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Argent Financials Pvt. Ltd.

Introduction

At the very inception of the project, we were very clear that our company- Argent Financials Private Ltd
has a profit maximization criterion.

We started by first understanding the functioning of a financial services company. Especially, in the
areas of wealth management, credit rating, mergers and acquisition and merchant banking and fund
raising (these are the services that the company is providing). We appreciate that for each of the
services mentioned above there are companies who have specialized in the respective area. However,
we at Argent Financials Private Ltd try to excel in each of the key areas and synergize our efforts to give
our treasured customers the highest returns that they can receive.

We aim at providing a one stop shop for any financial need that our customers might require. Our four
main departments not only have healthy communication but in most instances collaborate so as to
provide our customers a unique financial experience to give them the best value for their money.

After having discussions with Dr Ramji Narayanan and essential brain storming sessions, the entire
group was able to come to a consensus on certain key issues. We are able to proceed in a fairly clear
manner once we were able to resolve some bottle necks that were hampering our progress. . At many
instances we were so engrossed in our work that we started to believe that we were really starting our
own company – it was a first for all of us.

The first major step to be taken was to set up the foundation for our project. This included such actions
as assuming our market structure, deciding our target clients and setting clear objectives for our
company. We then proceeded with the various activities and operational measures that would help us
realize the set objectives; after defining our organizational structure and assumptions that were
required to proceed.

As mentioned above Argent Financials Private Ltd has clear cut objectives it wants to achieve. The
objectives are as follows:-

• The return on investment has to be more than what would we could have realized if it would
have been utilized in the next best possible investment.
• We must utilize our resources in such a manner, so as attain a position of profit and output
maximization which is sustainable.

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Argent Financials Pvt. Ltd.
• To have efficient and coordinated communication and efforts not only intra but between the
various departments of operations in the company.

Assumptions:
There were certain assumptions that taken. They are as follows:-

1. Business Assumptions

a. There is no conflict of interest between the company and other players in the market.
The businesses that we are involved- Credit Rating, Wealth Management, Fund Raising
& Merchant Banking, Mergers and Acquisitions may have conflicts with each other-
creating problems in obtainment of licenses. Such conflicts are assumed to be resolved.
b. Each department in the company is assumed to be a profit centre.

2. Assumptions for Real Estate

a. Every employee requires 15 sq. ft. of space to work comfortably.


b. The company has four premises in the four respective cities it operates.
c. It is assumed that each of the premises in the four cities is located in prime location.
Such premises are not furnished.

3. Assets

a. The market for Assets purchased is a perfect competition

4. Cost

a. Cost of Shared Services include costs incurred on general administration departments like
Legal Dept, Human Resources, Research, Accounting, Security, Maintenance &
Conservancy, Transportation and IT services.

b. The cost for each of the administration departments has been taken as the minimum of
either maintaining the department in-house or outsourcing the department.

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Argent Financials Pvt. Ltd.
c. Of the costs incurred on Business Development and Shared Services, 10% are assumed to
be of the nature of sunk costs. These sunk costs include the cost of entering into a
contract and legal penalties that are unavoidable even if the firm goes out of business,
have no salvage value, and have no alternative use to the organization.

Cost Basis of allocation


Shared Services (Only Fixed And Variable) No. Of People
Salaries To Core Departments No. Of People
Fixed Assets No. Of People
Business Development (Only Fixed And Variable) Revenues
Salaries Of Top Mgmt Revenues
Opportunity Cost Of Premises No. Of People
Cost Of Parking No. Of People
Opportunity Cost Of BoD Services Revenues
Interest On Capital Revenues

Nature of the business

Argent
Financials
Private Ltd

Fund raising &


Wealth Mergers and
merchant Credit rating
management acquisitions
banking

The company involves itself and diversifies into four main activities. They are:-

 Wealth management
 Fund raising and merchant banking
 Mergers and acquisitions
 Credit rating

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Argent Financials Pvt. Ltd.
It also has various support departments that help the company run not only efficiently but smoothly.
These support departments include general administration, marketing and research. Each of these
departments is further differentiated to specialized functions to deal with specific organizational goals.

In each of the activities that Argent Financials Private Ltd participates in, the actions carried out are
especially specifies.

In wealth management include such activities as:

 Portfolio Management and Portfolio Rebalancing


 Investment Management and Strategies
 Trust and Estate Management
 Private Financing
 Tax Advice

 Family Office Structures and Management In fund raising and merchant banking, the company
performs such activities as: Under various capacities like Lead Manager, Co-Manager, Advisor,
Arranger etc. for public issues, rights issues and private placement.

 For acquisition of shares & takeovers under SEBI (Substantial Acquisition of shares and
Takeovers) Regulations, 1997, SEBI (Buyback of Securities) Regulations, 1998 and SEBI (De-listing
of Securities) Guidelines, 2003.
 For Employee Stock Option Scheme / Stock Purchase Scheme by Corporates under the SEBI
(Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999.
 Syndication of Loans
 Valuation of shares & other financial instruments The merger and acquisitions activities carried
out by the company include: Business valuation
 Preparation of Confidential Information
 Financing
 Negotiating Strategy & Transaction Structuring
 Evaluation of Purchase Proposals
 Legal compliance
 Negotiate & structure terms of the equity participation.
 Ensure the closing is executed properly and expeditiously.

Credit rating activities include:

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Argent Financials Pvt. Ltd.
 Providing credit rating for client companies
 Providing Private Credit Assessment (PCA) reports on companies that do not have a public credit
rating

Capital

Argent Financials Private Ltd has a startup capital of Rs. 200 crore. The capital structure of the company
is visible elaborated in the following table:-

Items Amount (Rs) Amount (Rs)

Equity
Cash 200,00,00,000
Premises
Delhi 25,00,00,000
Mumbai 65,00,00,000
Chennai 16,00,00,000
Kolkata 20,00,00,000 126,00,00,000
Total 326,00,00,000

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Argent Financials Pvt. Ltd.
Organizational Structure

Argent Financials Private Ltd has a divisional organizational structure. A divisional organizational
structure which divides the company into divisions/departments that brings together those employees
involved in a certain type of service or work. The organizational hierarchy is vertical, i.e., the chain of
command flows downwards.

There is the Chief Executive Officer who has to report to the twelve Board of Directors, who are at the
top of the organizational hierarchy. Under the CEO are four vice presidents who oversee operations,
general administration, business development and research. Under each VP there are the respective
divisions segregated according to their ore activities. This is better illustrated in the following diagram:

CEO

Vice president
Vice president Vice president Vice president
Business development
Operations Gen. administration Research
development

Operations: The vice president has four general managers under him, each of which looks after each

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Argent Financials Pvt. Ltd.
city. The organizational structure of each city is, as follows:

VP
Operations

Regional
Manager
City 1

General Gen Manager


General Gen Manager
Manager Merchant
Manager banking Wealth
M&A Credit Rating Management
and fund raising
rating

Executive Executive
Executive
Executive Assistant
Assistant Assistant
Assistant
Asst. manager Relationship
Asst. mngr
Asst. manager Rating & Manager
Grading Merchant
Corp. law banking *6
advisory (6mngrs/city
Research )
analysts IPO advisory
Asst. manager Asst.
Research
Inter co analyst Manager
relationships Issues advisory
Research
analysts
Asst.
Manager Asst.
Asst. manager Information Asst.mngr Manager
M&A operations systems Fund raising Advisory

Data Fund advisor


Deputy Collection
manager- M&a
Data Fund advisor
Deputy Collection
manager-
M&A

General Administration: This department is the back bone of the entire company and is situated in
Mumbai. It sees that all the other departments run smoothly. Its organizational structure is a follows:

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Argent Financials Pvt. Ltd.

VP
Gen.
administration

Accounting Security Maintenance IT HR


os os os os Gen. mngr

Manager
Manager
Training
Staffing

Note: "os" stands for outsourced. The company chosen will thereby allocate its required resources into
the different branches.

Research: This department provides all essential data and research material for the company.

