Ba7022 Notes

1
Sri rama jayam
BA9161 Merchant Banking And Financial Services

Unit-I Merchant
Banking
Indian Financial System:
The economic development of a nation is reflected by the progress of the various
economic units, broadly classified into corporate sector, government and household sector.
While performing their activities these units will be placed in a surplus/deficit/balanced
budgetary situations.
There are areas or people with surplus funds and there are those with a deficit. A financial
system or financial sector functions as an intermediary and facilitates the flow of funds from
the areas of surplus to the areas of deficit. A Financial System is a composition of various
institutions, markets, regulations and laws, practices, money manager, analysts, transactions
and claims and liabilities.
Financial System:
The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims, and
liabilities in the economy. The financial system is concerned about money, credit and
finance-the three terms are intimately related yet are somewhat different from each other.
Indian financial system consists of financial market, financial instruments and financial
intermediation. These are briefly discussed below;
Financial Markets
A Financial Market can be defined as the market in which financial assets are created
or transferred. As against a real transaction that involves exchange of money for real goods or
services, a financial transaction involves creation or transfer of a financial asset. Financial
Assets or Financial Instruments represents a claim to the payment of a sum of money
sometime in the future and /or periodic payment in the form of interest or dividend.
Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging from a single
day up to a year. This market is dominated mostly by government, banks and financial
institutions.
Capital Market - The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
Forex Market - The Forex market deals with the multicurrency requirements, which are met
by the exchange of currencies. Depending on the exchange rate that is applicable, the
transfer of funds takes place in this market. This is one of the most developed and integrated
market across the globe.
Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium
and long-term loans to corporate and individuals.
Prepared by: R.Kumara Kannan Assistant Professor Department of
Management studies Francis Xavier
Engineering College, Tirunelveli http://www.francisxavier.ac.in
Constituents of a Financial System:
Having designed the instrument, the issuer should then ensure that these financial
assets reach the ultimate investor in order to garner the requisite amount. When the borrower
of funds approaches the financial market to raise funds, mere issue of securities will not
suffice. Adequate information of the issue, issuer and the security should be passed on to
take place. There should be a proper channel within the financial system to ensure such
transfer. To serve this purpose, financial intermediaries came into existence. Financial
intermediation in the organized sector is conducted by a wide range of institutions
functioning under the overall surveillance of the Reserve Bank of India. In the initial stages,
the role of the intermediary was mostly related to ensure transfer of funds from the lender to
the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the
financial system widened along with the developments taking place in the financial markets,
the scope of its operations also widened. Some of the important intermediaries operating ink
the financial markets include; investment bankers, underwriters, stock exchanges, registrars,
depositories, custodians, portfolio managers, mutual funds, financial advertisers financial
consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the
markets are different, there may be a few intermediaries offering their services in move than
one market e.g. underwriter. However, the services offered by them vary from one market to
another.
Intermediary
Market
Role
Stock Exchange
Capital Market
Secondary Market to
securities
Investment Bankers
Capital Market, Credit
Corporate advisory
Market
services, Issue of securities
Underwriters
Capital Market, Money
Subscribe to unsubscribed
Market
portion of securities
Registrars, Depositories,
Capital Market
Issue securities to the
Custodians
investors on behalf of the
Primary Dealers Satellite Money Market

Dealers
Forex Dealers
Forex Market
company and handle share

transfer activity
Market
making
in
government securities
Ensure
exchange
ink
currencies
Financial Instruments:
Money Market Instruments
The money market can be defined as a market for short-term money and financial
assets that are near substitutes for money. The term short-term means generally a period upto
one year and near substitutes to money is used to denote any financial asset which can be
quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent on demand for a very short period.
When money is borrowed or lent for a day, it is known as Call (Overnight) Money.
Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on
a day and repaid on the next working day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14
days, it is "Notice Money". No collateral security is required to cover these transactions.
2. Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14 days is referred to as the term
money market. The entry restrictions are the same as those for Call/Notice Money except
that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.
3. Treasury Bills.
Treasury Bills are short term (up to one year) borrowing instruments of the union
government. It is an IOU of the Government. It is a promise by the Government to pay a
stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e.
less than one year). They are issued at a discount to the face value, and on maturity the face
value is paid to the holder. The rate of discount and the corresponding issue price are
determined at each auction.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in
dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of CDs are
presently governed by various directives issued by the Reserve Bank of India, as amended
from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional
Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-term resources within the umbrella
limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements.
An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments viz., term money, term deposits, commercial papers and
interoperate deposits should not exceed 100 per cent of its net owned funds, as per the latest
audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer. On issuing commercial
paper the debt obligation is transformed into an instrument. CP is thus an unsecured
promissory note privately placed with investors at a discount rate to face value determined by
market forces. CP is freely negotiable by endorsement and delivery. A company shall be
eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit
of the company from the banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the financing bank/s. The
minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL
or such equivalent rating by other agencies.
Capital Market Instruments
The capital market generally consists of the following long term period i.e., more than
one year period, financial instruments; In the equity segment Equity shares, preference
shares, convertible preference shares, non-convertible preference shares etc and in the debt
segment debentures, zero coupon bonds, deep discount bonds etc.
Hybrid Instruments
Hybrid instruments have both the features of equity and debenture. This kind of
instruments is called as hybrid instruments. Examples are convertible debentures, warrants
etc.
Merchant banking:
A merchant banker is a body corporate who carries on any activity of the issue
management, which consists of preparing prospectus & other information relating to the
issue. Merchant banks in India are not allowed to conduct any business other than that related
to securities market. There is no official category in investment banking.
The Notification of the Ministry of Finance defines a merchant banker as, any person
who is engaged in the business of issue management either by making arrangements
regarding selling, buying or subscribing to securities as manager, consultant, advisor or
rendering corporate advisory service in relation to such issue management.
Merchant Banking in India Historical Perspective:
The evaluation of Indian financial system has been briefly reviewed over 70 years. The
Indian financial system can be studied through three phases.
First phase (prior 1950)
Second phase (organization 1951-1990)
Third phase (policies and reforms 1991 to ..)
First Phase (prior 1950)
Currency and money
Banking systems
Small savings
Insurance funds
Stock markets
Fixed deposits
Govt. securities
Second phase (organization 1951-1990)
Financial development
Equity culture
Secondary markets
Third phase (policies &Reforms 1991 to..)
Financial reforms policy, capital, Banking, Global financial system.
Monetary policy
Financial sector reforms monetary measures, credit delivery mechanism, money
market, govt. securities, NBFCs.
th
Till 18 century moneylenders, moneychangers, village merchants (maharanis), &

saucers performed the function of banks & merchant banks. They also issued & discounted
bills of exchange (handiest) & bank draft. They gave loans on mutual trust, on mortgage of
lands, ornaments & other property. JAGAT SHETH (1720-1773AD, BENGAL) HABIB &
SONS which is now HABIB BANK (founded in 1941, now is in PAKISTAN). These were
the organized merchant bankers in recent history of INDIA.
Merchant Banking is an activity that includes corporate finance activities, such as
advice on complex financings, merger and acquisition advice (international or domestic), and
at times direct equity investments in corporations by the banks.
Merchant banks are private financial institution. Their primary sources of income are
PIPE financings and international trade. Their secondary income sources are consulting,
Mergers & Acquisitions help and financial market speculation. Because they do not invest
against collateral, they take far greater risks than traditional banks. Because they are private,
do not take money from the public and are international in scope, they are not regulated.
Anyone considering dealing with any merchant bank should investigate the bank and its
managers before seeking their help.
The reason that businesses should develop a working relationship with a merchant bank is
that they have more money than venture capitalists. Their advice tends to be more pragmatic
than venture capitalists. It is rare for a merchant bank to fail. The last major failure was
Barings Bank (1992). It failed because of unsupervised trading of copper futures contracts
and buybacks. When the Dot Com Bubble burst in 2001, scores of venture capital firms
failed. The greatest merchant bank failure in history was the Knights Templar. After the
Crusades, the Order became immensely wealthy controlling and funding the trade between
the Middle East and Western Europe. They foolishly loaned money to the French
Government. To avoid repaying the money, King Louie had the Pope declare the Order
heretics. Thousands of monks lost their lives, but France balanced its budget.
To understand Merchant Banks, you should know something of their history. Modern
merchant banking started in Italy during the 7th Century. The banking practices evolved from
the financing structure of the Silk Road Trading that predates the Roman Empire.
The basic financing structure was the advance payment for goods by merchant bankers at a
great discount to the delivery value of those goods. In the case of Italy and then Germany,
wheat was the product. The merchant banks purchased the wheat soon after planting. They
accepted the risk of crop failure.
They profited when they sold the wheat. In most countries today, the national government
accepts the risk through government crop insurance.
As the British Empire expanded in the 18th and 19th Centuries, merchant banks prospered in
London. For instance, merchant bankers funded Canadas Hudson Bay Company. This period
saw the rise of such merchant banks as Schroders, Warburgs or Rothschilds. Amsterdam
benefited from the trade created by the Dutch East Indian Company. Since the 18th century,
the role of the merchant banker has been considerably broadened to include a composite of
modern day skills. Such skills are inherently entrepreneurial, managerial, financial and
transactional.
Today, North American merchant banks have taken the form of "boutiques"- whereby, each
offers its own specialized services. The hallmarks of these merchant bank boutiques are that
they typically charge fees payable in cash and/or the client's stock for each service rendered.
You can find a merchant bank that meets any reasonable set of needs.
Merchant Banking in India Post Independence:
In 1967, RBI issued its first merchant banking license to grind lays started with
management of capital issues, production planning, system design and also market research.
It provides management consulting services as well. Citibank setup its merchant banking
division in 1970. its scope includes assisting new entrepreneur, evaluating new projects,
raising funds through borrowing and issuing equity. Indian banks started banking services as
a part of multiple services they offered to clients from 1972. State bank of India started the
merchant banking division in 1972. In the initial years the objective was to render corporate
advice and assistance to small and medium entrepreneurs. Merchant banking activities are
organized and undertaken in several forms. Commercial banks and foreign development
finance institutions have organized them through formation of division; nationalized banks
have formed subsidiaries companies and share brokers and consultancies constituted
themselves into public ltd. Co. or registered themselves as private ltd. companies. Some of
them have equity stake of foreign merchant bankers.
Characteristics of Merchant Banking:
High proportion of decision makers as a percentage of total staff.
Quick decision process.
High density of information.
Intense contact with the environment.
Loose organizational structure.
Concentration of short and medium term engagements.
Emphasis on fee and commission income.
Innovative instead of repetitive operations.
Sophisticated services on a national and international level.
Low rate of profit distribution.
High liquidity ratio.
Qualities of a Merchant Banker:
Ability to analyze
Abundant knowledge
Ability to built up relationship
Innovative approach
Integrity
Scope in India:
1. Growth of New Issues Market
Indian market largest emerging market
Domestic and foreign investors setting up their business here.
Many public and private issues coming up
2. Entry of Foreign Institutional Investment
Indian capital market is globalised
Foreign Institutional Investments are permitted to invest in India.
They need Merchant Banks to advise them for their invite in India.
Increasing number of Joint Ventures also require expert services of Merchant
Banks.
3. Changing Policy of Foreign Investments
Liberalization of policies
Foreign Investments would require expert services of Merchant Banks for
project appraisal, financial management, financial restructuring etc.
4. Development of Debt Market
Good portion of capital can be raised through debt instruments.
5. Innovations in Financial Instruments
New financial instruments have come up.
Merchant Banks are market makers for these instruments.
6. Corporate Restructuring
Liberalization and globalization
Competition in corporate sector becoming intense.
Companies reviewing their strategies, structure and functioning etc. leading to
corporate restructuring.
7. Disinvestment
It means reduction of some kind of asset of a firm for achieving either financial
or ethical objectives.
Motive of disinvestment is to obtain funds.
Problems of Merchant Banking:
1. Restriction of merchant banking activities:
SEBI guidelines have authorized merchant bankers to undertake issue related
activities and made them restrict their activities or think of separating these activities
from present one and float new subsidiary and enlarge the scope of its activities.
2. Minimum net worth of Rs.1 crore:
SEBI guidelines stipulate that a minimum net worth of Rs.1 crore for authorization of
merchant bankers.
3. Non co-operation of issuing companies:
Non co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem faced by merchant bankers.
4. Merchant Bankers Commission:
Maximum :- 0.5%
Project appraisal fees
Lead Manager : 0.5% up to Rs.25 crores
0.2% more in excess of Rs.25 crores
Underwriting fees
Brokerage commission :- 1.5%
Other expenses : Advertising
Printing
Registrars expenses
Stamp duty
In spite of problems popping up, merchant banking in India has vast scope to
develop because of lot of domestic as well as foreign businesses booming here. Indian
economy provides an amicable environment for these firms to set up, flourish and
expand here.
Difference between Commercial Banking & Merchant Banking:
Commercial Banking
Deals with Debt & Debt related finance.
Asset oriented.
Generally avoid risks.
Merchant Banking
Deals with Equity & Equity related finance.
Management oriented.
Willing to accept risks.
Difference between Investment Banking & Merchant Banking:
Investment Banking
Both fee-based and fund-based.
Commit their own funds.
Merchant Banking
Purely fee-based.
Impossible to stay aloof from international trends.
STRUCTURE:
Category
Minimum Net Worth
I
1 Crore
To carry on any activity of the issue management, which will inter-alia consist of
preparation of prospectus and other information relating to the issue, determining
financial structure, tie-up of financiers and final allotment and refund of the
subscription; and
To act as adviser, consultant, manager, underwriter, portfolio manager.
II
50 Lakhs
That is, to act as adviser, consultant, co-manager, underwriter, portfolio manager
III
20 Lakhs
That is to act as underwriter, adviser, consultant to an issue;
IV
Nil
That is to act only as adviser or consultant to an issue.
INSTITUTIONAL STRUCTURE MERCHANT BANKING
In India merchant bankers a large number of reputed international merchant bankers
like Merrill Lynch, Morgan Stanley, Goldmansochs, and Jardie.Fleming Kleinwort Benson
etc. are operating in India under authorization of SEBI. As a result of proliferation Indian
Merchant banker faced with severe competition not only among themselves but also with the
well developed global players.
A chart
represents the Merchant Bankers registered with SEBI classified according to the
category.
MERCHANT BANKERS
PUBLIC SECTOR
PRIVATE SECTOR
INTERNAT
IONAL
BANKS
10
CO.BAN
KS
FI
s
SIs
24
BANK
S
10
FINANCE &
INVESTME
NT
231
INSTITUTIONAL STRUCTURE OF
MERCHANT BANKERS

LEASING
1
0
FUNCTIONS OF MERCHANT BANKERS:

1. Management of Debt and Equity Offerings:
This forms the main function of the merchant banker. He assists the
companies in raising funds from the market. The undergoing tasks include instrument
designing, pricing the issue, registration of the offer document, underwriting support,
marketing of the issue, allotment and refund and listing on stock exchanges.
2. Placement and Distribution:
The merchant banker helps in distributing various securities like equity shares,
debt instruments, mutual funds, insurance products, and commercial paper, to name a
few. The distribution network of the merchant banker can be classified as institutional
and retail in nature. The institutional network consists of mutual funds, foreign
institutional investors; private equity funds pension funds, financial institutions, etc.
3. Corporate Advisory Services:
Merchant bankers offer customized solutions to their clients' financial
problems. Financial structuring includes determining the right debt-equity ratio and
the framing of appropriate capital structure theory.
4. Project Advisory Services:
Merchant bankers help their clients in various stages of the project undertaken
by the clients. They assist them in conceptualizing the project idea in the initial stage.
Once the idea is formed, they conduct feasibility studies to examine the viability of
the proposed project.
5. Loan Syndication:
Merchant bankers arrange to tie up loans for their clients. This takes place in a
series of steps. Firstly, they analyze the pattern of the client's cash flows, based on
which the terms of the borrowings can be defined. Then the merchant banker prepares
a detailed loan memorandum, which is circulated to various banks and financial
institutions and they are invited to participate in the syndicate. The banks then
negotiate the terms of lending on the basis of which the final allocation is done.
6. Providing Venture Capital Financing:
Merchant bankers help companies in obtaining venture capital financing for
financing their new and innovative strategies
Regulatory framework
The merchant banking activity in India is governed by SEBI (Merchant Bankers)
Regulations, 1992. Registration with SEBI is mandatory to carry out the business of
merchant banking in India. An applicant should comply with the following norms:
1. The applicant should be a corporate body.
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 interconnected 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 guilt for
any offence.
7. The applicant should have a minimum net worth Rs50 million.
1
1
SERVICES OF MERCHANT BANKS:

