Merchant Banking Final Notes

MERCHANT BANKING

1. Introduction:
According to SEBI Act:“Merchant Banker” means any person who is
engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities or
acting as manager, consultant, adviser or rendering corporate advisory
service in relation to such issue management.” Merchant Banks are issue
houses which manage new issues of the companies in the capital market.
According to the Banking Commission (1972), merchant banking
institutions are to offer services like syndication of financing, promotion
of projects, investment management and advisory services to medium and
small savers and to provide funds and trusts to various types. In fact,
merchant banking implies a wider range of specialist services, such as: (i)
Loan syndication, (ii) Financial and management consultancy, (iii)
Project counselling, (iv) Portfolio management, (v) Formulation of
schemes of rehabilitation, (vi) Guidance on foreign trade financing, (vii)
Guidance to non-resident Indians for investment in India. The formal
merchant banking services in Indian capital market were initiated in
1967, when Reserve Bank of India granted licence to The National
Grindlays Bank to perform the services relating to issue management.
The First National City Bank followed Grindlays Bank by opening a
‘Management Consultant Division’ in 1970. Both these banks acted as
‘managers to the issues’. From 1969 to 1992, merchant banks performed
the issue management activities under the legislative framework of
Capital Issues (Control) Act, 1947. The procedure of the managing capital
issue by a merchant banker is divided into pre-and post issue
management activities. Presently, public issue management activities of
merchant bankers are regulated and monitored by SEBI through the
guidelines, clarifications, circulars containing instructions to merchant
bankers, stock exchanges and other constituents of the capital market.
Under the Capital Issues (Control) Act, 1947, companies were required to
obtain prior approval from the Controller of Capital Issues (CCI) for
raising capital. CCI’s permission was required with regard to the timing,
size of the issue and the determination of price at which the securities
were to be issued. CCI norms for pricing often led to extreme under
pricing and heavy oversubscription. The extent of under pricing of public
issues deterred the firms from going public. So, debt played a major role
in financing the projects. With the passing of SEBI Act, 1992, and the
repeal of Capital Issues (Control) Act, 1947, the government’s control
over the determination of issue size, time and price of securities ceased
and the market was allowed to allocate resources on competitive basis.
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Under the SEBI (Merchant Bankers) Regulations, 1992, Merchant
Bankers were recognized as primary intermediaries in the role of ‘issue
manager’ in the capital market. The regulations provided for the
compulsory registration, capital adequacy requirements, general
obligations and responsibilities and code of conduct for the merchant
bankers as also the procedure for inspection of books of accounts, records
and documents of merchant bankers. The initial set of guidelines issued
by SEBI allowed almost all firms to freely price their issues and decide
on the size of the issue in consultation with lead merchant bankers.
2. Nature of Merchant Banking:
i. Advisory in nature
ii. Financial Arrangement
iii. Corporate Restructuring
iv. Capital Reoprganization
v. Capital Issue Management
vi. Special Assistance to Small Scale Industries.
vii. Portfolio Management
viii. Private Placements
ix. Foreign Currency Loans
x. Technical Assistance
xi. Investment Advisory Services
xii. Revival package for sick units.
3. Scope of Merchant Banking:
Merchant banking activities help in channelizing the financial surplus of
the general public into productive investment avenues. They help to
coordinate the activities of various intermediaries to the share issue such
as the registrar, bankers, advertising agency, printers, underwriters,
brokers, etc. and to ensure the compliance with rules and regulations
governing the securities market. This being the era where mergers and
acquisitions are hot, the scope of merchant banking has grown to a large
extent.