VP
research

Equity research Economic research Individual


manager manager researcher

Asst manager Asst, manager Asst.mngr Asst.mngr


ER ER Eco.r Eco.r

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Argent Financials Pvt. Ltd.
Business development: This section of the company basically handles the marketing and the PR
functions of the company. The organizational structure is as follows:

VP
Business
Development

Business Business Business


Business Development Development Development
Development Director Director Director
Director
Business
PR Development
Business
PR Business Assistant PR PR Business
Development
Developme Development
Assistant
nt Assistant
Assistant

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Argent Financials Pvt. Ltd.
Real Estate Decisions

Having premium quality office space in four metros in key locations has added to our 200 crore of liquid
funds and has made us a relatively strong base, in spite of our being a start up. But decisions regarding
our real estate properties had to be taken with proper care and prudence. It was part of our investing
decisions as to how we should use our premises best so that the highest income could be received from
them. Another subsequent decision was how to efficiently allocate the available office space to each of
our Core and Support departments.

In the process of finding out the answers to the above questions, we had to take some assumptions,
which are as follows:

1. The minimum area required by any staff in the office is 15 sq. ft.
2. The real estate costs have been apportioned among each department according to the space
allocated to them, which is in turn decided by the number of employees in each department.
3. The cost of common areas like that of Parking space, security, or store would be also
apportioned according to the number of employees in each department.
4. We have allocated rooms for our CEO and VP’s in each of the four offices, as they may be
needed to travel for work.
5. Our offices in each of the metros have fully functional electrical fixtures and fittings and require
no expenses regarding the setting up of office.

The commercial or business hub of India, Mumbai has our largest office with around 14000 sq ft
(including parking space). We expect to have the highest flow of customers and business at this location.
We also have our research department exclusively centralized and located at Mumbai. The business
development department also has most of its operations performed from here. Thus Mumbai, our
corporate office has adequate space to accommodate not only Core Operations, but support functions
as well.

The annual rental cost of the Mumbai office is fixed at Rs 500 per sq ft and the parking space at Rs 150
per sq ft. Thus the total rental cost of the Mumbai premises add up to around 6.5 crore rupees. This cost
is considered as the Opportunity cost for our premises and has been considered for calculating our
economic profits. It has also been observed that if we would have rented space other than our own
premises for setting up office, we would have to pay a lesser amount towards rent (around Rs 490 per
sq ft), but in total considering the cost of entering into contract and other related costs we would have
ended up spending more as elaborated in the following table. Also it needs to be remembered that
currently, our office is at one of the prime locations of the city.

Similarly we have premises at three other metros of the country including the National Capital, New
Delhi. Here as well, we have office sizes according to the expected business levels from each place and
hence the required number of people for that levels of operation. The Delhi office is a bit larger in size
than the other two offices for obvious reasons. Delhi, Chennai and Kolkata each have space of 7500,
6000 and 6000 sq ft (approx.) respectively.

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The costs also vary from place to place. Rental cost in Delhi it is around Rs 480 per sq ft where as in
Chennai and Kolkata it is around Rs 340 per sq ft. Thus the total annual rental cost for each place is
around three crore for Delhi and two crore each for Chennai and Kolkata. The premises in these three
places are smaller because they do not contain any research and development space and also the
personnel required is less in these cities.

In total the annual rental costs of our owned premises or the opportunity cost that we are losing out by
using our premises sums up to around twelve and half crore rupees. Whereas on calculating the costs
that we would have incurred if separate space was needed to be rented for our operational purposes
adds up to more than thirteen crore rupees. Thereby we can say that we have earned a notional profit
of fifty lakh rupees.

SPACE REQUIREMENTS (Per Mumbai Delhi Chennai Kolkata


Office, In Sq. Ft)
Operations
CEO 300 200 200 200
VP ( 4 VPs) 600 100 100 100

Senior person ( Head of the 80 80 80 80


whole Office)
Senior persons of each line of 40 40 40 40
business

Wealth Management staff 1600 800 400 280 1415200


Fund Raising & Merchant 800 400000
Banking staff
Credit Ratings staff 800 400000
M&A staff 800 400000

Front desk, cafeteria and


security space
Reception 200 200 200 200 332000
Security Office 150 150 150 150 249000
Store Room 100 100 100 100 166000
Cafeteria ( Terrace) 500 500 500 500 830000
Conference Room 300 150 150 150 324000
Extra Space for printer, 200 100 100 100 216000
expansion of office
HR
HR managers 200 200 200 200

Business Development
Conference room 200 100 100 100
Business Development Directors 150 150 150 150
Business Development 500 120 90 90

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Associates

Legal
Legal office room ( To seat Legal 100 100 100 100
work supervisors)

IT
IT office room ( To seat IT people 300 200 200 200
)

Accounts
Accounts office room ( To seat 500 500 500 500
Accounts supervisors)

Maintenance Department
Maintenance office room( To 120 120 40 40
seat people)

Transportation Department
Transportation office room( To 150 150 150 150
seat people)

Security Department
Security office room( To seat 60 60 60 60
people)

Research Department
Research Team 600

Total office space excluding 9350 4120 3610 3490


parking

Parking ( Basement ) 3500 2500 2500 2500

Opportunity cost of our own 500 480 340 340


premise
( rent that we can get if we rent
it out) in Rs. Per sq ft per month
Rent that we will pay for office 490 470 330 330
premise
somewhere else in Rs. Per sq ft
per month
Rent for parking space under 150 150 90 90
both the options 13,50,000.00

Opportunity Cost of using own


premises

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cost of space
5,61,00,000.00 2,37,31,200.00 1,47,28,800.00 1,42,39,200.00
cost of parking space
63,00,000.00 45,00,000.00 27,00,000.00 27,00,000.00
Total
6,24,00,000.00 2,82,31,200.00 1,74,28,800.00 1,69,39,200.00 12,49,99,200.00

If we lease premises from


outside
cost of space
5,49,78,000.00 2,32,36,800.00 1,42,95,600.00 1,38,20,400.00
cost of parking space
63,00,000.00 45,00,000.00 27,00,000.00 27,00,000.00
Cost of entering into lease
contract 10,00,000.00 8,00,000.00 6,00,000.00 6,00,000.00
Cost of searching for appropriate
office space 20,00,000.00 10,00,000.00 8,00,000.00 8,00,000.00

Total
6,42,78,000.00 2,95,36,800.00 1,83,95,600.00 1,79,20,400.00 13,01,30,800.00

Savings by using own premises


18,78,000.0 13,05,600.00 9,66,800.00 9,81,200.00 51,31,600.00

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Argent Financials Pvt. Ltd.
Assets

Assets are economic resources owned by business or company. Anything tangible or intangible that one
possesses, usually considered as applicable to the payment of one's debts is considered an asset. Assets
can further be divided into tangible or intangible assets.

Assets

Tangible Intangible
A long-term tangible piece of property that a firm owns and uses in the production of its income and is
not expected to be consumed or converted into cash any sooner than at least one year’s time. Fixed
assets are sometimes collectively referred to as “plant”. The examples are land, building, machinery,
inventory, office equipment, real estate, vehicle, and other property. Fixed assets are not consumed or
sold during the normal course of a business but their owner uses them to carry on its operations.

Intangible assets can be defined as identifiable non-monetary assets that cannot be seen, touched or
physically measured, which are created through time and/or effort and that are identifiable as a
separate asset. Corporate intellectual property (items such as patents, trademarks, copyrights, business
methodologies), goodwill and brand recognition are all common intangible assets in today's
marketplace. An intangible asset can be classified as either indefinite or definite depending on the
specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the
company as long as the company continues operations. However, if a company enters a legal agreement
to operate under another company's patent, with no plans of extending the agreement, it would have a
limited life and would be classified as a definite asset.

As we already have the Premises and we have assumed that they are located at the prime location of
the respective cities, so we have also assumed that they are fully furnished and are equipped with the
necessary equipments. We have also considered some of the variable assets which will be acquired each
year for the functioning of the company like computer software, stationary and miscellaneous items.

Fixed assets can either be acquired/purchased or hired on lease/rent which depends on the annual
acquisition cost or lease cost. The annual acquisition cost can be calculated by subtracting the scrap
value of particular asset from the purchase cost per asset and divided by the life of the asset. If annual
acquisition cost is less than annual lease cost, than it will be purchased and vice-versa.

