SRI SAIRAM INSTUTE OF MANAGEMENT STUDIES

MERCHANT BANKING AND FINANCIAL SERVICES

INTRODUCTION TO FINANCIAL SERVICES:

Indian Financial System

Indian Financial system consists of four parts:
1) Financial Institutions
2) Financial markets
3) Financial Instruments
4) Financial Services

Financial Institutions
They mobilize the savings and transfer it to deficit units. They are divided into
regulatory, intermediaries, non- intermediaries and others. They deal only in financial
assets like deposits, securities, etc. They collect fund from those units having savings.

Financial Markets
This is the place from where savings are transferred from surplus units to deficit units.
There are two segments of financial market. They are money market and capital market.
Money market is concerned with short-term funds or claims.
Capital market deals with those financial assets, which have maturity period of
more than a year.
Another classification could be primary and secondary markets.
Primary market deals with new issues. The secondary market deals with
outstanding securities.
Primary markets by issuing new securities mobilise the savings directly.
Secondary markets provide liquidity to the securities.

Financial Instruments:
 The products, which are traded in a financial market, are financial assets or
financial instruments. The requirement of lenders and borrowers are varied.
 Therefore, there is a variety of securities in the financial markets. Financial assets
represent a claim on the repayment of principal at a future date.Financial services
include the services offered by both types of companies- Asset Management
Companies and Liability Management Companies
 Financial services include the services offered by both types of companies- Asset
Management Companies and Liability Management Companies

FUNCTIONS OF FINANCIAL SERVICES:

Financial services firms not only help to raise the required funds but also assure
the efficient deployment of funds.
 They assist in deciding the financing mix.
They extend their service up to the stage of servicing of lenders.They provide
services like bill discounting, factoring of debtors, parking of short-term funds in the
money market, e-commerce, Securitisation of debts, etc. in order to ensure an efficient
management of funds.
Financial services firms provide some specialised services like credit rating,
venture capital financing, lease financing, factoring, mutual funds, merchant banking,
stock lending, depository, credit cards, housing finance, book building, etc.

REGULATING AUTHORITIES:

There are 3 main regulatory authorities. They are:

 The Structural Regulation,
 The Prudential Regulation, and
 The Investor Protection Regulation.

FEATURES OF FINANCIAL SERVICES:

 It is a customer-intensive industry.
 Financial services are intangible in nature.
 Production and supply of financial services must be performed simultaneously.
 Marketing of financial service is people intensive.
 Financial services firms should always be proactive in visualizing in advance
what the market wants, or reactive to the needs and wants of customers.
 They must always be changing to the tune of the market

PROBLEMS:
 Indian financial industry hardly finds suitable personnel to deal with financial
services.
 Expensive physical accommodation is another problem being faced by the
financial services firms.
 The financial services firms lack core competence.
 They cannot review their performance without a benchmarking.
 They fully depend on fee-based business.
 Lack of proper appreciation of the advantages that could be derived by using the
advances
 In computer and telecommunication technology has constrained the growth of the
industry.

MERCHANT BANKING

Merchant Banking – Meaning:

“Merchant banking means any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying, underwriting or
subscribing to the securities underwriter, manager, consultant, advisor or rendering
corporate advisory services in relation to such issue management”

Merchant Banking- Definition:

 “Merchant banks mostly provide advisory services, issue management, portfolio
management and underwriting, which require less capital but generate more
income (non interest income).”

Services Rendered by Merchant Banker:

1. Corporate Counseling
2. Project Counseling and Pre-investment Studies
3. Capital Restructuring
4. Credit Syndication and Project Finance
5. Issue Management and Underwriting
6. Portfolio Management
7. Non-resident Investment
8. Working Capital Finance
9. Acceptance Credit and Bill Discounting
10. Mergers, Amalgamations and Takeovers
11. Venture Capital Financing
12. Lease Financing
13. Foreign Currency Finance
14. Fixed Deposit Broking
15. Mutual Funds Floatation and Management

REGISTRATION OF MERCHANT BANKER:

1.The applicant should be a body corporate.
2. The applicant should not carry on any business other than those connected with the
securities market.
3. The applicant should have necessary infrastructure like office space, equipment
manpower, etc
4. The applicant must have at least two employees with prior experience in merchant
banking.
5. Any associate company, group company, subsidiary or inter connected company of the
applicant should not have been a registered merchant banker.
6. The applicant should not have been involved in any securities scam or proved guilty
for any offence.
7. The applicant should have a minimum net worth of Rs. 5 crores

FUNCTIONS OF A MERCHANT BANKER:

1. Management of debt and equity offerings
2. Promotional activities
3. Placement and distribution
4. Corporate advisory services
5. Project advisory services
6. Loan syndication
 7. Providing venture capital and mezzanine financing
8. Leasing Finance
9. Bought out deals
10. Non-resident Investment
11. Advisory services relating to mergers and acquisitions
12. Portfolio management

ISSUE MANAGEMENT:
Issue management refers to management of securities offering of clients to the
general public and existing shareholders on
right basis. Issue managers are known as Merchant Banker or Lead managers

Type of Issues:
Issues are of three types. They are as follows:
(a) Public Issue,
(b) Right Issue, and
(c) Private Placements.

Public Issue-Reasons for Going Public:

1. To raise funds for financing capital expenditure needs like expansion,
diversification, etc.
2. To finance increased working capital requirement.
3. As an exit route for existing investors.
4. For debt financing.

Public Issue-Advantages:
1.The IPO provides avenues for funding future needs of the company.
2.It provides liquidity for the existing shares.
3. The reputation and visibility of the company increases.
4. Additional incentive for employees in the form of the company’s stocks. This also
helps to attract potential employees.
5. It commands better valuation for the company.

Public Issue-Disadvantages:
1.The profit earned by the company should be shared with its investors in the form of
dividends.
2. An IPO is a costly affair. Around 15-20% of the fund realised is spent on raising the
same.
3. In an IPO, the company has to disclose results of operations and financial position to
the public and the Securities and Exchange Board of India (SEBI).
4.The company has to invest substantial
management time and effort.

Marketing of the Issue:

Post-issue Activities:
 Principles of Allotment
 Formalities associated with Listing

RIGHTS ISSUE:
Existing shareholders have pre-emptive right in taking part in the right issue. In
right issue, shares are offered to existing shareholders according to the proportion of their
shareholding.

PRIVATE PLACEMENT:
 The direct sale of shares by a company to investors is called private placement.
 No prospectus is issued in private placement.
 Private placement covers equity shares, preference shares and debentures.

ISSUE MANAGER:
 Issue managers generally do issue management. To be an issue manager, they
register themselves with SEBI.

Roles of Issue Manager:

 Merchant banker floats the shares for and behalf of issuing company. It may be
either right or public issue. It is the stipulation of SEBI.
 One of the important areas of issue management relates to capital structuring,
capital gearing and financial planning for the company. Merchant banker acts as a
master designer in performing these activities.
 Merchant banker underwrites and invests in the issue lead managed by them.
 They invest, continue to hold and offer buy and sell quotes for the scrip's of the
company after listing. His association with the company is not merely restricted to
management of issue but continues throughout.
 Every merchant banker is expected to perform due diligence while managing a
capitalissue.
 A merchant banker is required to coordinate with a large number of institutions
and agencies.
 They are expected to interact and file offer documents with SEBI while managing
issues.
 They file number of reports related to issues. They have to revolve around SEBI.
 Marketing of an issue is an essential component of issue management. Merchant
banker makes number of promises to the potential investors. He puts him in the
shoes of a dream merchant.

