ASSIGNMENT OF FINANCIAL SERVICES

MB 511

Q1 Define ‘Financial Services and their characteristics’. What are various types of Financial
Services provided by banks & financial Institutions?

Q2(i) State various forms of leasing and also explain various benefits of leasing.
(ii) what are the functions performed by a factor? Also state the benefit of Factoring.

Q3 Explain the functions of Credit Rating agency. Discuss the important factors that affects
the credit rating in India?

Q4 What are the main features of Venture Capital & write a note on Venture Capital in India.

Q5 Write a note on NSDL & CDSL and define the process of Dematerialisation &
Rematerialisation
Q1 Define ‘Financial Services and their characteristics’. What are various types of Financial
Services provided by banks & financial Institutions ?

Ans: Financial services can be defined as the products and services offered by institutions
like banks of various kinds for the facilitation of various financial transactions and other
related activities in the world of finance like loans, insurance, credit cards, investment
opportunities and money management as well as providing information on the stock market
and other issues like market trends

Functions of financial services

1. Facilitating transactions (exchange of goods and services) in the economy.

2. Mobilizing savings (for which the outlets would otherwise be much more limited).

3. Allocating capital funds (notably to finance productive investment).

4. Monitoring managers (so that the funds allocated will be spent as envisaged).

5. Transforming risk (reducing it through aggregation and enabling it to be carried by

those more willing to bear it).

Characteristics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focused. The firms providing
these services, study the needs of their customers in detail before deciding their financial
strategy, giving due regard to costs, liquidity and maturity considerations. Financial services
firms continuously remain in touch with their customers, so that they can design products
which can cater to the specific needs of their customers. The providers of financial services
constantly carry out market surveys, so they can offer new products much ahead of need and
impending legislation. Newer technologies are being used to introduce innovative, customer
friendly products and services which clearly indicate that the concentration of the providers
of financial services is on generating firm/customer specific services.

ii) Intangibility: In a highly competitive global environment brand image is very crucial.
Unless the financial institutions providing financial products and services have good image,
enjoying the confidence of their clients, they may not be successful. Thus institutions have to
focus on the quality and innovativeness of their services to build up their credibility.
iii) Concomitant: Production of financial services and supply of these services have to be
concomitant. Both these functions i.e. production of new and innovative financial services
and supplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlike any other service, financial services do tend to perish and
hence cannot be stored. They have to be supplied as required by the customers. Hence
financial institutions have to ensure a proper synchronization of demand and supply.
v) People based services: Marketing of financial services has to be people intensive and
hence it’s subjected to variability of performance or quality of service. The personnel in
financial services organisation need to be selected on the basis of their suitability and trained
properly, so that they can perform their activities efficiently and effectively.

vi) Market Dynamics: The market dynamics depends to a great extent, on socioeconomic
changes such as disposable income, standard of living and educational changes related to the
various classes of customers. Therefore financial services have to be constantly redefined and
refined taking into consideration the market dynamics. The institutions providing financial
services, while evolving new services could be proactive in visualising in advance what the
market wants, or being reactive to the needs and wants of their customers.

vii) Labour intensive: Personalised service versus automation, in fact, is an important issue
in financial services. The financial services sector is highly Labour intensive. It leads to
increase in the cost of production and consequently increases price of financial products.

viii) Informational Based: Financial services industry is an informational based industry. It

involves creation, dissemination& use of Information. Information is an essential component
in the production of financial Services.

Type of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into two,
namely:

i. Traditional. Activities
ii. Modern activities.

i. Traditional Activities
Traditionally, the financial intermediaries have been rendering a wide range of services
encompassing both capital and money market activities. They can be grouped under two
heads, viz.

1. Fund based activities and

2. Non-fund based activities.

Fund based activities: The traditional services which come under fund based activities are
the following:
 Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary
market activities).
 Dealing in secondary market activities.
 Participating in money market instruments like commercial Papers, certificate of
deposits, treasury bills, discounting of bills etc.
 Involving in equipment leasing, hire purchase, venture capital, seed capital,
 Dealing in foreign exchange market activities. Non fund based activities

Non fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can be
called ‘fee based’ activity. Today customers, whether individual or corporate, are not satisfied
with mere provisions of finance. They expect more from financial services companies. Hence
a wide variety of services, are being provided under this head. They include:

 Managing the capital issue — i.e. management of pre-issue and post-issue activities
relating to the capital issue in accordance with the SEBI guidelines and thus enabling the
promoters to market their issue.
 Making arrangements for the placement of capital and debt instruments with
investment institutions.
 Arrangement of funds from financial institutions for the clients’ project cost or his
working capital requirements.
 Assisting in the process of getting all Government and other clearances.
ii. Modern Activities
Beside the above traditional services, the financial intermediaries render innumerable
services in recent times. Most of them are in the nature of non-fund based activity. In view of
the importance, these activities have been in brief under the head ‘New financial products and
services’. However, some of the modern services provided by them are given in brief
hereunder.

