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Q1. Explain the concept of merchant banking. Give small

introduction on book building and write about the methods and
guidelines for book building?
Ans:- Merchant banking was initiated and grew in Europe. It was enhanced by
American patronage by offering services to both banking & Non banking institution.
It is kind of diversification of bank services and were originally the real form of bank.
The ancient practice of Merchant banking was associated with financing the long
trading journeys of commodities invented by Italian merchants. In France, during
the 17th and 18th centuries person in Merchant banking (marchandbanquier) was
given the status of being an entrepreneur. But in UK, Merchant banking came into
existence in the 19th century & Barings bank was the oldest Merchant banking. For
100 years Merchant banking grew as a way of financing the trades and then
extended to crop loans. After that bankers also got involved in future transaction in
grains. This practice was continued and they started making settlements for other
trades. So the merchants benches (bank is derived from the Italian word for
bench) in the great grain markets became centre for holding money against a bill
and these funds were kept for the settlement of trades in grains. This is how the
activity of discounting of bill became a part of Merchant banking. In India too, the
same functions are performed by Merchant banking. Initially it was involved .In bank
as ICICI, IDBI, IFCI, LIC & UTI. Merchant banking in India was formally introduced by
the National and Grindlays bank which was known as Grindlays bank in 1967. RBI
issued a license of Merchant banking
Book building is the process through which prices of Initial Public Offers (IPOs)
(securities issued 1st time for public) are got via demand of market. Through Book
building, we can raise capital from public by offering IPOs& issuing Follow-on Public
Offers (FPOs). In Book building, the investors send their bids at price which seems
reasonable within a price range. The prices quoted by both small investors (retail
investors) and big investors (wholesale investors/ institutional investors) are
considered to identify the right price of security. There is a closing date for the bid
after which they are evaluated. The price thus got is the outcome of price generated
by the demand of public issue.
Methods and guidelines of book building
An issuer company(IC) as per rules in Chapter XI of SEBI (Disclosure& Investor
Protection) Guidelines, 2000 can follow two ways.

75 % Book building: company is allowed 75 % Book building of issue of capital to
public by giving an offer in prospectus if it follows below:

Company must be eligible to issue capital to the public.

Issuer Company can reserve Book building for firm allotment as an option.
The issue of securities through Book building shall be separately identified/
indicated as placement portion category, in prospectus.
A minimum limit of 25 % must be mentioned for public issue (PI) in
prospectus as net offer to public.
There must be a provision of underwriting for public issue.
Prospectus of the public offer must give all information except for price of
security & this information is to be filed with SEBI.
Lead merchant banker must be appointed as Book runner & his name must
be given in prospectus.
Copy of draft prospectus must be circulated to the institutional investors
eligible for firm allotment.
Draft prospectus must mention the information about price band offered for
public issue.
Book Runner maintains the necessary records.
Underwriter (U) will maintain the record of public issue order.
Underwriter shall intimate Book runner about the aggregate amount of order.
The institutional investors shall also forward its order to Book runner.
Book Runner & Issuer Company shall determine the price of securities to be
offered to the public.
Issue price will be same for public & placement offers.

ii) 100 % Book building: Company can also make a 100 % of net offer to the
public through Book building if the issue size is `25 crore or above this amount. The
reservation of allotment is fixed as specified by the SEBI guidelines. The reservation
is available for:
(a) Permanent e of issuer company & if new co permanent e of promoting co;
(b) Shareholders of the promoting co if new co & shareholders of group co if existing
co either on a competitive basis or on a firm allotment basis.
In this case also, an (more than one) eligible merchant banker(s) is appointed as
Book runner which works as the lead banker and ensures all the functions to be
performed by a lead banker. But in such a case, co has to compulsorily issue 10 %
of the share capital to the public through an offer made by prospectus.