PRICING OF PUBLIC ISSUES:

1. A new company set up by entrepreneurs without a track record will be permitted to
issue capital to public only at par.
2. A new company set up by existing companies with a five-year track record of
consistent profitability will be free to price its issue provided the participation of the
promoting companies is not less than 50 per cent of the equity of the new company and
the issue price is made applicable to all new investors uniformly.
3. An existing private/closely held company with a three-year track record of consistent
profitability shall be permitted to freely price the issue.
4. An existing listed company can raise fresh capita! by freely pricing further issue.

CODE OF CONDUCT OF MERCHANT BANKERS:

 A merchant banker in the conduct of his business shall observe high standards of
integrity and fairness in all his dealings with his clients and other merchant
bankers.
 A merchant banker shall render at all times high standards of service, exercise due
diligence, ensure proper care and exercise independent professional judgment.
 A merchant banker shall not make any statement or become privy to any act,
practice or unfair competition, which is likely to be harmful to the interests of
other merchant bankers.
 A merchant banker shall not make any exaggerated statement, whether oral or
written, to the client either about the qualification or the capability to render
certain services or his achievements in regard to services rendered to other clients.

CODE OF CONDUCT OF MERCHANT BANKERS:

A merchant banker shall not—
(a) creation of false market;
(b) price rigging or manipulation
(c) passing of price sensitive information to brokers,
(d) divulge to other clients, press or any other party any confidential information
about his client, which has come to his knowledge
(e) deal in securities of any client company without making disclosure to the Board.

REGISTRATION CHARGES:
Category I Merchant Banker- A sum of Rs. 2.5 lakhs to be paid annually for the
first two years.
 Category II Merchant Banker- A sum of Rs. 1.5 lakhs to be paid annually for the
first two years.
 Category III Merchant Banker- A sum of Rs 1 lakh to be paid annually for the
first two years.
 Category IV Merchant Bankers- A sum of Rs. 5,000 to be paid annually for the
first two years.

Book-Building:
 Book-building is a process of offering securities in which bids at various prices
from investors through syndicate, members and based on bids, demand for the
security is assessed and its price discovered.

Other Requirements of Book-building:

(a) issuer to provide indicative floor price and no ceiling price,
(b) bids to remain open for at least 5 days,
(c) only electronic bidding is permitted,
(d) bids are submitted through syndicate members,
(e) investors can bid at any price,
(f) retail investors have option to bid at cut off price,
(g) bidding demand is displayed at the end of everyday, and
(h)the lead manager analyses the demand generated and determines the issue price in
consultation with the issuer, etc.

E-IPOS:
 A company proposing to issue capital to public through on-line system of the
stock exchange has to comply with Section 55 to 68A of the Companies Act,
1956 and SEBI (DIP) Guidelines,2000.

MUTUAL FUNDS

Meaning of Mutual Fund:

 A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal.
Types of Mutual Funds Schemes:
Based on Maturity Period:
1) Open End Scheme
2) Close End Scheme
Based on Investment objective :
1) Growth
2) Income
3) Money Market 4) Gilt edged 5) Others
Special Schemes:
1) Tax Savings
2) Load
3) No-Load 4) Industry Specific 5) Sector Specific

Risk vs. Mutual Funds:

 The following are some risks associated with investment in mutual funds:
 Market Risk
 Interest Rate Risk
 Inflation Risk
 Business Risk
 Credit Risk
 Political Risk
 Liquidity Risk
 Timing Risk

Performance Measures of Mutual Funds:

 The performance of a mutual fund, in general, can be evaluated by using the beginning
and the end period net asset values (NAV) as follows:

Rp= ((NAVt- NAVT-1) + D1 + C1) / NAV T-1

The one period rate of return for a mutual fund (Rp) is defined as the change in
net asset value (NAV) plus its cash disbursements (D) and capital gains disbursements
(C). Net asset values of the fund are adjusted for bonus and rights.

Performance Measures of Mutual Funds:

The most important and widely used measures of performance are:
1. The Treynor Measure
2. The Sharpe Measure
3. Jenson Model
4. Eugene Fama Model

Treynor Measure:
Treynor’s Index (Ti) = (Ri - Rf)/Bi
where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of
the fund.
Sharpe Measure:
Sharpe Index (Si) = (Ri - Rf)/Si
where, Si is standard deviation of the fund.
Jenson Model:
Required return of a fund at a given level of risk (Bi) can be calculated as:
Ri = Rf + Bi (Rm - Rf)
where, Rm is average market return during the given period. Eugene Fama
Model:
Required return can be calculated as :
Ri = Rf + Si / Sm (Rm - Rf)
where, Sm is standard deviation of market returns.

Advantages of Mutual Funds:

Reduced Risk
Diversified investment
Stress free investment
Revolving type of investment
Selection and timings of investment
Wide investment opportunities
Investment care
Low investment and easy liquidity
Tax benefits
Moderate Returns
Mutual Fund Taxation:
 Tax provisions applying to fund investments and funds themselves in respect of
various matters are listed below:
Capital Gains
Tax Deducted at Source (TDS)
Wealth Tax
Income from Units
Income Distribution Tax
Section 88

Growth of Mutual Fund:

There are several yardsticks available to measure the performance of a fund sector. They
are:
(a) Asset Under Management (AUM),
(b) Number of Unit Schemes in Operation,
(c) Net Asset Value
(d) Return and
(e) Volume of Investment expressed in Rupee Value

LEASE FINANCE
Definition:
“A Lease is a transfer of a right to enjoy the property. The consideration may be a
price or a rent. The rent may be either money, or share of crops, service of anything of
value, to be rendered periodically by the transferee to the transferor.”

Classification of Lease:
 Finance Lease and Operating Lease.
 Sale and Lease Back and Direct Lease.
 Single Investor Lease and Leveraged Lease.
 Domestic Lease and International Lease.

Accounting Treatment of Lease:

Accounting transaction for the Lessor:
 Assets under financial leases should be disclosed as “assets given on lease” as a
separatesection under the head “fixed assets” in the balance sheet of the lessor.
The classification of the assets should correspond to that adopted for other fixed
assets.
 Lease rentals should be shown separately under gross income in the income
statement of the relevant period.
 There would be a lease equalization charge where the annual lease charge is more
than the
 minimum statutory depreciation.

Accounting Treatment of Lease:

Accounting transaction for the Lessee:
 A lessee should disclose assets taken under a finance lease by way of a note to the
accounts,
Disclousing the future obligations of the lessee as per the agreement.
  Lease rentals should be accounted for on an accrual basis over the lease period to
recognize an appropriate charge in this respect in the income statement, with a
separate disclosure thereof.
 The excess of lease rentals paid over the amount accrued in respect thereof should
be treated as pre-paid lease rental and vice versa.

