund: an investment company that invests its shareholders money in a diversified portfolio of securities

Investors own a share of the fund proportionate to the amount of the investment

First started in 1924

A mutual fund is a common pool of money into which investors place their contributions that are to be invested in different types of securities in accordance with the stated objective. An equity fund would buy equity assets ordinary shares, preference shares, warrants etc. A bond fund would buy debt instruments such as debenture bonds, or government securities/money market securities. A balanced fund will have a mix of equity assets and debt instruments. Mutual Fund shareholder or a unit holder is a part owner of the funds asset

The history of the Indian mutual fund industry can be traced to the formation of UTI in 1963. This was a joint initiative of the Government of India and RBI. It held monopoly for nearly 30 years. Since 1987, non-UTI mutual funds entered the scenario. These consisted of LIC, GIC and publicsector bank backed Indian mutual funds. SBI Mutual fund was the first of this kind. 1993 saw the entry of private sector players on the Indian Mutual Funds scene. Mutual fund regulations were revised in 1996 to accommodate changing market needs

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

 Entry

of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management.

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.

ABN AMRO Mutual Fund

JM Financial Mutual Fund

Benchmark Mutual Fund

Birla Mutual Fund BOB Mutual Fund

Kotak Mahindra Mutual Fund

LIC Mutual Fund Morgan Stanley Mutual Fund

Canbank Mutual Fund

Chola Mutual Fund Deutsche Mutual Fund

PRINCIPAL Mutual Fund

Prudential ICICI Mutual Fund Reliance Mutual Fund

DSP Merrill Lynch Mutual Fund

Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Investments HDFC Mutual Fund HSBC Mutual Fund ING Vysya Mutual Fund

Sahara Mutual Fund

SBI Mutual Fund Standard Chartered Mutual Fund

Sundaram Mutual Fund

Tata Mutual Fund Taurus Mutual Fund

Unit Trust of India

Portfolio diversification: It enables him to hold a diversified investment portfolio even with a small amount of investment like Rs. 2000/-. Professional management: The investment management skills, along with the needed research into available investment options, ensure a much better return as compared to what an investor can manage on his own. Reduction/Diversification of Risks: The potential losses are also shared with other investors. Reduction of transaction costs: The investor has the benefit of economies of scale; the funds pay lesser costs because of larger volumes and it is passed on to the investors. Wide Choice to suit risk-return profile: Investors can chose the fund based on their risk tolerance and expected returns.

Liquidity: Investors may be unable to sell shares directly, easily and quickly. When they invest in mutual funds, they can cash their investment any time by selling the units to the fund if it is openended and get the intrinsic value. Investors can sell the units in the market if it is closed-ended fund.
Convenience and Flexibility: Investors can easily transfer their holdings from one scheme to other, get updated market information and so on. Funds also offer additional benefits like regular investment and regular withdrawal options. Transparency: Fund gives regular information to its investors on the value of the investments in addition to disclosure of portfolio held by their scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook

No control over costs: The investor pays investment management fees as long as he remains with the fund, even while the value of his investments are declining. He also pays for funds distribution charges which he would not incur in direct investments. No tailor-made portfolios: The very high net-worth individuals or large corporate investors may find this to be a constraint as they will not be able to build their own portfolio of shares, bonds and other securities. Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. So, he may again need advice on how to select a fund to achieve his objectives. Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investors account.

 Open-end

Fund

Available for sale and repurchase at all times based on the net asset value (NAV) per unit. Unit capital of the fund is not fixed but variable. Fund size and its total investment go up if more new subscriptions come in than redemptions and vice-versa.

Closed-end

Fund

One time sale of fixed number of units. Investors are not allowed to buy or redeem the units directly from the funds. Some funds offer repurchase after a fixed period. For example, UTI MIP offers a repurchase after 3 years. Listed on stock exchange and investors can buy or sell units through the exchange. Units maybe traded at a discount or premium to NAV based on investors perception about the funds future performance and other market factors.

Marketing a new mutual fund scheme involves initial expenses. These expenses are charged to the investors through loads and are recovered from the investors in different ways: Front-end or entry load is charged to the investor at the time of his entry into the scheme. Back-end or exit load is charged to the investor at the time of his exit from the scheme. Deferred load is charged to the investor over a period of time. Contingent deferred sales charge: Different amount of loads are charged to the investor depending upon the time period the investor has stayed with the fund. The longer he stays with the fund, lesser the amount of exit fund he is charged. Very often, AMCs do not charge any initial expenses to the investor in the IPO. These are hence are no-load funds. In no-load funds, the investors get units for the complete amount invested.