 Rendering project advisory services right from the preparation of the project report till
the raising of funds for starting the project with necessary Government approvals.
 Planning for M&A and assisting for their smooth carry out.
 Guiding corporate customers in capital restructuring.
 Acting as trustees to the debenture holders.
 Recommending suitable changes in the management structure and management style
with a view to achieving better results.
 Structuring the financial collaborations / joint ventures by identifying suitable joint
venture partners and preparing joint venture agreements.
 Rehabilitating and restructuring sick companies through appropriate scheme of
reconstruction and facilitating the implementation of the scheme.
 Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and
political risk by using swaps and other derivative products.
 Managing In- portfolio of large Public Sector Corporations.
 Undertaking risk management services like insurance services, buy-hack options etc.
 Advising the clients on the questions of selecting the best source of funds taking into
consideration the quantum of funds required, their cost, lending period etc.
 Guiding the clients in the minimization of the cost of debt and in the determination of
the optimum debt-equity mix.
 Promoting credit rating agencies for the purpose of rating companies which want to
go public by the issue of debt instrument.
 Undertaking services relating to the capital market, such as 1)Clearing services,
2)Registration and transfers, 3)Safe custody of securities, 4)Collection of income on
securities.

Q2(i) State various forms of leasing and also explain various benefits of leasing.
 (ii) what are the functions performed by a factor? Also state the benefit of Factoring.

Ans: (i) Businesses generally own fixed assets, but it is the use of buildings and equipment
that is important, not their ownership. One way to obtain the use of assets is to raise debt or
equity capital and then use this capital to buy them. An alternative way to obtain the use of
assets is by leasing.

Lease agreements are basically of two types. They are (a) Financial lease and (b)
Operating lease. The other variations in lease agreements are (c) Sale and lease back
(d) Leveraged leasing and (e) Direct leasing.

a) FINANCIAL LEASE
Long-term, non-cancellable lease contracts are known as financial leases. The
essential point of financial lease agreement is that it contains a condition whereby the
lessor agrees to transfer the title for the asset at the end of the lease period at a
nominal cost. At lease it must give an option to the lessee to purchase the asset he has
used at the expiry of the lease. Under this lease the lessor recovers 90% of the fair
value of the asset as lease rentals and the lease period is 75% of the economic life of
the asset. The lease agreement is irrevocable. Practically all the risks incidental to the
asset ownership and all the benefits arising there from are transferred to the lessee
who bears the cost of maintenance, insurance and repairs. Only title deeds remain
with the lessor. Financial lease is also known as ‘capital lease’. In India, financial
leases are very popular with high-cost and high technology equipment.

b) OPERATING LEASE

An operating lease stands in contrast to the financial lease in almost all aspects. This lease
agreement gives to the lessee only a limited right to use the asset. The lessor is responsible
for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the
asset at the end of the lease period. Normally the lease is for a short period and even
otherwise is revocable at a short notice. Mines, Computers hardware, trucks and automobiles
are found suitable for operating lease because the rate of obsolescence is very high in this
kind of assets.
c) SALE AND LEASE BACK
It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party
(the buyer), who in turn leases back the same asset to the owner in consideration of lease
rentals. However, under this arrangement, the assets are not physically exchanged but it all
happens in records only. This is nothing but a paper transaction. Sale and lease back
transaction is suitable for those assets, which are not subjected depreciation but appreciation,
say land. The advantage of this method is that the lessee can satisfy himself completely
regarding the quality of the asset and after possession of the asset convert the sale into a lease
arrangement. The sale and lease back transaction can be expressed with the help of the
following figure.

SELLER Sale Transaction BUYER

Sale Value

Lease Transaction
LESSEE LESSOR

Lease rentals

Under this transaction, the seller assumes the role of a lessee and the buyer assumes the role
of a lessor. The seller gets the agreed selling price and the buyer gets the lease rentals. It is
possible to structure the sale at agreed value (below or above the fair market price) and to
adjust difference in the lease rentals. Thus the effect of profit/loss on sale of assets can be
deferred.

d) LEVERAGED LEASING
Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The
lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e.,
lender and the asset so purchased is held as security against the loan. The lender is paid off
from the lease rentals directly by the lessee and the surplus after meeting the claims of the
lender goes to the lessor. The lessor, the owner of the asset is entitled to depreciation
allowance associated with the asset.

e) DIRECT LEASING
Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly.
The ownership of the asset leased out remains with the manufacturer itself. The major types
of direct lessor include manufacturers, finance companies, independent lease companies,
special purpose leasing companies etc

VARIOUS ADVANTAGES OF LEASING ARE AS FOLLOWS:

1. SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the
business by providing 100% finance. The lessee is not to provide or pay any margin
money as there is no down payment. In this way the saving in capital or financial
resources can be used for other productive purposes e.g. purchase of inventories.

2. FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in

respect of lease period and lease rentals according to the convenience and
requirements of all lessees.

3. PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows
properly. The rentals can be paid out of the cash coming into the business from the use
of the same assets.

4. IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their

liquidity position by adopting the sale and lease back technique.

Ans : 2(ii) Factoring may broadly be defined as the relationship, created by an agreement,
between the seller of goods/services and a financial institution called .the factor, whereby the
later purchases the receivables of the former and also controls and administers the receivables
of the former.
Various functions of a Factor are:
The purchase of book debts or receivables is central to the function of factoring permitting
the factor to provide basic services such as:
1. Administration of sellers’ sales ledger.
2. Collection of receivables purchased.
3. Provision of finance.
4. Protection against risk of bad debts/credit control and credit protection.
5. Rendering advisory services by virtue of their experience in financial dealings with
customers. These are explained as under.

1. Administration of Sales Ledger

The factor assumes the entire responsibility of administering sales ledger. The factor
maintains sales ledger in respect of each client. When the sales transaction takes place, an
invoice is prepared in duplicate by the client, one copy is given to customer and second copy
is sent to the factor. Entries are made in the ledger on open-item method. Each receipt is
matched against the specific invoice. On any given date, the customer account indicates the
various open invoices outstanding. Periodic reports are sent by factor to the client with
respect to current status of receivables and amount received from customers. Depending upon
the volume of transactions, the periodicity of report is decided. Thus, the entire sales ledger
administration responsibility of the client gets transferred to the factor. He performs the
following functions with regard to the administration of sales ledger:

i. He ensures that invoices raised represent genuine trade transactions in respect of goods sold
or services provided.
ii. He updates the sales ledger with latest invoices raised and cash received.
iii. He ensures that monthly statements are sent to the debtors, efforts are made to collect the
dues on the due dates through an efficient mechanism of personal contacts, issuance of
reminders, telephone messages etc.
iv. He remits the retention to the clients after collection of the dues. Where the factoring is
operating on Fixed Maturity Period (FMP) basis, the factor is to ensure that the client is paid
the retention money at the expiry of the said period.
v. He establishes close links with the client and the customers to resolve the various disputes
raised in respect of quantity or quality of the goods/services supplied besides the
unauthorised discounts claimed or deducted by the debtors while making payment.
vi. He reviews the financial strength of the debtors at periodic intervals to ensure
collectability of debts.
vii. He submits at periodic intervals the reports containing information as to the details of
overdue unpaid invoices, disputes, legal cases etc. to the client.

2. Collection of Receivables
The factor helps the client in adopting better credit control policy. The main functions of a
factor is to collect the receivables on behalf of the client and to relieve him from all the
botheration’s/problems associated with the collection. This way the client can concentrate on
other major areas of his business on one hand and reduce the cost of collection by way of
savings in labour, time and efforts on the other hand. The factor possesses trained and
experienced personnel, sophisticated infrastructure and improved technology which helps
him to make timely demands on the debtors to make payments.

3. Provision of Finance
Finance, which is the lifeblood of a business, is made available easily by the factor to the
client. A factor purchases the book debts of his client and debts are assigned in favour of the
factor. 75% to 80 percent of the assigned debts is given as an advance to the client by the
factor.
a. Where an agreement is entered into between the client (seller) and the c factor for the
purchase of receivables without recourse, the factor becomes responsible to the seller
on the due date of the invoice whether or not the buyer makes the payment to the
factor.
b. Where the debts are factored with recourse- the client has to refund the full finance
amount provided by the factor in case the buyer fails to make the payment on due
date.
4. Protection against Risk
This service is provided where the debts are factored without recourse. The factor fixes the
credit limits (i.e. the limit up to which the client can sell goods to customers) in respect of
approved customers. Within these limits the factor undertakes to purchase all trade debts and
assumes risk of default in payment by the customers. The factor not only relieves the client
from the collection work but also advises the client on the creditworthiness of potential
customers. Thus the factor helps the client in adopting better credit control policy. The credit
standing of the customer is assessed by the factors on the basis of information collected from
credit rating reports, bank reports, trade reference, financial statement analysis and by
calculating the important ratios in respect of liquidity and profitability position.

5. Advisory Services
These services arise out of the close relationship between a factor and a client. Since the
factors have better knowledge and wide experience in field of finance, and possess extensive
credit information about customer’s standing, they provide various advisory services on the
matters relating to:
a. Customer’s preferences regarding the clients products.
b. Changes in marketing policies/strategies of the competitors.
c. Suggest improvements in the procedures adopted for invoicing, delivery and sales return.
d. Helping the client for raising finance from banks/financial institutions, etc.