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Regulations of Merchant Banking:
The merchant banking activity in India is governed by SEBI (Merchant
Bankers) Regulations, 1992. Registration with SEBI is mandatory to
carry out the business of merchant banking in India. An applicant should
comply with the following norms: i) The applicant should be a corporate
body. ii) The applicant should not carry on any business other than those
connected with the securities market. iii) The applicant should have
necessary infrastructure like office space, equipment, manpower, etc.
iv) The applicant must have at least two employees with prior experience
in merchant banking. v) Any associate company, group company,
subsidiary or interconnected company of the applicant should not have
been a registered merchant banker. vi) The applicant should not have
been involved in any securities scam or proved guilt for any offence. vii)
The applicant should have a minimum net worth Rs50 million.
An Overview: Q. Is it mandatory for a merchant banker to register
with the SEBI? A. Yes. Without holding a certificate of registration
granted by the Securities and Exchange Board of India, no person can act
as a merchant banker. Q. Who is eligible to obtain registration as a
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merchant banker? A. Only a body corporate other than a non-banking
financial company shall be eligible to get registration as merchant banker.
Q. What are the various categories for which registration can be
obtained? A. The categories for which registration may be granted are
given below: • Category I – to carry on the activity of issue management
and to act as adviser, consultant, manager, underwriter, portfolio manager.
• Category II - to act as adviser, consultant, co-manager, underwriter,
portfolio manager. • Category III - to act as underwriter, adviser or
consultant to an issue • Category IV – to act only as adviser or consultant
to an issue Q. What is the capital requirement for carrying on activity
as merchant banker? A. The capital requirement depends upon the
category. The minimum net worth requirement for acting as merchant
banker is given below: • Category I – Rs. 5 crores • Category II – Rs, 50
lakhs • Category III – Rs. 20 lakhs • Category IV – Nil Q. What is the
procedure for getting registration? A. An application should be
submitted to SEBI in Form A of the SEBI (Merchant Bankers)
Regulations, 992. SEBI shall consider the application and on being
satisfied issue a certificate of registration in Form B of the SEBI
(Merchant Bankers) Regulations, 1992. Q. What is the registration fee
payable to SEBI? A. Rs. 5 lakhs which should be paid within 15 days of
date of receipt of intimation regarding grant of certificate. Q. What is the
validity period of certificate of registration? A . Three years from the
date of issue. Q. How to renew the certificate? A. Three months before
the expiry period, an application should be submitted to SEBI in Form A
of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider
the application and on being satisfied renew certificate of registration for
a further period of 3 years. Q. What is the renewal fee payable to
SEBI? A. Rs.2.5 lakhs which should be paid within 15 days of date of
receipt of intimation regarding renewal of certificate. Q. What is the
consequence of non-registration or failure to renew registration? A.
The person whose registration is not current shall not carry on the activity
as merchant banker from the date of expiry of validity period.
Overview of current Indian Merchant Banking Scene:
In India, though the existence of this branch of financial services can be
traced to over three decades, investment banking was largely confined to
merchant banking services. In India prior to the enactment on Indian
Companies Act, 1956, managing agent acted as issue houses for the
securities, evaluated project reports, planned capital structure and to some
extent provided venture capital for new firms. Few share broking firm
also functioned as Merchant Bankers.
The need for the specialized Merchant Banking services was felt in India
with the rapid growth in thenumber and size of the issues made in the
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primary market. The Merchant Banking services were started by foreign
banks, namely the National Grindlays Bank in 1967 with licence obtained
from RBI followed by the Citi Bank in 1970. The Banking commission in
its report in 1972 recommended the setting up of Merchant Banking
institutions by commercial banks and Financial institutions. This marked
the beginning of specialized merchant banking in India. To begin with,
Merchant Banking services were offered with traditional banking
services. In the mid-eighties, the Banking Regulations Act was amended
permitting commercial banks to offer a wide range of financial services
through the subsidiaries rule. The State Bank of India was the first to set
up Merchant Banking Division in 1972 and ICICI was the first financial
institution to set up its Merchant Banking Division in 1973. This was
followed by Bank of India, Central Bank of India, Bank of Baroda,
Syndicate Bank, Punjab National Bank, Canara Bank,etc. The later
entrant were IFCI and IDBI with the latter setting up its Merchant
Banking Division in 1992. Growth Merchant Banking in India was given
a shot in the arm with the advent of SEBI in 1992 and subsequent
introduction of free pricing of primary market equity issues in 1992.
However, post-1992, the merchant banking industry was largely driven
by issue management activity which fluctuated with the trends in the
primary market. There have been phases of hectic activity followed by a
severe setback in business. SEBI started to regulate the merchant banking
activity in 1992 and a majority of the merchant bankers who registered
with SEBI were either in issue management or associated activity such as
underwriting or advisorship. SEBI has four categories of merchant
bankers with varying eligibility criteria based on their networth. The
highest number of merchant bankers with SEBI was seen in the midnineties, but the numbers have reduced since, due to the inactivity in the
primary market. The number of registered merchant bankers with SEBI
as at end of March 2003 was 124, from a peak of almost a thousand in the
nineties and later on number started reducing.
6. Structure of Merchant Banking Industry:
Initially Merchant Bankers were classified into 4 categories with regard
to their nature and range of activities and their responsibilities to SEBI,
investors and issuers of securities. Since September 1997 only a single
category exists. The requirements are as under: There are four different
categories of merchant bankers. Only category 1 merchant bankers are
allowed to act as lead managers to the issue: Category 1: Those merchant
bankers who can conduct all above mentioned activities, relating to
management of issues. They may, if they so choose, act only in an
advisory capacity or as co-manager, underwriter or as portfolio manager.
Category 2: Those merchant bankers who can act as consultant, advisor,
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portfolio manager and co-manager. Category 3: Those merchant bankers
who can act as underwriter, advisor and consultant. Category 4: Those
merchant bankers who can act only as advisor or consultant to an issue.
Different types of organizations in India which provide merchant baking
services:
i. Commercial Banks
ii. All India Financial Institutions
iii. Private Consultancy Firms
iv. Technical Consultancy Organizations.
7. Professional Ethics and Code of Conduct:
i. REGULATORY/STATUTORY COMPLIANCE: The
Members/Associates of AMBI are custodians of confidence and a bridge
between investors and investees. The role includes reporting obligations
which have in essence a legal requirement for meeting certain specific
objectives. Accordingly, various Government agencies on the local, state
and federal level may require the filing of numerous records and reports
which are designed to safeguard public interest. Members/Associates of
AMBI are expected to adhere to the Code of Conduct, regulations,
guidelines, clarifications, rules, circulars and press releases issued by
SEBI from time to time. Special care must be taken to ensure that all
reporting to any branch or agency of the government is done with the
utmost accuracy and promptness. No attempt should be made to distort or
disguise the true nature of any procedure or transaction.
ii. CONFIDENTIALITY: Members/Associates may obtain financial and
other “price sensitive” information, information about their client and/or
competitors. The success of a Merchant Banker depends on the
confidence of the client that its Merchant Banker would maintain
confidentiality of the information obtained by it and the assurance that it
would be utilized by the Merchant Banker in a proper manner. It goes
with assurance that such information shall never be used for gain.
The Member/Associate shall: Request its clients, other members and
others for only such information as may be statutorily required or such
information, as may be properly considered as necessary for rendering
professional service as a Merchant Banker. Restrict the use of the
information, knowledge, secrets only for the purpose of discharging its
functions as Merchant Banker. Ensure that access to the information
about the client and/or its competitors is accessed only by authorized
employees/representatives of the Merchant Bankers. Ensure that the files
contained only pertinent data used for advising the client. Ensure that
access to all sensitive or privileged information is denied to others unless
for good cause and/or reason and in discharge of their duties.
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iii. ACCURATE RECORDS, REPORTING AND FINANCIAL
RECORD KEEPING: Merchant Bankers are required by law to maintain
financial and other records that will accurately present its activities and
transactions. All supporting documents, including agreements, invoices,
cheque requests and expense reports, are likewise required to fairly and
accurately reflect the information contained therein.
No false or misleading entries should be made in any books or records of
the Members/Associates for any reason; either in its accounts or in
accounts maintained for and on behalf of clients and no fund, asset or
account of the company should be established for any purpose unless it is
accurately and fairly recorded in the books and records of the company.
All errors and adjustments should be promptly corrected and recorded
when discovered. Accounting information should be prepared in
conformity with the prescribed accounting standards and generally
accepted accounting practices. In the event of the adherence causing any
hardship the Members/Associates could refer such situations to AMBI to
enable it to examine the same. No entries should be made which will
conceal or differently portray the essence of a transaction. The need for
accurate and proper recording of information is not restricted to the
accounting and financial functions of the Members/Associates.
Members/Associates are also expected to maintain detailed records of all
transactions, correspondence, meetings etc., with their clients/prospective
clients. In an evolving regulatory environment, the attempt should be to
lay down standards which will stand the test of time and avoid concealing
the essence of a transaction behind the legalities of compliance
regulations.
CONFLICT OF INTEREST : Members/Associates shall always
endeavour to avoid conflict of interest in performance of its service as a
Merchant Banker. Conflict of interest may be actual or apparent. All
situations which leads to a conflict of interest should be avoided. This
would apply in relation to other Members/Associates, clients, employees,
group companies and dealings with other regulatory authorities. Before
accepting a new assignment from a prospective client, a merchant banker
is expected to conduct its own Due Diligence with the prospective clients’
bankers, merchant bankers and other capital market intermediaries with a
view to arrive at a decision whether to accept or reject the assignment.
v. ETHICS IN CONDUCTING BUSINES :Members/Associates shall in
dealings with other members, clients, investors, institutions, the public,
employees and others comply with all applicable laws, rules and
regulations both in letter and in spirit. Where there appears any difficulty
in interpretation of any law, rules, regulation, the Members/Associates
may refer such issues to AMBI.
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vi. POLITICAL CONTRIBUTIONS AND ACTIVITY:
Members/Associates may, on its absolute sole discretion make political
donations and participate in any political activity that are legally
permitted. When expressing views on political issues the
Member/Associate should make it clear that the views expressed are
those of concerned Member/ Associate and not of AMBI.
vii. COMMUNICATION: Members/Associates are required to
communicate with the Regulatory Authority, Government departments
and Agencies, Public etc.
The Member/Associates shall communicate accurately in a manner which
would ensure that the communication is truthful and accurate. All
communication by a member to the investor at the instance of a client or
based on information available with the client, should be made only if the
member is fully aware of the facts and contents of the matter.
Members/Associate would acknowledge the fact that they are an
important link between the listed companies and the investment public.
Opinions and recommendations required for from a Merchant Banker
regarding any matter within his professional scope of work may be
provided by him. The merchant banker shall be free to charge such fees
for such professional services as he may deem fit. No incorrect or
misleading information should be given. Information regarding advisable
investments and update on investments should be given in a professional
manner and should not be based on any extraneous motive or
consideration.
viii. PUBLIC DISCLOSURE AND REPORTING: Reporting of financial
information to the investing stockholders, the SEBI and the financial
institutions requires the highest standard of fairness and honesty. Much
harm can be caused due to incorrect or fraudulent or misleading
reporting. All advice which suppresses or does not wholly disclose the
material nature of a transaction should be avoided as being prohibited.
ix. DISPARAGEMENT OF COMPETITORS:
Competition among Merchant Bankers is increasing day after day which
is welcome as public interest is best served by free and open competition.
Any activity or conduct that reduces or eliminates competition in the
market place is not in the interest of the development of a vibrant security
market and investors. No Member/Associate shall undertake any activity
which tends to or is likely to result in any restrictive trade practice or an
unfair trade practice. One may choose not discuss fees, costs,
commissions etc. earned/incurred by him with a competitor as this may
lead to an unlawful agreement to determine price or restrain competition.
However, a member is discouraged from entertaining client solely on the
ground of fees when matters may have reached advanced stages of
negotiation with other members.
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In the ordinary course of business one may require information about a
competitor, his clients etc. However, a Merchant Banker shall not acquire
or seek to acquire information through improper means such as industrial
espionage, hiring an employee of the competitor etc. Should any such
instance come to light the same should be reported to the SEBI & AMBI.
x. MARKETING & SALES :Members/Associates are encouraged to
compete in the market place solely based on merits and competitive
positioning. Abiding by generally accepted practices and norms of fair
competition and providing clients with accurate, adequate and prompt
information is expected. Business should be obtained on merits, avoiding
compromising the loyalty of a customer’s employee in an effort to make a
sale through misuse of business courtesies.
xi. DISCRIMINATION: No Member/Associate shall discriminate in
favour of or against any of its competing customers. No client company
shall by an agreement or otherwise be coerced into resorting to the
services of a particular Merchant Banker. While AMBI recognizes that
collective co-operation strengthens the position of Merchant Banker
generally, it should in no circumstances be considered as being a tool
adverse to the interest of any client.
xii. CONTRACTS WITH CLIENTS: All agreements with clients shall be
in writing and contain detailed scope of services to be rendered by the
Members/Associates. The agreement shall include the amount of fees to
be charged and the manner of payment thereof. The agreement between
the Member/Associate and the client shall be entered into before any
service is rendered by the Member/Associate. A Member/Associate
before accepting any assignment from the client / prospective client shall
obtain information as to whether the client / prospective client has already
entered into an MOU / Agreement with any other Merchant Banker in
respect of the same assignment and its status thereof.
Member/Associate shall ensure that their clients follow rules, regulations,
guidelines etc. issued by SEBI and other regulatory authorities from time
to time. A Merchant Banker shall exercise Due Diligence to ensure fair
and true disclosures in the offer document so that the investors are in a
position to take well informed investment decisions. Apart from
informing SEBI, Members/ Associates shall keep AMBI informed about
the non-compliance, if any, concerning such matters as reflect the
interaction of the clients with the member. Members/Associates shall also
keep AMBI informed about the non payment of fees etc. by the client as
agreed.
xiii. EXPENSES REIMBURSEMENT: It is customary for a client to
reimburse its Merchant Banker for all reasonable and necessary expenses
actually incurred in the conduct of the client’s business.
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Members / Associates are expected to incur such expenditure as would
normally have been incurred by them in the discharge of their duties.
Without making it mandatory in any manner, Members / Associates are
encourage to confirm with clients the particulars of expenses they would
be incurring including the nature and class of travel, particulars regarding
stay and expected duration etc.
xiv. GIFTS, ENTERTAINMENT, FAVOURS AND OTHER ITEMS OF
VALUE: Members / Associates shall not accept or give any gift which
may deem to influence the making of any commercial decision by the
recipient of the gift. A gift may take various forms including money,
tangible property, services free of cost or at concessional rate, discount,
credit etc. Member / Associates are required by needs of the profession to
interact with a cross section of the society. Members/Associates shall not
make any illegal payment either directly or indirectly to any person
irrespective of the reason or motive. Even reasonable gifts, be they
received or given, should be avoided if to a reasonable observer, it might
appear to influence a decision. PROCUREMENT / PURCHASING:
AMBI may, from time to time, indicate minimum fees for the services to
be rendered by members in certain select areas of merchant banking
activities, eg. Lead Managers/Joint Managers/ Co-Managers fees. While
indicating such fees, AMBI shall keep in mind the cost expected to be
incurred in rendering such services.
No undercutting should be resorted to in any circumstances much less in
a manner which may not be easily detected in the course of discharging
responsibilities. Similarly all deals for procuring investments, either
short, medium or long term should not be structured in a manner as not to
be in keeping with the spirit and essence of this code.
xvi. INSIDE INFORMATION: A Merchant Banker will be considered as
an “insider” in accordance with the meaning of the term as per the
Securities and Exchange Board of India (Insider Trading) Regulations,
1992.
A Member/Associate shall not : Either on his behalf, or on behalf of any
other person, deal in securities of a company listed on any stock exchange
on the basis of any unpublished price sensitive information.
Communicate any unpublished price sensitive information to any person
except as may be necessary to carry on the business ordinarily on or
under any law; Give advice, suggestions, recommendations, to any person
to deal in securities of any company on the basis of unpublished price
sensitive information. No Members/Associates or any of their employees
shall indulge in “insider trading”. This may require the
Members/Associates to obtain from its employees, existing as well as to
be employed in their organization in future to give suitable declarations
that he/she shall not act on any unpublished price sensitive information.
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There should be mechanism by which the Members/ Associates are in a
position to monitor the compliance. Employees should make periodic
disclosure of transactions in securities entered into by them and their
dependent relatives. Each Merchant Banker shall fix its own internal limit
for transactions above which it would be obligatory for the employees to
disclose the same to his employers. The Board/Management Committee
should take note of these disclosures for proper monitoring. Every
Member/Associate shall co-operate in adopting such regulatory procedure
as AMBI may impose for ensuring that the Code of Conduct, Articles of
Association of AMBI and other regulatory mandates issued by SEBI and
AMBI from time to time are complied with, both in letter and in spirit.
xvii. TRADE SECRETS: During the course of employment, employees
may work with innovative derivatives or other tools for financial
management. They may also learn valuable information and gather
materials relating to the business of the Member / Associate that are not
otherwise known or available outside. This information and materials are
of great importance in the present day highly competitive business; and to
retain their value they must be kept confidential.
Any person taking up employment with a Member / Associate accepts a
continuing moral and legal obligation not to disclose any trade secrets to
anybody including an earlier or subsequent employer. The obligation to
protect the secrets would continue, even after ceasing employment for
any reason.
xviii. COMPLIANCE RESPONSIBILITY: Every Member/Associate is
expected to be responsible for the conduct of its employees and will be
reasonable for his or her compliance with this Code of Conduct. If there
be any questions of interpretation they should be directed to AMBI.
xix. POWER OF AMBI TO CALL FOR CERTAIN INFORMATION:
AMBI may call for such information from members as it may feel
necessary or appropriate.
1. Current Development
The first merchant bank was set up in 1969 by Grind lays Bank. Initially
they were issue mangers looking after the issue of shares and raising
capital for the company. But subsequently they expanded their activities
such as working capital management; syndication of project finance,
global loans, mergers, capital restructuring, etc., initially the merchant
banker in India was in the form of management of public issue and
providing financial consultancy for foreign banks. In 1973, SBI started
the merchant banking and it was followed by ICICI. SBI capital market
was set up in August 1986 as a full fledged merchant banker. Between
1974 and 1985, the merchant banker has promoted lot of companies.
However they were brought under the control of SEBI in 1992. Recent
Developments in Merchant Banking and Challenges Ahead: The
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recent developments in Merchant banking are due to certain contributory
factors in India. They are
i. The Merchant Banking was at its best during 1985-1992 being when
there were many new issues. It is expected that 2010 that it is going to be
party time for merchant banks, as many new issue are coming up.
ii. The foreign investors – both in the form of portfolio investment and
through foreign direct investments are venturing in Indian Economy. It is
increasing the scope of merchant bankers in many ways.
iii. Disinvestment in the government sector in the country gives a big
scope to the merchant banks to function as consultants.
iv. New financial instruments are introduced in the market time and
again. This basically provides more and more opportunity to the merchant
banks.
v. The mergers and corporate restructuring along with MOU and MOA
are giving immense opportunity to the merchant bankers for consultancy
jobs.
However the challenges faced by merchant bankers in India are:
i. SEBI guideline has restricted their operations to Issue Management and
Portfolio Management to some extent. So, the scope of work is limited.
ii. In efficiency of the clients are often blamed on to the merchant banks,
so they are into trouble without any fault of their own.
iii. The net worth requirement is very high in categories I and II specially,
so many professionally experienced person/ organizations cannot come
into the picture.
iv. Poor New issues market in India is drying up the business of the
merchant bankers. Thus the merchant bankers are those financial
intermediary involved with the activity of transferring capital funds to
those borrowers who are interested in borrowing. The activities of the
merchant banking in India is very vast in the nature of
1.The management of the customers securities
2.The management of the portfolio
3.The management of projects and counseling as well as appraisal
4. The management of underwriting of shares and debentures
5. The circumvention of the syndication of loans
6. Management of the interest and dividend etc
Thus, Indian Financial consists of following: 1. Financial markets 2.
Financial institutions/intermediaries 3. Financial assets/instruments
Financial markets can be further divided into: 1. Organized sector 2.
Unorganized sector Organized sector markets can be further divided into:
1. Money Market 2. Capital Market (Primary Market & Secondary
Market) Financial institutions / Intermediaries can also be divided into :
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1. Regulatory Bodies – Key regulatory bodies are : - RBI - Securities &
Exchange Board of India (SEBI) - Insurance Regulatory & Development
Authority (IRDA) - Govt. of India (Dept. of Banking & Insurance,
Ministry of Finance) 2. Intermediaries – Which may be : - Money Market
Intermediaries. - Capital market intermediaries
FINANCIAL SERVICES:
1. Meaning, Definition and Concept:
Financial Services – In general, all types of activities which are of a
financial nature can be brought under the term “financial services”. In
broad sense, it means “mobilizing and allocating savings”. Thus it
involves all activities involved in the transformation of savings into
investment. It can also be called financial intermediation which is a
process by which funds are mobilized by large number of sectors and
make them available to all those who are in need particularly corporate
customers. Thus financial service sector is a key area and is vital for
industrial development. Financial service help not only to raise required
funds but also ensure their efficient deployment. In order to ensure
efficient management of funds, services such as bill discounting,
factoring, parking of short term funds in money market, securitization of
debt are provided by financial service firms. Besides banking and
insurance, this sector provides specialized services such as credit rating,
venture capital financing, lease financing, merchant banking, credit cards,
housing finance etc. Hence, in brief, these are the services rendered by
financial institutions and intermediaries operating in the market. Financial
services cover a wide range of activities. They can be broadly classified
into two: (i) Traditional activities (ii) Modern activities.
Traditional activities can be further classified as: (i) Fund based
activities/services
(ii) Fee based activities /services
Fund based activities / services are those where funds of financial
institutions are involved such as:
 Underwriting of investments in shares, debentures.
Advancing different types of loans (short term, medium term, long
term) and in the form of clean loan, pledge, hypothecation, housing,
education, consumption loan etc.
Investing / participating in money market instruments like CPs, CDs
bill discounting, treasury bills etc.
Providing finance like leasing, hire purchase, venture capital, seed
capital etc.
Non-Fund based activities/services are those where funds are not
involved and financial institution gets income in the form of fee such as:
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Commission on demand draft.
Guarantee/Letter of credit
Managing capital issue (pre-issue & post issue management services)
Advisory/Consultancy services
Project preparation/appraisal/arranging finance through projects from
financial institutions
Assisting in the process of getting clearances from Govt/Govt bodies.
Modern activities/services provided by financial institutions are like
advisory role in corporate restructuring, acting as trustees for debentures,
rehabilitation and restructuring sick units, portfolio management of large
corporate risk management services, hedging of risks, guiding
management in cost minimization efforts, safe custody of securities etc.
Role in financial system:
i. Financial Services are fundamental to economic growth and
Development;
ii. Banking, savings and investment, and debt and equity financing, all
help us to save our money, guard against uncertainty, and build credit,
while enabling our businesses to start up, expand, -increase efficiency, and compete in local and international markets;
iii. They provide the payment services;
iv. Matching savers and investors;
v. Generating and distributing of crucial information,
vi. Allocation of credits efficiently;
vii. Pricing, pooling and trading risks;
viii. Increasing of asset liquidity.
ix. Accelerate the rate of economic development
x. Allocation of resources to different investment channels.
xi. Catalyst for economic development
xii. Lowers risk and helps in diversification.
xiii. Expert Knowledge and professional guidance
xiv. Fosters industrial development
xv. Revival of sick units
xvi. Investor’s education.