 Money

Market Funds/Cash Funds

Invest in securities of short term nature I.e. less than one year maturity. Invest in Treasury bills issued by government, Certificates of deposit issued by banks, Commercial Paper issued companies and inter-bank call money. Aim to provide easy liquidity, preservation of capital and moderate income.

Gilt

Funds

Invest in Gilts which are government securities with medium to long term maturities, typically over one year. Gilt funds invest in government paper called dated securities. Virtually zero risk of default as it is backed by the Government. It is most sensitive to market interest rates. The price falls when the interest rates goes up and vice-versa.

 Debt

Funds/Income Funds

Invest in debt instruments issued not only by government, but also by private companies, banks and financial institutions and other entities such as infrastructure companies/utilities. Target low risk and stable income for the investor. Have higher price fluctuation as compared to money market funds due to interest rate fluctuation. Have a higher risk of default by borrowers as compared to Gilt funds. Debt funds can be categorized further based on their risk profiles. Carry both credit risk and interest rate risks.

Equity Funds: Invest a major portion of their amount in equity shares issued by companies, acquired directly in initial public offering or through secondary market and keep a part in cash to take care of redemptions. Risk is higher than debt funds but offer very high growth potential for the capital. Equity funds can be further categorized based on their investment strategy. Equity funds must have a long-term objective.

Balanced Funds: Has a portfolio comprising of debt instruments, convertible securities, preference and equity shares. Almost equal proportion of debt/money market securities and equities. Normally funds maintain a Equity-Debt ratio of 55:45 or 60:40. Objective is to gain income, moderate capital appreciation and preservation of capital. Ideal for investors with a conservative and long-term orientation.

Product

Return

Safety

Liquidity

Tax Benefit No

Convenience High

Bank Deposit Equity Instruments Debentures Fixed Deposits by Companies Bonds

Low

High

High

High

Low

High or Low Low Low

No

Moderate

Moderate Moderate

Moderate Low

No No

Low Moderate

Moderate

Moderate

Moderate

Yes

Moderate

Product RBI Relief Bonds

Return Moderate

Safety High

Liquidity Low

Tax Benefit Yes

Convenience Moderate

PPF
National Saving Certificate National Saving Scheme Monthly Income Scheme

Moderate
Moderate

High
High

Low
Low

Yes
Yes

Moderate
Moderate

Moderate

High

Low

Yes

Moderate

Moderate

High

Low

Yes

Moderate

Product

Return

Safety

Liquidity

Tax Benefit Yes

Convenience Moderate

Life Insurance Mutual Funds (Open-end) Mutual Funds (Closedend)

Moderate

High

Low

Moderate

Moderate

High

No

High

Moderate

Moderate

High

Yes

High

The Fund Sponsor

Any person or corporate body that establishes the Fund and registers it with SEBI. Form a Trust and appoint a Board of Trustees. Appoints Custodian and Asset Management Company either directly or through Trust, in accordance with SEBI regulations. SEBI regulations also define that a sponsor must contribute at least 40% to the net worth of the asset management company.

 Trustees

Created through a document called the Trust Deed that is executed by the Fund Sponsor and registered with SEBI. The Trust-the mutual fund may be managed by a Board of Trustees- a body of individuals or a Trust Company- a corporate body. Protector of unit holders interests. 2/3 of the trustees shall be independent persons and shall not be associated with the sponsors.

Rights of Trustees: Approve each of the schemes floated by the AMC. The right to request any necessary information from the AMC. May take corrective action if they believe that the conduct of the fund's business is not in accordance with SEBI Regulations. Have the right to dismiss the AMC, Ensure that, any shortfall in net worth of the AMC is made up.

Obligations of the Trustees: Enter into an investment management agreement with the AMC. Ensure that the fund's transactions are in accordance with the Trust Deed. Furnish to SEBI on a half-yearly basis, a report on the fund's activities Ensure that no change in the fundamental attributes of any scheme or the trust or any other change which would affect the interest of unit holders is happens without informing the unit holders. Review the investor complaints received and the redressal of the same by the AMC.

Acts as an invest manager of the Trust under the Board Supervision and direction of the Trustees. Has to be approved and registered with SEBI. Will float and manage the different investment schemes in the name of Trust and in accordance with SEBI regulations. Acts in interest of the unit-holders and reports to the trustees. At least 50% of directors on the board are independent of the sponsor or the trustees.