Q3 Explain the functions of Credit Rating agency. Discuss the important factors that
affects the credit rating in India?
Ans: Functions of a Credit Rating Agency
A credit rating agency serves following functions:
1. Provides unbiased opinion: An independent credit rating agency is likely to provide an
unbiased opinion as to relative capability of the company to service debt obligations because
of the following reasons:
i. It has no vested interest in an issue unlike brokers, financial intermediaries.
ii. Its own reputation is at stake.
2. Provides quality and dependable information:. A credit rating agency is in a position to
provide quality information on credit risk which is more authenticated and reliable because:
i. It has highly trained and professional staff who has better ability to assess risk.
ii. It has access to a lot of information which may not be publicly available.
3. Provides information at low cost: Most of the investors rely on the ratings assigned by the
ratings agencies while taking investment decisions. These ratings are published in the form of
reports and are available easily on the payment of negligible price. It is not possible for the
investors to assess the creditworthiness of the companies on their own.
4. Provide easy to understand information: Rating agencies first of all gather information,
then analyse the same. At last these interpret and summarise complex information in a simple
and readily understood formal manner. Thus in other words, information supplied by rating
agencies can be easily understood by the investors. They need not go into details of the
financial statements.
5. Provide basis for investment: An investment rated by a credit rating enjoys higher
confidence from investors. Investors can make an estimate of the risk and return associated
with a particular rated issue while investing money in them.
6. Healthy discipline on corporate borrowers: Higher credit rating to any credit investment
enhances corporate image and builds up goodwill and hence it induces a healthy/ discipline
on corporate.
7. Formation of public policy: Once the debt securities are rated professionally, it would be
easier to formulate public policy guidelines as to the eligibility of securities to be included in
different kinds of institutional port-folio.

While assessing, the following are the main factors that are analysed into detail by the credit
rating agencies.
1. Business Risk Analysis
2. Financial Analysis
3. Management Evaluation
4. Geographical Analysis
5. Regulatory and Competitive Environment
6. Fundamental Analysis

These are explained as under:

I. Business Risk Analysis
Business risk analysis aims at analysing the industry risk, market position of the company,
operating efficiency and legal position of the company. This includes an analysis of industry
risk, market position of the company, operating efficiency of the company and legal position
of the company.
a. Industry risk: The rating agencies evaluates the industry risk by taking into consideration
various factors like strength of the industry prospect, nature and basis of competition, demand
and supply position, structure of industry, pattern of business cycle etc. Industries compete
with each other on the basis of price, product quality, distribution capabilities etc. Industries
with stable growth in demand and flexibility in the timing of capital outlays are in a stronger
position and therefore enjoy better credit rating.
b. Market position of the company: Rating agencies evaluate the market standing of a
company taking into account:
i. Percentage of market share
ii. Marketing infrastructure
iii. Competitive advantages
iv. Selling and distribution channel
v. Diversity of products
vi. Customers base
vii. Research and development projects undertaken to identify obsolete products
viii. Quality Improvement programs etc.
c. Operating efficiency: Favourable locational advantages, management and labour
relationships, cost structure, availability of raw-material, labor, compliance to pollution
control programs, level of capital employed and technological advantages etc. affect the
operating efficiency of every issuer company and hence the credit rating.
d. Legal position: Legal position of a debt instrument is assessed by letter of offer containing
terms of issue, trustees and their responsibilities, mode of payment of interest and principal in
time, provision for protection against fraud etc.
e. Size of business: The size of business of a company is a relevant factor in the rating
decision. Smaller companies are more prone to risk due to business cycle changes as
compared to larger companies. Smaller companies operations are limited in terms of product,
geographical area and number of customers. Whereas large companies enjoy the benefits of
diversification owing to wide range of products, customers spread over larger geographical
area. Thus, business analysis covers all the important factors related to the business
operations over an issuer company under credit assessment.