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Items per unit cost Quantity Total Scrap Life of Acquisition Annual Decision
Needed Value the Cost per year Lease
Asset after adjusting cost for
(Yrs) for salvage the same
value assets
Laser Printer 12,000 per piece 50 600,000 2,700 5 1,860 2,000 Acquire

Research database 200,000 per piece 20 4,000,000 - 2 100,000 100,000 Lease


licenses @
Photocopier 110,000 per piece 50 5,500,000 10,000 5 20,000 25,000 Acquire
Generator(Silent 500,000 per piece 16 8,000,000 100,000 12 33,333 40,000 Acquire
Type)
Coffee Vending 10,000 per piece 30 300,000 500 5 1,900 2,500 Acquire
Machine
RO (Water Purifier) 10,000 per piece 30 300,000 500 5 1,900 2,500 Acquire
Telephone & Fax 2,000 per piece 175 350,000 200 5 360 500 Acquire
Security System & 2,500,000 per office 4 10,000,000 250,000 5 450,000 500,000 Acquire
Fire Fighting

Computer 30,000 per piece 180 5,400,000 2,000 3 9,333 10,000 Acquire
Laptop 60,000 per piece 55 3,300,000 3,000 3 19,000 25,000 Acquire
Computer Software 5,000,000 per office 4 20,000,000 - 1 5,000,000 5,000,000 Lease
Stationary 1,000 per person 240 240,000 100 1 900 1,000 Acquire
Miscellaneous # 2,500,000 per office 4 10,000,000 400,000 1 2,100,000 2,500,000 Acquire
Mice, Speakers, Mixer 50,000 per office 4 200,000 1,500 5 9,700 10,000 Acquire
Projector & Screen 125,000 per piece 16 2,000,000 15,000 5 22,000 25,000 Acquire
TV 25,000 per piece 24 600,000 3,000 5 4,400 5,000 Acquire
Furniture 3,000,000 per office 4 12,000,000 200,000 7 400,000 500,000 Acquire
Solar Panel 5,000,000 per office 4 20,000,000 750,000 12 354,167 450,000 Acquire
Library 1,000,000 per office 4 4,000,000 30,000 3 323,333 450,000 Acquire
Mobile Phone Handset 5,000 per person 100 500,000 500 2 2,250 3,500 Acquire
Vehicles* 1,000,000 per office 4 4,000,000 250,000 5 150,000 145,000 Lease*
Fridge 10,000 per office 8 80,000 2,000 5 1,600 2,000 Acquire
Total Rs. 111,370,000 Rs. 9,006,037

* We will acquire vehicles because we need some cars of our own.

# Cost of Cartridges of printers and Toners for Photocopier, Diesel cost, Internet Broadband connection, coffee &
tea bags, milk powder, pen drives, Dish TV connection etc are included in Miscellaneous.

@ Research databases and software are always licensed and in essence leased and not acquired.

Laser printer, photocopiers, Generators, laptops, computers, projectors, TVs, Furniture, Mobile handset
etc are acquired, as the annual purchase cost of these items are less than the annual lease cost. On the
other hand Research database license & computer software are taken on lease by applying the same
fundamental used above. We have purchased one vehicle (Car) per office because we will use them in
office for the office use.

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Argent Financials Pvt. Ltd.

ASSETS
0.1%
0.6% 0.4%
5.0% Computer, Laptop & Accessories
4.3% 8.0%
Electronic Items
Projector, TV & Mobile Phones
Software & Research Database
23.3%
56.6%
Vehicles
Miscellaneous
Machines & Solar Panel
Security System & Fire Fighting
1.7%
Furniture, Stationary & Library

The above Pie-Chart


Chart shows the percentage of the assets under different heads. The heads are:

 Computer, Laptop & Accessories


 Electronic Items
 Projector, TV & Mobile Phones
 Software & Research Database
 Vehicles
 Machines & Solar Panel
 Security System & Fire Fighting
 Furniture, Stationary & Library
 Miscellaneous

The software and research data constitutes 56.6% of the whole assets which is taken on lease and are
intangible assets. All the electronics assets constitute 0.5% of the total as
assets.
sets. Computer, laptops &
accessories constitutes 0.6% of the total assets.

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Argent Financials Pvt. Ltd.
SHARED SERVICES: INHOUSE vs OUTSOURCE

Human Resource Department

HR department will play an important role in organizing people, reporting relationships, and work in a
way that best supports the accomplishment of the organization's goals. Additionally, the human
resource will function to make sure that the company mission, vision, values or guiding principles, the
company metrics, and the factors that keep the company guided toward success are optimized. Human
Resource services will also include compensation, recruitment, staffing, and training, dealing with
performance issues, organization development, and safety.

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST (Annual)
MANAGERS(RM/PM) 1,200,000 4 4,800,000
ASSISTANT MANAGERS 600,000 12 7,200,000
CLERKS 200,000 4 800,000
20

Seating Space 200 300 720,000


Fixed assets 480,000 20 9,600,000
HR Costs (Hiring, Payroll 5,000 20 100,000
Maintenance)
Training 50,000 167 8,350,000

Total in-house 31,570,000

OUTSOURCE COST (Annual)


Outsource Lump sum 10,000,000 1,000,000 9,000,000
Supervisors 1,000,000 8 8,000,000 8,000,000
Seating Space 3,984,000 3,984,000
Fixed assets 480,000 8 3,840,000 3,840,000
HR Costs (Hiring, Payroll 5,000 8 40,000 20,000 20,000
Maintenance)

TOTAL 8 25,864,000 1,020,000 3,840,000 21,004,000


SAVINGS 5,706,000
After working out the costs of outsourcing and managing the HR department in-house, we find that it
will be more profitable to outsource the HR department as the cost of outsourcing is less than the cost
of keeping an in-house HR department.

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Maintenance Department

The maintenance department of our firm will look into general utility services, as well as repair and
maintenance of the different departments. They will also keep equipment histories especially with
regards to standards and traceability.

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST 600,000 4 2,400,000
Director of maintenance 600,000 4 2,400,000
Maintenance superintendent 500,000 4 2,000,000
Electrical supervisor 180,000 4 720,000

Engineering manager 220,000 4 880,000


Building housekeeping and 150,000 20 3,000,000
sanitation works
Anti termite treatment and pest 100,000 4 400,000
control
11,800,000

Seating space 400 660 3,960,000


Assets 480,000 44 21,120,000
Hr(hiring, payroll maintenance) 5,000 40 200,000

Total in-house 37,080,000

Outsource
Outsource lump some 16,000,000 1,600,000 14,400,000
Maintenance coordinator 450,000 4 1,800,000 1,800,000
Seating space 11,952,000 11,952,000
Fixed assets 480,000 4 1,920,000 1,920,000
HR costs 5,000 4 20,000 10,000 10,000
TOTAL 4 31,692,000 1,610,000 1,920,000 28,162,000
SAVINGS 5,388,000

The cost estimations show that the cost of outsourcing the maintenance department is less than
managing it in-house. Hence we have decided to outsource the maintenance department.

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Argent Financials Pvt. Ltd.
Legal Department

The legal department of our firm will handle legal issues which may come up in the course of business,
ranging from drafting waiver forms for employees to handling lawsuits from customers.

It will play an important role in enhancing corporate and legal relationships. It will assist in building
constructive relationships, champion business integrity and pioneer innovative solutions which can earn
public trust and build our firm’s enduring value. Many companies have a legal department; whereas
some companies may choose to keep a lawyer or a staff of lawyers on retainer, ensuring that they have
rapid access to legal knowledge when they need it

Cost Numbe Total Cost Sunk Fixed Variable


Head r costs
INHOUSE DEPARTMENT COST (Annual)
Lawyers (Top Category) 1,000,000 3 3,000,000
Lawyers (For documentation, etc) 800,000 10 8,000,000
Assistants 500,000 15 7,500,000
Annual legal costs (compliance 7,500,000
with SEBI regulations, etc)
28

Seating Space 400 420 2,016,000


Fixed assets 480,000 28 13,440,000
HR Costs (Hiring, Payroll 5,000 28 140,000
Maintenance)

Total in-house 41,596,000

OUTSOURCE COST (Annual)


Outsource Lump sum (Retainer 15,000,000 1,500,00 13,500,00
ship basis) 0 0
Lawyers 800,000 4 3,200,000 3,200,000
Seating Space 1,992,000 1,992,000
Fixed assets 480,000 4 1,920,000 1,920,00
0
HR Costs (Hiring, Payroll 5,000 4 20,000 10,000 10,000
Maintenance)
Out-of-pocket expenses 2,000,000 2,000,00
0
Provision for Contingent fee 3,000,000
TOTAL 4 27,132,000 3,510,00 1,920,00 18,702,00
0 0 0
SAVINGS 14,464,000

Out of the options available, outsourcing the legal department seems to be the more economical option
out of the two because of lower costs involved. Thus we choose to outsource our Legal department.