Obligation of Asset Management Company:

Float investment schemes only after receiving prior approval from the Trustees and SEBI. Send quarterly reports to Trustees. Make the required disclosures to the investors in areas such as calculation of NAV and repurchase price. Must maintain a net worth of at least Rs. 10 crores at all times. Will not purchase or sell securities through any broker, which is average of 5% or more of the aggregate purchases and sale of securities made by the mutual fund in all its schemes. AMC cannot act as a trustee of any other mutual fund. Do not undertake any other activity conflicting with managing the fund.

 Custodian

Has the responsibility of physical handling and safe keeping of the securities. Should be independent of the sponsors and registered with SEBI. Depositories Indian capital markets are moving away from physical certificates for securities to dematerialized form with a Depository. Will hold the dematerialized security holdings of the Mutual Fund.

Mutual Funds are primary vehicles for large collective investments, working on the principle of pooling funds. A substantial portion of the investments happen at the retail level. Agents and distributors are a vital link between the mutual funds and investors. Agents Is a broker between the fund and the investor and acts on behalf of the principal. He is not exclusive to the fund and also sells other financial services. This in a way helps him to act as a financial advisor. Distribution Companies Is a company which sells mutual funds on behalf of the fund. It has several employees or sub-broker under it. It manages distribution for several funds and receives commission for its services.

 Banks

and NBFCs

Several banks, particularly private and foreign banks are involved in a fund distribution by providing similar services like that of distribution companies. They work on commission basis. Marketing Mutual funds sell their own products through their sales officers and employees of the AMC. This channel is normally used to mobilise funds from high net worth individuals and institutional investors.

Direct -

Calculating Net Asset Value Unit Capital is the investors subscriptions. In mutual funds it is not treated as a liability. Investments made on behalf of the investors are reflected on the assets side of the balance sheet. There are liabilities of short-term nature. Funds Net Asset = Asset Liabilities Net Asset Value = Net Assets of the scheme / No. of Outstanding Units NAV = (Market value of investments + Receivables + Other Accrued Income + Other assets Accrued Expenses Other Payables Other liabilities) / ( No. of Units Outstanding as at the NAV date)

The factors affecting the NAV are as following: Capital Gains or Losses on the sale or purchase of the Investment securities. Dividend and income earned on the assets. Capital Appreciation in the underlying value of the stocks held in the portfolio. Other assets and liabilities. Number of units sold or purchased.
NAV = Total market value of assets under management Number of mutual fund shares outstanding

NAV: per share value of a mutual funds investment holding.

Market Value of Assets Portfolio Liabilitie s NAV No of Shares Outstanding

Example A mutual fund has $100 mil in assets and $3 mil in short term liabilities. 10.765 mil shares outstanding. What is the NAV? Solution ($100 mil - $3 mil) / 10.765 mil = $9.0107 per share

SEBI regulations for NAV The day on which NAV is calculated by a fund is called valuation date. NAV of all schemes must be calculated and published at least weekly. This is applicable to both open-end and closed-end fund. Some closed end funds (Monthly Income Schemes) that are not listed on stock exchange may publish it monthly-quarterly.

SEBI Guidelines for Pricing of Units:

The mutual fund shall ensure that the re-purchase price is not lower than 93% of the NAV. The sale price is not higher than 107% of the NAV. Repurchase price of closed end scheme shall not be lower than 95% of the NAV. The difference between the repurchase price and the sale price of the units shall not exceed 7% of the sale price.

1.

Money Market Funds

2.

Objectives of income and liquidity Short-term money market instruments Low risk and high liquidity

(a) Mortgage Funds

Investment terms may be 5 years Riskier than money market (more interest rate risk), but less risky than bond funds (shorter maturities) Objectives of income and safety Subject to capital gains/losses due to interest rate risk

(b) Bond Funds

3.

(a) Balanced Funds

Objectives of safety, income and capital appreciation Min./max. rules apply for percentage invested in each asset class. Similar objectives as balanced funds, but typically not restricted by asset class percentage rules

(b) Asset Allocation Funds

4.

Equity/Common Stock Funds

Objective of capital gains Bulk of assets are in equity, but other assets held for liquidity, income and diversification purposes May vary greatly in degree of risk and growth objectives

5.