PUBLIC ISSUE AND REGULATIONS
1. Depository
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2. Meaning
3. Evolution
4. Merits
5. Demerits.
6. Dematerialization
7. Process of Dematerialization.
8. NSDL
9. CDSL
1. Meaning:
A depository is an institution that facilitates the investors in holding
securities in a book entry form, which is maintained electronically. It is
similar to a bank where one can deposit cash and can be withdrawn
and/or transferred to anybody at your instruction by issuing a cheque.
Similarly your investment can be sold in the stock exchange or
transferred to anybody at your instruction through a Depository
Participant (DP). On the simplest level, depository is used to refer to any
place where something is deposited for storage or security purposes.
More specifically, it can refer to a company, bank or an institution that
holds and facilitates the exchange of securities. Or a depository can refer
to a depository institution that is allowed to accept monetary deposits
from customers. Central security depositories allow brokers and other
financial companies to deposit securities where book entry and other
services can be performed, like clearance, settlement and securities
borrowing and lending.
Basics of Depository
Depository is an institution or a kind of organization which holds
securities with it, in which trading is done among shares, debentures,
mutual funds, derivatives, F&O and commodities. The intermediaries
perform their actions in variety of securities at Depository on behalf of
their clients. These intermediaries are known as Depositories Participants.
Fundamentally, There are two sorts of depositories in India. One is the
National Securities Depository Limited(NSDL) and the other is the
Central Depository Service (India) Limited(CDSL). Every Depository
Participant (DP) needs to be registered under this Depository before it
begins its operation or trade in the market.