S.No
Particulars
Summary
Corporate
Counseling
Covers the entire field of merchant banking, Ltd to giving

suggestions
Project
Counseling
Preparing project report for govt. approval , financial assistance
Loan Syndication
Assistance rendered to get term loan for project, help client

make appraisal, designing capital structure etc
Issue
Management
Marketing corporate securities, intermediary in transfer of

capital from one who owns to needy
Underwriting
Guarantee given by the underwriter, make raising of external

resource easy
Managers to
Issue
Drafting, completion of formalities, appoint Registrar etc
Portfolio
Management
Investment in different kind of securities
Mergers and
takeovers
Middlemen in setting negotiation
Off Shore
Finance
Help in areas involving foreign currency
10
Non- Resident
Investment
Provide help in better and smooth trade to Non-Resident

Investments
Legal & Regulatory framework relevant provisions: Companies act, SCRA, SEBI
guidelines, FEMA
(A) COMPANIES ACT 1956
The company law deals with the issue formalities of securities. The shares in India are
issued by public limited companies. The public is generally interested in buying shares. The
shares which are offered by the companies will be purchased by the investors in public issue.
The issuing company shall have to fulfill some formalities before coming to public. The
following factors will reveal about the issue of shares process before approaching for raising
finance.
Issue of shares MOA, AOA, Prospectus
Buy back the shares (Repurchase of shares)
Issue of share certificates
Prospectus part I, II, III.
(B) SECURITIES CONTRACT REGULATION ACT 1956

The securities contract act regulation provides the broad framework of the functioning
of Stock exchange in India. The first legislative measures were enacted in 1925. This act
known as The Bombay Securities Contract Act, 1925. The acts were regulated and control
certain contracts for sale and purchase of securities in the Bombay city. The Govt. had
appointed an expert committee in 1951. Under the chairmanship of A.D. Gorawala
committee had prepared a draft bill on the stock exchange regulation in India. Another
committee was appointed in 1954 under the chairmanship of Gorawala. The
recommendations of the committee were culminated in the enactment of Securities Contract
Regulation Act 1956. It provides the broad framework of the present scheme of the stock
exchange regulation in India. Stock exchange means, it is a place where the securities are
purchased and sold by the investors in a specified time. It regulates the business of buying,
selling or dealing in securities.
The objective of the SCRA is to present malpractice in securities transactions by regulating
the business. The act specifies the following instruments as securities
Shares, scrip, stocks bonds, debentures stock or other marketable securities like a
nature in or of any incorporated company or other body corporate
Government securities
Rights or interests in securities
Derivatives, units or any other instrument issued by collective investment scheme
Any other instruments such as specified by the SEBI
The SCRA framed the general framework of control regarding the market. It provides the
government with a flexible apparatus for the regulation of stock market in India. The
Securities Contract Regulation Act can be divided into the following aspects
Recognized stock exchanges
Contracts and options in securities
Listing of securities
Penalties
Misc.or other matters
(C) SECURITES AND EXCHANGE BOARD OF INDIA GUIDELINES, 1992
The securities and exchange board of India was established in April 1988. It has been
functioning under the overall administrative control of the government of India. It works
under the guidance of Ministry of finance. It is the agent of the central government in capital
market. It is established for the regulation and orderly functioning of the stock exchanges. It
also works for protecting the investors rights, prevents malpractices in security trading and
promotes healthy growth of the capital markets. It was granted statutory status in 1992 under
the SEBI Act. It has the full authority to control, regulate, monitor and direct the capital
markets. It is the watchdog of the securities market. It is the most powerful organ of the
central government in the capital market.
After the repeal of the capital issue control act and abolition of CCI (Controller of Capital
Issue) the SEBI was given full powers on new issue market and stock market. It has been
issuing guidelines since. April 1992 for all financial intermediaries in the capital market. The
guidelines have been issued with the objective of investor protection. The guidelines also
include the obligations of merchant bankers in respect of free pricing, disclosure of all correct
and true information and to incorporate the highlights and risk factors in investment in each
issue through prospectus. It has been established for the healthy development and regulation
of the capital market.
Objectives of Merchant Banking Regulations
Authorized Activities Issue management, Corporate advice, Managing, Consultation
and advising, Portfolio Management services
Method of Authorization
Terms of Authorization
Prospectus
Categories of Merchant Banking
Registration Fee to be a Merchant Banker
Renewal Fee
Lead Manager
Code of conduct
Obligation and Responsibilities of Merchant Banker
Responsibilities of Lead Manager
Acquisition of shares
Procedure for Inspection
Enquiry
Action by SEBI
(D) FOREIGN EXCHANGE MANAGEMENT ACT, 1999
The Foreign Exchange Management Act (1999) or in short FEMA has been introduced
as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came
into act on the 1st day of June, 2000.
An Act to consolidate and amend the law relating to foreign exchange with the
objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.
FEMA is applicable to the all parts of India. The act is also applicable to all branches,
offices and agencies outside India owned or controlled by a person who is resident of
India.
FEMA head-office also known as Enforcement Directorate is situated in New Delhi
and is headed by a Director. The Directorate is further divided into 5 zonal offices at
Delhi, Bombay, Calcutta, Madras and Jalandhar and each office is headed by a Deputy
Directors. Each zone is further divided into 7 sub-zonal offices headed by the Assistant
Directors and 5 field units headed by the Chief Enforcement Officers
RELATION WITH STOCK EXCHANGES
A stock exchange is an entity which provides "trading" facilities for stock
brokers and traders, to trade stocks and other securities. Stock exchanges also provide
facilities for the issue and redemption of securities as well as other financial instruments and
capital events including the payment of income and dividends. The securities traded on a
stock exchange include shares issued by companies, unit, derivatives, pooled investment
products and bonds.
To be able to trade a security on a certain stock exchange, it has to be listed there. Usually
there is a central location at least for recordkeeping, but trade is less and less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages of
speed and cost of transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary
market and subsequent trading is done in the secondary. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets are driven by
various factors which, as in all free markets, affect the price of stocks. There is usually no
compulsion to issue stock via the stock exchange itself, nor must stock be subsequently
traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is
the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of
a global market for securities.
ROLE OF STOCK EXCHANGES
Stock exchanges have multiple roles in the economy. This may include the following
1. Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for
expansion through selling shares to the investing public.
2. Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a
more rational allocation of resources because funds, which could have been
consumed, or kept in idle deposits with banks, are mobilized and redirected to
promote business activity with benefits for several economic sectors such
as agriculture, commerce and industry, resulting in stronger economic growth and
higher productivity levels of firms.
3. Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or acquire
other necessary business assets. A takeover bid or a merger agreement through
the stock market is one of the simplest and most common ways for a company to
grow by acquisition or fusion.
4. Profit sharing
Both casual and professional stock investors, through dividends and stock
price increases that may result in capital gains, will share in the wealth of profitable
businesses.
5. Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve
on their management standards and efficiency in order to satisfy the demands of these
shareholders and the more stringent rules for public corporations imposed by public
stock exchanges and the government. Consequently, it is alleged that public
companies (companies that are owned by shareholders who are members of the
general public and trade shares on public exchanges) tend to have better management
records than privately held companies (those companies where shares are not publicly
traded, often owned by the company founders and/or their families and heirs, or
otherwise by a small group of investors).
Despite this claim, some well-documented cases are known where it is alleged that
there has been considerable slippage in corporate governance on the part of some
public companies. The dot-com bubble in the late 1990's, and the subprime mortgage
crisis in 2007-08, are classical examples of corporate mismanagement. Companies
like Pets.com (2000), Enron Corporation (2001), Nextel (2001),Sunbeam (2001), Web
van (2001), Adelphia (2002), MCI WorldCom (2002), Parma at (2003), American
International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General
Motors (2009) and Satyam Computer Services (2009) were among the most widely
scrutinized by the media.
However, when poor financial, ethical or managerial records are known by
the stock investors, the stock and the company tend to lose value. In the stock
exchanges, shareholders of underperforming firms are often penalized by significant
share price decline, and they tend as well to dismiss incompetent management teams.
6. Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is
open to both the large and small investors because a person buys the number of shares
they can afford. Therefore the Stock Exchange provides the opportunity for small
investors to own shares of the same companies as large investors.
7. Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing estates
by selling another category of securities known as bonds. These bonds can be raised
through the Stock Exchange whereby members of the public buy them, thus loaning
money to the government. The issuance of such bonds can obviate the need to directly
tax the citizens in order to finance development, although by securing such bonds
with the full faith and credit of the government instead of with collateral, the result is
that the government must tax the citizens or otherwise raise additional funds to make
any regular coupon payments and refund the principal when the bonds mature.
8. Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces.
Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial
crisis could eventually lead to a stock market crash. Therefore the movement of share
prices and in general of the stock indexes can be an indicator of the general trend in
the economy.
FUNCTIONS & SERVICES OF STOCK EXCHANGE
Stock exchanges play an important role in the capital formation of an economy paving
way for the industrial and economic development of the country. It induces the public to save
and invest in the corporate sector that is profitable to them. Companies depend upon stock
exchanges for raising finance. Stock exchanges render many important services to the
investors and the corporations alike.
Following are some of the functions and services rendered by a stock exchange:
i. Common, trading platform
ii. Mobilization of savings
iii. Safety to investors
iv. Distribution of new securities
v. Ready market
vi. Liquidity
vii. Capital formation
viii. Speculative trading
ix. Sound price setting
x. Economic barometer
xi. Dissemination of market data
xii. Perfect market conditions
xiii. Seasoning of securities
xiv. Efficient channeling of savings

xv. Optimal resource allocation
xvi. Platform for public debt
xvii. Clearing house of business information
xviii. Evaluation of securities
xix. True market mechanism
xx. Investor education
xxi. Fair price discrimination
xxii. Industrial financing
xxiii. Company regulation
STOCK EXCHANGE TRADERS
Only the registered members are permitted to carry out trading on the floor of a
stock exchange. However, for reasons of convenience some other persons are also
permitted to enter the premises and transact business on behalf of the members. They are:
Recognition of stock exchange
Listing of securities
Registration of brokers
On line trading
Speculative trading
Stock indices
Margin trading
Specialists
Market makers
Broker dealer
OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)
The first electronic OTC stock exchange in India was established in 1990 to provide
investors and companies with an additional way to trade and issue securities. This was the
first exchange in India to introduce market makers, which are firms that hold shares in
companies and facilitate the trading of securities by buying and selling from other
participants.
Over - the Counter Exchange of India (OTCEI) was incorporated in October 1990 under
Section 25 of the Companies Act, 1956 with the objective of setting up a national, ringless,
screen-based, automated stock exchange. It is recognized as a stock exchange under Section 4
of the Securities Contracts (Regulations) Act, 1956. It was set up to provide investors with a
convenient, efficient and transparent platform for dealing in shares and stocks; and to help
enterprising promoters set up new projects or expand. their activities, by providing them an
opportunity to raise capital from the capital market in a cost-effective manner. Trading in
securities takes place through OTCEIs network of members and dealers spanning the length
and breadth of India. OTCEI was promoted by a consortium of financial institutions
including:
Unit Trust of India.
Industrial Credit and Investment Corporation of India.
Industrial Development Bank of India.
Industrial Finance Corporation of India.
Life Insurance Corporation of India.
General Insurance Corporation and its subsidiaries.
SBI Capital Markets Limited.
Canbank Financial Services Ltd.

Salient Features of OTCEI:
1. Ring less and Screen-based Trading: The OTCEI was the first stock exchange to
introduce automated, screen-based trading in place of conventional trading ring found
in other stock exchanges. The network of on-line computers provides all relevant
information to the market participants on their computer screens. This allows them the
luxury of executing their deals in the comfort of their own offices.
2. Sponsorship: All the companies seeking listing on OTCE have to approach one of
the members of the OTCEI for acting as the sponsor to the issue. The sponsor makes a
thorough appraisal of the project; as by entering into the sponsorship agreement, the
sponsor is committed to making market in that scrip (giving a buy sell quote) for a
minimum period of 18 months. sponsorship ensures quality of the companies and
enhance liquidity for the scrips listed on OTCEI.
3. Transparency of Transactions: The investor can view the quotations on the
computer screen at the dealers office before placing the order. The OTCEI system
ensures that trades are done at the best prevailing quotation in the market. The
confirmation slip/trading document generated by the computers gives the exact price
at which the deals has been done and the brokerage charged.
4. Liquidity through Market Making: The sponsor-member is required to give twoway quotes (buy and sell) for the scrip for 18 months from commencement of trading.
Besides the compulsory market maker, there is an additional market maker giving two
way quotes for the scrip. The idea is to create an environment of competition among
market makers to produce efficient pricing and narrow spreads between buy and sell
quotations.
5. Listing of Small and Medium-sized Companies: Many small and medium-sized
companies were not able to enter capital market due to the listing requirement of
Securities Contracts (Regulation) Act, 1956 regarding the minimum issued equity of
Rs.10 crores in case of the Mumbai stock Exchange and Rs.3 crores in case of other
stock exchanges. The OTCEI provides an opportunity to these companies to enter the
capital market as companies with issued capital of Rs.30 lacks onwards can raise
finance from the capital market through OTCEI.
6. Technology: OTCEI uses computers and telecommunications to bring
members/dealers together electronically, enabling them to trade with one another over
the computer rather than on a trading floor in a single location.
7. Nation-wide Listing: OTCEI network is spread all over India through members,
dealers and representative office counters. The company and its securities get nationwide exposure and investors all over India can start trading in that scrip.
8. Bought-out Deals: Through the concept of a bought-out deal, OTCEI allows
companies to place its equity with the sponsor-member at a mutually agreed price.
This ensures swifter availability of funds to companies for timely completion of
projects and a listed status at a later date.