Regulatory Authority:
There is no specific Act or legislation governing leasing in India. All legislations
or Acts referring to assets and management of assets encompass leased assets, either in
terms of assets held by the lesser or joined with assets for which payment in full has not
been received. Some of the Acts include:
 Companies Act, 1956
 Consumer Protection Act, 1986
 Easements Act, 1882
 Foreign Exchange Regulation Act, 1973, now replaced with Foreign Exchange
Management
 Act, 2000.
 Hire Purchase Act, 1972
 Income Tax Act, 1962
 Indian Contract Act, 1872
 Indian Stamp Act, 1899
 Manufacturing and Other Companies (Auditor’s Report) Order, 1988
 Motor Vehicles Act, 1988
 Recovery of Debts due to Banks and Financial Institutions Act, 1993
 Registration Act, 1908
 Reserve Bank of India Act, 1934
 Sale of Goods Act, 1930
 Sick Industrial Companies (Special Provisions) Act, 1985
 Transfer of Property Act, 1882g

Advantages of Leasing:
 Flexibility
 Leased With User Oriented Variants
 Tax-Based Benefits
 Less Paper Work and Quick Disbursement
 Convenience
 Financing for the Total Requirements
 Scope for Better Use of Own Funds
 Off-Balance Sheet Financing
 Miscellaneous Benefits

Disadvantages of Leasing:
1. Lease contracts may have terms restricting use of leased assets resulting in under-
utilization of operating capacity.
2. since, most of the equipment lease transactions are finance leases, the chances of the
lessee disinvesting is restricted. The non-cancelable nature is a disadvantage where
equipments have uncertain technology and market life.
3. ‘Off-balance sheet financing’ through leasing exposes the firm to high financial risks
as they tend to be highly geared (high debt equity ratios).
4. in an imperfect financial market, and different methods of leasing and owning by tax
authorities, leasing may be costlier than other forms of borrowing.

Indian Context:
Salient Features of the Lease Structured In the Indian Context
1. The leases structured in the Indian context are only ‘finance lease’.
2. Operating leases are very limited as the resale market for the used capital equipment is
Nil.
3. Lease agreements do not provide for transfer of ownership to the lessee either
during the lease period or at the end of the lease, as it will turn out to be a hire-
purchase transaction From tax angle.
4. The lease rentals are structured to recover the entire investment cost during the primary
period. Lease rentals for the secondary period are very nominal, e.g., Lease rates.

HIRE PURCHASE
Definition of HP:
A hire purchase can be defined:
“as a contractual arrangement under which the owner lets his goods on hire to the
hirer and offers an option to the hirer for purchasing the goods in accordance with the
terms of the contract.”

Features of Hire Purchase:

 The hire-vendor (the counterpart of lessor) gives the asset on hire to the hirer (the
counterpart of lessee).
 The hirer is required to make a down payment of around 20 per cent of the cost of
the equipment and repay the balance in regular hire purchase installments over a
specified
period of time.
 When the hirer pays the last installment, the title of the asset is transferred from
the hire vendor to the hirer.
 The hire-vendor charges interest on a flat basis. This means that a certain rate of
interest (usually around 10%) is charged on the initial investment (made by the
hire-vendor) and not on the diminishing balance.
 Theoretically the hirer can exercise the cancelable option and cancel the contract
after giving due notice to the finance company.

Hire Purchase And Lease Compared:

 Ownership of the vehicle is with the owner in HP but it is with the lessor in
leasing.
  After the repayment vehicle is transferred to the owner but in leasing after the
lease period the vehicle may not be transferred to the user.
 Risk is very high in HP due to technological Obsolescence. But it is less in
leasing.
 Cancellation of lease is possible, which is not in HP.

Law & Accounting on HP & Leasing:

Motor vehicles law in India contains specific provisions relating to lease and hire
purchase transactions.
 Basic Tax Treatment of Hire Purchase and Lease Transactions.
 Depreciation Allowance on Hire Purchase
 Accounting for Hire Purchase Transactions
 Indian and International Accounting Standards

Problems:
 Taxation
 Shortage of Low-cost Funds
 Slow Market Growth
 Less Number of Players
 Increasing Conservatism in the Market

FACTORING

Factoring:
 Factoring is essentially a financial service designed to help firms manage their
trade credit or receivables effectively.
 Factoring is defined as an asset-based means of financing by which the factor
buys up the book debts of a company on a regular basis, paying cash down against
receivables, and then collects the amounts from the customers to whom the
company has supplied goods.

Reasons to Factor:
a. It helps to obtain a source of working capital.
b. It increases sales.
c. It expands client’s business or fills more orders.
d. It eliminates the risk of credit losses on client’s customers.
e. Factor has a professional credit checking and collection payment system
f. It has flexible funding programme that increases as seller increases his sales (the
goal of factoring).
g. It helps to pay suppliers timely or take cash discounts or increase credit limits
with suppliers.
h. It facilitates to have funds for payroll and taxes.
i. Clients can extend credit to customers on large orders without having to ask them
pay Cash on Delivery (COD).
j. It helps to buy equipment or inventory on demand.
 k. It helps to obtain a source of working capital.
l. It increases sales.
m. It expands client’s business or fills more orders.
n. It eliminates the risk of credit losses on client’s customers.
o. Factor has a professional credit checking and collection payment system
p. It has flexible funding programme that increases as seller increases his sales (the
goal of factoring).
q. It helps to pay suppliers timely or take cash discounts or increase credit limits
with suppliers.
r. It facilitates to have funds for payroll and taxes.
s. Clients can extend credit to customers on large orders without having to ask them
pay Cash on Delivery (COD).
t. It helps to buy equipment or inventory on demand.

Mechanism of Factoring:

The concept of factoring consists of six stages:

1. In this stage, the client concludes a credit sale.
2. Here, the client sells the customer’s account to the factor and notifies the same to the
customer.
3. A partial payment is made by the factor after adjusting commission and interest in
advance against the account purchased.
4. Customer’s account is maintained by the factor and he undertakes any follow-ups for
payment.
5. Any amount due from the customer is remitted to the factor.
6. On due date, the factor makes the final payment to the client.

Types Of Factoring:
 Recourse Factoring
 Non-recourse Factoring
 Advance Factoring
 Invoice Discounting
 Full Factoring
 Bank Participation Factoring
  Supplier Guarantee Factoring
 Cross-border Factoring
 Maturity Factoring

Financial Aspects of Factoring:

To use the services of a factor, one should meet two types of expenses. They
a. Factoring commission, and
b. Interest on funds advances.

Advantages:
Factoring offers the following advantages from the firm’s point of view:
(a)There will be no liquidity problem if firms effectively use the factoring services. The
factoring improves the cash flow.
(b) Factoring is invaluable as it leads to a higher level of activity resulting in profitability.
(c) Division of work is effectively carried out if a firm hires a factor. The management
has more time for planning, running and improving business.
(d) Factoring also helps the firms to explore and exploit opportunities.
(e) The improved cash flows and speedy collection will bring down the cost of debt. This
will contribute towards cost savings.

Disadvantages:
 Factoring could prove to be costlier to in-house management of receivables.
Large firms having access to similar sources of funds function like factors,
themselves as they have large size of business and well-organised credit and
receivable management. Therefore, there is no need for factor services separately.
 Factoring is perceived as an expensive form of financing and also as finance of
the last resort. This tends to have a negative effect on the creditworthiness of the
company in the market.

Forfaiting:
 It is a technique of trade finance, which has attracted growing interest in the
banking sector and the financial press of export-orientated countries over the last
years. This is certainly due to the fact that in many cases it has proven to be the
most efficient instrument when it comes to export finances.
Definition of Forfaiting :
 “Forfaiting is the term generally used to denote the purchase of obligations falling
due at some future date, arising from deliveries of goods and services—mostly
export transactions— without recourse to any previous holder of the obligation.”