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IT Department

IT department is a collection of persons who are experts when it comes to electronic communications of
all kinds. In addition to understanding what forms of electronic data, visual, and audio communication
are available, the IT department will be able to evaluate available services and determine which services
and vendors can provide the best equipment and service support for the company. Along with making
determinations about what equipment to use and which vendors to work with, the IT department will
also oversee the day to day operations of all electronic communication devices within the company.
Oversight of all equipment would include configuring network access, setting up and making changes to
existing workstations, and assigning access rights at various levels to key personnel within the company.
The competent IT tech would also ensure there is a workable disaster recovery backup in the event that
some section of the network should happen to fail. The best IT department teams understand the
importance of network redundancy to the continued healthy operations of the company.

Head Cost Numbe Total Cost Sunk Fixed Variable


r costs
INHOUSE DEPARTMENT COST
Software Engineers 600,000 30 18,000,00
0
Business Analysts 800,000 5 4,000,000
35

Seating Space 400 1,050 5,040,000


Fixed assets 480,000 35 16,800,00
0
HR Costs (Hiring, Payroll 5,000 35 175,000
Maintenance)
Datacenters, Servers, Back ups 1,000,000

Total in-house 45,015,00


0

OUTSOURCE COST (Annual)


Outsource Lump sum 20,000,00 2,000,00 18,000,00
0 0 0
Supervisors 1,000,000 8 8,000,000 8,000,000
Seating Space 2,592,000 2,592,000
Fixed assets 480,000 8 3,840,000 3,840,00
0
HR Costs (Hiring, Payroll 5,000 8 40,000 20,000 20,000
Maintenance)

Total Outsource 8 34,472,00 2,020,00 3,840,00 28,612,00


0 0 0 0
SAVINGS Savings 10,543,00
0
Our costing estimates show that it is much more economical and profitable to outsource the IT
department rather than managing it in-house.

20 | P a g e
Argent Financials Pvt. Ltd.
Security department
The primary function of the security department would be to provide protection to our visitors, staff and
all other facilities as well as provide for the safety and security of all assets. It will make sure that
security services are delivered properly by overseeing all operational aspects of patrol, communications
and investigations.

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST
Salaries
Security Officers 600,000 4 2,400,000
Supervisors/Trainer 400,000 4 1,600,000
Guards 175,000 40 7,000,000
48

Seating Space 400 720 3,456,000


Fixed assets 480,000 8 3,840,000
HR Costs (Hiring, Payroll 5,000 48 240,000
Maintenance)
buying safety equipment and 2,000,000 4 8,000,000
security systems

Total in-house 18,536,000

OUTSOURCE COST (Annual)


Outsource Lump sum 10,000,000 1,000,000 9,000,000
Supervisors 400,000 4 1,600,000 1,600,000
Seating Space 1,195,200 1,195,200
Fixed assets 480,000 4 1,920,000 1,920,000
HR Costs (Hiring, Payroll 5,000 4 20,000 10,000 10,000
Maintenance)

TOTAL 4 14,735,200 1,010,000 1,920,000 11,805,200


SAVINGS 3,800,800

After working out the costs of the security department, we have decided to outsource the security
department instead of keeping it in-house.

21 | P a g e
Argent Financials Pvt. Ltd.
Transportation Department

The transport department manages the cab facility provided to the main employees of the firm. The
transport department looks into the supervision, maintenance, repair, and purchase of the
transportation fleet.

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST
Supervisors/trackers 300,000 10 3,000,000
Drivers 180,000 30 5,400,000
Car maintenance workers 800,000 4 3,200,000

Cars Purchase 175,000 25 4,375,000 700,000 car with 4 year


life
Cars Maintenance 10,000 25 250,000

Seating Space 400 375 1,800,000


Fixed assets 480,000 10 4,800,000
HR Costs (Hiring, Payroll 5,000 14 70,000
Maintenance)

Total in-house 22,895,000

OUTSOURCE COST (Annual)


Outsource Lump sum 12,240,000 1,224,000 11,016,000
Supervisors 300,000 8 2,400,000 2,400,000
Seating Space 2,988,000 2,988,000
Fixed assets 480,000 8 3,840,000 3,840,000
HR Costs (Hiring, Payroll 5,000 8 40,000 20,000 20,000
Maintenance)
TOTAL 8 21,508,000 1,244,000 3,840,000 16,424,000
SAVINGS 1,387,000

The transport department of our firm will be managed in-house since the cost of outsourcing is greater
than managing the transport department in-house. Thus, it would be more economical to keep the
department in-house

22 | P a g e
Argent Financials Pvt. Ltd.
Accounts Department

The accounts department will be responsible for maintaining the accounts of our firm in accordance
with the prescribed rules, prompt settlement of claims as and when required, compile the budget in
consultation with the other departments, and monitor the budgetary control procedures as may be laid
down in relevant orders and code rules from time to time. It will also keep a check so that no financial
irregularities occur in the transactions along with discharging management accounting services such as
providing financial data for management reporting.

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST
CA 1,200,000 10 12,000,000
Assistants 400,000 25 10,000,000
CS 800,000 4 3,200,000
39

Seating Space 400 2,808,000


585
Fixed assets 480,000 39 18,720,000
HR Costs (Hiring, Payroll 5,000 39 195,000
Maintenance)

Total in-house 46,923,000

OUTSOURCE COST (Annual)


Outsource Lump sum 28,000,000 1,000,000
Supervisors 1,000,000 8 8,000,000 0 8,000,000
Seating Space 1,737,600 1,737,600
Fixed assets 480,000 8 3,840,000 3,840,000
HR Costs (Hiring, Payroll 5,000 8 40,000 20,000 20,000
Maintenance)
TOTAL 8 41,617,600 1,020,000 3,840,000 9,757,600
SAVINGS 5,305,400

After doing the relevant costing, we have decided to outsource our accounting department instead of
keeping it in-house.

23 | P a g e
Argent Financials Pvt. Ltd.
Research Department
The research department will basically focus on research on funds, equity, investment products using
proprietary analysis/evaluation processes with the aim of attaining future reliability. The organization
structure of the firm will ensure an integrated approach by bringing together the evaluation and analysis
teams, the investment management teams, marketing, and middle and back office functions

Head Cost Number Total Cost Sunk Fixed Variable


costs
INHOUSE DEPARTMENT COST
VP research 1 1,500,000 1,500,000
1,500,000
Equity Research manager 1 1,200,000 1,200,000
1,200,000
Economic Research Manager 1 1,200,000 1,200,000
1,200,000
Individual Researcher 18 16,200,000 16,200,00
900,000 0
Annual contract costs with 1,000,000 1,000,000
databases etc
21

Seating Space 200 315 756,000 756,000


Fixed assets 480,000 21 10,080,000 10,080,00
0
HR Costs (Hiring, Payroll 5,000 21 105,000 52,500 52,500
Maintenance)

Total in-house 21 31,348,000 1,052,50 10,080,00 20,908,50


0 0 0

OUTSOURCE COST (Annual)


Outsource Lump sum (Retainer 30,000,000
ship basis)
Equity Research manager 1,000,000 2 2,000,000
Seating Space 3,600,000
Fixed assets 480,000 2 960,000
HR Costs (Hiring, Payroll 5,000 2 10,000
Maintenance)
TOTAL 36,570,000
SAVINGS 5,222,000

After working out the costs of the research department, we have decided to outsource the research
Department. The cost of outsourcing the research department turns out to be less than that of
managing the department in-house.