UNIT-II
ISSUE MANAGEMENT
ROLE OF MERCHANT BANKER IN APPRAISAL OF PROJECT
A project proposal for capital investment to develop facilities to provide goods and
services. JARGONS such as project evaluation, appraisal and assessment are used
interchangeably. Project evaluation is used to analyze the soundness of an investment project.
Project analysis is done to implement it. The possible net cash flows of the investment are the
bases for project analysis. Merchant bankers usually carry out the project analysis for every
proposal. The investment proposal may be for setting up a new unit. It may be an expansion
of an existing unit. It many aim at improving the existing facilities.
Project evaluation is indispensable because resources are scare. The same resources
may have high yielding alternative opportunities. Project evaluation helps an entrepreneur
or a firm to select the best proposal for investment. Project selection can only be rational if it
is superior to others in terms of commercial viability.
The various appraisals, initiated by the merchant banker as a part of
project appraisal,
are
Prepared
bbyy::
nngg
Engineeri
depicted in
nnnaann
or
l vveellii
ci
DDeeppaarrtt agement studies Francis

Xavier
ssxxaavviieerr
1. Management Appraisal
Management appraisal is related to the technical and managerial competence,
integrity, knowledge of the project, managerial competence of the promoters etc. The
promoters should have the knowledge and ability to plan, implement and operate the
entire project effectively. The past record of the promoters is to be appraised to clarify
their ability in handling the projects.
2. Technical Appraisal
Technical feasibility analysis is the systematic gathering and analysis of the data
pertaining to the technical inputs required and formation of conclusion there from.
The availability of the raw materials, power, sanitary and sewerage services,
transportation facility, skilled man power, engineering facilities, maintenance, local
people etc are coming under technical analysis. This feasibility analysis is very
important since its significance lies in planning the exercises, documentation process,
and risk minimization process and to get approval.
3. Financial Appraisal
One of the very important factors that a project team should meticulously prepare is
the financial viability of the entire project. This involves the preparation of cost
estimates, means of financing, financial institutions, financial projections, break-even
point, ratio analysis etc. The cost of project includes the land and sight development,
building, plant and machinery, technical know-how fees, pre-operative expenses,
contingency expenses etc. The means of finance includes the share capital, term loan,
2
0
special capital assistance, investment subsidy, margin money loan etc. The financial
projections include the profitability estimates, cash flow and projected balance sheet.
The ratio analysis will be made on debt equity ratio and current ratio.
4. Commercial Appraisal
In the commercial appraisal many factors are coming. The scope of the project in
market or the beneficiaries, customer friendly process and preferences, future demand
of the supply, effectiveness of the selling arrangement, latest information availability
an all areas, government control measures, etc. The appraisal involves the assessment
of the current market scenario, which enables the project to get adequate demand.
Estimation, distribution and advertisement scenario also to be here considered into.
5. Economic Appraisal
How far the project contributes to the development of the sector, industrial
development, social development, maximizing the growth of employment, etc. are
kept in view while evaluating the economic feasibility of the project.
6. Environmental Analysis
Environmental appraisal concerns with the impact of environment on the project. The
factors include the water, air, land, sound, geographical location etc.
DESIGNING CAPITAL STRUCTURE AND INSTRUMENTS
The term capital structure refers to the proportionate claims of debt and equity in the
total long term capitalization of a company. Merchant banker restricts his activities to two
major long term sources like debt and equity, when he deals with capital structure of a firm.
TAKING DECISIONS ON CAPITAL STRUCTURE
The decisions regarding the use of different types of capital funds in the overall long term
capitalization of a firm are known as capital structure decisions. Any decision concerning the
capital structure of a firm is guided by the following fundamental principles.
Cost principle
Control principle
Return principle
Flexibility principle
Timing principle
FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS

The following factors significantly influence the capital structure decisions of a firm:
2
1
Economy characteristics
Industry characteristics
Company characteristics
Issue pricing
While fixing an appropriate price, the relevant guidelines for capital issues by SEBI from
time to time must be considered. Companies themselves in the consultation with the merchant
bankers, do the pricing of issues. While fixing a price for the security issue, the following
factors should be considered:
Qualitative factors
Quantitative factors
The CCI MODEL
Although the CCI was abolished long ago, it would be interesting to discuss the mode of
fixing the price for the issue. The fair value of the share is calculated on the basis of NAV of
the share, profit Earning capacity value and Average Market price.
Safety Net Scheme
This is the most popular method of pricing public issue used by a no. of companies in India.
The method aims at affording a measure of protection while fixing the price. Some
companies, while making public issues at premium, use this scheme. Under this scheme
merchant bankers provide a buy back facility to the individual investor, incase the price of the
2
2
share goes below the issue price after listing. This arrangement is of great help to investors as
it reduces losses. In this connection, SEBI has laid down guidelines for the safety net scheme.
BOOK BUILDING
A method of marketing the shares of a company whereby the quantum and the price of
the securities to be issued will be decided on the basis of the bids received from the
prospective shareholders by the lead merchant bankers is known as book building method.
Under the book building method, the share prices are determined on the basis of real demand
for the shares at various price levels in the market. For discovering the price at which issue
should be made, bids are invited from prospective investors from which the demand at
various price levels is noted. The merchant bankers undertake full responsibility for the issue.
The book building process involves the following steps:
Appointment of book runners
Drafting prospectus
Circulating draft prospectus
Maintaining offer records
Intimation about aggregate orders
Bid analysis
Mandatory underwriting
Filling with ROC
Bank accounts
Collection of completed applications
Allotment of securities
Payment schedule and listing
Under - subscription
Preparation of Prospectus Selection of Bankers, Advertising Consultants, etc.
Preparation of Prospectus Selection of Bankers:
A document through which public are solicited to subscribe to the share capital of a corporate
entity is called prospectus. The purpose of the prospectus, issued under the provisions of the
companies Act, 1956, is to invite the public for the subscription/ purchase of any securities
(Shares / debentures) of a company. The form and the contents of the prospectus are
prescribed by the part I of schedule II of the companies Act.
Contents
2
3
The nature of contents of prospectus (offer document) varies with the number of issue made
by the company.
Prospectus for the public offer
In respect of offer of shares and debentures made to the general public, the content of
prospectus shall take the following forms:
Regular prospectus
The contents of a regular prospectus are presented in three parts as follows:
PART I
Part I of the prospectus should contain details about the specific information about the
company. Following are the details furnished in this regard:
General Information
Capital structure
Terms of issue
Particulars of the issue
Company, Management and project
Disclosure of public issues made by the company
Disclosure of outstanding Ligation, criminal prosecution and defaults
Perception of Risk factors
PART II
The information to be included under this part of the prospectus are as follows:
General information
Financial information
Statutory and other information
PART III
The requirement of this section of the prospectus is that the report by the accountants under
Part III must be made by qualified practicing chartered accountant. The time and place at
which copies of all balance sheets and profits and loss accounts, materials contracts and
documents, etc. to be inspected should be specified under Part III.
Declaration

2
4
Every prospectus must contain a declaration by the directors that all the relevant provisions of
the companies Act, 1956 and guidelines issued by the government (SEBI) have been
complied with.
ABRIDGED PROSPECTUS
A memorandum containing such salient features of a prospectus as may be prescribed is
called abridged prospectus. The concept of abridged prospectus was introduced by the
companies (amendment) Act of 1988 with a view to make the public issue of shares an
inexpensive proposition. Accordingly, a document has to be sent along with the application
forms showing a brief version of the salient features of the prospectus. One abridged
prospectus can carry two application forms.
An abridged prospectus must contain the following particulars:
General information
Capital structure
Terms of issue
Issue particulars
Company, Management and project
Financial performance
Refunds and Interest
Companies under the same management
Risk factors
PROSPECTUS FOR RIGHTS ISSUE
Where shares are offered to the existing shareholders, a company is not required to issue a
prospectus. Shares offered to the existing shareholders of a company are called right issues.
The offer for rights shares is made in the form of a 15 days notice specifying the number of
shares offered. Where the right is renounced by the shareholders, the board of directors have
the right to dispose off the shares renounced in such a manner as they think most beneficial
for the company.
DISCLOSURES IN PROSPECTUS
Consequent to the acceptance of the recommendations of the Malegam committee, the
following disclosures are made mandatory by the SEBI to be made by issuing companies
2
5
with effect from November 1995. This is in addition to the requirements of Schedule II of the
companies Act.
An index
Project cost
Turnover
Assets and liabilities
Major expansion
Future projections
Directors statement
Promoter definition
Promoter group definition
Promoters shareholdings
Share prices
Agreements
Management discussion and analysis
Buy back
Major shareholders
No responsibility statement
Qualified notes
Information about ventures promoted
Risk factors
Tax benefits
Basis for issue price
Ratios
Other disclosures
Types of prospectus
Red herring prospectus
Information Memorandum
Issue of securities
SHELF PROSPECTUS (SEC.60A)
Information about issue of shares contained in a file lying on a shelf is called Shelf
prospectus. Financial institutions and banks issue this type of prospectus. A company filing
2
6
such a prospectus is also required to file an information memorandum on all material facts
relating to new charges created, changes occurring in the financial position in the period from
the first offer, previous offer, and the succeeding offer of securities within such time as may
be prescribed by the central Government prior to making of a second or subsequent offer of
securities under the shelf prospectus
Advertising Consultants:
Following are the guidelines applicable to the lead merchant banker who shall ensure due
compliance by the issuer company:
Factual and truthful
Clear and concise
Promise of profits
Mode of advertising
Financial data
Risk factors
Issue date
Product advertisement
Subscription
Issue closure
Incentives
Reservation
Undertaking
Availability of copies.
APPOINTMENT OF MERCHANT BANKER AND OTHER INTERMEDIARIES:
ROLE OF REGISTRAR TO THE ISSUE
Registration with SEBI is mandatory to taken on responsibilities as a registrar and share
transfer agent. The registrar provides administrative support to the issue process. The
registrars of the issue assist in everything. He helps the lead manager in the selection of
bankers. He helps the issue and the collection centers in preparing the allotment and
application forms, collection of applications and allotment money, reconciliation of bank
accounts with application money, listing of issues and grievance handling.
BANKERS TO THE ISSUE
2
7
Any scheduled bank registered with SEBI can be appointed as the banker to the issue. There
are no restrictions on the number of bankers to the issue. The main functions of banker
involve collection of application forms with money. It maintains a daily report. The banker
transfers the proceeds to the share application money account maintained by the controlling
branch. He also forwards of the money collected with the application forms to the registrar.
UNDERWRITERS TO THE ISSUE
Underwriting involves a commitment from underwriter to subscribe to the shares of a
particular company to the extent it is under subscribed by the public or existing shareholders
of the corporate. An underwriter should have a minimum net worth of Rs.20 lakhs. His total
obligation at any time should not exceed 20 times the underwriters net worth. A
commission is paid to the underwriters on the issue price for undertaking the risk of under
subscription.
The maximum rate of underwriting commission paid is given in table:
Maximum Rate of Underwriting Commission
Nature of
On amounts
Issue
Shares(Equity &
Preference)
and
Debentures
Issue amount up to Rs.5 lakhs
developing on
On amounts
subscribed by public
underwriters
2.5%
2.5%
2.5%
1.5% Issue amount
exceeding Rs. 5
lakhs
2.0%
TYPES OF
UNDERWRITERS
A brief description of types of underwriting is outlined below.

1.0%
2
8
BENEFITS / FUNCTIONS OF UNDERWRITING MECHANISMS

The financial service of underwriting is advantageous to the issuers and the public alike. The
function and the role of underwriting firms are explained below:
Adequate funds
Expert advise
Enhanced goodwill
Assurance to investors
Better marketing
Benefits to buyers
Benefits to stock market
Corporate
Entity
Purchase
Under
of
writing
Prepared by:
nnnnaaaannn
securities
ssor Department
of M
Francis Xavier
R.Kumara Kan
n agreeme
aaaannnnaa
nt
Engineering College,AAAAssssssssiincisxavier.ac.inaaggggeeee
Tirunelv
Under
writer
Sale of
securiti
es
Publi
c
Stoc
k
Marke
t
UNDERWRITING AGENCIES
The Indian capital market is dominated by several underwriting agencies such as private
firms, banks and financial Institutions, etc.
Private Agencies
Investment companies
Commercial Banks
Development Finance Institutions
OBSTACLES
Underwriters in India face several debilitating conditions that constitute obstacle to their
progress. Some of the hardships faced by them are as follows:
Chaotic capital market
Slow industrialization
Managing agency system
Bashful investors
Lack of specialized institutions

Unsuccessful corporate
SEBI GUIDELINES

3
0
SEBI has issued detailed guidelines regulating underwriting as financial service. Following
are the important guidelines:
Optional
No .of underwriters
Registration
Obligations
Sub underwriting
Underwriting commission
BROKERS TO THE ISSUE
Any member of a recognized stock exchange can become a broker to the issue. A broker
offers marketing support, underwriting support, disseminates information to investors about
the issue and distributes issue stationery at retail investor level. Only the registered members
are permitted to carry out trading on the floor of a stock exchange. However, for reasons of
convenience some other persons are also permitted to enter the premises and transact
business on behalf of the members. They are:
Remisiers
Authorized clerk
Brokers and Jobbers
Tarawaniwalas
Dealers
REQUIREMENTS FOR BROKERS
Brokers contribute in large measure to the liquidity and the solvency of the stock market. It is
therefore, essential that their smooth functioning is ensured so as to contribute to the growth
and the development of an exchange. It is for this purpose that guidelines on the eligibility
conditions for brokers and the manner of their selection are laid down by stock exchanges.
The eligibility norms are as follows:
Written tests
Financial background
Infrastructure
Code of conduct
Information
3
1
Penalty for violation