Questions
15

1. Explain what merchant banking is. Its functions & Scope. ( Page 1 to 5)
2. Explain current challenges by Indian merchant bankers ( page 8)
3. Explain Financial services & activities under taken by them. ( Page 10)

CHAPTER 2
PUBLIC ISSUE MANAGEMENT AND REGULATIONS
16

The joint stock company has to issue shares to the public for getting
funds for business. This is done in form of shares, debentures etc. There
is a laid down procedure for issue of shares as under
1. IPO 2. Private placement 3. Right issues method 4.Bonus shares method
5. Book building method 6. Stock option method 7. Bought out method.
All the above methods can be used for issue of shares by which the
companies capital shall increase.
For doing so the companies have to issue prospectus to the
public. Prospectus is a document by which the company can give details
of Categories of Issue Managers: SEBI has classified Issue Managers
into four categories as follows:
a)Category l: Merchant banker who I s authorized to act as issue
manager, advisor, consultant, underwriter and portfolio manager.
b) Category II: Merchant banker who is authorized to act only as
advisor, consultant, underwriter and portfolio manager.
c)CategoryIll: Merchant banker who is authorized to act as underwriter,
advisor and consultant to an issue.
d)CategoryIV:Merchant banker who is authorized to act only as advisor
or consultant to an issue.
Duties of Merchant Banker .
a)Easy Floatation: An issue manager acts as an indispensable pilot
facilitating a public/rights issue.
b) Financial Consultant: An issue manager essentially acts as a
financial architect, by providing advice relating to capital structuring,
capital gearing and financial planning for the company.
c) Underwriting: An issue manager allows for underwriting the issues of
securities made by corporate enterprises.
d) Market Makers: Merchant bankers, as issue managers often act as the
market makers for the issues lead-managed by them.

17

e) Due Diligence: The issue manager has to comply with SEBI
guidelines. The merchant banker will carry out activities with due
diligence and furnish a Due Diligence Certificate to SEBI.
f) Co-ordination: The issue manager is required to coordinate with a
large number of institutions and agencies while managing an issue in
order to make it successful.
g) Liaison with SEBI: The issue manager, as a part of merchant banking
activities, should register with SEBI..
h )Due Diligence Certificate i. Submission of Offer Document:

2.1 Public Issue Management
1. Signing of MOU
2. Obtaining Appraisal Note
3. Optimum Capital Structure
4. Converting meeting
5. Appointment of Financial Intermediary
6. Preparing Documents
7. Due Diligence Certificate (All Legal formalities Followed Certificate)
8. Submission of offer documents
9. Finalization of collection centers.
10. Filling with registrar of companies
11. Issue launch
12. Promoters Contribution
13. Issue closure.
New Issue Market refers to the set-up which helps the industry to raise
the funds by issuing different types of securities.
A) Various Methods of Marketing of New Issues:
Followingarethevariousmethodsbeingadoptedbycorporateentitiesformarke
tingthesecuritiesintheNewIssuesMarket:
1) Pure Prospectus Method
2) Offer for Sale Method
3) Private Placement Method
4) Initial Public Offers(IPOs)Method
5) Rights Issue Method
6) Bonus Issue Method
7) Book-building Method
8) Stock Option Method
18

9) Bought-out Deals Method

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

2.2 Marketing of New Issue
For marketing of shares as per SEBI guide lines the following steps are to
be followed.
Approval
Maximum Limit
Minimum Period
Superintendence
Eligibility
Director’s report
IPO
Issue at discount
PROSPECTUS