24 | P a g e
Argent Financials Pvt. Ltd.
Business Development Department:
We will call our department as Business development Department. The Core functions of this
department would be the following:

1. Brand Development
2. Brand Maintenance
3. Business Development

Head Cost Number Total Cost Sunk costs Fixed Variable


Brand Development Costs
Registered Trademark and 10,000,000 10,000,000 10,000,000
Copyright costs
Internet Domain Name Cost 1,000,000 1,000,000 1,000,000
Logo Designing Costs 2,000,000 2,000,000 2,000,000

Brand Maintained
Marketing with Financial Seminars 10,000,000 10,000,000 10,000,000
Email Marketing 2,000,000 2,000,000 2,000,000
Internet Marketing 5,000,000 5,000,000 5,000,000
Direct Marketing 20,000,000 20,000,000 20,000,000
White Paper/ Research Papers 10,000,000 10,000,000 10,000,000
Sponsorships 5,000,000 5,000,000 5,000,000
TV Commercials 30,000,000 60,000,000 60,000,000
Tele Marketing 10,000,000 10,000,000 10,000,000

Business Development
Affiliation with Moody's
One time Affiliation Fees 2,000,000 2,000,000 2,000,000
Annual Charges 1,200,000 1,200,000 1,200,000

Business Development Directors 2,000,000 4 8,000,000 8,000,000


Business Development Associates 500,000 20 10,000,000 10,000,000
Marketing Salesman (Direct 400,000 40 16,000,000 16,000,000
Marketing)

Marketing salesman require no sitting space and no


fixed assets usage
Seating Space 10,005,600 10,005,600
Fixed assets 480,000 24 11,520,000 11,520,000
HR Costs (Hiring, Payroll 5,000 64 320,000 160,000 160,000
Maintenance)

Total In-house 194,045,600 15,160,000 134,720,000 44,165,600

25 | P a g e
Argent Financials Pvt. Ltd.
Notional Profit for Shared Services Departments
We have taken the in-house versus outsourcing decisions based on the total estimated cost of doing
things inside versus outsourcing them. The savings made by taking this decision is the notional profit for
respective departments. The table below enlists the profits made by respective shared services.

Notional Profit (Cost of alternative-Cost of Decision taken)


Legal Dept 12,532,000.00
HR 5,046,000.00
Research 6,778,000.00
Accounting 44,232,000.00
Security 356,800.00
Maintenance & Conservancy 2,807,000.00
Transportation 383,000.00
IT services 5,713,000.00

Real Estate 5,131,600.00


Assets 792963.3333
83,772,363.33

26 | P a g e
Argent Financials Pvt. Ltd.
Wealth Management
Wealth Management is an investment advisory discipline that incorporates financial
planning, investment portfolio management and a number of aggregated financial services. High net
worth individuals, small business owners and families who desire the assistance of a credentialed
financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning,
legal resources, tax professionals and investment management.

Current Industry Scenario

Wealth management is one of the most profitable and fastest growing financial services businesses,
when it is well run. As financial institutions move towards recognising economic profit as a critical
measure, wealth management businesses within large integrated institutions will grow in stature. So it
becomes obvious for us to recognize this as an important division for our company. Moreover, the
future of Wealth Management in India looks bright. According to a recent report, Indians will have one
trillion dollars worth investable wealth by 2012, with the country’s robust economic growth driving a
four-fold surge from just about 250 billion dollars in 2007. Some important things to note are:

• The wealth management market will have a target size of 42 million households by 2012, as
against just about 13 million in 2007.
• Out of these 42 million households, a vast majority, that is, 39 million households would belong
to the mass market (Rs2-10 lakh).
• The remaining 3 million households would comprise of –

a) mass-affluent category (10-50lakhs),


b) super affluent category (Rs50-400 lakh),
c) high net worth individuals (($1-10million),
d) super-high net worth individuals ($10-30million),
e) Ultra-high net worth individuals (at least $30 million).

Market Structure

Monopolistically Competitive
Number of Firms Large number of firms; HSBC, Barclays, Citibank, Kotak providing wealth
(Sellers) management services to their premium clients. A large number of
Private wealth managers also exist who provide services to clients.
Barriers to Entry and Easy entry and exit
Exit
Product Price and Non-price differences in products; In the market for Wealth
Differentiation Management, differences in the charges of wealth managers exist. Non-
price differences in the form of more personalized services, higher
returns earned, proximity to residence/office, investment expertise
spread over diversified assets, countries and economies etc.
Degree of Control No total control over price.
over Price

27 | P a g e
Argent Financials Pvt. Ltd.
This market segment is Monopolistic and already banks such as HSBC, Barclays, Citibank, Kotak, etc.
along with a number of Wealth Management firms are competing here. We believe that the key success
factors for us to compete with these established entities would be our functional knowledge, product
knowledge and relationship skills. And by obtaining a pool of highly skilled and dynamic professionals at
the best remuneration levels in the industry, we believe that we will get the required edge. Also since
we are in our inception stage, it would be easier for us to capture a big chunk of the mass category (Rs
2-10lakhs) and this is the segment wherein huge opportunities are available for us. Also we will venture
into the mass-affluent and super affluent categories as well and expect a fair number of HNIs as well
under our umbrella.

Wealth management at Argent Financials Pvt. Ltd.

To undertake our operations in the field of Wealth Management, we’ll be employing a Wealth Manager
in each of the four cities. The wealth managers would be the ones who have a huge experience over a
no. of years in the field of Wealth Management and will be assisted by an executive assistant. Each
wealth manager will have a team of six Relationship Managers, six Assistant Managers (Research) and
six Assistant Managers (Advisory) working under him. Total strength works out to 77 in this division.

Computation of Optimum level of operations for the Wealth Management division:

COMM. AUM Man-hours needed Units of AUM REV MR FC VC TC MC

2.70%
1,500 30,000 3 40.43 6.54 19 2.94 22.30
2.55%
1,800 54,000 4 45.88 5.45 19 5.29 24.65 2.35
2.40%
2,100 75,000 4 50.43 4.54 19 7.34 26.70 2.06
2.26%
2,400 97,000 5 54.21 3.79 19 9.50 28.86 2.15
2.12%
2,700 1,21,000 5 57.37 3.16 19 11.85 31.21 2.35
2.00%
3,000 1,47,840 6 60.00 2.63 19 14.47 33.83 2.63
2.02%
3,300 1,75,840 7 66.50 2.19 19 17.21 36.57 2.74
2.00%
3,600 2,05,340 7 72.00 1.83 19 20.10 39.46 2.89
1.96%
3,900 2,36,540 8 76.50 1.52 19 23.16 42.52 3.05
1.90%
4,200 2,69,540 8 80.00 1.27 19 26.39 45.75 3.23
1.83%
4,500 3,04,540 9 82.50 1.06 19 29.81 49.17 3.43
1.75%
4,800 3,41,740 10 84.00 0.88 19 33.46 52.82 3.64
1.66%
5,100 3,81,340 10 84.50 0.73 19 37.33 56.69 3.88

28 | P a g e
Argent Financials Pvt. Ltd.
7.00

6.00

5.00
MR = MC here
4.00 AUM = 3000 cr
Rev. = 60 cr MR
3.00
MC
2.00

1.00

-
1,500 1,800 2,100 2,400 2,700 3,000 3,300 3,600 3,900 4,200 4,500 4,800 5,100

As per the above table, in the first year of our operations, we would like to manage a minimum of Rs.
3000 crore of assets because this is where our Additional Revenue (i.e., MR) from employing an extra
unit would equate to the additional cost (i.e., MC) to be incurred by us to generate such additional
revenue [MR = MC]. At this level, we would be able to charge a commission of 2% resulting in revenues
to the extent of Rs. 60 crore. This means that it would be the highest revenue generating division out of
all our divisions and consequently, most profit making as well. AUMs of Rs. 3,000 crore would constitute
around 0.25% of the total market share.