OFFER FOR SALE
Where the marketing of securities takes place through intermediaries, such as issue houses,
stock brokers and others, it is a case of Offer for Sale Method.
Features
Under this method, the sale of securities takes place in two stages. Accordingly, in the first
stage, the issuer company makes an en- block of securities to intermediaries such as the issue
houses and share brokers at an agreed price. under the second stage, the securities are re- sold
to ultimate investors at a market related price. The difference between the purchase price
and the issue price constitutes profit for the intermediaries. The intermediaries are responsible
for meeting various expenses such as underwriting commission, prospectus cost,
advertisement expenses, etc.
The issue is also underwritten to ensure total subscription of the issue. The biggest advantage
of this method is that it saves the issuing company the hassles involved in selling the shares
to the public directly through prospectus. This method is however, expensive for the investor
as it involves the offer for securities by issue houses at very high prices.
GREEN SHOE OPTION
A provision contained in an underwriting agreement that gives the underwriter the right to
sell investors more shares than originally planned by the issuer. This would normally be done
if the demand for a security issue proves higher than expected. Legally referred to as an overallotment option
A green shoe option can provide additional price stability to a security issue because the
underwriter has the ability to increase supply and smooth out price fluctuations if demand
surges.
Green shoe options typically allow underwriters to sell up to 15% more shares than the
original number set by the issuer, if demand conditions warrant such action. However, some
issuers prefer not to include green shoe options in their underwriting agreements under
certain circumstances, such as if the issuer wants to fund a specific project with a fixed
amount of
cost and
does not want more capital than
it originally sought.
The term is derived from the fact that the Green Shoe Company was the first to issue this type
of option.
3
2
Companies that want to venture out and start selling their shares to the public have ways to
stabilize their initial share prices. One of these ways is through a legal mechanism called the
green shoe option. A green shoe is a clause contained in the underwriting agreement of an
initial (IPO) that allows underwriters to buy up to an additional 15% of company shares at the
offering price. The investment banks and brokerage agencies (the underwriters) that take part
in the green shoe process have the ability to exercise this option if public demand for the
shares exceeds expectations and the stock trades above the offering price. (Read more about
IPO ownership in IPO Lock-Ups Stop Insider Selling.)
The Origin of the Green shoe
The term "green shoe" came from the Green Shoe Manufacturing Company (now
called Stride Rite Corporation), founded in 1919. It was the first company to implement the
green shoe clause into their underwriting agreement.
In a company prospectus, the legal term for the green shoe is "over-allotment option",
because in addition to the shares originally offered, shares are set aside for underwriters. This
type of option is the only means permitted by the Securities and Exchange Commission
(SEC) for an underwriter to legally stabilize the price of a new issue after the offering price
has been determined. The SEC introduced this option in order to enhance the efficiency and
competitiveness of the fundraising process for IPOs. (Read more about how the SEC protects
investors in Policing the Securities Market: an Overview of the SEC.)
Price Stabilization
This is how a green shoe option works:
The underwriter works as a liaison (like a dealer), finding buyers for the shares that
their client is offering.
A price for the shares is determined by the sellers (company owners and directors)
and the buyers (underwriters and clients).
When the price is determined, the shares are ready to publicly trade. The underwriter
has to ensure that these shares do not trade below the offering price.
If the underwriter finds there is a possibility of the shares trading below the offering
price, they can exercise the green shoe option.
In order to keep the price under control, the underwriter oversells or shorts up to 15% more
shares than initially offered by the company. (For more on the role of an underwriter in
securities valuation, read Brokerage Functions: Underwriting And Agency Roles.)
3
3
For example, if a company decides to publicly sell 1 million shares, the underwriters (or
"stabilizers") can exercise their green shoe option and sell 1.15 million shares. When the
shares are priced and can be publicly traded, the underwriters can buy back 15% of the
shares. This enables underwriters to stabilize fluctuating share prices by increasing or
decreasing the supply of shares according to initial public demand. (Read more in The Basics
of The Bid-Ask Spread.)
If the market price of the shares exceeds the offering price that is originally set before
trading, the underwriters could not buy back the shares without incurring a loss. This is where
the green shoe option is useful: it allows the underwriters to buy back the shares at the
offering price, thus protecting them from the loss.
If a public offering trades below the offering price of the company, it is referred to as a
"break issue". This can create the assumption that the stock being offered might be unreliable,
which can push investors to either sell the shares they already bought or refrain from buying
more. To stabilize share prices in this case, the underwriters exercise their option and buy
back the shares at the offering price and return the shares to the lender (issuer).
Full, Partial and Reverse Green shoes
The number of shares the underwriter buys back determines if they will exercise a partial
green shoe or a full green shoe. A partial green shoe is when underwriters are only able to
buy back some shares before the price of the shares increases. A full green shoe occurs when
they are unable to buy back any shares before the price goes higher. At this point, the
underwriter needs to exercise the full option and buy at the offering price. The option can be
exercised any time throughout the first 30 days of IPO trading.
There is also the reverse green shoe option. This option has the same effect on the price of the
shares as the regular green shoe option, but instead of buying the shares, the underwriter is
allowed to sell shares back to the issuer. If the share price falls below the offering price, the
underwriter can buy shares in the open market and sell them back to the issuer. (Learn about
the factors affecting stock prices in Breaking Down The Fed Model and Forces That Move
Stock Prices.)
The Green shoe Option in Action
It is very common for companies to offer the green shoe option in their underwriting
agreement. For example, the Esso unit of Exxon Mobil Corporation (NYSE:XOM) sold an
3
4
additional 84.58 million shares during its initial public offering, because investors placed
orders to buy 475.5 million shares when Esso had initially offered only 161.9 million shares.
The company took this step because the demand surpassed their share supply by two-times
the initial amount.
Another example is the Tata Steel Company, which was able to raise $150 million by selling
additional securities through the green shoe option.
Conclusion
one of the benefits of using the green shoe is its ability to reduce risk for the company issuing
the shares. It allows the underwriter to have buying power in order to cover their short
position when a stock price falls, without the risk of having to buy stock if the price rises. In
return, this helps keep the share price stable, which positively affects both the issuers and
investors.
E- IPO
Indian Securities Markets have gone through a major upheaval after a long duration. During
the last one year, there has been a surge in the Companies raising funds from the securities
markets through Initial Public Offerings (IPOs), which has re-kindled the interest of the
investors. Gone are the days when the IPOs used to be fixed price. All the IPOs that come
up for issuance has been made to go through the book -building process. This, in fact, has
opened up a tremendous business potential for the members of the Stock Exchanges to have
their customers participate more and more in the IPOs. Without an adequate system in place,
it has become difficult for the members to manage the slew of IPOs. This not only requires
speed in populating the data but the accuracy and precision of the data is of paramount
importance. Financial Technologies India
Limited, an industry leader in providing solutions for the Financial Services Industry, has
launched eIPO to address these needs of the exchange members. Designed on a distributed
architecture, eIPO is just not data entry software for IPOs but Provides a host of other
functionalities, thereby making the life easier for its users.
Some of the key highlights of eIPO are:
It offers a centralized and integrated platform for primary market book building process.
Bidding for IPOs can be done for the clients from Dealer terminal as well as the end
clients can connect through Internet and bid for IPO.
Multiple IPOs can be comfortably managed.
3
5
Enhanced user access and entitlements permit creation of role based access to
thevariousFunctions across multiple issues and securities.
Online generation of NSE/BSE bulk files on a single platform.
Exporting of NSE bid entries into BSE format and vice versa.
It is a user friendly windows based application, which is very interactive for the user
and easy to learn
Confirmations received from the exchanges can be uploaded to provide immediate
status update to the end-clients.
Reports are provided which can be sorted by users; column orders can be moved /
changed by User. It can be exported to excel also.
Uploading facility for Branch Master and Clients Master.
Feature List for e-IPO
E-IPO Administrator facilitates user or group creation. The rights for the users created
Can be assigned here, the rights assigned to the users defines the role of the user, the type of
data access the user is permitted to and the activities that can be carried by the user. If
the users created are administrators or super administrators they are permitted to insert,
modify or delete data. Any user created as a guest user is authorized to only view the details.
E-IPOprovides a report of all the users logged in to the system along with the login details
facilitating access management through hierarchal authorization access.
E-IPO Branch are the users which are created by the Administrator who can login and place
bids for the clients mapped under that branch. The Branch can create a new branch, delete or
modify related details, add new IPO details depending upon the privileges or rights given by
the Administrator at the time of creation of Branch.
The following are the features which are available in both the Administrator and Branch
version. Depending upon the User rights the Branch user will be able to access any of the
following menus.
Master Creation
E-IPO software facilitates the creation of new branches, modification and deletion of
Branch related details, Sub broker and Brokers details, Depository Participants details,
addition of new IPO details. E-IPO also provides a facility to capture the preference details of
the Members and helps the user update the same. Preference details like Preference Date,
3
6
Exchange, Broker, Sub- Broker, IPO, Branch, Users Bid Limits can be set here. Upload
facility for Branch details and Client details.
Transaction Entry
E-IPO facilitates data entry of relevant mandatory details received from various clients
of the Branch / Broker / Suborder for both NSE and BSE for a particular IPO. Option is
Provided for Price entry i.e. Best Price, Manual Price or Cut off price on the basis of the price
mentioned in the application form submitted by the client. Every entry made into the system
is validated through set validations to avoid invalid data entry. Data modification facility is
provided in the system till the data entered resides on the local database i.e. before
submissions the respective exchange. The system facilitates the user to make entries and store
them on the local database and later submit the same on the central database.
Reports
E-IPO facilitates the users to view reports for the details entered by them for their
Respective clients. The branch can view the reports for entries made by all the users. The
reports can be viewed based on various criteria such as IPO based, Branch wise, and Broker
wise, date wise, exchange wise, only exported data or not exported data.
Export NSE/BSE Entries
E-IPO facilitates the user to export the NSE/BSE entries as per the predefined format
provide by NSE / BSE i.e. pipe (|) separated file in case of NSE and comma (,) separated file
in case of BSE. Security measures are taken care of as the data exported by a particular user
depends on the type of user he is. The super administrator can export data entered by all the
users. The system provides flexibility to export the file in any user defined location and view
the exported file. Prior to exporting the file the user can have a filtered view of the data. Post
exporting the data, the files generated by the e-IPO software are required to be
Uploaded to the respective Exchange. Further to the successful upload of the file in the
Exchanges system the exchange returns the file with the proper status of the entries and the
bided (bid number).e-IPO facilitates the user to export the NSE entries in BSE format and
vice versa but this activity can be done only once. If it the NSE entries are exported in BSE
format then we cannot export the same entries again in NSE format.
Import NSE/BSE Transactions
The file received from the respective exchange (NSE/BSE) with the BID ID number against
the respective client entry is required to be uploaded in the e-IPO system to facilitate the
3
7
user to view the BID number assigned by the respective exchange against the client entry
made in the file exported. The Import feature facilitates the user to import the file received
from the exchange for further book building process.
Import DP File
This feature facilitates the user to import the DP file in the e-IPO system. The details
imported are Client Code (CLIENT DP ACCOUNT NO, DP Type and DP Name in a comma
separated format.
Note: For NSDL CLIENT Code should be of 8 char in length and for CDSL CLIENT Code
should be in 16 char in length.
Optimal Database Management
e-IPO software provides the user the facility to delete all Master entries, transaction entries
for particular IPO, all IPOs, selected date or all dates. Further managing the database load
helping faster access.
Other features
Calculator provided in the software, short cut keys for access to various data for entry,
modification, export BSE or NSE entries in a user friendly manner, user login time, date are
some of the other features that are provided in e-IPO. Each an every window has an
Explanation for the use of that window for easy understanding of the use of that window.
Various shortcuts are available on the main page of the module for easy and faster access.
Theres also feature of sending Transaction Slip of the bids placed by the clients with all the
necessary details via e-mail. We can also filter out for which clients or which exchange we
would like to send the transaction slip.
Feature List for e-IPO Web Client
E-IPO Web Client is a user-friendly front end, which provides bidding for IPO orders;
Modifying orders and Order history can be provided to retail and institutional investors
through the Internet at very marginal costs. Some of the features are listed below:
Market Watch
Market Watch provides a view with all the IPOs available for bidding. All the details like
IPOname, Price determination, Start date, End Date, Minimum Price, Maximum Price, and
Minimum Qty are available. The user can also place an order for IPO through the Market
Watch also
3
8
Transfer Funds
Before placing any IPO order the user needs to transfer funds of the amount he is bidding for
to the brokers account. The transferred amount will be set as a limit for the user. When the
user places an IPO order his limits will be checked. If the transferred amount exceeds the
amount he has bid for then the user can send a request to the broker to transfer the rest
amount to his account.
Order Book
The user can see the details of the last placed order for the present IPO. The user can have a
look at the previous placed IPO bids by filtering on the date, in a particular range of date. The
user can also modify the current placed IPO order by just clicking on the name of the IPO.
Place Order
The client can place an IPO order through this window by selecting a IPO. He just has to
select the Application no. from the drop down menu and enter QTY and bid price. The
Minimum and Maximum Price as well as Minimum Qty and Multiples Qty will be displayed.
The user can also select the price module as Best Price, Market Price and Cut -Off Price.
Modify Order
The user can modify the IPO order from this window. The user will be able to modify all the
latest placed IPO. The user can also cancel the order from this window. All necessary
validation like Minimum Qty, Minimum price will be checked while modifying an IPO order.
PRIVATE PLACEMENT
Private placement (or non-public offering) is a funding round of securities which are sold
[1]
without an initial public offering, usually to a small number of chosen private investors.
In
the United States, although these placements are subject to the Securities Act of 1933, the
securities offered do not have to be registered with the Securities and Exchange
Commission if the issuance of the securities conforms to an exemption from registrations as
set forth in the Securities Act of 1933 and SEC rules promulgated there under. Most private
placements are offered under the Rules know as Regulation D. Private placements may
typically consist of stocks, shares of common stock or preferred stock or other forms of
membership interests, warrants or promissory notes (including convertible promissory notes),
and
purchasers
are
often institutional
investors such
as banks, insurance
companies or pension funds.

3
9
The sale of securities to a relatively small number of select investors as a way of raising
capital. Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds. Private placement is the opposite of a public issue,
in which securities are made available for sale on the open market.
Since a private placement is offered to a few, select individuals, the placement does not have
to be registered with the Securities and Exchange Commission. In many cases, detailed
financial information is not disclosed and the need for a prospectus is waived. Finally, since
the placements are private rather than public, the average investor is only made aware of the
placement after it has occurred.
BOUGHT OUT DEALS
A bought out deal is a process by which an investor (usually the investment banker) buys out
a significant portion of the equity of an unlisted company with a view to make it public
within an agreed time frame.
The advantage of the bought deal from the issuer's perspective is that they do not have to
worry about financing risk (the risk that the financing can only be done at a discount too
steep to market price.) This is in contrast to a fully-marketed offering, where the underwriters
have to "market" the offering to prospective buyers, only after which the price is set.
The advantages of the bought deal from the underwriter's perspective include:
1. Bought deals are usually priced at a larger discount to market than fully marketed
deals, and thus may be easier to sell; and
2. The issuer/client may only be willing to do a deal if it is bought (as it eliminates
execution or market risk.)
The disadvantage of the bought deal from the underwriter's perspective is that if it cannot sell
the securities, it must hold them. This is usually the result of the market price falling below
the issue price, which means the underwriter loses money. The underwriter also uses up its
capital, which would probably otherwise be put to better use (given sell-side investment
banks are not usually in the business of buying new issues of securities).
PLACEMENT WITH FIS, MFS, FIIS
Financial Institutions:
All Financial Institutions
Export Credit Guarantee Corporation (ECGC)
4
0
Export Import Bank (Exim Bank)

Industrial Credit and Investment Corporation of India (ICICI)
Industrial Credit and Investment Corporation of India Ventures (ICICI Ventures)
Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India (IFCI)
Industrial Investment Bank of India (IIBI)
Infrastructure Development Finance Company (IDFC)
Investment by Insurance Companies
National Bank of Agriculture and Rural Development (NABARD)
National Small Industries Corporation (NSIC)
Non-Banking Financial Company (NBFC)
North Eastern Development Finance Corporation (NEDFi)
Risk Capital and Technology Finance (RCTF)
Small Industries Development Bank of India (SIDBI)
State Industrial Development Corporations (SIDCs)
Tourism Finance Corporation of India (TFCI)
Unit Trust of India (UTI)
MUTUAL FUNDS
A mutual fund is a professionally managed type of collective investment scheme that
pools
money
from
many
investors
and
invests
typically
in
investment securities (stocks, bonds, short-term money market instruments, other mutual
[1 ]
funds, other securities, and/or commodities such as precious metals).
The mutual fund
will have a fund manager that trades (buys and sells) the fund's investments in
accordance with the fund's investment objective. In the U.S., a fund registered with the
Securities and Exchange Commission (SEC) under both SEC and Internal Revenue
Service (IRS) rules must distribute nearly all of its net income and net realized gains
from the sale of securities (if any) to its investors at least annually. Most funds are
overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as
4
1
they commonly are) which is charged with ensuring the fund is managed appropriately
by its investment adviser and other service organizations and vendors, all in the best
interests of the fund's investors.
Since 1940 in the U.S., with the passage of the Investment Company Act of 1940 (the
'40 Act) and the Investment Advisers Act of 1940, there have been three basic types of
registered investment companies: open-end funds (or mutual funds), unit investment
trusts (UITs); and closed-end funds. Other types of funds that have gained in popularity
are exchange traded funds (ETFs) and hedge funds, discussed below. Similar types of
funds also operate in Canada, however, in the rest of the world, mutual fund is used as a
generic term for various types of collective investment vehicles, such as unit trusts,
open-ended investment companies (OEICs), unitized insurance funds, undertakings for
collective investments in transferable securities (UCITS, pronounced "YOU-sits")
and SICAVs (pronounced "SEE-cavs").
FOREIGN INSTITUTIONAL INVESTORS
An investor or investment fund that is from or registered in a country outside of the one
in which it is currently investing. Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds.
The term is used most commonly in India to refer to outside companies investing in the
financial markets of India. International institutional investors must register with the
Securities and Exchange Board of India to participate in the market. One of the major
market regulations pertaining to FIIs involves placing limits on FII ownership in
Indian companies.
Foreign institutional investors (FIIs) poured inflows heavily to bet on the India growth
story.
As per data released by the Securities and Exchange board of India (SEBI), FIIs invested
US$ 2.1 billion in equities in April 2010, and US$ 684.18 million in debt in April 2010.
During January to April 2010, FIIs invested US$ 6.6 billion in equity and US$ 5.94
billion in debt, of which US$ 4.4 billion in equity and US$ 2.1 billion in debt was
invested in March 2010.
According to SEBI, FIIs transferred a record US$ 17.5 billion in domestic equities
during the calendar year 2009. FIIs infused a net US$ 1.1 billion in debt instruments
4
2
during the said period.

