Loan Syndication

Loan syndication is the process of involving several different

lenders in providing various portions of a loan. Loan syndication
most often occurs in situations where a borrower requires a
large sum of capital that may be too much for a single lender to
provide or outside the scope of a lender's risk exposure levels.
Thus, multiple lenders work together to provide the borrower
with the capital needed.
For most loan syndications, a lead financial institution is used to
coordinate all aspects of the deal. The lead financial institution
is often known as the syndicate agent. This agent is also often
responsible for all aspects of the deal including the initial
transaction, fees, compliance reports, repayments throughout
the duration of the loan, loan monitoring and overall reporting for
all lenders within the deal.
 Loan Syndication

Advantages:
Merchant bankers helps company to identify potential sources
of finance for taking loans for a fee.
Best Price
Disbursal of loan quickly.

Disadvantages:
Payment of fees
 New Financial Institutions &
Instruments
In India, several reforms were made to strengthen financial
system after 1991.

Financial reforms were intended to move from controlled

economy to a free economy with following objectives:
Develop financial sector infrastructure
Bring about financial supervision for investor protection
Financial liberalization for moving from controlled economy to
efficient market driven economy.
Bring about improvement in quality of services and bring in
confidence amongst the savers for encouraging savings
Introduce new financial instruments for giving options to investor
Emphasize requirement of protection of investors from fraudulent
bills.
 New Financial Institutions &
Instruments
Contributors to Financial System
Household sector which are suppliers of funds

Firms that are engaged in commercial activities and require

funds for carrying on business activities

Government which regulates the market through policies and

regulations and gives direction.

Financial institutions which play role of giving funds and

putting savers and investors together.

Financial instruments which facilitate transfer of money within

a country and internationally.
 Book Building
New Issue market/Primary market performs functions of
providing an environment for sale and purchase of new issues.
Stock market has the function of trading in securities after new
securities are allotted and then listed with it.
Book Building is used in context of sale of a new security
offered for the first time in New Issue market before trading of
this share begins in stock market.
Process of offering shares to public in new issue market through
public demand by bidding for the shares. Based on bids, price is
discovered.
A price band is given and public is asked to bid for price within
that band.
Fairly new concept and one of the developments in financial
sector to bring about a fair and just system of issuing shares
through openness and public demand.
 Depository or Paperless trading
Dematerialization of securities for electronic trading of shares is
one of the major steps for improving and modernizing stock
market and enhancing level of investor protection.

Advantages:
Eliminates risk as it does not have physical certificates.
Expedite transfer of shares through electronic transfer.
De-mat account which provides client identification number and
depository identification number.
Account statement which is similar as in case of a bank.
No Stamp duty (tax on legal documents) on transfer of
securities as there is no physical transfer.
Allows a nomination facility
Automatic credit of bonus amount and other benefits
 Factoring
Is a financial service for financing credit sales in which
receivables are sold by a company to specialized financial
intermediary called factor.
Factor provides several services to a company that draws an
agreement for managing its receivables.

Parties to factoring:
Seller sells goods on credit to buyer. He gives delivery invoice
and instructs buyer to pay amount due on credit sales to his
agent or factor.
Buyer makes an agreement with seller after negotiating terms
and signing a memorandum of understanding.
Factor is a financial intermediary between buyer and seller.
He is an agent of seller. Factor pays 80% of price in advance
and receives payment from buyer on due date, then remits
balance to seller after deducting his commission.
 Types of Factoring
With Recourse Factoring : factor does not take credit risks
which is associated with receivables. Factor has the right to
receive commission and his expenses for maintaining sales
ledger.

Without Recourse Factoring: Factor has to bear all losses that

arise out of irrecoverable receivables. For this he charges a
higher commission which is premium for higher risk.

Factor takes a great interest in business matters of client in this

type of factoring.
 Venture Capital
Venture capital is financing that investors provide to startup
companies and small businesses that are believed to have
long-term growth potential. For startups without access to
capital markets, venture capital is an essential source of money.
Risk is typically high for investors, but the downside for the
startup is that these venture capitalists usually get a say in
company decisions.
Venture capitalists make an agreement whereby they support
the project and fund it, in return for monetary gains,
shareholding and acquisition rights in business financed by
them.
Fist venture capital in India was established by IFCI in 1975.
Other venture capital funds in India are
IDBI Venture capital fund
ICICI venture funds management company limited
 Credit Rating
Is a service provided by a credit rating agency for evaluating a
security and rating it by grading it according to its quality. An
estimate of the ability of a person or organization to fulfill their
financial commitments, based on previous dealings.
In India credit rating had its inception in 1987 with incorporation
of firsts service company named CRISIL Credit Rating
Information Services of India
Four rating agencies in India which are registered and regulated
by SEBI:
CRISIL
ICRA Investment Information and Credit Rating Agency of India
CARE Credit analysis and Research Ltd.
Duff and Phleps.
 Objectives of Credit Rating
To analyze the risks of the company
Provide information to investor for selecting debt securities
Express an opinion about the company by grading of debt
securities with technical expertise.

Debenture Rating Symbols Fixed Deposit Rating Symbols

AAA Highest Safety FAAA Highest Safety

AA High Safety FAA High Safety

A Adequate safety FA Adequate safety

BBB moderate safety FB Moderate safety

 Commercial Paper (CP)
Commercial paper is an unsecured, short-term debt instrument
issued by a corporation, typically for the financing of
accounts receivable, inventories and meeting short-term
liabilities

Is a promise by borrowing company to return loan on specified

date of payment.