Computation of Accounting and Economic Profits for Wealth Management division:

Revenues 60,00,00,000
Costs Amount (in Rs)
Shared services (only fixed and variable) 10,38,93,357
Salaries to Wealth Management 11,56,00,000
department.
Fixed Assets 43,34,155
Business development (only fixed and 7,97,40,981
variable)
Salaries of Top Mgmt 2,00,59,435
Opportunity Costs
Opportunity cost of premises 24,34,006
Cost of parking 6,49,688
Opportunity Cost of BoD services 4,81,42,645
Interest on Capital 7,13,22,437
Economic Profits (Revenues - Normal Costs 15,38,23,296
– Opportunity Costs)
Sunk Costs
Company Registration 9,62,500

29 | P a g e
Argent Financials Pvt. Ltd.
Specific Licenses 10,00,000
Shared Services 60,09,128
Business Development 67,57,801
Accounting Profits (Revenues - Normal 26,16,42,643
Costs - Sunk Costs)
Total Accounting Costs (Revenues- 33,83,57,357
Accounting Profits)
Fixed costs for WM department
19,36,01,678
Variable Costs
14,47,55,680
No. of employees
77
Man-hours (77*8*240)
1,47,840
Marginal Cost per hour
979
AUM
30,00,00,00,000

Total Accounting costs = Fixed Costs + Variable Cost+ Sunk cost

= 193,601,678 + 144,755,680

= Rs. 33, 83, 57,358

Accounting profits = Revenue – (Total Accounting Cost)

= 600,000,000 - 338,357,357

= Rs. 261,642,643

Economic Profits = Revenues – Opportunity Costs – Operating Costs

= 600,000,000 – 12, 25, 48,775 – 32, 36, 27,928

= Rs. 153,823,296

30 | P a g e
Argent Financials Pvt. Ltd.
Fund Raising and Merchant Banking

In our pursuit to become a one stop shop for financial products and services, we have expanded our
services and our company will also foray into fund raising and merchant banking. Our aim is to offer
financial services and quality advice to corporations and to wealthy individuals. We have a separate
team of professionals for merchant banking services backed by our branch network at all the cities we
are setting up. By constantly improving our knowledge capital and remaining focused on client needs,
we aim to create significant value for our clients by helping them execute the right capitalization
strategy.

Our services will include:

 Project appraisal
 Loan syndication
 Issue management
 Corporate advisory services
 Management of debt and equity offerings
 Placement and distribution
 Debenture trustee
 Refund banker

We are registered with SEBI as category-1 merchant bankers.

Market Structure
We have assumed the market structure to be a monopolistic competition. Our fund raising and
merchant banking operations will be competing with a large number of firms in the industry. Significant
among them are Citibank, HSBC, DSP Financial services, Morgan Stanley, Kotak Mahindra, Indbank
merchant banking services, ICICI securities, Goldman Sachs etc. Thus there will be very little control over
pricing and in a way we will be the price takers. Also there is a great deal of non-price competition
(based on subtle product differentiation).

This division will be headed by a General Manager. The two lines of business i.e. Merchant Banking and
Fund Raising will be headed by an Assistant Manager each, who will report to the GM. Further Assistant
Manager, Merchant banking will have an associate each for IPO Advisory division and Issues Advisory
Analysts Division working under him. Similarly the Assistant Manager, Fund Raising will have two Fund
advisors working under him.

Monopolistically Competitive
Number of Firms Large number of firms; these include big corporate advisory companies
(Sellers) firms like Citibank, HSBC, DSP Financial services, Morgan Stanley and
Kotak Mahindra
Barriers to Entry and Easy entry and exit
Exit

31 | P a g e
Argent Financials Pvt. Ltd.
Product Price and Non-price differences in products; We differentiate our
Differentiation services by providing wider access to markets, offering services at
competitive rates, and superior project appraisal.
Degree of Control No total control over price.
over Price

Marginal Revenue and Marginal Cost Analysis


We have assumed that fund raised amounting to Rs 400 Crore is equivalent to one unit and marginal
cost per man increasing. At a point when the fund raised equals 5 units, both the marginal revenue and
marginal cost becomes equal. At this point Funds raised is Rs 2000 Crore and Marginal Revenue and
Marginal Cost are each 1.13 Crore.

COMMISION Funds Man Units of REV MR FC VC TC MC


raised hours funds
needed raised
3.67%
800 30,000 2 31.07 7.29 3.91 11.20
2.66%
1,200 39,000 3 32.57 1.50 7.29 5.09 12.38 1.17
2.12%
1,600 47,000 4 33.87 1.30 7.29 6.13 13.42 1.04
1.75%
2,000 55,680 5 35.00 1.13 7.29 7.26 14.55 1.13
1.50%
2,400 64,680 6 36.00 1.00 7.29 8.44 15.73 1.17
1.32%
2,800 73,880 7 36.85 0.85 7.29 9.64 16.93 1.20
1.18%
3,200 83,380 8 37.65 0.80 7.29 10.88 18.17 1.24
1.07%
3,600 93,080 9 38.40 0.75 7.29 12.14 19.43 1.27
0.98%
4,000 103,080 10 39.10 0.70 7.29 13.45 20.74 1.30
0.90%
4,400 113,330 11 39.70 0.60 7.29 14.78 22.07 1.34
0.84%
4,800 123,830 12 40.20 0.50 7.29 16.15 23.44 1.37
0.78%
5,200 134,630 13 40.60 0.40 7.29 17.56 24.85 1.41
0.73%
5,600 145,730 14 40.90 0.30 7.29 19.01 26.30 1.45

32 | P a g e
Argent Financials Pvt. Ltd.
Below chart shows the point where the Marginal Revenue Curve intersects the Marginal Cost curve. At
this point the Revenue earned by the Merchant Banking Department. Is Rs 35 Crore.

Following table summarizes the Revenue, Costs Incurred, Economic Profit and Accounting Profit made
by the firm. Accounting profit does not take opportunity costs into account whereas Economic Profits
does not take Sunk Costs into account. The following formula has been used to calculate the various
profits:

Head FR,MB
Revenues
350,000,000

Costs
Shared Services (ex sunk)
39,128,667
Salaries To Core Departments
39,500,000
Fixed Assets
1,632,344
Business Development (ex sunk)
46,515,572
Salaries Of Top Management
11,701,337

Opportunity Cost
Opp Cost Of Premises
783,706
Cost Of Parking
244,688

33 | P a g e
Argent Financials Pvt. Ltd.
Opportunity Cost Of Bod
Services 28,083,210
Interest On Capital
41,604,755

Economic Profits
140,805,722

Sunk Costs
Company Registration
362,500
Specific Licences
500,000
Credit Rating Affliation Charges
Shared Services
2,263,178
Business Development
3,942,051

Accounting Profit
204,454,351

Total Accounting Costs


145,545,649
Fixed Cost For Each Department
72,914,918
Variable
72,630,732
No. Of People
29
Man Hours
55,680
Marginal Cost Per Hour
1,304
Aum
20,000,000,000
Optimum Charge Rate 1.750%

Total Accounting Costs = Fixed Cost + Variable Cost


= Rs 72,914,918 – Rs 72,630,732
= Rs 145,545,649

Economic Profits = Revenue – (Costs + Opportunity Cost)


= Rs 350,000,000 – Rs 133,477,920 – Rs 70,716,358
= Rs 140,805,722

34 | P a g e
Argent Financials Pvt. Ltd.
Accounting Profits = Revenue – (Costs + Sunk Costs)
= Rs 350,000,000 – (Rs 133,477,920 + Rs 7,067,729)
= Rs 204,454,351

35 | P a g e
Argent Financials Pvt. Ltd.
Mergers and Acquisitions
Mergers and acquisitions are the terms used to refer to the consolidation of companies. A merger is a
combination of two companies in which an exchange of shares takes place between the entities
involved. Generally, the company that survives is the buyer which retains its identity and the seller
company is extinguished. An acquisition is the purchase of one company by another in which both the
companies continue to exist but the holding structure changes. No new company is formed in
acquisition. In real terms, the rationale behind mergers and acquisitions is that the two companies are
more valuable, profitable than individual companies and that the shareholder value is also over and
above that of the sum of the two companies.

Current Industry Scenario


The total estimated mergers and acquisitions deals within the boundaries of India were 185 in the year
2007. It has involved monetary transaction of US $20 billion. Globally in 2008, 1,270 deals with Indian
participation and a known value of US $50 billion. Indian Mergers & Acquisitions activity was slightly
decreased in 2008 in terms of numbers (-6%). The total known value of Indian deals has decreased by
18%.

A transaction typically requires six to nine months and involves many steps. Locating parties with whom
to conduct a transaction forms one step in the overall process and perhaps the most difficult one.
Qualified and interested buyers of multimillion dollar corporations are hard to find. Even more difficult
is to bring a number of potential buyers forward simultaneously during negotiations.

An industry of professional "middlemen" (known variously as intermediaries, business brokers, and


investment bankers) exists to facilitate M&A transactions. These professionals provide their services for
fee and generally resort to previously-established personal contacts, direct-calling campaigns, and
placing advertisements in various media. In servicing their clients they attempt to create a one-time
market for a one-time transaction. Many, but not all, transactions use intermediaries on one or both
sides. The M & A markets typify any private negotiated markets.