Data sourced from SEBI shows that the number of registered FIIs stood at 1711 and
number of registered sub-accounts rose to 5,382 as of April 30, 2010.
According to a report by CNI Research, companies that could be short-listed as shortterm investment targets based on interest from FIIs and as yet modest stock movement,
have expanded 33 per cent for the quarter ended March 2010. As per the report FII stake
rose in 299 companies in the quarter ended March 2010, as compared to 322 companies
in the quarter ended December 2009. However, the number of companies which can be
considered as investment picks has increased to 142 in March from 107 in December,
said the report.
Moreover, India accounted for more than one-fifth of the US$ 22.1 billion private equity
investments received by the emerging markets across the globe in 2009, according to a
report by Emerging Markets Private Equity Association (EMPEA) released in March
2010. In 2009, emerging markets accounted for about 26 per cent of global private
equity (PE) investment. The report added that global PE investment in emerging markets
totalled US$ 22.1 billion across 674 deals in 2009. Asia captured 63 per cent of total
emerging market PE investments by value in 2009, with India capturing US$ 4 billion,
according to the report.
The amount of private equity (PE) and venture capital (VC) funding in India touched
US$ 1.9 billion in the first three months of 2010, according to a report by global
consulting firm, Deloitte. This funding came from 88 transactions, with an average deal
size of US$ 22.1 million. The amount accounts for nearly 50 per cent of the entire
funding in the previous year of 2009, i.e., US$ 4.4 billion from 299 deals with average
deal size of US$ 14.6 million.
Investment Scenario
Private equity firms invested about US$ 2 billion across 56 deals during the quarter
ended March 2010, according to a study by Venture Intelligence, a research service
focused on private equity and merger and acquisitions (M&A) transaction activity in
India.
The amount invested during the latest quarter (January-March 2010) was the highest in
the last six quarters. The figure was significantly higher than that during the same period
last year (January-March 2009) which witnessed US$ 620 million being invested across
4
3
58 deals and also the immediate previous quarter (October-December 2009) where
investments worth US$ 1.7 billion were made across 102 deals.
The largest investment during January-March 2010 was the US$ 425 million investment
into power generation firm Asian Genco by General Atlantic, Morgan Stanley, Norwest,
Goldman Sachs and Ever stone. Other top investments reported during the first quarter
of 2010 included Quadrangle Capital Partners US$ 300 million investment into telecom
tower infrastructure company Tower Vision India; Stanch art PE, KKR and New Silk
Routes US$ 217 million investment into Coffee Day Resorts and TPG Growths US$ 115
million investment into Clean Tech firm Greenko Group.
Moreover, FIIs invested a record US$ 5 billion in Indian corporate paper in the first four
months of 2010. Maximum investments have been in top-rated bond offerings at an
average tenure of 18-24 months and in commercial paper. The investment limit for FIIs
in corporate bonds has been raised to US$ 15 billion in 2009. According to data released
by SEBI, FIIs have cumulatively invested US$ 11.24 billion in Indian debt since
November 1992. This includes investment in both government and corporate bonds.
During 2009-10, FIIs pumped in a record US$ 6.04 billion in corporate and government
papers. This is a 12-fold rise over their investment of US$ 480 million in 2008-09.
Numbers crunched by education-focused private equity fund Kaizen Management
Advisors show that venture capitalists and private equity players have pumped in excess
of US$ 140 million so far this year, 50 per cent more than what they invested in the
whole of 2009. The total VC/PE investment into the sector is expected to be close to
US$ 300 million in 2010, according to Sandeep Aneja, managing director of Kaizen
Management Advisors.
Kidswear maker and retailer Lilliput sold an undisclosed stake to private equity firm
TPG Growth for around US$ 25.9 million in April 2010. Earlier, the company had sold a
31 per cent stake for around US$ 60.8 million to private equity player Bain capital.
Reliance Equity Advisors (India) Ltd (REAIL), the private equity arm of Reliance
Capital Ltd, invested US$ 22.6 million in Pathways World School in April 2010.
Singapore-based Temasek Holdings signed an agreement in April 2010 with GMR
Energy Ltd (GEL) to raise capital for energy expansion plans. Temasek Holdings would
invest US$ 200 million through its wholly-owned subsidiary Claymore Investments
(Mauritius) Pte.
4
4
Government Initiatives
The Securities and Exchange Board of India (SEBI), in January 2010, allowed equity
investors to lend and borrow shares for 12 months compared with the current limit of
one month. The new norms will also allow a lender or a borrower to close his position
before the agreed-upon expiry date.
According to a circular dated April 9, 2010, based on the assessment of the allocation
and the utilization of the limits to FIIs for investments in Government and corporate
debt, the unutilized limits will be allocated in the following manner:
No single entity (FII) shall be allocated more than US$ 45.2 million of the
government debt investment limit for allocation through bidding process. The
minimum amount which can be bid for shall be US$ 11.3 million and the
minimum tick size shall be US$ 11.3 million.
No single entity shall be allocated more than US$ 452.2 million for the corporate
debt investment limit.
In terms of SEBI circular dated January 31, 2008, the government and corporate debt
limits shall be allocated on a first come first serve basis subject to the following
conditions:
An investment limit of US$ 45.2 million in Government debt shall be allocated
among the FIIs/sub-accounts on a first-come first-served basis, subject to a
ceiling of US$ 11.1 million per registered entity.
The remaining amount in corporate debt after bidding process shall be allocated
among the FIIs/sub accounts on a first-come first-served basis, subject to a
ceiling of US$ 45 million per registered entity.
No single entity (FII) shall be allocated more than US$ 45.2 million of the government
debt investment limit for allocation through bidding process. The minimum amount
which can be bid for shall be US$ 11.3 million and the minimum tick size shall be US$
11.3 million.
No single entity shall be allocated more than US$ 452.2 million for the corporate debt
investment limit.
In terms of SEBI circular dated January 31, 2008, the government and corporate debt
limits shall be allocated on a first come first serve basis subject to the following
4
5
conditions:
An investment limit of US$ 45.2 million in Government debt shall be allocated among
the FIIs/sub-accounts on a first-come first-served basis, subject to a ceiling of US$ 11.1
million per registered entity.
The remaining amount in corporate debt after bidding process shall be allocated among
the FIIs/sub accounts on a first-come first-served basis, subject to a ceiling of US$ 45
million per registered entity.
The Government of India reviewed the External Commercial Borrowing (ECB) policy
and increased the cumulative debt investment limit by US$ 9 billion (from US$ 6 billion
to US$ 15 billion) for FII investments in corporate debt in March 2010
OFF SHORE ISSUES
An offshore bank is a bank located outside the country of residence of the depositor,
typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.
These advantages typically include:
greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking
Act)
low or no taxation (i.e. tax havens)
easy access to deposits (at least in terms of regulation)
protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the United
Kingdom, and most offshore banks are located in island nations to this day, the term is used
figuratively to refer to such banks regardless of location, including Swiss banks and those of
other landlocked nations such as Luxembourg and Andorra.
Offshore banking has often been associated with the underground economy and organized
crime, via tax evasion and money laundering; however, legally, offshore banking does not
prevent assets from being subject to personal income tax on interest. Except for certain
[1]
persons who meet fairly complex requirements , the personal income tax of many
countries
[2]
makes no distinction between interest earned in local banks and those earned
abroad. Persons subject to US income tax, for example, are required to declare on penalty
of perjury, any offshore bank accountswhich may or may not be numbered bank
accountsthey may have. Although offshore banks may decide not to report income to other
4
6
tax authorities, and have no legal obligation to do so as they are protected by bank secrecy,
this does not make the non-declaration of the income by the tax-payer or the evasion of the
tax on that income legal. Following September 11, 2001, there have been many calls for more
regulation on international finance, in particular concerning offshore banks, tax havens,
and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for
major illegal money flows.
Defenders of offshore banking have criticised these attempts at regulation. They claim the
process is prompted, not by security and financial concerns, but by the desire of domestic
banks and tax agencies to access the money held in offshore accounts. They cite the fact that
offshore banking offers a competitive threat to the banking and taxation systems in developed
countries,
suggesting
that Organisation
for
Economic
Co-operation
and
Development (OECD) countries are trying to stamp out competition.

Advantages of offshore banking
Offshore banks can sometimes provide access to politically and economically stable
jurisdictions. This will be an advantage for residents in areas where there is risk of
political turmoil,who fear their assets may be frozen, seized or disappear (see
the corralito for example, during the 2001 Argentine economic crisis). However,
developed countries with regulated banking systems offer the same advantages in
terms of stability.
Some offshore banks may operate with a lower cost base and can provide
higher interest rates than the legal rate in the home country due to lower overheads
and a lack of government intervention. Advocates of offshore banking often
characterise government regulation as a form of tax on domestic banks, reducing
interest rates on deposits.
Offshore finance is one of the few industries, along with tourism, in which
geographically remote island nations can competitively engage. It can help
developing countries source investment and create growth in their economies, and can
help redistribute world finance from the developed to the developing world.
Interest is generally paid by offshore banks without tax being deducted. This is an
advantage to individuals who do not pay tax on worldwide income, or who do not pay
tax until the tax return is agreed, or who feel that they can illegally evade tax by
hiding the interest income.
4
7
Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.
Offshore
banking
is often
linked
to
other
structures,
such
as offshore
companies, trusts or foundations, which may have specific tax advantages for some
individuals.
Many advocates of offshore banking also assert that the creation of tax and banking
competition is an advantage of the industry, arguing with Charles Tiebout that tax
competition allows people to choose an appropriate balance of services and taxes.
Critics of the industry, however, claim this competition as a disadvantage, arguing
that it encourages a "race to the bottom" in which governments in developed countries
are pressured to deregulate their own banking systems in an attempt to prevent the off
shoring of capital.
Disadvantages of offshore banking
Offshore bank accounts are less financially secure. In banking crisis which swept the
world in 2008 the only savers who lost money were those who had deposited their
funds in offshore branches of Icelandic banks such as Kaupthing Singer &
Friedlander. Those who had deposited with the same banks onshore received all of
their money back. In 2009 The Isle of Man authorities were keen to point out
that 90% of the claimants were paid, although this only referred to the number of
people who had received money from their depositor compensation scheme and not
the amount of money refunded. In reality only 40% of depositor funds had been
repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and
onshore banking centers often have depositor compensation schemes. For example
The Isle of Man compensation scheme guarantees 50,000 of net deposits per
individual depositor or 20,000 for most other categories of depositor and point out
that potential depositors should be aware that any deposits over that amount are at
risk. However only offshore centers such as the Isle of Man have refused to
compensate depositors 100% of their funds following Bank collapses. Onshore
depositors have been refunded in full regardless of what the compensation limit of
that country has stated thus banking offshore is historically riskier than banking
onshore.
4
8
Offshore banking
has been associated in the past with the underground

[3 ]
economy and organized crime, through money laundering. Following September 11,
2001, offshore banks and tax havens, along with clearing houses, have been accused
of helping various organized crime gangs, terrorist groups, and other state or non-state
actors. However, offshore banking is a legitimate financial exercise undertaken by
many expatriate and international workers.
Offshore jurisdictions are often remote, and therefore costly to visit, so physical
access and access to information can be difficult. Yet in a world with global
telecommunications this is rarely a problem for customers. Accounts can be set up
online, by phone or by mail.
Offshore private banking is usually more accessible to those on higher incomes,
because of the costs of establishing and maintaining offshore accounts. However,
simple savings accounts can be opened by anyone and maintained with scale fees
equivalent to their onshore counterparts. The tax burden in developed countries thus
falls disproportionately on middle-income groups. Historically, tax cuts have tended
to result in a higher proportion of the tax take being paid by high-income groups, as
previously sheltered income is brought back into the mainstream economy [4].
The Laffer curve demonstrates this tendency.
Offshore bank accounts are sometimes touted as the solution to every legal, financial
and asset protection strategy but this is often much more exaggerated than the reality.
ISSUE MARKETING
Following are the various methods being adopted by corporate entities for marketing the
securities in the New Issues Market:
Pure prospectus method
Offer for sale
Private placement
Initial public offerings
Right Issue method
Bonus Issue methods
Book building Method
Stock option method and
Bought out Deals methods
4
9
Over the counter placement

Tender method
ADVERTISING STRATEGIES
With the increasing number of new issues flooding the market, some of them bunching at the
same time, keen competition has emerged in the new issues market. This has led to larger fish
swallowing the smaller fish and smaller companies facing rising costs, development and
under subscription. Bigger and well established companies having reputed promoters with a
track record and professional management could secure easily oversubscription multifold.
Medium and small sized projects and relatively new and first generation promoters face stiff
competition. Adequate pre- issue planning and proper marketing strategy have become
absolutely necessary. Investors have become extremely choosy and shy of the majority of
new issues.
Need for aggressive salesmanship
Innovative Ideas
SEBIS code of Advertisement
Advertisement campaign
Collection centers and rising cost
Advertisement Expenses
SEBI code on Advertisement
Mailing Agents
Pre- issue Mailing
Mailing work after issue is closed
NRI MARKETING
Non resident investment of the merchant banker provide investment advisory services in
terms
of identification of investment opportunities, selection of securities, portfolio
management, etc. to attract NRI investment in primary and secondary markets. They also
take care of the operational details like purchase and sale of securities securing the
necessary clearances from RBI under FEMA for repatriation of interest and dividends, etc.
NriInvestIndia.com is a NRI, PIO and OCI focused financial broker company, offering
investment options in India at some unbelievably low charges and fees for Investing in India.
We help NRIs - Non resident Indians, PIOs - person of India origin & OCI holders - overseas
citizenship of India to Invest in Stock Markets of India. We offer quality NRI investment
5
0
services to Non Resident Indian clients. Some of our investment services for NRIs include:
Stock Trading, Mutual Funds Investments for NRI, Online Dmat account, NRI Derivative
trading & Investment advising. We offer a gamut of NRI investment options in India that
would make NRI Investing in India easy.
Featured Services are:
Indian Mutual fund
Stock trading
Investment advise
De mat account
Tax services
PAN card assistance
POST ISSUE ACTIVITIES

Principles of allotment:
After the closure of the subscription list, the merchant banker should inform, with in 3 days
of the closure, whether 90% of the amount has been subscribed or not. If it is not subscribed
up to 90% then the underwriters should bring thte shortfall amount with in 60 days. In case of
over subscription, the shares should be allotted on a pro rata basis and the excess amount
should be refunded with the interest to the share holders with in 30 days from the date of
closure.
Formalities associated with Listing:
The SEBI lists certain rules and regulations to be followed by the issuing company. These
rules and regulations are laid down to protect the interests of investors. The issuing company
should disclose to the public its profit and loss account, balance sheet, information relating to
bonus and right issue and any other relevant information

5
1
UNIT-III
OTHER FEE BASED SERVICES
The Main Idea
One plus one makes three: this equation is the special alchemy of a merger or an acquisition.
The key principle behind buying a company is to create shareholder value over and above
that of the sum of the two companies. Two companies together are more valuable than two
separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong companies
will act to buy other companies to create a more competitive, cost-efficient company. The
companies will come together hoping to gain a greater market share or to achieve greater
efficiency. Because of these potential benefits, target companies will often agree to be
purchased when they know they cannot survive alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were
synonymous, the terms merger and acquisition mean slightly different things. When one
company takes over another and clearly established itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases to exist, the
buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and
operated. This kind of action is more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company stock is issued in its place. For example,
both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new
company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't
happen very often. Usually, one company will buy another and, as part of the deal's terms,
simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's
technically an acquisition. Being bought out often carries negative connotations, therefore, by
describing the deal as a merger, deal makers and top managers try to make the takeover more
palatable. A purchase deal will also be called a merger when both CEOs agree that joining
together is in the best interest of both of their companies. But when the deal is unfriendly that is, when the target company does not want to be purchased - it is always regarded as an
acquisition. Whether a purchase is considered a merger or an acquisition really depends on
whether the purchase is friendly or hostile and how it is announced. In other words, the real
difference lies in how the purchase is communicated to and received by the target company's
board of directors, employees and shareholders.
Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement and cost savings. By merging, the
companies hope to benefit from the following:
Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all
the money saved from reducing the number of staff members from accounting, marketing and
other departments. Job cuts will also include the former CEO, who typically leaves with a
compensation package.
Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate
IT system, a bigger company placing the orders can save more on costs. Mergers also
translate into improved purchasing power to buy equipment or office supplies - when placing
larger orders, companies have a greater ability to negotiate prices with their suppliers.
Acquiring new technology - To stay competitive, companies need to stay on top of
technological developments and their business applications. By buying a smaller company
with unique technologies, a large company can maintain or develop a competitive edge.
Improved market reach and industry visibility - Companies buy companies to reach new
markets and grow revenues and earnings. A merge may expand two companies' marketing
and distribution, giving them new sales opportunities. A merger can also improve a
company's standing in the investment community: bigger firms often have an easier time
raising capital than smaller ones. That said, achieving synergy is easier said than done - it is
not automatically realized once two companies merge. Sure, there ought to be economies of
scale when two businesses are combined, but sometimes a merger does just the opposite. In
many cases, one and one add up to less than two. Sadly, synergy opportunities may exist only
in the minds of the corporate leaders and the deal makers. Where there is no value to be
created, the CEO and investment bankers - who have much to gain from a successful M&A
deal - will try to create an image of enhanced value. The market, however, eventually sees
through this and penalizes the company by assigning it a discounted share price. We'll talk
more about why M&A may fail in a later section of this tutorial.
Varieties of Mergers: From the perspective of business structures, there is a whole host of
different mergers. Here are a few types, distinguished by the relationship between the two
companies that are merging:
Horizontal merger - Two companies that are in direct competition and share the same
product lines and markets.
Vertical merger - A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
Market-extension merger - Two companies that sell the same products in different markets.
Product-extension merger - Two companies selling different but related products in the
same market.
Conglomeration - Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is financed. Each
has certain implications for the companies involved and for investors:
Purchase Mergers - As the name suggests, this kind of merger occurs when one company
purchases another. The purchase is made with cash or through the issue of some kind of debt
instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax
benefit. Acquired assets can be written-up to the actual purchase price, and the difference
between the book value and the purchase price of the assets can depreciate annually, reducing
taxes payable by the acquiring company. We will discuss this further in part four of this
tutorial.
Consolidation Mergers - With this merger, a brand new company is formed and both
companies are bought and combined under the new entity. The tax terms are the same as
those of a purchase merger.
Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be
different in name only. Like mergers, acquisitions are actions through which companies seek
economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all
acquisitions involve one firm purchasing another - there is no exchange of stock or
consolidation as a new company. Acquisitions are often congenial, and all parties feel
satisfied with the deal. Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy
another company with cash, stock or a combination of the two. Another possibility, which is
common in smaller deals, is for one company to acquire all the assets of another company.
Company X buys all of Company Y's assets for cash, which means that Company Y will have
only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell
and will eventually liquidate or enter another area of business. Another type of acquisition is
a reverse merger, a deal that enables a private company to get publicly-listed in a relatively
short time period. A reverse merger occurs when a private company that has strong prospects
and is eager to raise financing buys a publicly-listed shell company, usually one with no
business and limited assets. The private company reverse merges into the public company,
and together they become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common
goal: they are all meant to create synergy that makes the value of the combined companies
greater than the sum of the two parts. The success of a merger or acquisition depends on
whether this synergy is achieved.
Business Valuation Methods:
How much your business is worth depends on many factors, from the current state of the
economy through your businesss balance sheet.
Let me say up front that I do not believe that business owners should do their own business
valuation. This is too much like asking a mother how talented her child is. Neither the
business owner nor the mother has the necessary distance to step back and answer the
question objectively.
So to ensure that you set and get the best price when you're selling a business, I recommend
getting a business valuation done by a professional, such as a Chartered Business Valuator
(CBV). In Canada, you can find Business Valuators through the yellow pages or through the
website of the Canadian Institute of Chartered Business Valuators.
A Business Valuator (or anyone valuating your business) will use a variety of business
valuation methods to determine a fair price for your business, such as:
1) Asset-based approaches
Basically these business valuation methods total up all the investments in the business. Assetbased business valuations can be done on a going concern or on a liquidation basis.
A going concern asset-based approach lists the business net balance sheet value of
its assets and subtracts the value of its liabilities.
A liquidation asset-based approach determines the net cash that would be received
if all assets were sold and liabilities paid off.
2) Earning value approaches