Q2. Explain the whole concept of issue management which includes pre-issue
and post issue management? Ans:-Issue management is key functions of Merchant
banking &lead bankers. Issue management for raising funds through various types of
instruments by companies is known issue management. E.g. PNB Investment Services is a
subsidiary of the PNB, is claiming to be a Category I in Merchant banking registered with
SEBI. They also say they have the expertise in Merchant banking & issue management. Its
portfolio has IPOs, rights offerings, buy-back of securities, equity mobilization &public
offerings of corporate bonds. This means that they have the registration & license from
SEBI to be bankers to an issue. Merchant Bankers act as intermediaries between issuers
of capital & ultimate investors who buy these securities. There are a few of activities that
are involved in the pre- & post- issue management :
(i) Pre- issue management
Pre-issue obligations are as:
(a) Lead Merchant - banker shall exercise due diligence.
(b) The standard of due diligence shall be such that he will satisfy himself about all the
aspects of offering, authenticity& adequacy of disclosure in the offer documents.
(c) His liability shall continue even after the completion of public issue.
(d) Lead Merchant - banker shall pay a requisite fee as per rule 24A of SEBI (M-Bankers)
1992, along with draft offer documents filed with the Board.
In the case of a fast track public issue, requisite fee will be paid along with the copy of the
red herring prospectus, prospectus or letter of offer, as the case may be, filed under
(e)Lead Merchant-banker shall ensure that facility of Applications Supported by Blocked
Amount is provided in all books built public issue which provide for not more than one
payment option to the retail individual investors.
(ii) Post-issue obligations
(a) Post-issue monitoring reports: Irrespective of the level of subscription, the post-issue
lead M-banker will ensure the submission of Post-issue monitoring reports as per formats
in Schedule XVI. Post-issue monitoring reports will be submitted within 3 working days
from due date. Due date for submitting Post-issue monitoring reports in public issue by
listed and unlisted co:

Three-day monitoring report: In the case of issue through Book building Route,
for book built portion: Due date of the report shall be the third day from the date of
allocation in the book built portion or one day prior to the opening of the fixed price
portion whichever is earlier.
Three-day monitoring reports: In other cases, including fixed price portion of

book built issue: Due date for the report shall be the third day from date of closure
of the issue.
Final Post-issue monitoring reports for all issues: Due date for this report
shall be the third day from the date of listing or 78 days from the date of closure of
the subscription of the issue, whichever is earlier. Due date for submitting Postissue monitoring reports in case of rights issues.
Three-day Post-issue monitoring reports: Due date for this report shall be the
third day from the date of closure of subscription of the issue.
Fifty-day Post-issue monitoring report: Due date for this report shall be the
50th day from the date of closure of subscription of the issue.
Due diligence certificate to be submitted with final Post-issue monitoring
reports. The post-issue lead merchant banker shall file a due diligence certificate in
the format given in Schedule XVI-A along with the final Post-issue monitoring

Q3. Financial services are of several kinds. Financial services are divided into
two extensive categories. Explain in detail both the categories of financial
Answer. Types of financial services are two as: Fund based services and Fee based
Fund Based Services:
Fund-based services involves funds of Financial institution & Includes as:
(i)Lease financing: Lease is a means of financing capital equipments. E.g., PNB Housing
Finance Limited provides Lease Rental Discounting. When customer avail this scheme,
bank (B) provides a loan against assured rental receivable from a property owned by him.
It is contract b/w lessor means owner &lessee means user. Lessee pays these Lease
rentals as per contract. Rent can be on basis of profits of Lessee & time of Lease contract.
After the expiration of contract, underlying assets slip back to Lessor, but in some cases
Lessee has the option to buy or renew its Lease.
(ii) Hire purchase: Hire purchase is a special kind of contract in which goods are given to
the hirer for a particular period of time with an alternative to buy these goods. E.g., Bajaj
Financial Services provides the facility of Hire purchase.
(iii) Factoring: Factoring can be e provided by Financial institution in which Financial
institution buy (through contract) receivables from the seller of services/goods and
manages sellers receivables. Its Definition is given by International Institute for
Unification of Private Law in Rome (1988). E.g., Deutsche bank & ANZ Grindlays bank Ltd
among others provide factoring services to their customer.
(iv) ) Forfeiting : Forfeiting is a type of financing whereby bank gives exporter cash up
front against invoices guaranteed by importer