II. Financial Analysis

Financial analysis aims at determining the financial strength of the issuer company through
ratio analysis, cash flow analysis and study of the existing capital structure. This includes an
analysis of four important factors namely:
a. Accounting quality
b. Earnings potential/profitability
c. Cash flows analysis
d. Financial flexibility
Financial analysis aims at determining the financial strength of the issuer company through
quantitative means such as ratio analysis. Both past and current performance is evaluated to
comment the future performance of a company. The areas considered are explained as
follows.
a. Accounting quality: As credit rating agencies rely on the audited financial statements, the
analysis of statements begins with the study of accounting quality. For the purpose,
qualification of auditors, overstatement/understatement of profits, methods adopted for
recognising income, valuation of stock and charging depreciation on fixed assets are studied.
b. Earnings potential/profitability: Profits indicate company’s ability to meet its fixed interest
obligation in time. A business with stable earnings can withstand any adverse conditions and
also generate capital resources internally. Profitability ratios like operating profit and net
profit ratios to sales are calculated and compared with last 5 years figures or compared with
the similar other companies carrying on same business. As a rating is a forward-looking
exercise, more emphasis is laid on the future rather than the past earning capacity of the
issuer.
c. Cash flow analysis: Cash flow analysis is undertaken in relation to debt and fixed and
working capital requirements of the company. It indicates the usage of cash for different
purposes and the extent of cash available for meeting fixed interest obligations. Cash flows
analysis facilitates credit rating of a company as it better indicates the issuer’s debt servicing
capability compared to reported earnings.
d. Financial flexibility: Existing Capital structure of a company is studied to find the
debt/equity ratio, alternative means of financing used to raise funds, ability to raise funds,
asset deployment potential etc. The future debt claims on the issuer’s as well as the issuer’s
ability to raise capital is determined in order to find issuer’s financial flexibility.

III. Management Evaluation

Any company’s performance is significantly affected by the management goals, plans and
strategies, capacity to overcome unfavourable conditions, staff’s own experience and skills,
planning and control system etc. Rating of a debt instrument requires evaluation of the
management strengths and weaknesses.
IV. Geographical Analysis
Geographical analysis is undertaken to determine the locational advantages enjoyed by the
issuer company. An issuer company having its business spread over large geographical area
enjoys the benefits of diversification and hence gets better credit rating. A company located in
backward area may enjoy subsidies from government thus enjoying the benefit of lower cost
of operation. Thus geographical analysis is undertaken to determine the locational advantages
enjoyed by the issuer company.

V. Regulatory and Competitive Environment

Credit rating agencies evaluate structure and regulatory framework of the financial system in
which it works. While assigning the rating symbols, CRAs evaluate the impact of regulation/
deregulation on the issuer company.

VI. Fundamental Analysis

Fundamental analysis includes an analysis of liquidity management, profitability and
financial position, interest and tax rates sensitivity of the company. This includes an analysis
of liquidity management, profitability and financial position, interest and tax rates sensitivity
of the company.
1. Liquidity management involves study of capital structure, availability of liquid assets
corresponding to financing commitments and maturing deposits, matching of assets and
liabilities.
2. Asset quality covers factors like quality of company’s credit risk management, exposure to
individual borrowers and management of problem credits etc.
3. Profitability and financial position covers aspects like past profits, funds deployment,
revenues on non-fund based activities, addition to reserves.
4. Interest and tax sensitivity reflects sensitivity of company following the changes in interest
rates and changes in tax law. Fundamental analysis is undertaken for rating debt instruments
of financial institutions, banks and non-banking finance companies.

Q4 What are the main features of Venture Capital & write a note on Venture Capital in
India.
Ans: The term ‘venture capital’ represents financial investment in a highly risky project with
the objective of earning a high rate of return. These venture capital companies provide the
necessary risk capital to the entrepreneurs so as to meet the promoters’ contribution as
required by the financial institutions. In addition to providing capital, these VCFs (venture
capital firms) take an active interest in guiding the assisted firms.
The main features of venture capital can be summarised as follows:
i. High Degrees of Risk Venture capital represents financial investment in a highly risky
project with the objective of earning a high rate of return.
ii. Equity Participation Venture capital financing. is, invariably, an actual or potential equity
participation wherein the objective of venture capitalist is to make capital gain by selling the
shares once the firm becomes profitable. .
iii. Long Term Investment Venture capital financing is a long term investment. It generally
takes a long period to encash the investment in securities made by the venture capitalists.
iv. Participation in Management In addition to providing capital, venture capital funds take an
active interest in the management of the assisted firms. Thus, the approach of venture capital
firms is different from that of a traditional lender or banker. It is also different from that of a
ordinary stock market investor who merely trades in the shares of a company without
participating in their management. It has been rightly said, “venture capital combines the
qualities of banker, stock market investor and entrepreneur in one”.
v. Achieve Social Objectives It is different from the development capital provided by several
central and state level government bodies in that the profit objective is the motive behind the
financing. But venture capital projects generate employment, and balanced regional growth
indirectly due to setting up of successful new business.
vi. Investment is liquid A venture capital is not subject to repayment on demand as with an
overdraft or following a loan repayment schedule. The investment is realised only when the
company is sold or achieves a stock market listing. It is lost when the company goes into
liquidation
The venture capital providers in India can be divided into following categories.