These business valuation methods are predicated on the idea that a business's true value lies
in its ability to produce wealth in the future. The most common earning value approach is
Capitalizing Past Earning.
With this approach, a valuator determines an expected level of cash flow for the company
using a company's record of past earnings, normalizes them for unusual revenue or expenses,
and multiplies the expected normalized cash flows by a capitalization factor. The
capitalization factor is a reflection of what rate of return a reasonable purchaser would expect
on the investment, as well as a measure of the risk that the expected earnings will not be
achieved.
Discounted Future Earnings is another earning value approach to business valuation where
instead of an average of past earnings, an average of the trend of predicted future earnings is
used and divided by the capitalization factor.
What might such capitalization rates be? In a Management Issues paper discussing "How
Much Is Your Business Worth?" Grant Thornton LLP suggests:
"Well established businesses with a history of strong earnings and good market share might
often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a
fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to
50%."
3) Market value approaches
Market value approaches to business valuation attempt to establish the value of your business
by comparing your business to similar businesses that have recently sold. Obviously, this
method is only going to work well if there are a sufficient number of similar businesses to
compare.
Although the Earning Value Approach is the most popular business valuation method, for
most businesses, some combination of business valuation methods will be the fairest way to
set a selling price.
UNIT-IV
FUND BASED FINANCIAL SERVICES
Leasing-Definition
A lease is an agreement whereby the lessor conveys to the lessee, in return for rent,
the right to use an asset for an agreed period of time. Lessor is a person who conveys to
another person (lessee) the right to use an asset in consideration of a payment of periodical
rental, under a lease agreement. Lessee is a person who obtains from the lessor, the right to
use the asset for a periodical rental payment for an agreed period of time.
-Institute of chartered accountants of India.
Or
Leasing, in actual practice, is basically a contractual arrangement whereby the owner
(Lessor) of assets transfers the right to use the assets to the user (lessee) for a fixed period of
time in return of rentals. Once the agreed period lapses, the lease agreement expires and the
assets revert back to the owner.
Lessor: is the owner of the asset that is being leased.
Lessee: is the receiver of the services of the asset under a lease contract.
Lease term: is the period for which the lease agreement remains in operation.
Lease rental: is the consideration which the lessee pays to the lessor for the lease transaction.
Why leasing?
A flexible investment instrument
A way of broadening the financing options available to local companies;

An effective way to finance investment in capital assets by new companies with no
credit history;
Attractive for financing small and medium enterprises.
Factors that contributed to growth of Indian leasing:Ne entry barriers
Buoyant growth in capital expenditure by companies
Fast growth in car market
Tax motivations
Optimistic capital markets
Access to public deposits
A generally go-go business environment.
Essential elements of leasing
Parties to the contract
Asset
Ownership separated from user
Term of lease
Lease rentals
Modes of terminating lease
Parties to the contract: There are essentially two parties to a contract of lease financing,
namely, the owner and the user, called the lessor and lessee. Lessors as well as lessees may
be individuals, partnerships, joint stock companies, corporations or financial institutions.
Sometimes there may be joint lessors or joint lessees, particularly where the properties or the
amount of finance involved is enormous.
Asset: The asset, property or equipment to be lease is the subject-matter of a contract of lease
financing. The asset may be an automobile, plant and machinery, equipment, land and
building, factory, a running business, aircraft, and soon. The asset must, however, be of the
lessees choice suitable for his business needs.
Ownership separated from user: The essence of a lease financing contract is that during the
lease-tenure, ownership of the asset vests with the lessor and its use is allowed to the lessee.
On the expiry of the lease tenure, the asset reverts to the lessor.
Term of lease: The term of lease is the period for which the agreement of lease remains in
operations. Every lease should have a definite period otherwise it will be legally inoperative.
The lease period may sometimes stretch over the entire economic life of the asset. (I.e.
financial lease) or a period shorter that the useful life of the asset (i.e. operating lease). The
lease may be perpetual, that is, with an option at the end of lease period to renew the lease for
the further specific period.
Lease rentals: The consideration which the lessee pays to the lessor for the lease transaction
is the lease rental. The lease rentals are so structured as to compensate the lessor for the
investment made in the asset (in the form of depreciation),. The interest on the investment,
repairs and so forthborne by the lessor, and servicing charges over the lease period.
Mode of terminating lease: The lease is terminated at the end of the lease period and various
courses are possible, namely,
The lease is renewed on a perpetual basis or for a definite period, or
The asset reverts to the lessor, or
The asset reverts to the lessor and the lessor sells it to a third party, or
The lessor sells the asset to the lessee.
The parties may mutually agree to, and choose, any of the aforesaid alternatives at the
beginning of the term.
CLASSIFICATION OF LEASE
Financial lease: A financial lease is also known as full payout lease, capital lease, long-term
lease, or net lease. In financial lease, the contractual period between the lessee and the lessor
is generally to the expected full economic life of the equipment. Here, the lessor acts as a
financer and the lessee takes the responsibility of maintenance and servicing of the
equipment.
Operating lease: Operating lease is generally a short-term and cancellable lease and the
contractual period between the lessor and lessee is generally less than the full expected useful
economic life of the equipment. The maintenance and other servicing costs are borne by the
lessor and consequently the rentals are far higher than in other of leasing. This type of leasing
is not popular in India.
Leveraged lease: In a leveraged lease, there are three parties involved--- lessor (leasing
company), lessee (user of the equipments), and financer. Leasing company contributes by
way of equity capital, financial institution, and banks finance by way of term loans towards
the purchases of an asset to be leased.
Manufacturer
Sells
Assets
Lessor
Leases
Assets
Lessee
Lender
Sale and lease back lease: under this type of lease, a firm may sell an asset which it already
owns to another party and lease it back from the buyer. The lessee receives immediate cash
for his assets and repays the lease rentals over the stipulated period.
6
0
Sale transaction
Seller
Buyer
Sale value
Lease transaction
Lessee
Lessor
Lease rentals
Primary and secondary lease: primary and secondary lease is also known as front-ended
lease. It is split into two parts where first part is known as the primary lease and latter part is
a secondary lease. The rentals are generally structured in such a manner that the costs of the
assets with profit are recoupled in the primary period of the lease. The secondary lease is a
perpetual lease with a nominal rental.
Domestic lease: A lease transaction is said to be a domestic lease if all parties to the
transaction are domiciled in the same country. On the other hand, if the parties involved in
the leasing transaction are located in two different nations, the transaction is clarified as an
international lease transaction. International lease is further classified into:
Import lease
Cross-border lease
Import lease: In an import lease, the lessor and the lessee are domiciled in the same country
but the equipment supplier is located in a different country. The lessor imports the asset and
leases it to the lessee.
Cross-border lease: When the lessor and the lessee are domiciled in different countries, the
lease is classified as cross-border lease. The domicile of the supplier is immaterial.
Advantages of leasing:
Advantages to lessor:
1. Stable business
2. Wider distribution
3. Sale of supplies
4. Second-hand market
5. Tax benefits
6. Absorbing obsolescence risks
7. Fillip to capital market

8. Easy finance
9. Other benefits
Stable business: Leasing mechanism provides for a continuous and stable manufacturing
business for the lessor. The business is supported by the lessees continued patronage, since
there is no necessity for capital investment outlay. It is possible for the lessee to acquire the
asset even in times of depression, thus contributing to the growth of the manufacturers sales,
even in times of depression.
Wider distribution: Leasing allows for capturing a wider distribution network by the lessor.
This assumes significance given the fact that the lessees do not have to allocate funds for
heavy capital investments.
Sale of supplies: Depending on the nature of the leasing arrangement, the lessor has to
ensure the supply of spare parts and components required for the maintenance of the asset
leased. This would augment the sale by the lessor- manufacturer.
Second-hand market: In the case of operating lease, where the asset leased by the lessee is
reverted to the lessor, it is possible for the lessor to either lease out the asset again, or to sell it
in the open market. This creates a second-hand market for the used asset.
Tax benefits: There is relative tax benefit for the receipt of lease rentals. For instance, sales
tax payable on lease rentals is lower than the direct tax payable on revenue receipts on the
sale of the asset. This enables the manufacturer-lessor to supply products at highly
competitive rates. In addition, the lessor-owner of the asset can also claim depreciation tax
benefits on assets let out on lease. This provides a better tax planning opportunity to the
lessor.
Absorbing obsolescence risks: In the case of a non-cancelable financial lease, the risk of
obsolescence arising from the usage of the asset has to be borne by the lessee. In the same
way, the cancelable nature of operating lease enables the lessor to cancel the lease and
acquire a new asset for further lease. In addition, the lessor charges a premium on the lease
rentals.
Fillip to capital market: Leasing companies, as intermediaries of finance, give an impetus to
investment activity, and facilitate the flow of saving into real investment. By reducing the
terms on which finance is provided, lessors encourage an accelerated rate of real investments.
This way, leasing companies contribute to the growth and development of the capital market.
Easy finance: The availability of easy and convenient finance has proved to be a great
stimulant for the increase in demand for capital equipment. This in turn boosts the
manufacture and sales of the leasing companies.
Other benefits: In additional to the benefits discussed above, the lessor commands some of
the following benefits too:
Advantage of collateral security on the lease payments by the lessee
Offers a high growth potential, even in times of general depression
High return on equity because of better leveraging
Ability to accept public deposits, and contribute to better financial resources
Advantages to lessee:
1. Efficient use of funds
2. Cheaper sources
3. Flexible source
4. Enhanced borrowing capacity
5. Off-balance sheet financing
6. Tax benefits
7. Favorable terms
8. Guards against obsolescence
9. Avoidance of initial cash outlay
10. Better liquidity
Efficient use of funds: Leasing arrangements allow the lessee to acquire the use of the asset
without having to own it. This dispenses with the need for capital investment. This also
enables the lessee to make efficient use of the available financial resources. This way, more
funds are released for working capital purposes. The conservation of cash outflows also
contributes to the profitability of the firm.
Cheaper source: Leasing, as a mode of financing the use of capital assets, is found to be less
expensive, as compared to other modes such as the buying option, etc.
Flexible source: Leasing of equipment is a highly flexible source of financing, as compared
to other methods. The flexible nature of the lease contract allows for promotion of the mutual
interest of the parties, especially of the lessee. This is because it is always possible for the
leasing plan to be tailor-made to suit the requirements of the lessee. However, the extent of
flexibility of the lease depends on its financing structure.
Enhanced borrowing capacity: Leasing is considered advantageous to the lessee since it
helps enhance the ability to borrow in a diversified way. This is possible because the lessors
credit rating of the lessee is less stringent. Besides, owing to the advantage of lower debtequity ratio, lease financing allows for a mix of financing methods rather than relying on one
source.
Off-balance sheet financing: The biggest advantage claimed by lease financing is that the
asset acquired, and the corresponding liability, need not be shown in the balance sheet. This
helps keep the debt-equity ratio of the lessee either intact or low, thus contributing to an
improved ROI. This is possible because there is an increase in operating income, without any
increase in net block.
Tax benefits: The extent of benefits that would be derived by owning an asset, by way of
depreciation tax shield is less than the benefits to the lessee by way of lease rentals. This is
because depreciation tax shield is less than lease rentals. Moreover, lease rentals are fully taxdeductible. Further, this will help amortize the cost of the asset in the books of the lessee in a
much shorter period. This also enables the lessee to write off more amounts in the initial
years, which eventually makes it possible to postpone taxes to the latter years. Similarly, the
lease on the land permits the lessee to write-off land values against taxable income, which is
not otherwise permissible under income tax rules.
Favorable terms: The terms of financial arrangements with institutions are usually
restrictive and disadvantageous to loanees. Lease arrangements allow the use of the asset on
favorable terms.
Guards against obsolescence: In the case of operating lease, the lessee can be protected
from risk of obsolescence of the asset leased, since it is always possible for the lessee to
terminate the existing lease arrangement anytime, and to take up another asset under a fresh
lease. This becomes all the more significant in the context of rapid technological changes.
Avoidance of initial cash outlay: Leasing provides 100 percent financing and the benefits of
using the finances without having to borrow. The initial investment required is thus avoided
in a leasing arrangement.
Better liquidity: Sale and lease-back arrangement provides the advantages of better
liquidity, since it enables the lessee to make a sale of the asset owned to the prospective
lessor, and then take the asset back on lease. This helps a lessee-firm to overcome a liquidity
crunch be being in a position to sell and realize cash. This helps overcome working capital
crises.
LIMITATIONS OF LEASE FINANCING
1. Disguised debt financing
2. Costly option
3. Loss of tax shield
4. Double sales-tax
5. Loss of residual value
6. Unfavorable gearing
7. No ownership
8. Risk of default
9. On working capital
10. Indiscriminate finance
11. Long-term venture
Disguised debt financing: Evidence has been gained through studies that lease financing is
another form of debt financing. In fact, it is considered to be a disguised form of debt
financing. It essentially involves borrowing of an asset, instead of funds. Moreover, the
obligations of leasing are similar to those incurred under debt financing. In a survey
conducted in the US in1959. It has been found that leasing was an intermediate between
secured and unsecured debt.
Costly option: When the leasing company acts only as a financial intermediary, and borrows
from the market at prevailing or even higher interest rates, leasing may prove to be a costlier
exercise as compared with a straight borrowing.
Loss of tax shield: If depreciation rates are higher, and leasing is preferred over buying, it
may result in loss of depreciation tax shield for the lessee.
Double sales-tax: Depending on the prevailing sales tax laws in various sates, there are
possibilities of the lease rental revenues attracting sales tax twice, once at the time of the sale
and again when the asset when the asset is leased out.
Loss of residual vale: There is a loss of residual value for the lessee, since the leased asset
has to be returned to the lessor at the end of the lease period. If the residual value of the
leased asset fetches a substantial amount of scrap, it would bring the advantages of cash flow.
Moreover, sale of residue sometimes acts as a protective shield against inflationary erosion of
money.
Unfavorable gearing: Like any other borrowing, leasing also creates fixed obligations. This
results in an increase in the capital gearing of the company. This might be disadvantageous to
the borrowing capacity of the company.
No ownership: Unfortunately leasing does not provide the advantage of ownership to the
users. This is not suitable especially for those who would not be satisfied merely with the
right of usage, as against the right of ownership, of the asset.
Risk of default: If the lessor has borrowed funds in hypothecation in order to acquire the
asset for being leased out and if there is a default in the repayment of installments, the asset
may be taken over by the financial institution. This might hamper the interest of the lessee
and ultimately affect business.
No working capital: Leasing provides a mechanism only for long-term capital requirements.
It fails to provide access to much needed working capital finance.
Indiscriminate finance: Lease companies provide lease financial assistance to the lessee,
sometimes too enthusiastically, without considering their requirements, project feasibility,
repayment capability, etc. this attitude of indiscriminate financing defects the genuine object
of leasing.
Long term venture: The lessor is in relatively disadvantageous position, since funds are
required to be invested for longer term. It naturally takes years to recover the original cost of
the assets that are leased out, which in turn expose the lessor to various types of risks.
TAX CONSIDERATION OF LEASING
1. Accounting treatment of leases
2. Sales tax provision for leasing
3. Break-even lease rental
Accounting treatment of leases: Over the past three decades, the accounting treatment of
lease has been changed. At the inception stage, lessee was never disclosed in the financial
statements but now it is done by way of footnotes in the financial statements. A statement
issued by the financial accounting standards board (FASB) establishes financial accounting
standards for lessees and lessors. The leased asset is shown on the balance sheet of the lessor,
and the depreciation and other taxes associated with the leases assets are claimed by the
lessor. In addition to this, lessees are allowed to show lease payments as an expense and the
lessors are required to show lease receipts as income for income tax purposes.
Sales tax provision for leasing: In a lease transaction, the lessor is not entitled for the
th
concessional rate of central sales tax due to absolute owner of the asset. But the 46
amendment act has brought lease transaction under the purview of sale and has empowered
the central and state government to levy sales tax on lease transaction. Further a new closure
29A as a part of article 366 states that the tax on purchase or sale of goods includes a tax on
the transfer of the right to use the goods for any purpose for cash deferred payment or other
valuable consideration.
Break-even lease rental: The lease rentals of leasing vary widely from company to company
depending upon the profile of the clients, tax and depreciation planning, cash flows, and cost
structure of the leasing companies. The cost structure plays an important role in determining
the lease rental quotas of leasing company. The break-even lease rental is the minimum lease
rental which the lessee can accept and from lessors point of view, the net advantage of
leasing is equal to zero. To calculate the break-even lease rental, the following parameters are
required to be consideration:
P-[M (1-t) + I.P.t +

L
Where
L = break-even lease rent,
P = cost of the asset,
M = management fees for lease agreement,
t = tax rate,
I = Invested allowance in percentage,
di = depreciation is the asset in the year I,
k = post tax cost of capital or minimum required rate of return,
S = expected salvage value (after tax) at the end of its life,
n = primary lease period.