E.g. Two massive earthquakes hit Turkey in 1999. Many died. Even after a year, survivors
were living in tents or makeshift houses. Select Homes, a housing manufacturer entered
into Joint venture with Turkish cement co. Turkish Housing Ministry granted contract to this
joint venture & manufacturing facility was purchased from Select Homes. But Select
Homes was unable to organize funds but managed to secure a Turkish Development bank
(v) Venture capital: Venture capital today it is more tempting for the businesses. Venture
capital companies give risky capital to entrepreneur so that they can meet the minimum
requirements of promoters contribution.
E.g. , Chennai Angels, is a group of city-based angel investors who have come together to
form a group of V- capitalists firm. They are so called as they provide finance to any upcoming V which has a strong foundation and unique idea but lacks fund.
(vi) Consumer credit: Consumer credit is like Hire purchase but with some difference as
there is no specific regulating authority for consumer credit in India and it includes goods
like vehicles, appliances etc; almost all consumer goods come under this credit. E.g, Bajaj
Auto Finance Limited give auto loans, personal loans etc.
(vii) Insurance services: Insurance services is a social device which is used to
accumulate certain money in order to meet some uncertain losses in the future. The
insured pays a certain amount of premium at pre-determined time intervals & is
benefitted in different ways depending upon the type of insurance policy he has taken.
The insurer is in a position to meet the losses due to uncertainties by pooling the funds.
b)Non-fund services/fee-based services are as:
(i) Credit rating is actually provided by an approved body which rates the various debt
securities of a co as per set model.
(ii) Loan syndication is fund-based activity performed by merchant bankers. Merchant
banking helps their corporate clients to raise funds through a single Financial institution
& from a syndication or consortium of Financial institution.
(iii) Merger & acquisition: Merchant banking assists companies in M&A& takeovers.

Merger: Here two or more company coMerchant bankingine by offering the

stockholders of one company in acquiring co in exchange for surrender of their
Acquisition: Here acquirer buys most ownership stakes of the target firm.
Take over: Here big firm takeover usually smaller firm through purchase of 51 % or
more of its voting shares or stock.

The Competition Act and FEMA/FERA continue to keep an eye on any activity resulting in
to M&A.

(iv) Portfolio is a bundle of securities and is made for the purpose of maximizing SWM or
minimizing the risk. The diversification of the risk is the basic idea of construction of
Portfolio. In Portfolio investment avenues are shares, debentures, derivatives (options and
futures), precious metals (gold, silver etc.), foreign currency, post office saving schemes,
bank deposits, real estate, antique pieces, mutual funds, off-shore funds, provident funds,
insurance policies, etc.
E.g. Portfolio management services provided by NBFC India Infoline in grab. As a service,
they invest the resources of their investors into stocks of various sectors, depending on
the risk return profile of the individual.
(v) Merchant banking is an organization that underwrites securities for corporations,
advises such clients on mergers.
Q4. Give the difference between Bank Vs Depository. Explain the functions
performed by depository?
Ans:- Depository functions like bank as bank deals with the funds of clients &
Depository deals with the holding of security-accounts. Both maintain their respective
accounts as per prevailing rules. But both do differently. As per SEBIs , Depository in India
has to maintain records of:

security eligible for dematerialization & securities - dematerialization

security rematerialized
Transfer of security, i.e., names of transferor, transferee, & schedules of transfer of
Details of beneficial owners & day-to-day record of security held by beneficial



1. Holds funds in accounts

1. Holds security in accounts

2. Transfer funds b/w accounts on

instructions of accounts holder

2. Transfer security between accounts

on instructions of the beneficial owners
accounts holder.

3. Renders services like safe keeping of

the money (funds) of customer in book
entry form.
4. Bank needs written consent of the
customer (like a cheque) for debiting his

The functions performed by depository

3. Renders services like safe keeping

ofsecurity (shares, bonds, debentures
etc.) of customer in book entry form.
4. Depository needs written consent
(debit instruction slip) of accounts holder
for debiting his accounts.