Advantages of Forfaiting:
 100 % Risk Cover
 Country Risk (Political and Transfer Risk)
 Currency Risk
 Commercial Risk
 Interest Rate Risk
  Instant Cash
 Flexibility and Simplicity

CAPITAL MARKET

Primary Market:
 It is a market for new issues of shares, debentures and bonds.
 Type of Issues
 Issues are of three types. They are as follows:
(a) Public Issue
(b) Right Issue
(c) Private Placements

IPO Process:
 Appointment of merchant banker and other intermediaries
 Registration of offer document
 Book Building
 Marketing of the issue
 Post-issue activities

Book Building:
 Book Building is basically a capital issuance process used in Initial Public Offer
(IPO). It is a process used for marketing a public offer of equity shares of a
company. The Book Building process allows for price and demand discovery. The
cost of the public issue is reduced. The time taken to complete the entire process
is also reduced. It is a mechanism where, during the period for which the book for
the IPO is open, bids are collected from investors at various prices. Bids are
probable price offered by the possible buyers of shares. Such bids are above or
equal to the floor price. The process aims at tapping both wholesale and retail I
investors. The offer or issue price is then determined after the bid closing date
based on certain evaluation criteria.

Marketing of the Issue:

(a) Timing of the Issue
(b) Retail Distribution
(c) Reservation of the Issue
(d) Advertising Campaign

Post-Issue Activities:
 Principles of Allotment
 Formality Associated With Listing

Secondary Market:
  It is a market for the secondary sale of securities. In other words, the market
where existing securities are traded is referred to as the secondary market or stock
market.

Types of Securities Traded:

 Industrial Securities
 Government Securities
 Financial Intermediaries Securities

Stock Market in India:

 With small beginnings in the early 19th century, India’s stock market has risen to
great heights.
 By 1990, India had 19 stock exchanges. By 1999, the number of stock exchanges
has risen to 23.
 There were around 9877 listed companies.

Role and Functions:

The major roles played by a stock exchange in a country are:
 The stock exchange provides a market place for purchase and sale of securities.
 The stock exchange provides the linkage between the savings in the household
sector and the investment in corporate economy.
 The stock exchanges provide a market quotation of the prices of shares and bonds.
 It serves a barometer, not only of the state of health of individual companies, but
also of a nation’s economy as a whole.
 The stock exchanges in India serve the joint sector units as also! to some extent
public sector enterprises.
 Another important function that stock exchanges in India discharge is of
providing a market for gilt-edged securities. Central Government, State
Government, and Municipalities etc issue gilt-edged securities.

Individual Membership Qualifications:

(a) Minimum age of 21.
(b) Citizenship of India: The Governing Board may, in suitable case, relax this
condition.
(c) Not been adjudged bankrupt or insolvent.
(d) Not compounded with his creditors.
(e) Not been convicted of an offence involving fraud or dishonesty.
(f) Not engaged as principal or employee in any business other than that of securities.
(g) Not been, at any time, expelled or declared a defaulter by any other Stock
Exchange.
(h) Either matriculate or has the 10 plus 2 years, qualification. Generally, however,
preference is given to professionally qualified persons.

Weaknesses of Stock Exchanges in India:

1Unprecedented booms and crashes lead to rampant speculative activities. This does not
reflect a very healthy state of affairs.
2. Insider trading is rampant on Indian stock exchanges. Insider trading means operating
on information, which is price sensitive and not available to the public. Potential source
of information is people working in companies.
3. Demand and supply forces in the stock market are not allowed to act freely. It is highly
dominated by large financial firms, big brokers and operators. Therefore, it is
oligopolistic in structure. In an Oligopoly market, only few sellers prevail.
4. There are limited forward trading activities in the stock exchanges.
5. The major problem areas include settlement periods, margin system and carry forward
(badla) system.
6. The recent development of the primary market has created serious problems of
interfacing with the secondary market. The secondary market should be re-oriented as to
discharge the new responsibilities cast on it by the recent developments.
7. Indian stock market has still fragmented regulation even with the arrival of SEBI.
There is multiplicity of administration.
8. The Primary markets are not ignited enough to cope with changes taking place in the
financial system.
9. Poor disclosure in prospectus is still rampant.
10. Even with the world of dematerialization, investors face problems of delays (refund,
transfer, etc.).
11.FIIs are now permitted to invest in unlisted securities and corporate and Government
debt. Still there is some wall separating the foreign institutional investors to invest
inIndian securities.
12. Stock Exchanges are run as brokers’ clubs. Management is still dominated by
brokers.
13. Poor disclosures by mutual funds are the main problem in the mutual fund industries.
Net asset value (NAV) is not revealing the real picture about the performance of the fund.

Reforms in Indian Securities Market:

1. Capital Issues (Control) Act of 1947 was repealed and the office of controller of
Capital Issues abolished. Control over price and premiums of shares were removed.
Companies are now free to raise funds from securities markets after filing prospectus
with the Securities and Exchange Board of India (SEBI).
2. The power to regulate stock exchanges has been delegated to SEBI by the
Government.
3. SEBI introduces regulations for primary and other secondary market intermediaries,
brings them within the regulatory framework.
4. Reforms by SEBI in the primary market include improved disclosure standards,
introduction of prudential norms, and simplification of issue procedures. Companies are
required disclosing all material facts and specific risk factors associated I with their
projects while making public issues.
5.Listing agreements of stock exchanges have been amended to require listed companies
to furnish annual statement showing variations between financial projections and
projected utilization of funds in the offer document and actual figures. This is to enable
shareholders to make comparisons between performance and promises.
6. SEBI introduces a code of advertisement for public issues to ensure fair and truthful
disclosures.
7. Disclosure norms further have strengthened by introducing cash flow statements.
8. New issue procedures have been introduced. Book building for institutional investors
is introduced to bring down the costs of issue.
9. SEBI introduces regulations governing substantial acquisition of shares and takeovers
and lays down conditions under which disclosures and mandatory public offers are to be
made to the shareholders. Regulations further revised and strengthened in 1996.
10. SEBI reconstitutes the governing boards of the stock exchanges and introduces
capital adequacy norms for broker accounts. Hi. Private mutual funds are permitted and
several such funds have been already set up. All mutual funds are allowed to apply for
firm allotment in public issues. This is to reduce issue costs.
11. Regulations for mutual funds have been revised in 1996, giving more flexibility to
fund managers while increasing transparent-disclosure, and accountability.
12. Over-the-Counter Exchange of India has been formed.
13. National Stock Exchange (NSE) has been established as a stock exchange with
nationwide electronic trading.
14. Bombay Stock Exchange (BSE) introduces screen-based trading. 15 stock exchanges
now have screened-based trading. BSE has been granted permission to expand its trading
network to other centers.
15. Capital adequacy requirement for brokers has been enforced.
16. System of mark-to-market margins has been introduced in the stock exchanges.
17. Stock lending scheme has been introduced.
18. Transparency is brought about in short selling.
19. \NSE has set up the National Securities Clearing Corporation, Ltd.
20. BSE is in the process of implementing a trade guarantee scheme
21. SEBI strengthens surveillance mechanisms and directs all stock exchanges to have
separate surveillance departments.
22. SEBI strengthens enforcement of its regulations.
23. SEBI begins the process of prosecuting companies for misstatements and ensures
refunds of application in several issues on account of misstatements in the prospectus.
24.Indian companies are permitted to access international capital markets through Euro
issues.
25.Foreign direct investment has been allowed in stock broking, asset management
companies, merchant banking, and other non-bank finance companies.
26. Foreign institutional investors (FIIs) are allowed access to Indian capital markets on
registration with SEBI.

New Generation Stock Exchanges:

 Over the Counter Exchange of India (OTECI)
 National Stock Exchange of India

Regulation of Stock Exchanges:

All stock exchanges were subject to self-regulation from their own management bodies
i.e., Board of Governors till 1956. However, after that it is changed to three-tier
regulation.
1. Constitution of India lists the subject of ‘Stock Exchanges and Future Markets’ under
the exclusive authority of Central Government. Central Government through Ministry of
Finance regulates the stock exchanges primarily through Securities Contract (Regulation)
Act, 1956 (SCRA).
2. The Securities and Exchange Board of India (SEBI) also regulates the stock exchanges
in order to protect the interest of investors and to promote the development of security
markets in India.
3. In addition, all stock exchanges have their own separate rules, byelaws and regulations,
which are exercised through their governing Councils.