A prospectus is required to be issued by a public company to the public
only when it wants to raise funds from the public in the form of shares or
debentures. In case the public company is interested in raising its funds
not from the public but from other sources ,it will not be required to issue
a prospectus but will have to deliver to the Registrar of Companies a
‘statement in lieu of prospectus’ (SLP).A private company is not required
to prepare any of the two documents.
A) Meaning:
A document through which public are solicited to subscribe to
the share capital of a corporate entity is called ‘Prospectus‘.
B)Definition:
Section2(36)defines prospectus as follows:
Prospectus means any document described or issued as a prospectus and
includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the
subscription or purchase of any shares in ,or debentures of, a body
corporate.
In respect of offer of shares and debentures made to the general public,
the contents of the prospectus shall take the following forms: 1)Regular
Prospectus: The contents of a regular prospectus are presented in three
parts as follows: a)PART I:PartI of the prospectus should contain details
about the specific information about the company. Following are the
details furnished in this regard: i)General Information: The prospectus
in its pan I shall contain such information as the following:
•Name and address of the registered office of the company.
•Consent of the Central Government (SEBI) for the present issue and
declaration of Central Government (SEBI) about non-responsibility for
19

financial soundness or correctness of statements and letter of
intent/industrial license.
•Names of regional stock exchanges and other stock exchanges where
application has been made for listing of present issue.
•Provisions of sub-section(1) of Section68A of the Companies Act
relating to punishment for fictitious applications.
•Statement/declaration about refund of the issue if minimum subscription
of 90percent is not received within 90days of closure of the issue.
•Declaration about the issue of allotment letters/refunds within a period
of 10weeks and interest in case of any delay in refund at the prescribed
rate.
•Date of opening and closing of the issue, and date, of earliest closing of
the issue. ii) Capital Structure: Information about the company’s capital
structure such as authorized, issued, subscribed, and paid-up capital
should be furnished
iii) Terms of Issue:
iv) Particulars of the Issue
v) Company ,Management and Project
vi)Disclosure of Public Issues made by the Company
vii)Disclosure of Outstanding Litigation, Criminal Prosecution and
Defaults
b) PARTII: The information to be included under this part of the
prospectus are as follows:
i) General Information consent of directors, auditors, solicitors
managers to issue, registrar of issue, bankers to the company, bankers to
the issue, and experts and their opinions if any obtained.
•Change, if any, in directors and auditors during the last three years and
reasons thereof.
•Authority for the issue and details of resolutions passed for the issue.
ii)Financial Information: Under this category report-based information
relating to financial matters are to be shown.
•Minimum subscription.
• Expenses
•Issue made previously for cash.
•Previous public or rights issue, if any (during last five years).
•Date of allotment; closing date; date of refunds; date of listing on the
stock exchange.
c)PARTIII: Made by a qualified practicing chartered accountant. i)
Declaration: declaration by the directors that all the relevant provisions
of the Companies Act, l956 and guidelines issued by the Government
have been complied with.
ii)Application with Prospectus: Under Section56(3) of the
CompaniesAct,1956 any issue for shares or debentures must necessarily
20

be accompanied by a memorandum containing such salient features of
prospectus as may be prescribed. No prospectus if
•offer is made in connection with an underwriting agreement with respect
to the shares or debentures.
•Where the offer of shares or debentures is not made to the public.
Abridged Prospectus:
A memorandum containing such salient features of a prospectus as may
be prescribed is called ‘Abridged Prospectus’. The concept of abridged
prospectus was introduced by the Companies Act of 1988 with a view to
make the public issue of shares an inexpensive proposition.
General Information
Capital Structure
Terms of Issue:
Issue Particulars:
Company, Management and Project
Financial Performance
Refunds and Interest
Companies Under the Same Management
Risk Factors
Importance of Prospectus:
The prospectus includes very important information like the historical
performance of the company in the previous years, the current owners of
the company, the amount of shares that they are offering to the public,
what they intend to do with the money after the I.P.O amongst other
things
D) Disclosures In Prospectus: Consequent to the acceptance of the
recommendations of the Malegam Committee, the following disclosures
are made mandatory by the SEBI to be made by issuing companies with
effect from November1995.
1)An index: to the contents of the prospectus.
2)Project Cost: Details of actual expenditure incurred on the project
within a period of 2months of filing the prospectus with the SEBI or
Registrar Of Companies(ROC),whichever is later.
3) Turnover
4) Assets and Liabilities
5) Major Expansion
6) Future Projections
7) Directors Statement
Promoter
21

Definition: The term ‘promoter' in relation to securities offered to the
public for subscription means and includes the following:
a)The person or persons who are in overall control of the company.
The following are to be disclosed in Prospecturs
1) Promoters Shareholdings
2) Share Price
3)Agreements
4)Management Discussion and Analysis
5)Buy-back
6) Major Shareholders:
7) No Responsibility Statement:
8) Qualified Notes
9) Information about Ventures Promoted
10) Risk Factors
11) Tax Benefits
12) Basis for Issue Price
13) Ratios
14) Other Disclosures:
In addition to the above, the following also need to be disclosed:
•Sale or purchase between companies in the promoter group where such
sales or purchases exceed 10percent of the total sales or purchases of the
issuer. •Material items of income or expenditure arising out of
transactions in the promoter group.
•A forecast of the estimated profits of the financial year ending
immediately before the date of the offer document (if such information is
not already given in the other document).
•A capitalization statement showing total debt and net worth, and the
debt/equity ratios before and after the issue is made.
Types of prospectus:
1) Red-herring Prospectus: According to sub-sections (2), (3) and (4) of
section 60 B of the Companies Act, 1956. "A prospectus which does not
have complete particulars on the price of securities offered and the
quantum of securities offered is known as Red- herring prospectus. "Such
a prospectus is issued where a company offers it securities through the
‘book-building mode'. 2)Information Memorandum: a)Definition:
According to Section2(19B) of the Companies Amendment Act of 2000,
‘Information Memorandum 'is defined as ‘a process undertaken prior to
the filing of a prospectus by which a demand for the securities proposed
to be issued by a company is elicited, and the price and the terms of issue
for such securities is assessed by means of a notice, circular,
advertisement or document. c)ShelfProspectus: i)Definition: ‘Shelf
22

prospectus’ means a prospectus issued by any financial institution or bank
for one or more issues of the securities or class of securities specified in
that prospectus.’
Underwriting
It is the activities connected with the management of the public issues of
corporate securities, viz., equity shares, preference shares, and debentures
or bonds, and are aimed at mobilization of money from the capital market
Under writing is a guarantee given by ‘underwriters’, the financial market
intermediary to take up a whole or a part of the issue of securities not
subscribed by the public. It is a marketing technique whereby corporate
enterprises are able to sell their securities to the public and thereby
achieve success in the public issue.
A)Activities in Post issue: The major activities covered are:
1)Finalization of basis of allotment: If the public issue is
oversubscribed to the extent of greater than five times, a SEBI-nominated
public representative is required to participate in the finalization of Basis
of Allotment(BOA). In case of rights issue that is over subscribed greater
than two times, a SEBI-nominated public representative is required to
participate in the finalization of BOA. lf it is under-subscribed,
information regarding accepted applications is formalized, and Regional
Stock Exchanges are approached for finalization of `BOA.
2) Dispatch of share certificates: Immediately after finalizing the BOA,
share certificates are dispatched to the eligible allotees, and refund orders
made to unsuccessful applicants. In addition, a 78 days report is to be
filed with SEBI. Permission for listing of securities is also obtained from
the stock exchange. 3)Advertisement: An announcement in the
newspaper has to be made regarding the basis of allotment, the number of
applications received and the date of dispatch of share certificates and
refund orders, etc.
1) Net Asset Value: NAV=Total Net worth/total no of shares outstanding. Where, Total Net worth=[Equity Capital+ Free reserves –
Contingent Liability] +Fresh Capital
2) Profit Earning Capacity Value (PECV)

2) Average Market Price: In this method, the fair price of the share is
determined as an average of the NAV and PECV. The average market
23

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

Questions of chapter 2
1. What are different sources by which funds can be raised in J.S.C ( page
15)
2. Duties of merchant banker. (page 16)
3. Write detailed note on Public issue management ( page 17)
4. Explain various methods of marketing issues & SEBI guidelines for the
same (page 17 & 18 )
5. Explain contents in Prospectors & its disclosures ( page 19,20,21)
6. Explain pre& post issue activities in an issue ( page 23 & 24)