And the tax is to be deducted from P at the numerator of the equation implies the tax benefits
enjoyed by the lessor.
PROBLEMS OF LEASING
1. Resource constraint
2. Risk of obsolescence
3. Non-availability of sales-tax consideration
4. Cut-throat competition
5. Lack of qualified personnel
6. Delay in rental payments
7. Attitude of government
Resource constraint: Lack of licensing requirements from the reserve bank of India and the
government was responsible for the entry of a large number of companies into leasing
business. As a result of cut-throat competition, a considerable fall in the rental was
experienced by the leasing companies. Further, the leasing companies are now leasing at
rated that do not cover their costs. Since the leasing investment involves huge capital outlay,
the companies are finding it very difficult to finance them out to their own funds.
Risk of obsolescence: The leasing company will get much trouble since it has to bear the
capital loss in case of obsolescence.
Non-availability of sales-tax consideration: The implications of sales tax on lease rentals
make leasing correspondingly more expensive as the cost of the equipment required under
leasing becomes inflated to the extent of sales tax paid by the leasing companies. A
combination of higher rate of sale tax on the acquisition of capital equipment and tax on lease
rental payments makes the leasing transaction totally uneconomical.
Cut-throat competition: Most of the companies doing business come out with maiden
dividends. But the companies are paying more interest on loans taken from the financial
institutions or commercial banks. In such a situation, the lease rentals have to be increased.
But it is not easy to raise the rental payment because the customer are used to lower rates.
Thus, lack of finance has become one of the important obstacles to leasing companies on the
way of progress.
Lack of qualified personnel: The nature of the leasing and hire purchase business is nothing
but financing the capital equipment to the capability of borrowed party, legal matters,
recovery of rentals following a special system. But in India it is very difficult to get right man
to deal with the problems of this business. On account of this fact, operations of the leasing
business are bound to suffer.
Delay in rental payments: The late payment of rent has some costs as per the lessors point
of view. But the lessor, while fixing the lease rentals does not take into consideration the
delay in recovery of the rentals at the time of lease agreement. Again, there is another type of
cost involved in the leasing activity in terms of bad debts. These two types of risks can
disturb the future prospects of leasing business.
Attitude of government: The government has not so far come out with well-defined
guidelines with regard to sales tax and investment allowances of leasing business.
STRUCTURE OF LEASING IN INDIA
1. Independent leasing companies
2. Other finance companies
3. Manufacture-lessors
4. Financial institutions
5. In-house lessors
6. Commercial banks
Independent leasing companies: A major part of their income is derived from leasing; some
of them have financial/technical collaboration with overseas partners. They offers their
services through direct advertisement, personal contracts, lease brokers including foreign
banks and merchant banks.
Other finance companies: A large number of other finance and investment companies also
carry on leasing business because of tax advantage. Leasing is not their regular business and
they normally opt for lease finance of 100 % depreciation items once in a while so as to defer
taxes.
Manufacture-lessors: A number of manufacturing companies have either set up independent
leasing outfits or through separate divisions carry on leasing business to promote the sale of
their own products.
Financial institutions: The development finance institutions, both all-India and state level,
provide leasing facility.
In-house lessors: Some big business houses have formed captive leasing companies for
providing lease finance to group companies.
Commercial banks: With effect from 1994-95, banks have been permitted to directly carry
on leasing and hire purchase business.
GENERAL PROVISIONS
Contract
a. Legal obligation
b. Lawful consideration
c. Competent parties
d. Free consent
e. Not expressly void
Contract: A contract is an agreement enforceable by law. The essential elements of a valid
contract are:
Legal obligation: A contract is an agreement with an intention to create legal obligation.
This is done through an offer and acceptance which signify willingness on the part of the
offerer and the offeree (acceptor) to be bound by the proposal to enter into an agreement.
Lawful consideration: A contract requires lawful consideration. Consideration means that
each of the parties to the agreement gives/gets something. In a lease contract, for instance, the
lessor receives rentals from the lessee who in consideration/ return uses the leased asset. A
consideration must not be illegal/fraudulent/immoral/opposed to public policy or must not
imply injury to another person or his property.
Competent parties: The parties to a contract/agreement must be of 18 years of age of sound
mind and not disqualified by any law to enter into a contract.
Free consent: The consent of the parties to a contract must be free, that is, it should not be
given under coercion, undue influence, fraud, misrepresentation or mistake.
Not expressly void: The agreement should not be void under any act/law. Such agreements
cannot be legally enforced.
LIABILITIES OF LESSEE (BAILEE)
1. Reasonable care
2. Not to make unauthorized use
3. To return the goods
4. Not to set up an adverse title
7
0
5. To pay the lease rental

6. To insure and repair the goods
Reasonable care: A lessee is required to take reasonable care of the goods leased to him, in
the same manner as a man of ordinary prudence would do to protect his own goods. If the
lessee fails to take reasonable care, he is liable for loss of, or damage to, the goods caused by
his own, or his employees/ agents negligence. However, unless there is an agreement to the
country, the lessee is not responsible for the loss of, or damage to, the goods, if he has taken
reasonable care to protect the goods, for instance, where the goods are damaged by flood or
burnt by riotous mob. It is generally, therefore, that lease agreements specifically make lessee
liable for all damages irrespective of lessees negligence.
Not to make unauthorized use: The lessee must not use the goods for a purpose different
from that stipulated in the lease agreement or do any unauthorized act in relation to the
goods. If the lessee does anything which is not permissible under the lease agreement, the
agreement is immediately terminated and the lessor may recover the possession of the goods.
To return the goods: The lessee is under an obligation to return the goods, as soon as the
time for which they were leased has expired, or the purpose for which they were leased has
been accomplished. Besides, the lessee is bound to return the goods to the lessor in the
following cases;
a) When the lessee has exercised his right to terminate the agreement.
b) Then the lessee himself has terminated agreement
c) When some event occurs which under the term of the lease agreement causes an
automatic termination of the lease agreement
The lessee can avoid his liability to return the goods, if the goods were lost/ destroyed for
none of his fault. Where, however, the goods are lost after the date stipulated for the return of
the goods, the lessee cannot avoid his liability.
If the lessee fails to return the goods, the lessor may sue him for damages, or may bring an
action for sale proceeds of the goods when wrongfully disposed off by the hirer.
Not to set up an adverse title: The lessee must protect the lessors title by informing him, as
soon as practicable, of any adverse claim on the goods leased.
To pay the lease rental: The lessee is under an obligation to pay the lease rentals at the times
and in the manner laid down in the lease agreements.
7
1
To insure and repair the goods: A lease agreement may also require a lessee to get the
goods insured and / or repaired as and when necessary. But if the agreement does not provide
so, the lessee is under no express/implied obligation to do the same.
LIABILITY OF LESSOR (BAILOR)
1. Delivery of goods
2. Peaceful possession
3. Fitness of goods
4. To disclose all defects
Delivery of goods: The lessor is required to ensure the delivery of goods to the lessee and to
supply him the necessary documents to enable him to use the goods lawfully. If the goods are
not delivered, the lease does not commerce.
Peaceful possession: In a lease agreement, the lessee is allowed only the possession of the
goods to make economic use of the goods. Thus, the lessor must ensure that the lessee enjoys
quiet possession of the goods during the currency of the agreement.
Fitness of goods: The lessor must ensure that the asset leased is in a reasonably fit condition
for the purpose for which the lessee is to use it. This applies where the lessee has made
known his particular purpose to the lessor and he relies upon lessors skill and judgment.
However, in a typical equipment lease arrangement, the lessor is only a financial
intermediary whose role is limited to purchasing the equipment from the supplier and
delivering it to the lessee. The equipment supplier is identified by the lessee and the
equipment specification and the terms and conditions relating to its performance are
negotiated by the lessor. Therefore, the implied obligation of the lessor to ensure that the
equipments leased is fit for the purpose for which the lessee is to use it is expressly negative
in a lease agreement.
To disclose all defects: The lessor must disclose, to the lessee, the faults or defects in the
goods leased of which the lessor has knowledge and which might interfere with their use or
expose the lessee to extra-ordinary risks. If he fails to do sa and the lessee suffers any loss
due to such non-disclosure, the lessor must compensate the lessee. The lessor must remove
the defects as reasonable examination would have disclosed. However, he is not liable for
latent defects in goods, whether discoverable or not.
HIRE PURCHASE
7
2
Possession of goods is delivered by the owner thereof to a person on condition that such
person pays the agreed amount in periodical installments.
OR
The property in the goods is to pass to such persons on the payment of the last of such
installments, and that such person pays the agreed amount in periodical installments, and
such person has a right to terminate the agreement at any time before the property passes.
Salient features of the hire purchase:
1. The hire purchases the equipment from the equipment supplier and lets it on the hire
to the hirer.
2. The hirer is required to pay, hire purchase installments over a specified period of time.
The hire purchases installments are payable monthly in advance.
3. The ownership of the asset is transferred after the hire has paid the last installment.
4. Each installment is treated as hire charge so that if default is made in payment of any
one installment, the seller is entitled to take away the goods.
5. The terms and conditions relating to the usage of the asset, namely its maintenance,
insurance, etc. and the rights and obligations of the parties to the agreement are
described in the hire purchase agreement.
ADVANTAGES:
1. Higher rate of interest can be charged and as the calculation is on the original
advance, higher income would be realized.
2. As the company is the owner, attachment of the vehicle and subsequent sale even by
private auction would keep the NPAs low,
3. As the borrowers would and up losing the installments paid as well as the vehicle,
defaults would be lower.
4. The banks can effectively recycle the funds recovered.
7
3
7
4
S.no
1
2
3
4
5
Characteristics
Hire purchase
Ownership
Ownership of the property lies with the finance company, the Ownership of the property is transferred to the hirer
lessor and it is never transferred to the lessee, the user
on the payment of the last installment
Depreciation
Lessor, and not the lessee, is entitled to claim depreciation The hirer (owner) is entitled to claim depreciation
tax shield.
tax shield
Capitalization
Capitalization of the asset is done in the books of the lessor, Capitalization of the asset is done in the books of the
the leasing company
hirer
The entire lease payments are eligible for tax computation in
Only the hire-interest is eligible for tax computation
the books of the lessee
in the books of the hirer.
The lessor, and not the lessee, has the right to claim the
The hirer can claim benefits of salvage value as the
benefits of salvage value
prospective owner of the asset
Payments
Salvage value
Magnitude
Leasing is used as a source of finance, usually for acquiring Hire purchase is used as a source of finance, usually
high cost assets such as machinery, ships, airplanes, etc
for acquiring relatively low cost assets such as
automobiles, office equipments, etc
Down payment
No down payment is required for acquiring the use of the Down payment is required to be made for acquiring
leased assets
the asset and there is a margin maintained to the
extent of 20-25 percent
Reporting
In the books of the lessee, leased assets are disclosed by way The asset bought on hire purchase will be shown as
of a note only
an asset, and the amount of installments payable to
the lessor as a liability.
LEASING FINANCING VS HIRE PURCHASE FINANCING

Lease financing
Maintenance
asset
of Whereas the lessee has to maintain the leased asset in the It is the hires responsibility to ensure the
case of financial lease, upkeep is the responsibility of the maintenance of the asset bought
College, Tirunelveli http://www.francisxavier.ac.in
lessor in the case of operating lease

Suitability
It is not suitable for the low-capital enterprises which desire It is highly suitable for the low-capital enterprises
to show a strong asset position in their balance sheets
which need to show a strong asset position in their
balance sheets
Nature of asset
An asset given on lease by a leasing company is considered The hire vendor normally shows the asset let under
as the fixed asset of the lessor
hire purchase either as stock in trade or as
receivables
Receipts
All receipts from the lessee is taken into the lessors profit Only the interest portion is take into the hire
and loss account
vendors profit and loss account
Income
Lessors income declines as the investment outstanding in the In the case of hire purchase transaction, finance
lease declines
charges are allocated to the hire purchase period
equally.
10
11
12
13
7
6
TAX ASPECTS OF THE HIRE PURCHASE

1. Income tax aspects
2. Sales tax aspects
3. Interest tax aspects
Income tax aspects: The treatment of a hire purchase transaction from the point of view of
income tax is governed by the provisions of a central board of direct tax (CBDT) circular
issued way back in 1943. According to this circular, the hirer is entitled to:
a. The tax shields on depreciation calculate with reference to the cash purchase price,
and
b. The tax shield on the consideration for hire. The circular defines consideration for
hire in the same way is the total charge for credit and requires this amount to be
spread evenly over the term of the agreement. From the owners angle the
consideration for hire received by hire is liable to tax.
Sale tax aspects:
The silent sales tax aspects are as follows:
th
a. Hire purchase transactions are liable to sales tax. The 46 amendment act clearly
states that the tax on the sale or purchase of goods includes a tax on the delivery of
goods on hire purchase or any other system of payment by installments.
b. For the purpose of levying sales tax a sale is deemed to take place only when the hirer
exercises the option to purchase.
c. The amount of sales tax must be determined with reference to the depreciated value of
the goods at the time when the hire exercises the purchase option.
d. The state in which the goods have been delivered is entitled to levy and collect sales
tax.
e. Sale tax cannot be lived on hire purchase transaction structured by finance companies
provided these companies are not dealers in the class of goods let on hire.
f. There is no one uniform rate of sales tax applicable to hire purchase transaction. The
rate varies from state to state.
Interest tax aspects:
The provisions under this act are as follows:
a. Interest tax is payable on the total amount of interest accruing to a hire purchase
company in the previous year at the rate of 3%