Role of SEBI in Regulation:

Few rules and regulations of SEBI are given below:

1. SEBI (Portfolio Managers) Rules and Regulations, 1992.
2. SEBI (Stockbrokers and Sub-brokers) Rules and Regulations, 1992.
3. SEBI (Insider Trading) Regulation, 1992
4. SEBI (Merchant Bankers) Rules and Regulations, 1992.
5. SEBI (Mutual Fund) Regulations, 1993.
6. SEBI (Underwriters) Rules and Regulations, 1993.
7. SEBI (Registrars to Issue and Share Transfer Agents) Rules and Regulations, 1993.
8. SEBI (Debentures Trustee) Rules and Regulations, 1993.
9. SEBI (Bankers to an Issue) Rules and regulations, 1993.

Few guidelines are given below:

(a) Free pricing of shares
(b) Disclosures and investors’ Protection
(c) Registration of Foreign Institutional Investors (FII)
(d) Allotment of shares
(e) New financial instruments
(f) Credit rating fixed return bearing securities.

Self-Regulatory Body:
 Self-regulatory organizations (SROs) have been adopted in many countries to
regulate various participants in the securities market. The SRO’s bylaws and
codes of conduct bind members.
 Through the SEBI Act of 1992, SROs were introduced in the Indian capital
market, but they are not yet operational.

VENTURE CAPITAL
Evolution:
 R.S. Bhat, the chairman of Bhat Committee highlighted the problems of new
entrepreneurs and technologists in setting up industries in 1972. The concept of
Venture Capital was introduced in India by the All India Financial Institutions in
1975.
 The Risk Capital Foundation (RCF) sponsored by the Industrial Finance
Corporation of India (IFCI) was inaugurated. The purpose of establishing the
 institution was to supplement promoters’ equity with a view to motivate
technologists and professionals to promote new firms. Industrial Development
Bank of India (IDBI) introduced Seed Capital Scheme in 1976. Till 1984, the
concept of venture capital was known as ‘Risk Capital’ and “Seed Capital’. The
objectives of risk capital were different to those understood under venture capital
today.

Meaning:
 Venture capital is a private equity investment in entrepreneurial companies used
to finance the working capital requirement and asset needs of growing businesses.

Venture Capital Funds generally:

(a) Finance new and rapidly growing companies;
(b)Invest in typically knowledge-based, sustainable, up-scaleable companies;
(c) Purchase equity or quasi-equity securities;
(d) Assist in the development of new products or services;
(e) Add value to the company through active participation;
(f) Take higher risks with the expectation of higher rewards;
(g) Have a long-term orientation.

Mechanism of Venture Capital:

 The flow of venture capital from the investor to a Start-up Company and back can
be thought of as a cycle that runs through several phases.
(A) Raising of venture fund.
(B) Investing in, monitoring of, adding value to firms.
(C) Exiting successful companies; returning capital to investors.

Types of Venture Capitalist:

 The types of venture investors are classified based on (a) the investment strategy
and (b) their specialization.
Based on the Investment Strategy
  Gen era lists
 Venture Capitalists of Early Stage
 Specialists
 Venture Capitalists of Expansion Stage Financing
 Later Stage Investors
 Turnaround Investors
 Diverse Investors
 Synergetic Venture Investment
Based on their Specialization
 Incubators
 Angel Investors
 Venture Capitalists (VCs)
 Private Equity Players
Types of Venture Capital Firms:
 Limited Partnership Firms
 Independent Venture Firms
 Affiliates or Subsidiaries
 Affiliates of Government
 Corporate Venturing

Benefits of Venture Capital:

(a) Venture backed companies have been shown to grow faster than other types of
companies. This is made possible by the provision of a combination of capital and
experienced personal input from venture capital executives, which sets it apart
from other forms of finance.
(b) Venture capital can help you achieve your ambitions for your company and
provide a stable base for strategic decision making.
(c) The venture capital firms will seek to increase a company’s value to its
owners, without taking day-to-day management control. Although you may have
a smaller “slice of cake”, within a few years your “slice” should be worth
considerably more than the whole “cake” was to you before.
(d) Venture capital firms often work in conjunction with other providers of
finance and may be able to help you to put a tats funding package together for
your business.

Types of Investors:
 Informal Investors
 Formal Investors
Venture Capital Fund Stages:

Problems With Vcs in India:

 License Raj
 Scalability
 Valuation
 Mindsets
  Enforceability
 Exit
 Returns, Taxes and Regulations

INSURANCE

Meaning:
 The function of insurance is to protect one against losses he cannot afford. This is
done by transferring the risks of a person, business, or organization, the “insured”
to an insurance company, the “insurer”. The insurer then reimburses the insured
for “covered” losses i.e., those losses it pays for under the terms of the policy.

Principles of Insurance:

 PROXIMATE CAUSE
It is the main cause which brings about a loss with no other intervening cause
which breaks the chain of events “Cause proxima”.

INSURABLE INTEREST
 To insure anything the Insured must have an insurable interest in the subject
matter of insurance,i.e. he/she must benefit by its safety or be prejudiced by its
loss.
 CONTRIBUTION
Although the Insured may effect more than one policy to cover the same property
or interest, he/she cannot recover in total more than a full indemnity.
 INDEMNITY
It is the placing of the insured in the same financial position after a loss as he/she
was immediately before the loss. In the event of a claim the Insured must:
 UTMOST GOOD FAITH - UBERRIMAE FIDEI
It is the duty to disclose all material facts relating to the risk to be covered. A
material fact is a fact which would influence the mind of a prudent underwriter in
deciding whether to accept a risk for insurance and on what terms.
 SUBROGATION - STEPPING INTO THE SHOES
It is the right of an insurance company who has paid a claim to its client to pursue
another party who may have caused the incident resulting in the claim.

Types of Policies:
 Endowment Policy
 Whole Life Policy
 Term Life Policies
 Money-back Policies
 Joint Life Policies
 Children’s Insurance Policies
 Pension Plan Or Annuities
  Women’s Policy
 Special Plans
 Group Insurance

Major Insurance Roles:

 Underwriter
 Surveyor
 Broker
 Claims Adviser
 Actuary
 Financial Adviser

Brief History of General Insurance Business in India:

 Some of the important milestones in the general insurance business in India are:
1907; The Indian Mercantile Insurance Ltd set up the first company to transact
all classes of general insurance business.
1957: General Insurance Council, a wing of the Insurance Association 1 of India,
framed a code of conduct for ensuring fair conduct and sound business practices.
1968: The Insurance Act was amended to regulate investments and I set minimum
solvency margins and the Tariff Advisory Committee 1 set up.
1972: There General Insurance Business (Nationalization) Act, 1972 was passed
as an act of parliament. It helped the Government to nationalize the general
insurance business in India with effect] from January 1, 1973. About 107 insurers
are amalgamated and grouped into four companies viz., the National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance
Company

Regulation of Insurance Companies:

 Insurance is a federal subject in India and the legislation that governs insurance in
India is:
• The Insurance Act, 1938; and
• The IRDA Act, 1999.

HOUSING FINANCE

Housing Vs Retail Lending:

 Housing is one of the basic human needs of the society. It is closely linked with
the process of overall socio-economic development of a country.
 The retail lending business is growing at an outstanding rate of over 30% every
year. Banks in India have gone a long way since 1990s where the retail portfolio
was less than 5% to the current
 level of around 18%. The proportion of the retail share in the lending portfolio is
slated to close in
at around 40% by 2005-2006.