CHAPTER -III
BANKERS
24

SERVICES OFFERED BY MERCHANT

1) Merger:
Merger is absorption of one or more companies by a single existing
company. Merger is an act or process of purchasing equity shares of one
or more companies by a single existing company. Merger is a technique
of business growth. It is not treated as a business combination. Merger is
done on a permanent basis. Generally, it is done between two companies.
However, it can also be done among more than two companies. During
merger, an acquiring company and acquired company comes together to
decide and execute a merger agreement between them.
2) Acquisition:
Acquisition refers to a situation where one firm acquires another and the
latter ceases to exist. An acquisition occurs when one company takes
controlling interest in another firm or its legal subsidiary or selected
assets of another firm.
3) Amalgamation:
Amalgamation is the blending of two or more companies into one, the
share holders of each blending company becoming substantially the
shareholders of the other company which holds blended companies.
4) Takeover:
In a takeover, a seller‘s management may oppose the acquisition or
merger but the buyer makes a direct bid to the seller‘s shareholders to
acquire seller‘s shares and thus gain control of the seller‘s company.
Takeover is a market route for the acquisition of a company.
B) Types of Merger
Horizontal Merger
Vertical Merger
Diagonal Merger
Forward Merger
Reverse Merger
Forward Triangular Merger
Reverse Triangular Merger
Conglomerate Merger
A Congeneric Merger
Negotiated Merge
Arranged Merger
Agreed Merger
Unopposed Merger
Defended Merger
Competitive Merger
Tender Offer

25

Advantages of Merger and Acquisition:
Advantages
Diversification
Growth through Acquisitions Economies of Scale
Early-mover Benefit
Tax Advantages
Regulatory Considerations
Size
Synergy
Diversifying Risk
Good Price
Creating Shareholder Value
Better Corporate Governance
Better Portfolio
Investor's Perspective
PROCEDURE OF AMALGAMATION.
Memorandum of Association
Board Meeting
Application to the Court
Person Entitled to Apply
Copy to Regional Director
Order of High Court
Notice of the Meeting
Advertisement of Notice of Meeting
Notice to Stock Exchange
Filing of Affidavit for the Compliance
Formalities for amalgamation
General Meeting
Reporting Of Result Of The Meeting
Formalities with ROC
Petition
Sanction of the Scheme
Stamp Duty
Filing with ROC
Copy of Order to be annexed
Allotment of shares
Hostile Takeover/Merger:
a) Meaning:
Normally acquisitions are made friendly, however when the process of
acquisition is unfriendly (hostile) such acquisition is referred to as
takeover. Hostile takeover arises when the Board of Directors of the
acquiring company decide to approach the shareholders of the target
company directly through a Public Announcement (Tender Offer) to buy

their shares consequent to the rejection of the offer made to the Board of
Directors of the target company.
b) Take Over Strategies:
Street Sweep ,
Strategic Alliance,
Bear hug ,
Brand Power

Financing Techniques in Merger
Ordinary Shares Financing
Debt and Preference Shares Financing
Deferred Payment Plan
Tender Offer
A) Concept of Buy-back of Shares: Buy- back is an excellent tool for
financial reengineering. Buy-back of shares relates to the company
buying back its shares which it has issued earlier from the market. When
a company elects to purchase outstanding shares of its own stock it can
accomplish this through one of two ways:
The company can tender an offer to existing stockholders. A tender offer
invites share holders to sell their stock, generally at a price above the
market price, within a certain period of time.
ii. The company can purchase shares of its stock in the open market,
similar to the way individuals would. In this case, the company would
simply pay market price.
Delisting is a process by which the name of a company is removed from
the list of securities of companies which are permitted to be traded in the
stock exchanges. Delisting disables the process of trading of shares in the
stock exchanges. The delisting can be voluntary delisting or compulsory
delisting.
Voluntary Delisting:
Under voluntary delisting, a company can request for delisting its shares
from one or more recognized stock exchanges, where their shares are
listed.

Formalities for Delisting the Shares
1. Prior approval from the Board of Directors.
ii. Prior approval of the share holders through a special resolution
iii. Submit an application for delisting of the shares in the prescribed
form to the recognized stock exchange
iv. Within one year of passing the special resolution make the final
application to the concerned recognized stock exchange
v. An audit report covering the period of six months from the date of
application should accompany the application submitted to recognized
exchange/s.
2. Application for Delisting of Shares
3. Furnish Proof: The Company is required to furnish proof of the exit
opportunity available to shareholders together with the final application
to the recognized stock exchange/s.
B) Compulsory Delisting: The recognized stock exchange can delist the
equity shares of a listed company, after giving a reasonable opportunity to
the company to be heard.
SEBI Guidelines for Compulsory Delisting:
SEBI has introduced the following guidelines for compulsory delisting of
shares from any recognized stock exchange:
1) The recognized stock exchange shall take all reasonable steps to trace the
promoters of a company whose equity shares are proposed to be delisted,
with a view to ensuring compliance with regard to the acquisition of
delisted shares.
2) The recognized stock exchange shall consider the nature and extent of the
alleged non-compliance of the company and the number and percentage
of share holders who may be affected by such non- compliance.
3. The recognized stock exchange shall take reasonable effort to verify the
status of compliance of the company with the office of the concerned
Registrar of Companies.
4) The names of the companies, whose equity shares are to be delisted
shall be displayed in a separate section on the website of the recognized
stock exchange for a brief period of time.
5) The recognized stock exchange shall inappropriate cases, file
prosecutions under relevant provisions of the Securities Contracts
(Regulation) Act, 1956, or any other law for the time being in force
against identifiable promoters and directors of the company for the
alleged non-compliances.

Meaning of Debentures:
A debenture is a medium to long-term debt format that is used by
large companies to borrow money. Debentures are the most common
form of long-term loans that can be taken by a company. Debentures are
usually loans that are re payable on a fixed date, but some debentures are
irredeemable securities.
SEBI Guidelines for Issue of Debentures:
1) Issue of FCDs having a conversion period more than 36 months will
not be permissible 2)Premium amount on conversion, the conversion
period, in stages, if any, shall be pre-determined and stated in the
prospectus.
3) The interest rate for above debentures will be freely determinable by
the issuer.
4) Issue of debenture with maturity of 18 months or less are exempt from
the requirement of appointing Debenture Trustees or creating a Debenture
Redemption Reserve (DRR).
5) In other cases, the names of the debenture trustees must be stated in the
prospectus and DRR will be created in accordance with guidelines laid
down by SEBI.
6) The trust deed shall be executed within six months of the closure of the
issue.
7) Any conversion in part or whole of the debenture will be optional at
the hands of the debenture holder, if the conversion takes place at or after
18months from the date of allotment, but before 36 months.
8) In case of NCDs /PCDs credit rating is compulsory where maturity
exceeds 18months.
9) Premium amount at the time of conversion for the PCD, redemption
amount, period of maturity, yield on redemption for the PCDs /NCDs
shall be indicated in the prospectus.
10) The discount on the non-convertible portion of the PCD in case they
are traded and procedure for their purchase on spot trading basis must be
disclosed in the prospectus.
11) In case, the non-convertible portions of PCD /NCD are to be rolled
over, a compulsory option should be given to those debenture holders
who want to with draw and en cash from the debenture programme.
Portfolio Management:
A portfolio refers to a collection of investment tools such as stocks,
shares, mutual funds, bonds, and cash and soon depending on the
investor‘s income, budget and convenient time frame. So the art of
selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.

1.
2.
3.
4.
5.

Scope.
Conversion & evaluation of fund
Regulation as per SEBI
RBI regulations and others
Portfolio strategy
Performance measurement & revision.

Portfolio Manager:
Portfolio Manager is a professional who manages the portfolio of an
investor with the objective of profitability, growth and risk minimization.
1) Discretionary Portfolio Manager:
A Portfolio Manager is called a discretionary portfolio manager if he
exercises or may exercise any degree of discretion as to management of
portfolio of securities or funds of the client.
2) Non-Discretionary Portfolio Manager:
A Portfolio Manager other than a discretionary Portfolio manager is
called a non-discretionary portfolio manager. So, such a port folio
manager has to build and manage the portfolio in accordance with the
guidelines of the client.
Registration Procedure
Application for Grant of Certificate
Conformance to Requirements
Furnishing of Further Information, etc
Consideration of Application
Capital Adequacy Requirement
Procedure for Registration
Renewal of Certificate
Procedure where registration is not granted
Effect of Refusal to Grant Certificate
Payment of Fees
No Person to Act as Portfolio Manager without Certificate
Conditions for Grant or Renewal of Certificate to Portfolio Manager
Period of Validity of the Certificate

Duties of portfolio manager
1. Reporting
2. Compliance
3. Growth and Performance
4. Wealth Protection
5. Hiring, Outsourcing and Oversight

Responsibilities of portfolio manager
Responsibilities relating to Contract with Clients
Maintenance of Books of Accounts/Records
Audit of Accounts
General Responsibilities of a Portfolio Manager
Rights of portfolio Manager
Right of Inspection by the Board
Right to Receive Notice before Inspection

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

Types of Syndicated loans:
Traditional Syndicated Bank Loans
Syndicated Bank Loan
Revolving Credit
Standby Facility
Multi-option Facilities (MOF )
Underwritten Deal
Club Deal

Best-Efforts Syndication Deal
Questions Chapter 3
1.
2.
3.
4.
5.
6.