1. Specialised financial institutions and their financing schemes.

2. Funds promoted by state level institutions.
3. Funds promoted by public sector banks.
4. Private agencies.
5. Overseas venture capital funds

I. Special/Seed Financial Institutions & Their Financing Schemes

In India, the Industrial Financial Corporations of India (IFCI), Industrial Development Bank
of India (IDBI) and the Industrial Credit and Investment Corporation of India (ICICI) are the
major three institutions, which are engaged in the financing of high tech new ventures. The
difference and similarities between three schemes of IFCI, IDBI and ICICI are discernible
from the objectives sought to be pursued under the broad characteristics of the schemes
precisely explained below.
A. Risk Capital Scheme of IFCI The IFCI began its equity financing through its Risk
Capital Foundation (RCF) by providing risk capital assistance on soft terms to first
generation entrepreneurs. The corporation envisages to provide assistance to technologists
and the professionals who do not have adequate resources of their own for contributing to
equity capital of the industrial projects undertaken by them with a view to enlarging
entrepreneurial base for wider dispersal of ownership and control of industry in the national
interest. The corporation is continuing its efforts through the newly formed Risk Capital and
Technology Finance Corporation Ltd. (RCTFC) set up in 1988 as a wholly owned subsidiary
of the IFCI. RCTFC was established with an objective of providing financial support to such
activities in the area of innovative technology, energy conservation and environmental
pollution. Some of the projects financed under the new scheme of IFCI include development
of artificial intelligence software, three Dimensional Computer animation, educational robots,
hybrid seeds etc. In addition to operating its own schemes, the RCTC also manages a Venture
Capital Unit Scheme VECAUS-III (started in mid-1991) with a resource base of Rs. 30
crores with participation from the UTI, IFCI and World Bank in equal proportions.
B. Technology Development & Information Company of India Ltd. (TDICI) of ICICI
Encouraged by the response to technology financing, ICICI floated a separate company-
Technology Development and Information Company of India (TDICI) in collaboration with
UTI in 1988. Apart from Venture Capital financing TDICI activity profile includes
technology consultancy services and technology escort services such as marketing, business
management, export marketing and guidance for individual venture capital projects etc.
TDICI makes investments in highly risky projects promising high return in future. It gives
preference to companies, which are unable to raise public share capital and would not be
financed by anyone else. In addition to equity participation (upto a maximum of 49%)
undertaken by typical venture capital companies, TDICI offers the unique option of
conditional loans. The entrepreneur neither pays interest on it nor does he have to repay the
principal amount. If the venture succeeds, TDICI recovers back its investment in the form of
royalty on sales which ranges between 2 % to 8 % . On the contrary, if venture fails to take
off even after 5 years, TDICI will consider writing off the loan. TDICI usually has a nominee
on the Boards of companies with whom it enters into long-term contracts. TDICI assists such
venture projects in arranging working capital finance, recruiting senior executives. It als.o
takes advise of the outside experts in taking various decisions. Some of the projects financed
by ICICI include:
i Mastek a Bombay based software firm in which TDICI invested Rs. 42 lakh in equity in
1989 went public in 1992. It showed an annual growth of 70% to 80% in the turnover.
ii Temptation Foods which exports frozen vegetables and fruits, went public in November,
1992. The TOICI invested Rs. 50 lakhs in its equity .
C. SEED Capital Scheme or Venture Capital Fund of IDBI
IDBI’s scheme is known as “Seed Capital Scheme” intended to help create a new generation
of entrepreneurs who have the requisite traits of entrepreneurship but who lack financial
resources to promote industrial ventures. The assistance is provided for meeting the risk
capital requirements of entrepreneurs. IDBI is doing well under the venture capital fund
scheme by assisting the projects which are engaged in the promotion and development of
indigenous technology that is new and untested in India. The financial assistance is provided
under this scheme in the areas of chemical, software electronics, biotechnology, food
products and medical equipment. The project cost varies between Rs. 5 lakh to Rs. 250 lakh.
IDBI provides assistance both for financing the cost of fixed assets as well as for meeting the
operating expenses in the form of unsecured loans carrying a concessional interest rate of 6%
p.a. during the early stages of development.

II. Funds Promoted by State Level Institutions

Funds promoted by state level institutions include:
a. APIDC- Venture Capital Ltd. (A VCL)
This is wholly owned by the Andhra Pradesh Industrial Development Corporation Ltd. It
aims at specialising venture fund management company. It has been entrusted with the
management of a fund, namely APIDC - Venture Capital Fund. It is established with a capital
of 13.5 crores contributed by APIDC, IDBI, Andhra Bank and IOB and few small
organisations. The A VCL undertakes investments with the objective of bringing
technological innovations in order to improve quality, reduce energy consumption, increase
competition and enhanced exports.