Reasons for lending housing loan:

• Poor credit off take of companies, commercial and other traditionally industrial
sector.
• Growing risk of lending to industry on account of recession.
• Growing financial disintermediation process enabling many triple A rated
companies to access the market directly.
• Relatively less risk for retail borrowers.
• Rising disposable income and changing life style aspiration of a sizable section
of the Population.
• Continuous softening of lending rates which has improved the borrowers’ ability
to repay.
• Increased governmental incentives by way of tax relief or concessions on certain
types of Loans.
• Improved liquidity with banks following a reduction in Cash Reserve Ratio
(CRR) and low credit off take in the face of continued accretion of deposits.
• Availability of better spread to banks.
• Widespread of risk among large number of borrowers and
• Developments in technology which have reduced transaction costs on a large
number of borrower accounts.

Housing Finance Institutions:

 The Housing Finance Institutions can be segregated into three categories:
• Public Sector Finance
• Banks
• Private Sector Finance

Public Sector Institutions:

 HUDCO (Housing and Urban Development Corporation Limited)
 LICHFL (Life Insurance Corporation Housing Finance Limited)
 GICHFL (General Insurance Corporation Housing Finance Limited)
 PNBHFL (Punjab National Bank Housing Finance Limited)
 SBIHF (State Bank of India Housing Finance)
 The other major players in the public sector are the Indian Housing, Corp bank
Homes, Cent Bank Home Finance Limited, etc.

Private Sector Finance:
 HDFC (Housing Development Finance Corporation)
 DHFCL (Dewan Housing Finance Corporation Limited)
 GHFCL (Global Housing Finance Corporation Limited)
 BHFL (Birla Home Finance Limited)
 Maharishi Housing
  Others
Other key housing finance providers in the private sector are Sundaram Home Finance,
Hometrust Housing, Grihaa Finance, Weizmann Homes, GLFL Housing, etc.

National Housing Bank:

 The National Housing Bank was setup in 1988 as a subsidiary of Reserve Bank of
India. It is a principal agency promoting housing finance institutions both at local
and regional levels and provides financial and other support to such institutions.

Housing Financial Services:

 Project Finance
 Refinance Assistance From NHB

Types of Home Loans:

 Home Purchase Loan
 Home Improvement Loan
 Home Construction Loan
 Home Extension Loan
 Home Conversion Loan
 Land Purchase Loan
 Bridge Loan
 Balance Transfer Loan
 Refinance Loan
 Stamp Doty Loan
 Loans to WRXs

Innovative Home Loan Schemes:

 Step Up Repayment Facility (SURF)
 Flexible Loan Instalment Plan (FLIP)
 Balloon Payment

SECURITIZATION
Definition:
SECURITISATION is the process of transforming assets into securities.

As defined by the recent Ordinance:

“Securitisation” means acquisition of financial assets by any
securitisation company or reconstruction company from any originator, whether
by raising of funds by such securitisation company or reconstruction company
from qualified institutional buyers by issue of security receipts representing
undivided interest in such financial assets or otherwise”.
Process of Securitisation:
 The SECURITISATION process begins with a financial institution segregating,
and then pooling receivables. In the usual ABS transaction, a wide variety of asset
types are eligible to be pooled.
  After pooling, a financial institution sells the selected assets to a special-purpose
vehicle. This special-purpose vehicle, or SPV, is responsible for both the financial
re-engineering of the underlying cash flows and the sale of securities to investors.
Process of Securitisation:

Types of assets Seuritised:

 Asset-backed securitisation (ABS)
 Mortgage-backed
 Asset-backed commercial paper
 Conduit
 Collateralized
 Commercial MBS
 Multi-seller
 Pass-through securities
 Special-purpose vehicle (SPV)

Reasons for Securitisation:

There are three basic reasons why a financial institution wants to securitize assets:
(a) Asset management,
(b) Funding, and
(c) Regulatory performance ratios.

Reasons for Purchasing Securitized Assets:

1. Asset diversification,
2. attractive returns,
3. safe investments.

Securitisation Instruments:
1. Pass-Through-Certificates (Single Maturity Structure)
2. Pay-Through-Securities (Multiple Maturity Structure)
3. Stripped Securities

Pricing of the Securitisation instruments:

Pricing of the instrument can be done in two ways.
(a) By Working Forward
 This is done by calculating the return to the originator and
then deducting the expenses from this return to arrive at the rate to be offered to
the investor.
(b) By ‘Working Backward
The expectations are taken into consideration and a rate of
return to be offered to the investor is arrived at. This should be less than the
weighted average rate of return to the organisation and the difference will be the
spread that the organisation will get as profit.

Legislation:
 RBI Regulations and Guidelines:
 Acquisition of Financial Assets
 Engagement of Outside Agency
 Sale Committee
 Issue of Security Receipts

Accounting for Securitisation:
 Importance of Accounting Standard
 Treatment Gain On Sale
 Accounting For Securitisation vs. Tradition Accounting Practices

Problems in securitization:
Several obstacles are hindering the growth of securitisation in India:
• Stamp duty on transfer of assets by originator to the SPV, as high as up to 13%.
• If PTC issued in the form of a receipt, it is not transferable by endorsement and
delivery; if PTC is issued in the form of a promissory note it will attract stamp
duty.
• Ambiguity on whether PTCs can be regarded as negotiable promissory notes.
• Unresolved tax issues - who will be taxed?
• Weak foreclosure laws failing to provide adequate comfort to investors in ABSs.

CREDIT RATING

Definition:
 “Credit ratings help investors by providing an easily recognizable, simple tool that
couples a possibly unknown issuer with an informative and meaningful symbol of
credit quality.”

Rating Process:
 Rating is an interactive process with a prospective approach. It involves series of
steps. The main points are described as below:
 Mandate
 Team
 Information
  Secondary Data
 Meetings and Visits
 Preview/Meeting
 Committee Meeting
 Rating Communication
 Rating Reviews
 Surveillance

Rating Framework:
 These factors can be conceptually classified into business risk and financial risk
drivers.

Business risk drivers Financial risk drivers

Industry characteristics - Funding policies
Market position - Financial flexibility
Operational efficiency - New projects
Management quality
Credit Rating Agencies in India:
 Credit Rating Information Services of India Limited (CRISIL)
 Investment Information and Credit Rating Agency of India (ICRA)
 Credit Analysis and Research Limited (CARE)

Criticisms:
 Since issuers are charged for ratings by CRAs, i.e., the issues are pay masters,the
independence of ratings becomes questionable.
 CRAs are not accountable for the ratings given by them.
 Ratings may lead to herding behaviour thereby increasing the volatility of capital
flows.
 Credit ratings change infrequently since the rating agencies are unable to
constantly monitor developments.

Regulations:
 In India, in 1998, SEBI constituted a Committee to look into draft regulation for
CRAs that were prepared internally by SEBI. The Committee held the view that
in keeping with international practice, SEBI Act 1992 should be amended to bring
CRAs outside the purview of SEBI for a variety of reasons.
 In consultation with Government, in July 1999, SEBI issued a notification
bringing the CRAs under its regulatory ambit in exercise of powers conferred on
it by Section 30 read with Section 11 of the SEBI Act 1992.