Explain mergers its types & advantages ( page 26 &27)
Explain meaning & consequences of hostile merger ( page 29)
Explain financing techniques in merger (page 30)
Explain delisting, its types (page 30 &31)
Explain debenture issues & SEBI guide lines in this regard ( page 32)
Explain portfolio management, types & registration procedure.(page
33&34)
7. Explain meaning of syndicate its types & loans given ( page 35 & 36)

CHAPTER- 4

FINANCIAL SERVICES (PART-1)

Financial services constitute an important component of the financial
system. Financial services, through the net work of elements such as
financial institutions, financial markets and financial instruments, serve
the needs of individuals, institutions and corporate.
It is through these elements that the functioning of the financial system is
facilitated. Considering its nature and importance, financial services are
regarded as the fourth element of the financial system.
In fact, an orderly functioning of the financial system depends, to a great
deal, on the range and the quality of financial services extended by a host
of providers.
Services that are offered by financial companies connote ‘financial
services. Financial companies include both Asset Management
Companies and Liability Management Companies. Asset Management
Companies include leasing companies, mutual funds, merchant bankers
and issue /portfolio.
Meaning:
Financial services refer to services provided by the financial institutions
in a financial system. The finance industry encompasses abroad range of
organizations that deal with the management of money. Among these
organizations are Asset Management Companies like leasing
companies ,merchant bankers and Liability Management Companies like
discounting houses and acceptance houses.
Scope of Financial Services Tradition Activities & Modern Activities
1) Traditional Activities: These are activities which comprise of both
capital and money market. They come under two categories:
a) Fund Based Activities: The traditional services which come
underfund based are the following: i) Underwriting of investment in
shares, debentures, bonds etc. ii) Dealing in secondary market activities.
ii) Participating in money market instruments like commercial papers iv)
Involving in equipment leasing, hire purchase, venture capital, seed
capital etc. v)Dealing in foreign exchange market activities.
b) Non-Fund Based Activities: They are following: i) managing the
capital issues.
ii) Making arrangements for the placement of capital
and debt instruments with investment institutions.
2)
Modern Activities: Besides the above traditional services, the financial
intermediaries render in numerable services in recent times. Most of them
are of the non-fund based activity. They are also referred to as new
financial products and services.
b) Non-Fund Based Activities: Managing the capital issues. ii) Making
arrangements for the placement of capital and debt instruments with

investment institutions.
1)Equipment Leasing/Lease Financing
2)Hire Purchase and Consumer Credit
3) Bill Discounting
4)Venture Capital
5)Housing Finance
6)Insurance Services
7)Factoring
8)Forfaiting: Forfaiting is a form of financing of receivables relating to
international trade. It is a non-recourse purchase by a banker or any other
financial institution of receivables arising from export of goods and
services.
9) Mutual Fund
10)Credit Rating
11)Credit Cards
12)Consumer Finance

LEASING
Leasing industry plays an important role in the economic development of
a country by providing money incentives to lessee. A)Meaning:
Leasing is a process by which a firm can obtain the use of a certain fixed
assets for which it must pay a series of contractual, periodic, tax
deductible payments. The lessee is the receiver of the services or the
assets under the lease contract and the lessor is the owner of the assets.
Lease is of different types. 1) Financial Lease 2) Operational Lease
3)Sale and Lease Back 4)Leveraged Leasing 5)Direct Leasing 6)First
Amendment Lease
PROCESS in leasing 1.Lease Selection 2.Order & Delivery 3.Lease
Contract 4.Lease Period
Advantages •Stable Business •Wider Distribution •Sale of Supplies

•Second-hand Market •Tax Benefits Absorbing Obsolescence Risks
•Fillip to Capital Market •Easy Finance
Advantages to Leases
i)Efficient Use of Funds
ii)Cheaper Source iii)Flexible Source iv)Enhanced Borrowing Capacity
v)Off-balance Sheet Financing vi)Tax Benefits vii)Favorable Terms
viii)Guards Against Obsolescence ix)Avoidance of Initial Cash Outlay
x)Better Liquidly

Financial Implications
Lease transactions would have accounting and financial implications for
both the lessor and the lessees as detailed below:
a) For Lessee:
i) Tax shield on lease rentals is available as business expenditure
ii) Depreciation tax shield is not available
iii) Tax shield on lease rentals represents a cash inflow
iv) Tax shield on depreciation represents cash outflow (cash inflow
foregone)
a) For Lessor:
i) Depreciation tax shield is available
ii) Tax shield on lease rentals is not available as business expenditure
iii) Tax shield on depreciation represents cash inflow
iv) Tax shield on lease rentals represent a cash outflow
V) Net salvage value of an equipment is treated as a post-tax cash flow

Hire purchase

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

Ownership
Method of financing
Depreciation

Tax benefits
Salvage value

Hire purchase
Thehirerofthegoodsnotbeco
mesownertillthepaymentofs
pecifiedinstalments.
HP is financing both
business and non-business
assets.
In HP, depreciation and IA
can be claimed by the hirer.
Only the interest component
of the HP installment is tax
deductible.
The hirer, in HP, being the
owner of the asset, enjoys
salvage value of the asset.

Deposit

20% deposit is required in
HP.

Extent of Finance

HP requires 20 to 25%
down payment.
Cost of maintenance hired
assets is borne by hirer.

Maintenance

Leasing
In lease, ownership rests
with the lessor throughout.
Leasing is a method of
financing business assets.
In leasing, depreciation and
investment allowances
cannot e claimed by the
lessee
The entire leaser entails tax
deductible expense.
The lessee, not being the
owner of the asset, doesn’t
enjoy the salvage value of
the asset.
Lessee is not required to
make any deposit. Since it is
required down payment
In lease financing is 100%
financing,
Cost of maintenance of the
leased asset is borne by the
lessor.

Rate of Interest :
The type of interest rates popularly used in hire purchase financing is as
follows:
i) Add-on Rate of Interest ii)Flat Rate of Interest iii)Effective Rate of
Interest Effective rate of Interest= Trial rate at which NPV of future
HP installments is Zero
Methods of Interest Calculation
Straight line method , Effective rate method, sum of digits method.

Factoring:
Business enterprises are always looking for selling the debtors for cash,
even at higher interest. This is possible through a financial service.
1)Meaning: Like securitization factoring also is a financial innovation.
Factoring provides resources to finance receivables. It also facilitates the
collection of receivables. The word factor is derived from the Latin word
facere.
Scope of factoring
i)Administration of Sales Ledger ii)Collection of Receivables
iii)Provision of Finance iv)Protection Against Risk v)Advisory Services
vi)Credit Management
Advantages i)Cost Savings ii)Leverage iii)Enhanced Return iv)Liquidly
v)Credit Discipline vi)Cash Flows vii)Credit Certification viii)Prompt
Payment ix)Information Flow x)Infrastructure
B) Forfaiting: Generally there is a delay in getting payment by the
exporter from the importer. This makes it difficult for the exporter to
expand his export business.
1) Meaning of Forfaiting: The term ‘forfait ’is a French word. It means
‘to surrender something’. Thus forfeiting means giving up the right of
exporter to the forfeit or to receive payment in future from the importer.
Advantage of forfaiting: The following are the benefits of forfaiting:
i)The exporter gets the full export value from the forfaitor

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

iii) It is simple and flexible. It can be used to finance any export transaction. The
structure of finance can be determined according to the needs of the
exporter, importer, and the forfaitor.
iv) The exporter is free from many export credit risks such as interest rate risk,
exchange rate risk, political risk, commercial risk etc.
v) The exporter need not carry the receivables into his balance sheet.
Bill discounting is book debt financing. This is done by commercial
banks
1)Meaning of Bills Discounting: When goods are sold on credit, the
receivables or book debts are created. The supplier or seller of goods
draws a bill of exchange on the buyer or debtor for the invoice price of
the goods sold on credit. It is drawn for a short period of 3 to 6 months
After drawing the bill, the seller hands over the bill to the buyer. .This
means he binds himself liable to pay the amount on the maturity of the
bill. Now the bill is with the drawer. He uses the alternative to discount
with the bank & get funds.