For a successful deal, the following key success factors should be taken into account:

• Strategic logic which is reflected by six determinants: market similarities, market


complementarities, operational similarities, operational complementarities, market power, and
purchasing power.
• Organizational integration which is reflected by three determinants: acquisition experience,
relative size, cultural compatibility.
• Financial / price perspective which is reflected by three determinants: acquisition premium,
bidding process, and due diligence.

Post-M&A performance is measured by synergy realization, relative performance (compared to


competition), and absolute performance

36 | P a g e
Argent Financials Pvt. Ltd.
Market Structure of M&A

Monopolistically Competitive

Number of Firms Large number of firms; these include big i-banks like Goldman Sach,
(Sellers) Kotak Mahindra, ICICI Securities etc and smaller boutique firms

Barriers to Entry Easy entry and exit


and Exit

Product Price and Non-price differences in products; In the market for M&
Differentiation A, there exists both a price differential in the amount of commission
charged as well as non-price differentiation. This consumer
perceived differentiation can be in the form of Reliability of
Recommendations, Experience in the industry, expertise in deal-
making etc.

Degree of Control No total control over price.


over Price

M&A at Argent Financials Pvt. Ltd.

• Our M&A department will be headed by a General Manger in each office in the four cities. GM
will be reporting to the Regional manager of the office. There will be one Assistant Manager
each for Corp. Law Advisory, Inter Co relationships and M&A operations who will be working
under the General Manager of the office. Further two analysts will be reporting to the Asst.
manager - M & A operations.
• Current Indian M & A intermediaries market is dominated by Goldman Sachs, Kotak Mahindra,
ICICI Securities, Morgan Stanley, SBI Capital, Rabobank India, ING, Rothschild. We intend to
compete with these players and gain about 2.5 percent of the market (a revenue of about 27.6
crore).
• M & A market is monopolistic and hence we can easily enter this market. We will differentiate
our services by adopting best management practices, optimizing our staff combination of fresh
ignited minds and people with valuable work experience of the industry, involving best analysis
techniques and valuation models. By creating synergies through our strengths, we intend to
create a cost advantage for us which we will pass on to our customers to increase our market
share. Our aim is to create value for our customers and our shareholders.

37 | P a g e
Argent Financials Pvt. Ltd.
The details of our Mergers and Acquisitions operations revenue are shown in the table and MR-MC
curve below.

Mergers & Acquisitions optimum production level


Marginal cost per man hour 1422.1
1 unit is 20 crore
COMMISION Funds Man Units Of REV MR FC VC TC MC
Raised Hours Funds
Needed Raised
3.98%
600 30,000 30 23.86 6.29 4.27 10.55
3.70%
680 35,000 34 25.16 1.30 6.29 4.98 11.26 0.71
3.44%
760 39,500 38 26.16 1.00 6.29 5.62 11.90 0.64
3.21%
840 43,500 42 26.96 0.80 6.29 6.19 12.47 0.57
3.00%
920 48,000 46 27.60 0.64 6.29 6.83 13.11 0.64
2.81%
1,000 52,700 50 28.10 0.50 6.29 7.49 13.78 0.67
2.64%
1,080 57,550 54 28.55 0.45 6.29 8.18 14.47 0.69
2.50%
1,160 62,450 58 28.95 0.40 6.29 8.88 15.17 0.70
2.36% 1,240 67,500 62 29.30 0.35 6.29 9.60 15.89 0.72
2.24%
1,320 73,000 66 29.60 0.30 6.29 10.38 16.67 0.78
2.13%
1,400 78,700 70 29.85 0.25 6.29 11.19 17.48 0.81
2.03%
1,480 85,000 74 30.05 0.20 6.29 12.09 18.37 0.90
1.94%
1,560 92,000 78 30.20 0.15 6.29 13.08 19.37 1.00

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Argent Financials Pvt. Ltd.

One unit of deal size has been taken as Rs. 20 crore.

We start analyzing from Rs. 600 crore amount of the total deals size. The amount of revenue that
can be earned from Rs. 600 crore deals is Rs.23.86 crore. As we increase the deals size, we find that
total revenue increases but the Marginal revenue decreases starting from Rs.1.3 crore. MC
decreases initially starting from Rs.0.71 crore till it reach Rs.0.57 crore and then it starts increasing.
At the point where the total deals size is Rs.920 crore, revenue is 27.6 crore and our profit is
maximized i.e. Rs. 14.49 crore. At this point, we have the following MR=MC.

• MR = Rs. 0.64 cr
• MC = Rs. 0.64 cr
• Total output = 46 units ( 1 unit = 20 crore of deal size)
• Size of the total number of deals = Rs. 920 cr
• Profit Amount = Rs. 14.49 cr

Thus our firm will operate at this point of profit maximization.

At this point of operation, the revenues, profits and costs details are shown below.

Economic and accounting profit AMOUNT


Revenues
276,000,000

Costs
Shared services (only fixed and variable)
18,637,875
Salaries to core departments

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Argent Financials Pvt. Ltd.
42,700,000
Fixed assets
1,407,193
Business development (only fixed and
variable) -
Salaries of top mgmt
9,227,340

Opportunity cost
Opportunity cost of premises
730,781
Cost of parking
210,938
Opportunity cost of BoD services
22,145,617
Interest on capital
32,808,321

Economic profits
148,131,935

Sunk costs
Company registration
312,500
Specific licenses
1,000,000
Credit rating affiliation charges
1,000,000
Shared services
2,775,000
Business development
-

Accounting profit
198,940,092

Total accounting costs


77,059,908
Fixed cost for each department
51,992,766
Variable
25,067,143
No. Of people
25
Man hours
48,000

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Argent Financials Pvt. Ltd.
Marginal cost per hour
522
AUM
9,200,000,000
Optimum charge rate 3.000%

Total Accounting costs = Fixed Costs + Variable costs

= 62,857,688 + 68,261,411

= Rs. 131,119,098

Accounting profits = Revenue – (Costs + Sunk Costs)

= 276000000 - 131119098

= Rs.144, 880,902

Economic Profits = Revenues – Opportunity Costs – Operating Costs

= 276,000,000 – 55,895,656 – 123,746,994

= Rs. 96,357,350

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Argent Financials Pvt. Ltd.
Credit Rating

Credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an
evaluation made by credit bureaus of a borrower’s overall credit history. A credit rating is also known as
an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request
of the lender. Credit ratings are calculated from financial history and current assets and liabilities.
Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a
loan.

Current Industry Scenario


The major players in the markets are

 CRISIL
 ICRA
 CARE
 FITCH

The Herfindahl Index of these players have been calculated as follows

Credit Rating Operating Income (2008- Market H-Index


Agency 09)( in laky) Share

CRISIL 52865.88 70.21 4929.02


ICRA 10143.58 13.47 181.46
CARE 7548.00 10.02 100.48
FITCH 4742.54 6.30 39.67
75300.00 100.00 5250.64

The high value of Herfindahl Index (greater than 1800) indicates greater concentration of market power
among a few firms and therefore indicates an oligopolistic market structure in India.

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Argent Financials Pvt. Ltd.
Market Structure of Credit Ratings

Oligopoly
Number of Firms Limited number of firms. Only 4 major players catering to industry
(Sellers) needs. At present the market power is concentrated in the hands of
major market players.
Barriers to Entry and Barriers to entry and exit. We have met the regulatory requirements
Exit and are the newest entrant in the market.
Product
Differentiation
Degree of Control We are a price follower in this market dominated by a price leader.
over Price

Assumptions

1. An Oligopolistic market structure has been assumed for the credit rating division. Entry in the
Credit Rating market is difficult as a government approval is required for the same. Therefore
there are only a few other firms providing Credit Rating services besides Argent Financials Pvt.
ltd. The service provided by Argent Financials is slightly differentiated. The product
differentiation leads to a downward sloping but flatter demand curve as the product is relatively
elastic.

2. The price leadership model has been assumed for the credit rating services provided by the firm.
According to this model there is an existing industry leader in the market that sets the price for
others to follow. Therefore Argent Financials is a price follower in the credit rating market and
the premium being charged is according to that being charged by the market leader.

Credit Rating at Argent Financial Pvt. Ltd.

3. Twenty nine people have been employed in this division across India. The Organizational
structure of the Credit Rating Division comprises Manager Credit rating, EA to wealth manager,
Assistant manager, Research Analysts, Assistant manager Information systems and employees
responsible for collecting data.

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Argent Financials Pvt. Ltd.

