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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. CCIs 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 governments control
over the determination of issue size, time and price of securities ceased
and the market was allowed to allocate resources on competitive basis.
1
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
1.
2.
3.
4.
5.
6.
7.
8.
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
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 sellers management may oppose the acquisition or
merger but the buyer makes a direct bid to the sellers shareholders to
acquire sellers shares and thus gain control of the sellers 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
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
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
investors 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
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).
CHAPTER- 4
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
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
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, doesnt
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.
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
Goldsmiths seminal works on Comparative National Balance Sheets
(1984) 2) Housing also represent a large proportion of most households
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.
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.
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
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
disadvantages of forfaiting.
Q.11 Explain in detail equity ratings and scope of Credit ratings.
Q.12 Explain advantages and disadvantages of venture capital.