1. It provides facility of demat of security &elimination of physical security. Demat of
security is needed to increase transparency in the working of SE &to reduce several types
of risk associated with paper form of security.
2. Account opening/modification/closure: An investor cannot deal with a Depository
directly. He can do so through its authorized agents known as Depository Participants (DP)
who are registered with depository. Opening accounts with Depository participants is like
opening accounts in bank. Investor enters into an agreement with the Depository
3. Account transfer: Depository records all transaction resulting due to various
settlements of trades between various beneficial owners
4. Transfer & registration: Whenever transfer of security takes place, there is a change
in the records of issuer. Depository speed up transfer as ownership is registered with
Depository & transfer of security takes place by a simple entry in the books of Depository
after getting the instruction of beneficial owners.
5. Clearing system: Depository &Clearing system is electronically linked as actual
delivery of security to Clearing system from selling brokers & delivery of security from
Clearing system to buying broker is done by Depository.
6. Corporate actions: Depository regularly inform about the owners of security to issuer
& also helps the issuer to distribute the corporate benefits to owner of security.
7. Pledge & hypothecation: beneficial owners can create Pledge or H of security owned
by him with the prior approval of Depository. Depository maintains the record of such
information and this record will be an evidence of Pledge or Hypothecation.
8. Freezing of accounts: Depository participants can freeze demat accounts. He shall do
so on the written instructions received from Depository pursuant to the orders of G, SEBI
or court, tribunal or any other statutory authority.
Q5. Give the introduction of leasing with an example. Explain all the four types
of leasing?
Ans:-Lease is basically a contract b/w renter and an owner. E.g. landlord & tenant. Lease
can be defined as a deal by which one can get the use and control over asset without
buying asset.
Types of Lease are as follows:
(i)Financial & operating Lease:
In Financial Lease lessor transfer all types of rewards & risks associated with the
underlying asset (A) to lessee But the ownership still lies with Lessee. It is for the entire
economic life of asset. In such cases, the total payment of the rentals by Lessee is greater
than the initial investment made by Lessor to acquire asset. Here Lessor behaves like a

financier and is less interested in asset. This type of lease is generally for asset as
aircrafts, land, heavy machinery, big ships, etc. It is also known as full payout Lease as
Lessor is able to earn some profits from rentals. Generally, it has below features:
1. Here Lessee makes a choice of asset as per his own need &from his own choice of
manufacturer & dealer.
2. Lessee make all types of bargains with manufacturer &settles agreement on the
payment, time of delivery, terms of warranty of asset, maintenance of asset & so on.
3. Lessor makes arrangements for purchase of the asset after Lessee makes all the above
dealings agreed on terms with the dealer or manufacturer.
After purchase of asset, Lessor now hands it over to Lessee for its subsequent use.
4. Here duration for the entire economic life of asset has 2 parts. One is called primary
Lease- period (LP) in which Lessor tries to recover his initial inv on asset along with some
profit. This period carries a huge amount of compensation if Lease is cancelled by Lessee.
Secondary lease period is one in which amount of Lease rental is very low &this has a
feature of renewal of Lease.
5. Here Lessee has right to choose asset so risk of obsolescence, repair & maintenance
cost all lies with Lessee.
Operating Lease: Here Lessor does not transfer all rewards and risks to Lessee. In such
Lease, Lessor does not earn a profit as Lease is less than economic life of asset. Here total
payment of the rentals by Lessee is less than initial inv made by Lessor to acquire asset
.Here Lessor provides various services (like maintenance, repairs and technical advice)
which are included in the initial price of asset. Due to this reason, these leases are known
as service Lease. E.g. Lease of computers, automobiles, office equipment, telephones,
etc. It has below features:
1. It does not cover the entire economic life of asset. E.g., in some cases it is even for an
hourly, weekly or monthly basis.
2. Here duration is less than the full economic life of asset. Total amount of Lease rental is
less than the cost of asset.
3. Here Lessor can make multiple Lease-arrangements for the same asset & recover its
initial investment cost. However, we should also keep in mind that Lessor has to bear the
risk due to the obsolescence of asset & that Lessee is in a position to terminate Lease any
time before expiry of lease period.
4. This type of Lease includes the maintenance clause by which Lessor is supposed to
maintain the quality of asset by providing services such as insurance, fuel, support staff,
among others For Lessee.

5. Examples of such type of Lease are: (1) Hiring a taxi for a travel; (2) Hiring of
computers; (3) Chartering of aircrafts; (4) Providing mobile cranes and others.
(ii) Sales & Lease back & direct Lease: Here, at first Lessee sells (for cash) one
particular asset to Lessor & after that, Lessee takes that asset back on payment of fixed
rentals for an agreed lease period.2 parties in bipartite Lease are:

Equipment supplier cum Lessor


Such a type of Lease is typically structured as an operating Lease with inbuilt facilities, like
up gradation of equipment (upgrade Lease), addition to the original equipment
configuration and so on. Lessor maintains asset & in some situations replaces it with a
similar type of asset.
E.g., manufacturer of a crane Lease them to a mining firm. Basically this Lease is
structured as an operating Lease. Tripartite Lease involves 3 parties: Lessee, Lessor &
(iii) Single investor Lease & levered Lease: In single investor Lease, one Lessor
finances entire Lease by raising funds from a mix of debt & equity. Here Lease is without
recourse which means if Lessor fails to repay debt amount; lender co is not allowed to take
payments from Lessee. But levered Lease is Lease which involves 3 parties:
Lessor (equity investor), lender & Lessee. Here, Lessor buys asset by using debts and this
is with recourse, i.e., if there is any default in repayment of loan am on part of Lessor ,
lender is entitled to get Lease- rentals as well as first right on leased asset .It has 1
trustee who takes care of Lease & interests of lender & Lessor .
On receipt of Lease rentals, this trustee divides it b/w Lessor & Lessee lender in
proportion of their interests.
iv) Domestic Lease& international Lease: If all parties (Lessee, Lessor & lender or
supplier) involved in Lease are from same nation then such Lease is called domestic
In case any of the parties is from another nation then Lease is called an international
Lease. International Lease can be of 2 types: import Lease & cross-border Lease. In an
import Lease, Lessor & Lessee are from the same nation but asset supplier is from another
nation or in other words, asset is imported from other nation. In cross-border Lease,
Lessee & Lessor are from different nation. Another difference b/w both is the basis of risk
involved in Lease. In case of international Lease, nation risk &currency risk are involved
with other types of risks.
Q6.Write about the concept of securitization and its features. Explain the
process of securitization of debts and its advantages?

Ans: Securitization
As per securitization Act, 2002, securitization is a process by which long-term loans, lease
receivables, credit card balance, HP debtors & trade debtors are converted into security &
are issued to potential investors. If some asset have predictable cash flows associated
with them and a minimum default rate risk, they are converted into tradable negotiable
certificates and given to the potential investors. So securitization converts long-term asset
into cash/liquid asset.
Securitization & factoring are different. In factoring, the receivables of the client are
converted into cash after deducting commission & not into tradable security. Its Features
(i) Certain financial asset (loan asset, mortgages, lease receivables, credit card balance,
etc.) are transferred to a Special Purpose Entity or Vehicle (SPE/SPV) which can be used as
collateral for taking a loan.
(ii) After conversion of asset into Special Purpose Entity, these Special Purpose Entitys can
be financed through issue of security as Pass Through Certificate and debt security to
investors. These Pass Through Certificate give certain rights to the buyer on the
underlying asset as right of interest payment and repayment pattern for principal amount.
Additionally, the issuer cannot change, cash in or restructure asset.
(iii)Credit rating agencies assign ratings to these security which give investors comfort and
assurance on timing of principal and interest payments.
(iv) Once above noted steps are accomplished, timing & pricing of the issue are
determined with help of merchant bankers.
(v) Investors pay to the Special Purpose vehicle and take ownership of security. Originator
of security gets payment on due date against security issued.
(vi) Credit enhancement is the ultimate objective of securitization. Usually with
securitization holder is protected against disparity in the repayment schedule through
agreements like, provision of cash collateral, case of over collateralization, guarantee by
3rd party & originator accept recourse agreement of securitization through issue of
Special Purpose Entity.
Process of securitization of debts
Money market (MM) is a fast growing area in India. Traditional Methods of financing are
making way for the modern methods. Changes in money market in foreign nation attract
the attention of regulating authorities as it translates into new ways to get finance
&pioneering multi-option instruments to money market in India. These days, bank, can
recycle their term loans (TL) and get finance against qualifying terms loans. These Term
loan involve risk of liquidity, default in the repayments and losses due to the borrowers. All
these factors add profound stress on original lenders to raise resources and to meet needs

of the capital adequacy norms given by regulating authorities. Securitization is a new and
innovative source of financing Term loan of bank so that they can convert their asset into
usable funds.
Advantages of securitization of debts
(i) Perfect matching of asset& liabilities in the books of accounts, as loan asset are
liquidated and repayment of amount is utilized to pay investors who have Special Purpose
(ii) As compared with other forms of capital, securitization involves less cost which makes
it less costly and a more affordable source of finance.
(iii) Securitization increases Capital Adequacy Ratios as loan asset are off-loaded from
balance sheet
(iv) Balance sheet of the original lender shows improved ratios (higher return on equity &
higher return on asset). Funds generated by securitization are utilized in the repayment of
the loans of lender which further improve the debt equity ratios.
(v) It reduces the risk (repayment risk, interest rate risk, etc.) related to loan (underlying