(b) Gujarat Venture Finance Ltd. (GVFL)

The GVFL has been promoted by Gujarat Industries Investment Corporation Ltd., (GIIC) in
association with Gujarat Lease Finance Corporation Ltd., Gujarat Alkalies and Chemicals
Ltd. and Gujarat State Fertiliser Corporation Ltd. GIIC holds 40% of the equity capital of the
GVFL and the rest is contributed by other three organisations. The GVFL is a fund
management company, and presently acts as a trustee manager of a venture fund, namely
(GVCF) Gujarat Venture Capital Fund, started in 1990. GVFL provides finance for
innovations in technology leading to an improvement - in product quality and energy
conservation, for launching new products based on imported technology.
III. Funds Promoted by Public Sector Banks Such as Canara Bank Venture Capital
Fund (CVCF)
This fund has been promoted by Canara Bank and its subsidiary Canbank Financial Services
Ltd. (CANFINA). It was set up in 1989 as a trust. It provides finance in the form of equity,
conditional loans, conventional loans or both. Its capital base is Rs. 24 crores. The Fund aims
at providing financial support for commercial exploitation of new technologies, technology
upgradation to improve quality etc.

IV. Private Agencies

Venture capital funds set up in the private sector include
1. Credit Capital Venture Fund (CCVF)
2. 20th Century Venture Capital Fund
3. India Investment Fund
4. Indus Venture Capital Fund (IVCF) (5) SBI Capital Venture Capital Fund

(1) Credit Capital Venture Fund (CCVF) - The Credit Capital Venture Fund (India) was
established in 1986. It has a capital base of 10.8 crores. The principal shareholders are Credit
Capital Finance Corporation, Bank of India, Asian Development Bank, Common Wealth
Development Corporation. It finances ventures promising high returns with maximum
assistance limited to Rs. 50 lakhs. It also provides value added services in an advisory role
and actively participates in marketing, recruitment and management affairs. -Thus it helps the
entrepreneurs to realise maximum returns. It has recently launched 10 state funds of Rs. 10
crore each. It is now known as Lazard Credit Capital Fund (India) Ltd. (LCCVF).
(2) 20th Century Venture Capital Fund It was promoted by 20th Century Finance Ltd. and has
a resource base of Rs. 20 crores. The fund aims at reviving the sick industries and help first
generation entrepreneurs.
(3) India Investment Fund It is India’s first private venture capital fund mainly subscribed by
Non-Resident Indians (NRIs). The Fund is “an offshore company owned predominantly by
NRI investors incorporated in early 1987. The fund provides equity or equity linked finance
to new projects or often young as well as established Indian companies which can
demonstrate a potential for sustained growth. The maximum assistance made available to one
venture is limited to Rs. One crore. The principal investment objectives of the fund is long
term capital appreciation. Merchant Banking Division of Grindlays Bank has been retained
as the advisers for the Fund which evaluates and recommends specific investment proposals.
The fund follows hands off approach in making the investment.
(4) Indus Venture Capital Fund (lVCF) This fund was promoted by Shri T. Thomas, the
former Director of Unilever. The Indus Venture Management Ltd. (IVML) has been entrusted
with the management of (IVCF). IVCF has a capital resource of Rs. 21 crores contributed by
IVML, the IDB!, IFCI, Deutsche Bank, International Finance Corporation (Washington) and
a few other national/international organisations.
(5) SBI Capital Venture Capital Fund. This fund has been set up by the SBI Capital Markets
Ltd. to finance ventures through its “bought out deals”. The objective behind the fund is to
promote new capital issues by purchasing them when capital market is sluggish and disposing
them off at times when market picks-up. The fund has a capital base of Rs. 10
crore.

V. Overseas Venture Capital Funds

Overseas Venture Capital Funds look for investment in areas ensuring high and guaranteed
returns such as tourism, hospitals, air transport, information technology, communication,
pharmaceutical, consumer durables, food processing industry, machinery components and
textiles etc. Following are some of the examples where foreign venture capitalists have
undertaken investments:
1. The global insurance giant, AIG, has tied up with IL & SF to float a 150 million venture
fund.
2. The IL & SF is also planning to launch a $ 100 million fund with the ADB.
3.NIKKO Securities has tied up with Walden and San Francis Company to float a venture
capital fund with a minimum capital of $ 50 million.

Q5 Write a note on NSDL & CDSL and define the process of Dematerialisation &
Rematerialisation

Ans: The earlier settlement system on Indian stock exchanges was very inefficient as it was
unable to take care of the transfer of securities in a quick/speedy manner. Since, the securities
were in the form of physical certificates; their quick movement was again difficult. This led
to settlement delays, theft, forgery, mutilation and bad deliveries and also to added costs. To
wipeout these problems, the Depositories Act 1996 was passed. It was formed with the
purpose of ensuring free transferability of securities with speed, accuracy & security. It has
been able to do so by:

a) Making securities of public limited companies freely transferable, subject to certain

exceptions;

b) Dematerialising the securities in the depository mode; and

c) Providing for maintenance of ownership records in a book entry form.