Growth Funds

Tend to invest in small-cap stocks, i.e. small companies with growth potential Riskier than equity funds (small firms pay no dividends) Objective of superior capital gains (through minimal diversification) Tend to focus on one industry, market, or segment International/Global Funds, for example, invest in foreign securities (and carry the risk of foreign exchange exposure)

6.

Specialty Funds

7.

(a) Real Estate Funds

Invest in income-generating properties for longterm growth and capital gains Portfolio valuation is based on infrequent external appraisal Less liquid than other funds investors may need to give advance notice when selling Relatively new type of fund Investments are guided by moral criteria (e.g., not investing in tobacco-related firms)

(b) Ethical Funds

8.

Index Funds

Objective is to mirror the performance of a market index (e.g., S&P/TSX 60) Generally lower management fees than other funds. Objective of tax reduction through favourable treatment of dividend Inappropriate for RRSPs or RRIFs Price changes are driven by interest rates and market trends

9.

Dividend Funds

ranked from lowest risk/return to highest risk/return as follows: 1. Money market 2. Mortgage 3. Bond 4. Balanced 5. Dividend 6. Equity 7. Real estate 8. Specialty http://finance.yahoo.com/funds

 Units

of these trusts hold shares of firms in market indices in proportion to their weights in the index Differences from traditional mutual funds: http://finance.yahoo.com/etf

Traded throughout the day on exchanges Lower management fees (e.g., 0.08% to 0.25% versus 2.5% average for active equity funds versus 0.75% average for Index funds) Lower portfolio turnover reduces capital gains income and taxes payable Permit short-selling May be purchased on margin

MODULE-1
Leasing & Hire purchase Sources of Finance

Sources of Finance

Own funds

Government Grants
Venture capital Hire purchase Selling assets Debentures Leasing Profits Overdraft

Loans

Shares

Owners funds this could be the owners own savings. The good point about using this method is that the money can be repaid at leisure.

Profits the profits of the business can be re-invested in the business. This type of finance does not have to be repaid. Loans these can be long term or short term. The borrower usually pays interest on the loan, which is a percentage of the amount of the loan, e.g. 5%. The good point - money is available immediately, but the drawback is that the money is paid back, usually on a monthly basis.

Overdrafts this is a very short-term loan, when a business can go overdrawn in the bank but will be repaid as soon as money is out into the account. It helps with short-term finance problems, i.e. paying the bills each month.

Hire Purchase this is used to purchase equipment or machinery for the business. This allows the business to have immediate use of the equipment but have to pay each month for it, until they own the equipment. The main problem with this form of finance is that when the HP agreement has been met, the equipment could be out of date.

Leasing this is similar to HP but the company will never own the equipment. They use the equipment and usually pay a monthly rental charge for it. The advantage to this is that equipment can be kept up to date and serving charges are usually included in the price.

Selling assets the business could sell some of their assets to gain instant money for a new purchase. The downside is that they no longer own that asset but it does give instant cash.

Venture Capital this is when another business will invest money in the business in return for a shared ownership and a share of the profits.

Government Grants the government may help a business by giving a grant to businesses that may locate in an area of high unemployment. A grant does not have to be paid back unless there is a breach of the terms of the grant agreement.

Shares this allows people to buy into the company (shares) in return for a money reward out of the profits (dividend).

Debentures are loans to a company. Debenture holders are not owners of the company but are paid a fixed rate of interest each year.

lease represents an agreement that gives control over an asset owned by the lessor to the lessee for a specific period of time upon the payment of an agreed upon amount, known as rent
OPERATING LEASE

THERE ARE SEVERAL TYPES OF LEASES:

CAPITAL (OR FINANCIAL) LEASE.

USUALLY A SHORT-TERM RENTAL ARRANGEMENT IN WHICH THE RENTAL CHARGE IS CALCULATED ON A TIME BASIS. SUCH AS THE HOUR OR THE DAY, ETC. THE LESSEE PAYS THE DIRECT COST SUCH AS FUEL AND LABOR

A LONG - TERM CONTRACTUAL ARRANGEMENT IN WHICH THE LESSEE ACQUIRES CONTROL OF AN ASSET IN RETURN FOR RENTAL PAYMENTS. USUALLY RUNS FOR SEVEAL YEARS AND CANNOT BE CANCELLED WITHOUT PENALTY. IS FULLY AMORTIZED, MEANING THAT THE PRESENT VALUE OF THE LEASE PAYMENTS EQUALS THE FULL PRICE OF THE LEASED EQUIPMENT. MAY HAVE A PRUCHASE OPTION AT THE END OF THE LEASE.