Unsecured promissory note which is issued for a period of 7

days to three months.

In India CP are popularly used between 91 to 180 days.

Corporate organization can directly issue commercial papers to

investors (direct paper) or can be indirectly issued through a
bank or a dealer (dealer paper).
 Certificate of Deposit (CDs)
Is a securitized short term deposit issued by banks at high rates
of interest during period of low liquidity.
Liquidity gap is met by banks by issuing CDs for short period.
In India, CDs are being issued by banks directly or through
dealers.
Are part of bank deposits and issued for 90 days but maturity
period vary according to corporate organizations
Minimum issue of CDs to single investor is 10 lakh rupees.

Advantages:
Reliable
Liquidity
Flexible
Trading
International Depository Receipts
American Depository Receipts
Are a method of raising funds in America in US stock markets.
First ADR was issued in 1920 to invest in oversees markets and
to provide a base to non-USA companies to invest in stock
market in USA.
ADRs could be traded only in USA.
Before ADRs existed, if American investors wanted to purchase
shares of a non-U.S. listed company, they had to buy the shares
on international exchanges.

European Depository Receipts

EDRs are issued in Europe and denominated in European
currency.
EDRs have a small market and are not attractive instruments.
Are not well developed like ADRs and GDRs.
International Depository Receipts
Global Depository Receipts

Are a method of raising equity capital by organizations which

are in Asian countries.
A global depositary receipt (GDR) is a bank certificate issued in
more than one country for shares in a foreign company
Have a low cost and help in bringing liquidity.
Govt of India allowed Indian companies to mobilize funds from
foreign markets through Euro issues of GDRs.
Companies with good track record can issue GDRs for
developing infrastructure projects in power, telecommunications
and petroleum and in construction and development of roads,
airports and ports in India.
 Indian Depository Receipts
Indian Depository Receipts

Are like ADRs and GDRs.

A new instrument as a source of raising finance.
Instrument provides global companies to have an entry in Indian
capital market.
Global companies can issue IDRs and raise money from India.
Although this instrument has been accepted as an international
financial instrument for raising funds, legal formalities are still
being worked out by Department of Company Affairs.
 Chapter 3
Concepts in Valuation
 Time Value of Money
Value of a unit of money is different in different time
periods i.e. Value of a sum of money received today
is more than its value received after sometime.

Due to reinvestment opportunities for funds which are

received early.

Since a rupee received today has more value,

rational investors would prefer current receipts to
future receipts.
 Time Value of Money
Mr. X has option of receiving Rs 1000 now or one
year later. What would be his choice?

He can deposit this amount received now and earn

nominal rate of interest (3%). At the end of the year,
amount accumulates to Rs 1030.

As a rational person, he should be expected to prefer

the larger amount (Rs 1030 here).

Same principle applies to a business firm.

Relevance of Time Value of Money
Money received today is higher in value than after a
certain period because of uncertainties, inflation and
preference for current consumption and opportunities
for reinvestment to get a higher yield.

Importance of money can be analyzed for three

reasons:
Compensation for Uncertainty
Preference for Current Consumption
Reinvestment Opportunity
Techniques of Time Value of Money
Basic techniques are:
Compounding for Future Values
Discounting for present Value
 Future Value
If you were to invest Rs 10,000 at 5-percent interest for one
year, your investment would grow to Rs 10,500

Rs 500 would be interest (Rs 10,000 .05)

Rs 10,000 is the principal repayment (Rs10,000 1)
Rs 10,500 is the total due. It can be calculated as:

Rs10,500 = Rs10,000(1.05).

The total amount due at the end of the investment is call the
Future Value (FV).
 Compound / Future Value
In the one-period case, the formula for FV can be
written as:
FV = PV (1 + i)n

Where PV is cash flow today (time zero), present

value
i is the appropriate interest rate for 1 period
n is the number of years
 Compound / Future Value
In the multi- period case, the formula for FV can be
written as:
FV = PV (1 + i/m)nm

Where PV is cash flow today (time zero), present

value
i is the appropriate interest rate for 1 period
n is the number of years
m is number of compounding per year
 Compound Value of Annuity

Compound Value = Annuity Amount * Compound

Value Annuity Factor

FV = A * CVAF
 Present Value
PV can be calculated through discounting approach.

If you were to be promised Rs10,000 due in one year when

interest rates are at 5-percent, your investment be worth
Rs9,523.81 in todays rupees.
RS 9523.81 = Rs 10000/1.05

The amount that a borrower would need to set aside today

to be able to meet the promised payment of Rs10,000 in
one year is call the Present Value (PV) of Rs10,000.

Note that Rs10,000 = Rs9,523.81(1.05).

 Present Value
In the one-period case, the formula for PV can be
written as:
PV = FV/ (1 + i)n

Where PV is cash flow today (time zero), present

value
i is the appropriate interest rate for 1 period
n is the number of years
 Present Value
In the multi- period case, the formula for FV can be
written as:
PV = FV/ (1 + i/m)nm

Where PV is cash flow today (time zero), present

value
i is the appropriate interest rate for 1 period
n is the number of years
m is number of compounding per year
Practical Applications
 Valuation of Securities
Valuation of Debentures
Valuation of Preference shares
Valuation of Equity Shares