CONSUMER FINANCE

Introduction:
  Consumer Finance includes all asset-based financing options provided to
investors for acquiring consumer durables. In a consumer finance transaction, an
individual initially pays a fraction of the cash on purchase while promising to pay
the balance with interest over a specified time period.
 Consumer finance is available for a large number of durables like televisions,
refrigerators, airconditioners, washing machines, cars, two-wheelers, personal
computers and four-wheelers too.
Consuming Class in India

Characteristics of Consumer Finance:

 Parties and Structure of the transaction
 Payment for the transaction
 Rate of Interest and Repayment Period
 Security
 Eligibility Criteria for Borrowers

Importance of Consumer Finance:

 Increasing Risk of Disintermediation in Corporate Lending
 Housing Loans
 Consumer Durables
 Reduction in Interest Rates

Impact of Consumer Finance Growth on Consumer Durables Market:

 Passenger Cars and Two-wheelers
 Key Issues and Success Factors
 Innovative Solutions
 Credit Constraint in Rural India for Consumer Durables
 Consumer Preferences
 Consumer Finance by GE Countrywide

Consumer Protection:
 Complaint Procedure
  Under the Consumer Protection Act, every district has at least one Consumer
Redressal Forum,more commonly called a Consumer Court.

CREDIT CARD

Introduction:
Credit card is a monetary instrument that enables the cardholder to obtain
goods and services without actual payment at the time of purchase. It is also popularly
known as plastic money.
The value of purchases made by the cardholder using the card
is recovered at the end of a specified period, usually a month, called the billing cycle. It
can be said that a credit card is basically a “Pay Later” card that is provided to a
customer.

Benefits of Holding Credit Card:

(a)Credit can be availed for a period of 30-45 days (Max.52 days).
(b) A cardholder need not have the required amount in his account to the extent of the
transaction made.
(c) The card carries a predetermined limit up to which the holder can spend.
(d) At the end of each billing cycle, the cardholder has to pay only 5-10% of the
outstanding value and the rest can be paid in installments over the next few months/years.
(e) An outstanding balance, a nominal rate of 2-3% per month is charged as interest.
(f) Regular use of the credit card by the user earns him additional points that provide the
cardholder with discounts on purchases.

Mechanism of a Credit Card Transaction:

Every transaction made on a credit card involves three parties:
(a) The Card Issuer
(b) The Cardholder
(c) The Merchant Establishment (ME)

Debit Card:
It is the accountholder’s mobile ATM. Open an account with
a bank that offers a debit card, and payments for purchases are deducted from your bank
account. The retailer swipes the card over an electronic terminal at this outlet, you enter
the personal identification number on a PIN pad and the money is immediately debited at
the bank.

Benefits of Debit Cards:

 Debit cards offer wide range of benefits to the customers. Some of them are:
(a) One can plan Budget within the savings instead of going for credit
(b) He can access his own money 24 hours a day
(c) He saves fee and other service changes on cash withdrawals.
(d) He can carry one card to use both at ATMs and at merchant locations
Types of Cards:
 MasterCard
 VISA Card
 Affinity Cards
 Standard Card
 Classic Card
 Gold Card or Executive Card
 Platinum Card
 Titanium Card
 Secured Card
 Charge Card
 Rebate Card
 Co-branded Card
 Travel Card
 Laghu Udyarni Credit Card (LUCC) Scheme

New Types of Credit Card:

1. Corporate Credit Cards
2. Smart Cards
3. Global Credit Cards

Eligibility To Get A Card:

 Place of Residence
 Telephone
 Profession
 Place of Eligibility To Get A Card
 Age
Costs of Credit Card Payment:
 Renewal
 Interest-free period on ‘every bill’
 Purchases on credit
 Fuel on credit
 Billing period
 Cash advance

Choosing The Right Card:

 Acceptability
 Eligibility
 Fees
 Other Charges
 Credit Period
 Cash Advance
 Insurance Cover
Uses of Credit Cards:
(a) Personal Accident Insurance.,
(b) Cash Withdrawal Facility.
(c) Increase in Credit.
(d) “Add-On” Facility.
(e) Leveraged Investment Facility.

MICRO FINANCE

Micro credit:
 Micro Credit is defined as provision of thrift, credit and other financial services
and products of very small amount to the poor in rural, semi-urban and urban
areas for enabling them to raise their income levels and improve living standards.

Grameen Credit:
 Grameen brought credit to the poor, women, the illiterate, the people who pleaded
that they did not know how to invest money and earn an income. Grameen created
a methodology and an institution around the financial needs of the poor, and
created access to credit on reasonable term enabling the poor to build on their
existing skill to earn a better income in each cycle of loans.

Features of Grameen Credit:

(a) It promotes credit as a human right.
(b)Its mission is to help the poor families to help themselves to overcome poverty. It is
targeted to the poor, particularly poor women.
(c) Most distinctive feature of Grameen credit is that it is not based on any collateral, or
legally enforceable contracts. It is based on “trust”, not on legal procedures and system.
(d) It is offered for creating self-employment for income-generating activities and
housing for the poor, as opposed to consumption.
(e) It was initiated as a challenge to the conventional banking which rejected the poor by
classifying them to be “not creditworthy”. As a result it rejected the basic methodology of
the conventional banking and created its own methodology.
(f) It provides service at the door-step of the poor based on the principle that the people
should not go to the bank, bank should go to the people.
(g) In order to obtain loans a borrower must join a group of borrowers.
(h) Loans can be received in a continuous sequence. New loan becomes available to a
borrower if her previous loan is repaid.
(i) All loans are to be paid back in installments (weekly, or bi-weekly).
(j) Simultaneously more than one loan can be received by a borrower
(k) It comes with both obligatory and voluntary savings programmes for the borrowers.

Self-help Group (SHG):

 A Self-Help Group (SHG) is a registered or unregistered group of micro
entrepreneurs having homogenous social and economic background voluntarily,
 coming together to save small amounts regularly, to mutually agree to contribute
to a common fund and to meet their emergency needs on mutual help basis.

Microfinance-credit Lending Models:

 Associations
 Bank Guarantees
 Community Banking
 Cooperatives
 Credit Unions
 Grameen
 Intermediaries
 Peer Pressure
 Rotating Savings and Credit Associations
 Village Banking

Loans Delivery Models:

 Conventional /Branch Model
 Partnership Model
 Under both the models

Legal Framework:

MERCHANT BANKING AND FINANCIAL SERVICES

 IMPORTANT QUESTIONS (From University Question Papers)

UNIT I
2 Marks
1. Distinguish merchant banking and investment banking. **
2. Explain the major players in financial services.
3. What is the difference between capital structure and financial structure?
4. State the role of HDFC.
5. Write the differences between money charger and exchanger.
6. How is ‘merchant banker defined under the SEBI regulations?
7. What is credit syndication?
8. What do you mean by ‘safety net scheme’?
9. Who is lead manager?
10. What is FEMA?
11. What is OTCEI and why is OTCEI not popular with investors?
12. How to issue shares through OTC Exchange of India?
13. What is green shoe option?
14. State the disclosure to be made to the SEBI as apart of general obligations of
merchant bankers.

16 Marks
1. Give a details account of the regulatory framework available for merchant
banking in India. **
2. Define merchant banking. Elaborate the various services rendered by merchant
bankers. **
3. Critically examine the functions, duties, and powers of the SEBI.
4. Trace the origin of Merchant Banking briefly and institutional structure of
Merchant banking in India.
5. State the capital adequacy requirement prescribed for the merchant bankers by the
SEBI.
 6. Outline the procedure relating to the registration of Portfolio managers under the
SEBI regulations, 1993.
7. Give an account of the code of conduct prescribed by the SEBI for the portfolio
managers.
8. Explain the legal provisions of the Companies Act concerning merchant bankers.
9. Enumerate the recent developments and challenges ahead of merchant bankers in
India. **
10. Explain in detail OTCEI.
11. Discuss the various general obligations of merchant bankers under the SEBI
regulations.
12. Features of Merchant banking?