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

Questions Chapter 4.

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

Explain financial services its meaning & scope (page 37 )
Explain various activities in financial services ( page 38)
Explain leasing types , process & advantages ( page 39)
Explain financial implications of leasing on lessor & lessee (page 40)
Explain hire purchase & its difference from leasing ( page 41)
Explain factoring its scope & advantages ( page 42 )

FINANCIAL SERVICES –PART II

1. Social, political, economic and institutional factors create a complex
context in which financial services organizations (FSOs) and their
customers interact, and, of course, these in turn may vary considerably
across countries.
2. All to often, discussions of marketing practice fail
to recognize the importance of explaining and understanding these
contextual influences.
The purpose of this current chapter is to provide an overview of the
context in which financial services are marketed and to explain the
economic significance of the sector.
Merchant banks, in essence, are financial Institutions providing
specialist services which generally include the acceptance of bills of
exchange, corporate finance, port folio management and other banking
services.
Consumer finance This refers to the segment of the financial services
industry that provides credit to consumers who are unable to directly
borrow from a bank or a financial institution. Consumer finance is the
highest growing segment in the Indian financial services sector .It has
become big ticket business in the last decade and a number of wellknown names have entered this area. Consumer finance mainly refers to
the division of retail banking that deals with lending money to
consumers.
Types of Consumer
Finance: 1) Revolving Credit 2) Fixed Credit 3) Cash Loan 4) Secured
Finance 5) Unsecured Finance

Players in Finance
•Traders
•Commercial Banks
•Credit Card Institutions
•NBFC's
•Credit Unions

•Middlemen
Role of Consumer Finance in Economy:
1) Consumer finance stimulates demand and consumption
2) Key is the maintenance of the critical balance between savings,
investment, and borrowers' debt-servicing ability.
3) The consumer are softer targets for loan pricing.
4) They are more likely to borrow at higher rates a convenience no
longer available on lending to industrial and commercial borrowers who
insist on fine loan rates.
Housing Finance
A set of all financial arrangements that are made available by Housing
Finance Companies (HFCs) to meet the requirements of housing is called
‘housing finance'.
Types
1.Contract system 2.Savings bank system 3. Mortgage bank.
Major players 1. National housing bank 2.HDFC 3.LIC 4.HUDC.
Advantages of Housing Finance: 1)The asset it finances, housing, is a
significant part of wealth and the fixed capital stock, as documented in
Goldsmith’s seminal works on Comparative National Balance Sheets
(1984) 2) Housing also represent a large proportion of most household’s
consumption. 3) In much the same way, housing remains mostly selffinanced by households’ equity in many emerging economies. Frequently,
the only alternative is finance provided by developers through deferred
installment sales.

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

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

b) To issuers 1.Index of faith 2. Wider investor base 3. Bench mark
c) To Intermediaries: 1. Efficient practice 2.Effective monitoring
d) To Regulators
GLOBAL CREDIT RATERS
•Moody's investor service
•Standard A Poor's corporation (s & P)
•Duff and Phelps Credit Rating
•Japan credit rating agency (JCR)
•IBCA ltd
•Thomson bank watch
b) Indian Credit Raters a) CRISIL
b) ICRA c) CARE
Scope in India:
1) Restricted to debt instruments.
2) In developed countries like the USA and the UK equity shares are also
rated.
3) In present environment the CR has become an obligation. 4) The
corporate sector entirely depends upon public for project finance. The
capital market is dominated by share brokers and the other
intermediaries.
5) It is necessary for the safety of the investors to rate the debt
instruments in the market.
6) lf the CR does not exist in the market, the investors may fall in
dilemma and there will be chance to cheat the innocent investors.
Functions of CIBIL:
1) CIBIL caters to both commercial and consumer segments.
2) Consumer Credit Bureau covers credit availed by individuals.
Commercial Credit Bureau covers credit availed by non-individuals
3)Aim of ClBIL's Commercial Credit Bureau minimize instances of
concurrent and serial defaults 4. CIBIL maintains a central data base of
information as received from its members.
Mutual fund It is an investment that enables investors to pool their
money together into one professionally managed investment. Mutual
funds can invest in stocks, bonds, cash and /or other assets. These under
lying security types ,called holdings combine to form one mutual fund,
also called as portfolio.
Classification
Operational Classification
Return-based Classification
Investment-based

Evaluating Mutual Funds:
1. Treynor Model Performance measure is calculated as follows:
PM= ( Ari- ARf )/Bi
Where, ARi=Average rate of return for portfolio ‘i’ during a period
ARf=Average rate of return on a risk free investment during the period
Bi=Slope of portfolio . ‘I’character is ticline which represents the
portfolios relative volatility and its systematic risk. PM=The Treynor
portfolio performance measure for the period. A positive measure shows a
superior ,risk adjusted performance of a fund.
2.Sharpe Model William F. Sharpe developed this model in 1966. It
measures the total risk, not merely systematic risk (as in Treynor model).
The relevant performance measure is computed as follows:
PM=(Ari-Arf)/Ni
where, Ni = Standard deviation of rate of returns for the portfolio for the
period. The positive performance measure value is indicative of good
performance.

Venture Capital
1) Meaning: The term venture capital comprises of two words, namely,
‘venture’ and ‘capital’. The term ‘venture’ literally means a ‘course’ or
‘proceeding’, the outcome of which is uncertain (i.e.,involving risk). The
term capital refers to there source to start the enterprise. Thus venture
capital refers to capital investment in an risky business enterprise. Money
is invested in such enterprises because these have high growth potential.
A high risk capital is provided by venture capital funds in the form of
long term equity finance with the hope of earning a high rate of return
primarily in the form of capital gain. In fact, the venture capitalist acts as
a partner with the entrepreneur.
2) Characteristics of Venture Capital:
1)It is basically equity finance.
2)It is a long term investment in growth-oriented small or medium firms.
3)Investment is made only in high risk projects with the objective of
earning a high rate of return.

4) In addition to providing capital, venture capital funds take an active
interest in the management of the assisted firm.
5) The venture capital funds have a continuous involvement in business
after making the investment.
6) Once the venture has reached the full potential, the venture capitalist
sells his holdings at a high premium.
Advantages of Venture Capital 1)Business Consultations
2)Management Consultations
1.
2.
3.
4.
5.

Questions chapter 5
Explain consumer finance its types & players involved (page 46&47)
Write notes on housing finance explain need, importance & major players
involved ( page 47)
Credit rating types, players involved. ( page 48)
Explain mutual funds & importance in economic growth ( page 49)
Explain venture capital, its meaning& importance ( page 50 & 51)

MODEL QUESTIONS

Q.1

What do you mean by Factoring? Explain advantages and

disadvantages of Factoring.
Q.2 Explain the role and functions of Stock Exchanges of India.
Q.3 Explain the duties and responsibilities of portfolio manager.
Q.4 What do you mean by financial services? Explain scope and evolution
of financial services.
Q.5 What do you mean by Consumer Finance? Explain in detail Player in
the Market and types of consumer finance.
Q.6 Explain the players in the Indian money market. Explain the reform in
Indian money market.
Q.7 Explain Define Merchant Banking. Explain its scope.
Explain the regulation of stock exchanges of India.
Q.8 What do you mean by Public Issue Management? Explain the
Mechanism of Public Issue Management in detail.
Q.9 What do you mean by hostile takeover/ merger? State the defensive
tactics or strategies to avoid hostile merger.
Q.10

What do you mean by forfaiting? Explain advantages and

disadvantages of forfaiting.
Q.11 Explain in detail equity ratings and scope of Credit ratings.
Q.12 Explain advantages and disadvantages of venture capital.