Calculation for optimum level of operation for Credit Rating

marginal cost per man hour 457.68


1 unit is 5000 crore
COMMISION Cumulative man hours units of REV MR FC VC TC MC
Market Cap of needed Market (Cr) (Cr) (Cr) (Cr)
Clients cap
0.044% 11.04
25,000 37,500 5 7.29 1.72 9.01
0.038% 11.40 0.36 0.28
30,000 43,700 6 7.29 2.00 9.29
0.033% 11.72 0.32 0.27
35,000 49,500 7 7.29 2.27 9.56
0.030% 12.00 0.28 0.28
40,000 55,680 8 7.29 2.55 9.84
0.027% 12.24 0.24 0.30
45,000 62,280 9 7.29 2.85 10.14
0.025% 12.44 0.20 0.32
50,000 69,380 10 7.29 3.18 10.47
0.023% 12.60 0.16 0.35
55,000 77,080 11 7.29 3.53 10.82
0.021% 12.72 0.12 0.38
60,000 85,480 12 7.29 3.91 11.20

Being price takers, the commission charged for the credit rating services is according to that charged by
the market leader. As the commission charged is decreased, there is an increase in demand in terms of
units of Market cap, where each unit of output equals 5000 crore. The marginal revenue decreases
because of the downward sloping demand curve, the marginal cost rises after a brief initial fall.

As seen in the aforementioned table the optimum level of operation for the Credit ratings division is
achieved when Marginal Cost equals Marginal revenue at 28 laky. At this level of operation the revenue
is 12 crore.

The total profit at the optimum level of operations is TR – TC is 2.16 crore

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Argent Financials Pvt. Ltd.

The following graph depicts optimum level of operation

0.45

0.4

0.35

0.3

0.25
MR
0.2
MC
0.15

0.1

0.05

0
25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000

Profit and Cost Calculations


The following table summarizes the Revenue, Costs incurred, Economic Profit and Accounting Profit.

Economic and accounting profit Amount


Revenues 12,00,00,000

Costs
Shared services (only fixed and variable) 3,91,28,667
Salaries to core departments 3,27,00,000
Fixed assets 16,32,344
Business development (only fixed and variable) 1,59,48,196
Salaries of top mgmt 40,11,887

Opportunity cost
Opportunity cost of premises 7,83,706
Cost of parking 2,44,688
Opportunity cost of BoD services 96,28,529
Interest on capital 1,42,64,487

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Argent Financials Pvt. Ltd.

Economic profits 16,57,496

Sunk costs
Company registration 3,62,500
Specific licences 10,00,000
Credit rating affiliation charges
Shared services 22,63,178
Business development 13,51,560

Accounting profit 2,16,01,667


Total accounting costs
9,83,98,333
Fixed cost for each department
7,29,14,918
Variable
2,54,83,415
No. Of people
29
Man hours
55,680
Marginal cost per hour
458
Cumulative market cap of cos. Rated
4,00,00,00,00,000
Optimum fee charged 0.030%

The aforementioned table summarizes the Revenue, Costs Incurred, Economic Profit and Accounting
Profit made by the firm. Accounting profit does not take opportunity costs into account whereas
Economic Profits does not take Sunk Costs into account. The following formula has been used to
calculate the various profits:

Total Accounting Costs = Fixed Cost + Variable Cost

= Rs 72,914,918 + Rs 25,483,415

= Rs 98,398,333

Economic Profits = Revenue – (Costs + Opportunity Cost)

= Rs 120,000,000 – Rs 118342504

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Argent Financials Pvt. Ltd.
= Rs 16, 57,496

Accounting Profits = Revenue – (Costs + Sunk Costs)

= Rs 350,000,000 – Rs 328,398,333

= Rs 2, 16, 01,667

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Argent Financials Pvt. Ltd.
Future Expansion Plans

M&A Department: One of the key focus areas for the company for future expansion will be the M&A

department. In 2008, 1,270 deal with Indian participation and a known value of 50 billion. USD had been

announced. Indian Mergers & Acquisitions activity has slightly decreased in 2008 in terms of numbers (-

6%). This decrease is smaller than the worldwide trend (-10%). So the company sees a huge potential in

the Indian M&A market and hopes to expand its revenues from 27.6cr in 2009 to 54cr in 2010.

Wealth Management and Merchant banking business: The Company is planning acquisitions or joint

ventures to expand its Wealth Management and Merchant banking business. To begin with it is looking

at acquisition and partnership opportunities in Malaysia, Indonesia and Hong Kong as it is difficult to

start a new venture in a highly fragmented market in these countries.

To fund these growth and expansion plans, company plans to raise funds to the tune of 200cr. It is

looking at public listing and Borrowings to raise the above amount.

Credit Rating Business: The company would be continuing with the alliance with European Rating

Agency in the credit rating business and remains committed in the alliance till 2013.The positive outlook

for rating business can be attributed to Basel II norms and the Reserve Bank of India’s stipulation that

corporate with borrowings over Rs 10 crore have to necessarily get themselves rated.

New Services: Company also plans to expand it verticals and enter the Private Equity Business. It has

ambitious plans to mobilize funds for its Private equity investments in India by 2011. It is looking at

funds with an initial size of around 100cr, coming from last year’s surplus, which will expand to around

300cr by 2012.

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Argent Financials Pvt. Ltd.
APPENDIX

Head WM FR,MB CR MA Firm


Revenues 120,000,000 276,000,000
600,000,000 350,000,000 1,346,000,000

Costs
Shared Services (ex sunk) 39,128,667 33,731,609
103,893,357 39,128,667 215,882,300
Salaries To Core Departments 32,700,000 42,700,000
115,600,000 39,500,000 230,500,000
Fixed Assets 1,632,344 1,407,193
4,334,155 1,632,344 9,006,037
Business Development (ex sunk) 15,948,196 36,680,851
79,740,981 46,515,572 178,885,600
Salaries Of Top Management 4,011,887 9,227,340
20,059,435 11,701,337 45,000,000

Opportunity Cost
Opportunity Cost Of Premises 783,706 730,781
2,434,006 783,706 4,732,200
Cost Of Parking 244,688 210,938
649,688 244,688 1,350,000
Opportunity Cost Of BoD 9,628,529 22,145,617
Services 48,142,645 28,083,210 108,000,000
Interest On Capital 14,264,487 32,808,321
71,322,437 41,604,755 160,000,000

Economic Profits 1,657,496 96,357,350


153,823,296 140,805,722 392,643,863

Sunk Costs
Company Registration 362,500 312,500
962,500 362,500 2,000,000
Specific Licenses 1,000,000 1,000,000
1,000,000 500,000 3,500,000
Credit Rating Affiliation Charges 1,000,000
Shared Services 2,263,178 1,951,016
6,009,128 2,263,178 12,486,500
Business Development 1,351,560 3,108,588
6,757,801 3,942,051 15,160,000

Accounting Profit 21,601,667 144,880,902


261,642,643 204,454,351 632,579,563

Total Accounting Costs 98,398,333 131,119,098


338,357,357 145,545,649 713,420,437
Fixed Cost For Each Department 72,914,918 62,857,688
193,601,678 72,914,918 402,289,200

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Argent Financials Pvt. Ltd.
Variable 25,483,415 68,261,411
144,755,680 72,630,732
No. Of People 29 25
77 29
Man Hours 55,680 48,000
147,840 55,680
Marginal Cost Per Hour 458 1,422
979 1,304
AUM 400,000,000,000 9,200,000,000
30,000,000,000 20,000,000,000
Optimum Charge Rate 2.000% 1.750% 0.030% 3.000%

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Argent Financials Pvt. Ltd.
References

Books Referred:

 Managerial Economics by Lewis, Peterson and Jain


 Microeconomics by Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. Mehta
 Managerial Economics in a Global Economy by Salvatore D.
 Managerial Economics by Keat and Young

Online References:

 http://www.reuters.com/article/pressRelease/idUS65808+12-Feb-2009+BW20090212
 http://www.researchandmarkets.com/research/ffafcf/mergers_and_acquis
 http://trak.in/tags/business/2007/08/16/indian-mergers-acquisitions-changing-indian-business/
 https://www.Wikipedia.com
 https://www.Investopedia.com
 https://www.Furniturewala.com
 https://www.reuters.com
 https://www.rbi.org.in
 https://www.legalserviceindia.com

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