UNIT II
2 Marks
1. Define underwriting and list the uses of underwriting?
2. What is Book Building **
3. What is Private placement?
4. How is issue managers categorized?
5. What does the term ‘optimal capital structure refers to’? **
6. Who is an issue manager?
7. What do you know of the IPO method of marketing securities?
8. What do you mean by ‘Private Placement’?
9. What is Sensex?
10. Define prospectus.
11. Explain E-IPO.
12. What is due diligence certificate?
13. What is GDRs. (Global depositary Receipt)
14. What are Euro issues?
15. Who are QIBs?
16 Marks
1. Briefly outline the salient features of offer documents connected with right issue.
2. Explain the activities undertaken by merchant bankers in pre and post-issue
management. (16)
[What are the main post-issue activity/activities relating to the issue of capital through
prospectus? **6)]
[Briefly outline the pre-issue activities relating to the issue of capital through prospectus
(16) **
3. What are the regulations and laws that govern issue management in India? Discuss in
detail.
4. What do you know the ‘IPO’ method of marketing securities? Explain the procedure
involved in the same. **
5. Explain the various kinds of roles performed by merchant bankers in an IPO.
6. What are the guidelines issued by SEBI with regard to the underwriting business in
India?
7. What are the contents of a prospectus issued for right issue as enshrined in the Indian
companies Act, 1956?
8. Name some of the companies that carry out underwriting business in India.
9. Describe the provisions of the Companies Act 1956 relating to allotment of shares and
issue of share certificates.
10. Explain the factors influencing issue pricing when the pricing mechanism is
considered to be right.
11. What is book-building? What are the requirements to be complied with by a company
proposing to issue capital through book-building?
12. What are the general obligations and responsibilities of the registrar to as issue?
13. What are the different modes of public issue? What is an IPO?
14. Write the guidelines and considerations relevant for planning the capital structure of a
new company.
UNIT III
2 Marks
1. How does a mutual fund operate?
2. Distinguish between merger and takeover.
3. What are the disadvantages of credit rating?
4. What are offshore mutual funds?
5. Give an account of some of the credit rating agencies, both domestic and
international.
6. What is ‘Bank Card Association’?
7. How does a mutual fund operate?
8. What is loan syndication?
9. What is business valuation?
10. What is meant by insider trading?
11. What is meant by bail out takeover?
12. What is credit rating?
13. What is credit syndication?
14. What are the types of mergers?
15. What is conglomerate merger?
16. Define credit syndication.
17. What is a mutual fund?
18. What is credit rating?

16 Marks
1. How can merger be financed? Analyse the impact of the various modes of finance on
company’s EPS.
2. Discuss the rating methodology used by rating companies for manufacturing and
finance companies. **
3. Discuss the major issues of Mergers and Acquisitions in India.
4. Discuss the major functions and services rendered by merchant bankers as regards
credit syndication. ** OR Write a detailed note on the syndication of working capital
funds by merchant bankers.
5. State the different approaches of ascertaining the purchase price by an acquiring firm.
6. Explain the factors that have contributed to the rating framework of credit rating
agencies worldwide.
7. How can the expected gains from merger be shared between the acquiring and the
acquired companies? Explain.
8. What are the functions of credit rating? Explain the methodology followed by CRISIL
in rating credit instruments. Explain the benefits of credit rating to rated companies na
dinvestors.
9. Describe the structure of the mutual fund operation in India. Also describe the various
schemes that can be offered by it. OR State briefly the framework of regulation of the
mutual funds in India.
10. What are the various methods of determining the value of a firm at the time of a
merger? What are the methods of financing techniques in mergers?
11. Discuss the importance of Mutual funds. Explain the various types of mutual funds.
What are the factors to be considered before selecting a mutual fund? **
12. Explain the portfolio management process of a mutual fund.

UNIT IV
2 Marks
1. What are the various types of lease?
2. Distinguish between primary and secondary lease.
3. What is ‘hire purchase finance’?
4. To which type of consumers are hire purchase system and instalment system
suitable?
5. What is AMC? (Asset Management Company)
6. What is cross border leasing?
7. What is operating lease?
8. What is leverage leasing?
9. What is Leverage Buyout.
10. What is ‘Swap leasing’?
16 Marks
1. Write a brief note on taxation aspects of hire purchase deals. Should a hirer deduct tax
at source from the hire purchase instalment paid to a finance company?
2. What is the debt displacement effect of leasing?
3. Discuss briefly the role played by various participants in lease finance services.
4. Identify the different ways of determining the rate of interest under the hire purchase
finance arrangement.
5. Explain the framework of evaluation (financial) of a hire purchase transaction from the
view point of. **
i. Hirer
ii. Finance Company.
6. Explain the different kinds of leasing. Enumerate and explain the advantages and
disadvantages of leasing. **
7. Differentiate hire purchase from leasing. **What guidelines do banks have for hire
purchase business? ***
8. What are the financial implications of leasing? Discuss.
9. Explain the methods of reporting adopted for a hire purchase finance transaction.
10. Distinguish between financial lease and operating lease. Discuss the advantages of
leasing.
11. State the provisions of the Hire Purchase Act, 1972 regarding
i. Limitation on hire purchase charges and
ii. Repossession of goods by the hire vendor.

UNIT V
2 Marks
1. What is Edi factoring?
2. Explain the different types of consumer finance.
3. What is forfeiting? How is forfeiting advantageous?
4. How is factoring different from forfeiting?
5. How will you define the term’ housing’?
6. How is forfeiting different from export factoring?
 7. Define venture capital.
8. What are the various types of venture capital?
9. What is real estate financing?
10. What is kite flying?
11. What is forfeiting?
12. What is a stock invest?
13. Define Venture capital.
14. What is a credit card?
15. What is Smart card?
16. Distinguish between ‘with recourse’ and ‘without recourse’ factoring.
17. Write any two similarities between factoring and bills discounting.
18. What is consumer credit? List some of its features.

16 Marks
1. Critically examine the SEBI venture capital fund regulations, 1996.
2. Briefly outline the procedure of bills discounting. How does it differ from factoring?
3. List the guidelines regarding factoring services in India.
4. What are the facilities and services provided by credit card issuers?
5. How do you appreciate the need for regulating the growth of venture capital funds in
India?
6. State the salient features of cross border factoring and explain.
7. Identify the safeguards to be followed by a banker while granting consumer credit.
8. What are the characteristics features that distinguish venture capital from other capital
investments? Describe in detail.
9. How was the bills discounting misused by banks and finance companies? What steps
have been taken by the RBI to prevent such misuse in future? Discuss.
10. Discuss in detail the various services rendered by factoring intermediaries. Critically
evaluate the role of factoring as a source of financing. Explain the benefits of factoring.
***
11. Explain the various types of credit cards. Discuss the advantages and disadvantages
of credit card to various parties. *** What are the facilities offered to credit card holders?
12. What are the features of venture capital? Explain the stages in financing of venture
capital. Make suggestions for the success of venture capital in India.
13. Briefly explain the venture capital scenario in India, with special reference to SEBI
venture capital funds (VCFs) Regulations, 1996. **
14. What is ‘start-up’ financing? What factors does a venture capitalist consider before
making start-up advance?
15. Comment on the recommendations of SEBI (Chandrasekhar) Committee, 2000 to
identify the impediments in the growth of venture capital industry in the country and
suggest suitable measures for its rapid growth.