For performing the above tasks, two depositories viz, NSDL & CDSL have come up.

National Securities Depository Limited (NSDL) does the above tasks for the trades done on
NSE. It is a joint venture of:

IDBI (Industrial Development Bank of India Limited);

NSE (National Stock Exchange); and

UTI (Unit Trust of India).

NSDL is the first depository to be set up in India. It was registered by SEBI on June 7,1996.

The second depository Central Depository Services Limited (CDSL) has been promoted by
Bombay Stock Exchange and Bank of India. It was formed in February 1999. Both
depositories have a network of Depository participants (DPs) which are further electronically
connected to their clients. So, DPs act as a link between the depositories and the clients

The Depository system to some extent works like the banking system. There is a central bank
and the rules and regulations related to the working of all the commercial, foreign, co-
operative and other types of banks are framed by the central bank. In order to do the daily
transactions, the investors open an account with the associate banks, and not with the central
one. Like an investor can have a bank account with more than one bank, similarly one can
have more than one Demat Account. We can further bring out the similarities as well as the
differences between the two in understanding the depository system. As a broker represents
their investors, and can trade on their behalf either on the stock exchange or off-market.
Similarly, a Depository Participant (DP) is the representative (agent) of the investor in the
depository system providing the link between the Company and the client through the
Depository. The client’s Depository Participant will maintain his securities account balances
and intimate the status of the holding from time to time. According to SEBI guidelines,
Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the
depository. A DP is one with whom a client needs to open an account to deal in electronic
form. While the Depository can be compared to a Bank, DP is like a branch of a bank with
which one can have an account. Therefore, DPs are authorized to maintain accounts of
dematerialized shares. They help in instantaneous electronic transfer of shares held in Demat
form through electronic book entry system.

Dematerialisation

Dematerialisation is a process by which the physical share certificates of an investor are

taken back by the Company and an equivalent number of securities are credited in electronic
form at the request of the investor. An investor will have to first open an account with a
Depository Participant and then request for the dematerialisation of his share certificates
through the Depository Participant so that the dematerialised holdings can be credited into
that account. This is very similar to opening a Bank Account. Dematerialisation of shares is
optional and an investor can still hold shares in physical form. However, he/she has to demat
the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an
investor purchases shares, he/she will get delivery of the shares in demat form.

Process of Dematerialisation

The following steps may be followed for getting physical securities converted into Demat
form. The following diagram will make the understanding of the steps even better.

Step: 1 Client/Investor submits the DRF (Demat Request Form) and physical certificates (to
be dematted) to the DP. DP checks whether the securities are available for demat. Client
defaces the certificate by stamping ‘Surrendered for Dematerialisation”. DP punches two
holes on the name of the company and draws two parallel lines across the face of the
certificate. This ensures that your shares are not lost in transit or misused till credit is received
by you in your demat account. The DP upon receipt of the shares and the DRF, will issue the
client an acknowledgement and will send an electronic request to the Company.

Step: 2 DP enters the demat request in his system to be sent to Depository.

Step: 3 DP dispatches the physical certificates along with the DRF to the R&T Agent.
Step: 4 Depository records the details of the electronic request in the system and forwards the
request to the R&T Agent.

Step: 5 R&T Agent, on receiving the physical documents and the electronic request, verify
and check them. Once the R&T Agent is satisfied, dematerialization of the concerned
securities is electronically confirmed to Depository.

Step: 6 Depository credits the dematerialised securities to the beneficiary account of the
investor and intimates the DP electronically.

Step: 7 The DP issues a statement of transaction to the client.

Depository NSDL
6
Participant

7 1 3 4 5

Investor Registrar

Rematerialisation

Securities can be changed from demat form to physical form. For this one has to submit a
Rematerialisation Request Form (RRF) through the concerned DP in the same manner as
Dematerialisation. The Depository Participant will forward the request to the Depository after
verifying that the client has the necessary securities in balance. The Depository in turn will
intimate the Registrar and Transfer Agents of the Company who will print and dispatch the
share certificates for the number of shares so rematerialised and the beneficiary account will
be debited by the Depository and credited with the Company. It is not necessary that one gets
the shares of the same folio number. The Registrars and Transfer Agents will print new
certificates with a new range of certificate numbers. The investor will be allotted a new folio
number; however if one is already having an existing folio number, he may be allotted the
same.
Process of Rematerialisation

Step 1: The investor submits the Rematerialisation Request form to Depository Participant

Step 2: Depository Participant intimates the Depository (NSDL) of the request through the
system

Step 3: NSDL intimates the Registrar

Step 4: The Registrar prints certificates with new numbers & informs NSDL

Step 5: NSDL updates the accounts & downloads the details to the Depository Participant

Step 6: The Registrar dispatches the certificates to the investors.