Engineering College, Tirunelveli website: http://www.francisxavier.ac.in
7
7
b. The amount of interest which is established to have become a bad debt during the
previous year can be deducted from the chargeable interest. The interest tax payable
by the hire purchase company is treated as tax-deductible expenses for the purpose of
competing the taxable income under the income tax act.
LEGAL FRAMEWORK
The hire purchase act was passed in 1972. The act contains provisions for regulating;
a. The format/contents of the hire-purchase agreement
b. Warrants and the conditions underlying the hire-purchase agreement
c. Ceiling on hire purchase charges
d. Rights and obligations of the hirer and the owner
Sales of goods act
In a contract of hire-purchase, the elements of sale is inherent as the hirer always has the
option to purchase the movable asset by making regular payment of hire charges and the
property in the goods passes to him on payment of the last installment.
Contract of sales of goods: Is a contract whereby the seller transfers/agrees to transfer the
property in the goods to the buyer for a price.
Essential ingredients of a sale:
Two parties: Namely, the buyer and seller, both competent to contract to effectuate the sale.
Goods: That is, the subject-matter to be transferred from the seller to the buyer.
Money consideration: For the goods, known as price.
Transfer of ownership: Of the general property in the gods from the seller to the buyer.
Essentials of a valid contract: Under the India contract act.
Sales Vs bailment: In a sale, there is a conveyance of property in goods from seller to buyer
for a price, and the buyer becomes the owner of goods and can deal with them in the manner
he likes. In case of bailment (or leasing), there is a mere transfer of possession of the goods
from the bailor to the bailee with no conveyance intended. The goods are delivered for a
certain purpose, on the condition that when that purpose is over the goods will be returned in
specie.
Sales Vs Mortgage, pledge and hypothecation: The essence of contract of a sale is the
transfer of general property in the goods. A mortgage is a transfer of interest in the goods
from a mortgagor to a mortgagee to secure a debt. A hypothecation is an equitable charge on
goods without possession, but not amounting to a mortgage. The essence and purpose of

7
8
these contracts is to secure o debt. All the three duffer from sale, since the ownership in the
goods is not transferred which is an essential condition of sale.
Sale Vs Hire purchase: A hire purchase agreement is a kind of bailment whereby the owners
of the goods lets them on hire to another person called hirer, on payment of certain stipulated
periodical payments as hire charges or rent. If the hirer makes the payment regularly, he gets
an option to purchase the goods on making the full payment. Before this option is exercised,
the hirer may return the goods without any obligation to pay the balance rent. The hirer is,
however, under no compulsion to exercise the option and purchase the goods at the end of the
agreement period. A hire-purchase contract, therefore, differs from sale in the sense that:
a. In a hire-purchase the possession of the goods is with the hirer while the ownership
vests with the original owner;
b. There is no agreement to buy but only an option is given to the hirer to buy the goods
under certain conditions; and
c. The ownership in the goods passes to the hirer when he exercises his option by
making the full payment.
Hire purchase agreement:
A hire-purchase agreement is in many ways similar to a lease agreement, in so far as the
terms and conditions are concerned. The important clauses in a hire-purchase agreement are:
Nature of agreement: stating the nature, term and commencement of the agreement.
Delivery of equipment The place and time of delivery and the hirers liability to bear
delivery charges
Location: The place where the equipment shall be kept during the period of hire.
Inspection: That the hire has examined the equipment and is satisfied with it.
Hire-charges: To be paid by the hirer, the time schedule, the rate of interest/penalty for
delayed payment/default.
Repairs: The hirer to obtain at his cost, insurance on the equipment and to hand over the
insurance policies to the owner
Alteration: The hirer not to make and alterations, additions and so on to the equipment,
without prior consent of the owner.
Termination: The events or acts of hirer that would constitute a default eligible to terminate
the agreement.
Risk: Of loss and damage to be borne by the hirer.

7
9
Registration and fees: The hirer to comply with the relevant laws, obtain registration and
bear all requisite fees.
Indemnity clause
Stamp duty
Schedule of equipment forming subject-matter of agreement.
Schedule of hire charges.

8
0
UNIT-V
OTHER FUND BASED FINANCIAL SERCIVES
CONSUMER CREDIT:
Includes all asset-based financing plans offered to primarily individuals to quire
durable consumer goods.
The term consumer credit refers to a transfer of wealth, the payment of which is deferred in
whole or in part, to future, and is liquidated piecemeal or in successive fractions under a plan
agreed upon at the time of the transfer.
Or
Business procedures through which the consumers purchase semi-durables and durables
other than real estate, in order to obtain from them a series of payments extending over a
period of three months to five years, and obtain possession of them when only a fraction of
the total price has been paid.
Types of consumer credit:
1. Revolving credit
2. Fixed credit
3. Cash loan
4. Secured finance
5. Unsecured finance
Revolving credit: An on-going credit arrangement similar to a bank overdraft, whereby the
financier, on a revolving basis, grants credit, is called revolving credit. The consumer is
entitled to avail credit to the extent sanctioned as the credit limit. An ideal example of
revolving credit is credit cards.
Fixed credit: It is like a term loan whereby the financier provides loan for a fixed period of
time. The credit has to be squared off with a stipulated period. Examples of fixed credit
include monthly installment loan, hire purchase, etc.
Cash loan: Under this type of credit, banks and financial institutions provide money with
which the consumers buy articles for personal consumption. Here, the lender and the seller
are different. The lender does not have the responsibilities of a seller.
Secured finance: When the credit granted by a financial institution is secured by collateral, it
takes the form of secured finance. The collateral is taken by the creditor in order to satisfy

8
1
the debt in the event of default by the borrower. The collateral may be in the form of personal
property, real property or liquid assets.
Unsecured finance: When there is no security offered by the consumer against which money
is granted by financial institutions it takes the form of unsecured finance.
SOURCES OF CONSUMER FINANCE
1. Traders
2. Commercial banks
3. Credit card institutions
4. NBFCs
5. Credit unions
6. Middlemen
7. Other sources
Traders: The predominant agencies that are involved in the provision of consumer finance
are traders. They include sales finance companies, hire purchase and other such financial
(nonbank) institutions.
Commercial banks: Commercial banks take keen interest in providing, directly or indirectly,
the finance for consumer durables. Banks lend large sums of money at wholesale rates to
commercial or sales finance companies, hire purchase concerns and other such financial
intermediaries. Recently, banks have also started directly financing consumers through
personal loans, which are meant for purchasing consumer durable goods. Personal loans are
granted without a security. They are cheaper than hire purchase credit.
Credit card institutions: Credit card institutions arrange for credit purchase of consumer
articles through the respective banks which issue the credit cards. The credit card system
enables a person to buy goods and services on credit. The credit card scheme operates in the
following ways:
On presentation of the credit card by the buyer, the seller prepares there copies of the sales
voucher-the first for the seller, the second for the bank or credit card company and the third
for the buyer. The seller gives one copy to the buyer and the other is forwarded to the bank
for collection. The sellers bank forwards all such bills to the card issuing bank or company.
The bank receives a monthly statement from the card issuing bank or company and the
outstanding amount is to be paid within a period of 20-45 days without any additional charge.
If payment is delayed, bank charges interest per year on the amount outstanding.

8
2
NBFCs: Non-banking finance companies constitute other important sources of consumer

finance. Consumer finance companies, also known as small loan companies, personal finance
companies or licensed lenders, are non-savings institutions, whose prime assets constitute
sale-finance receivables, personal cash loans to consumers, short and intermediate-term
business receivables, etc. these finance companies charge substantially higher rates of interest
than the market rates. Consumers approach them as a last resort. Such companies run an
equal risk of high collection charges too.
Credit union: A credit union is an association of people who agree to save their money
together and in turn provide loan to each other at relatively lower rates of interest. These are
called cooperative credit societies in India. The first credit union was started in Germany in
the year 1848. These are non-profit, deposit-taking and low-cost credit.
Middlemen: Middlemen, such as dealers of consumer articles, also grant credit to consumer
as part of their promotion campaign. In many cases, dealers work in unison with banks and
finance companies, and direct the consumers to the friendly finance companies. This type of
arrangement helps dealers maintain a close and loyal relationship with customers.
Other sources
a. Saving and loan associations
b. Mutual savings banks.
BOOMS IN CONSUMER FINANCING:
a. Fall in the average age of the consumer for large ticket items like housing, etc.
b. Cheaper rate of interest in borrowings
c. Flexible interest rate structure
d. Increase in the start up salary levels of people
e.
Aspirational changes in the life styles
f. The DINK(double income no kid) factor

g. The credit card advantage
h. Spurt in the number of financial services institutions thus increasing competition
i. Increasing tie-ups of manufacturers with financiers
j. Thriving market for used cars
k. The lure of zero interest scheme
l. Attractive terms of lending by financial institutions.
SALIENT FEATURES OF CONSUMER CREDITS:
1. Parties to the transaction
8
3
2. Structure of the transaction

3. Mode of payment
4. Repayment period and rate of interest
5. Security.
Parties to the transaction: The parties to a consumer credit transaction depend upon the
nature of the transaction:
a. A bipartite arrangement, there are two parties, namely, borrower-consumer-customer
and dealer-cum-financier
b. A tripartite arrangement where the parties are dealer, financier and the customer. The
dealer in this type of arrangement arranges the credit from the financier.
Structure of the transaction: A consumer credit arrangement can be structured in three
ways:
Hire-purchase
Conditional sale
Credit sale
Hire-purchase: The customer has the option to purchase the asset. But he may not
exercise the option and return the goods according to the terms of the agreement.
Most of the tripartite consumer credit transactions are of this type.
Conditional sale: The ownership is not transferred to the customer until the total
purchase price including the credit charge is paid. The customer cannot terminate the
agreement before the payment of the full price.
Credit sale: The ownership is transferred to the customer on payment of the first
installment. He cannot cancel the agreement.
Mode of payment: From the point of view of payment, the consumer credit arrangements
fall into two groups: (i) down payment schemes and (i) deposit-linked schemes. The down
payment may range between 20-25 percent of the cost while the deposit may vary between
15-25 percent of the amount financed at compound rate of interest. Some arrangements also
provide zero deposit schemes with higher equated monthly installment (EMI).
Payment period and rate of interest: A wide range of options are available. Typically, the
repayment period ranges between 12-60 monthly installments. The rate of interest is normally
expressed at a flat rate; the effective rate of interest is generally not disclosed. In some
schemes, the rate of interest is not disclosed; instead the EMI associated with the different
8
4
repayment periods is mentioned. Most of the schemes provide for easy repayment. They also
provide for either a rebate for prompt payments and charge for delayed payment.
Security: is generally in the form of a first charge on the asset. The consumer cannot
sell/pledge/hypothecate the asset.
Plastic money refers to credit cards, you use them whenever you want and pay later (with
interest, of course). It makes it too easy for people to buy things they normally could not
afford, which makes it easier to get into debt.
TYPES OF PLASTIC MONEY:
1.
Credit card
2. Debit card
3. Charge card
4.
Amex card
5.
Dinner club card
6. Global card
7.
Co-branded card
8.
Master card & Visa
9.
Smart card
10. Photo card
Credit card: A credit card is plastic money that is used to pay for products and services at
over 20 Million locations around the world. All you need to do is produce the card and sign a
charge slip to pay for your purchases. The institution which issues the card makes the
payment to the outlet on your behalf; you will pay this 'loan' back to the institution at a later
date.
Debit card: Debit cards are substitutes for cash or check payments, much the same way that
credit cards are. However, banks only issue them to you if you hold an account with them.

8
5
When a debit card is used to make a payment, the total amount charged is instantly reduced
from your bank balance.
Don't borrow on your credit card! Here's why
A debit card is only accepted at outlets with electronic swipe-machines that can check
and deduct amounts from your bank balance online.
Charge card: A charge card carries all the features of credit cards. However, after using
a charge card you will have to pay off the entire amount billed, by the due date. If you fail
to do so, you are likely to be considered a defaulter and will usually have to pay up a
steep late payment charge. When you use a credit card you are not declared a defaulter
even if you miss your due date. A 2.95 per cent late payment fees (this differs from one
bank to another) is levied in your next billing statement.
Amex card: Amex stands for American Express and is one of the well-known charge cards.
This card has its own merchant establishment tie-ups and does not depend on the network of
MasterCard or Visa. Credit cards: Remember these dos and don'ts. This card is typically
meant for high-income group categories and companies and may not be acceptable at many
outlets. There are a wide variety of special privileges offered to Amex cardholders.
Dinner club card: Diners Club is a branded charge card. There are a wide variety of special
privileges offered to the Diners Club cardholder. For instance, as a cardholder you can set
your own spending limit. Besides, the card has its own merchant establishment tie-ups and
does not depend on the network of MasterCard or Visa. However, since this card is typically
8
6
meant for high-income group categories, it may not be acceptable at many outlets. It would
be a good idea to check whether a member establishment does accept the card or not in
advance.
Global card: Global cards allow you the flexibility and convenience of using a credit card
rather than cash or travelers cheque while traveling abroad for either business or personal
reasons.
Co-branded card:
Co-branded cards are credit cards issued by card companies that have tied up with a
popular brand for the purpose of offering certain exclusive benefits to the consumer.
A debit card with a difference
For example, the Citi-Times card gives you all the benefits of a Citibank credit card
along with a special discount on Times Music cassettes, free entry to Times Music
events, etc.

8
7
Master card & Visa: MasterCard and Visa are global non-profit organizations dedicated to
promote the growth of the card business across the world.
They have built a vast network of merchant establishments so that customers

worldwide may use their respective credit cards to make various purchases.
Smart card
A smart card contains an electronic chip which is used to store cash. This is most
useful when you have to pay for small purchases, for example bus fares and coffee.
No identification, signature or payment authorization is required for using this card.
The exact amount of purchase is deducted from the smart card during payment and is
collected by smart card reading machines. No change is given. Currently this product
is available only in very developed countries like the United States and is being used
only sporadically in India.
Photo card
If your photograph is imprinted on a card, then you have what is known as a photo card.
Doing this helps identify the user of the credit card and is therefore considered safer. Besides,
in many cases, your photo card can function as your identity card as well.

8
8
DEFINITION:The credit
card
can be
defined as A small
plastic card
that allows its
holder to buy goods and services on credit and to pay at fixed intervals through the card
issuing agency
MEANING:A credit card is a card or mechanism which enables card holder to purchase goods, travels
and dine in a hotel without making immediate payments. The holders can use the cards to get
credit from banks up to 45 days.
The credit card relieves the consumers from the botheration of carrying cash and ensures
safety. It is a convenience of extended credit without formality. Thus credit card is a passport
to, safety, convenience, prestige and credit.
ADVANTAGES & DISADVANTAGES OF CREDIT CARD

ADVANTAGES OF CREDIT CARD
1. Benefits to the bank
2. Benefits to card holder
3. Benefits to the merchant establishment
BENEFITS TO THE BANK
8
9
1. A credit card is an integral part of banks major services these days. The credit card
provides the following advantages to the bank: the system provides an opportunity to
the bank to attract new potential costumers.
2. To get new customers the bank has to employee special trained staff. This gives the
bank an opportunity to find the latent talent from among existing staff that would have
been otherwise wasted.
3. The more important function of a credit card, however, is simply to yield direct profit
for the bank. There is a scope and a potential for a better profitability out of income /
commission earned from the traders turn over.
4. This also provides additional customer services to the existing clients. It enhances the
customer satisfaction.
5.
More use by the car holder and consequently the growth of banking habits in general.
6. Better network of card holders and increased use of cards means higher popularity
and image of the bank
7. Savings of expense on cash holdings, i.e. stationery, printing and man power to
handle clearing transactions while considerably is reduced. It increases
BENEFITS TO CARD HOLDER
The principal benefits to a card holder are:
1. He can purchase goods and services at a large number of outlets without cash or
cheque. The card is useful in emergency, and can save embarrassment.
2. The risk factor of carrying and storing cash is avoided. It is convenient for him to
carry credit card and he has trouble free travel and may purchase his without carrying
cash or cheque.
3. Months purchases can be settled with a single remittance, thus, tending to reduce bank
and handling charges.
4. The card holder has the period of free credit usually between 30-50 days of purchase
5. Cash can usually be obtained with the card, either on card account or by using it as
identification when encasings a cheque at the bank.
6. Availing credit with minimum formality.
7. The credit card saves trouble and paper work to traveling business man.
BENEFITS TO THE MERCHANT ESTABLISHMENT
The principal benefits offer credit card to the retailer is
1. This will carry prestigious weight to the outlets.
9
0
2. Increases in sale because of increased purchasing power of the cardholder due to

unbilled credit available to the card holder.
3. The retailers gain from the impulse buying and trading up the tendency to buy the
bigger or better article
4. Credit card ensures timely and certainly of payments.
5. Suppliers/sellers no longer have to send reminders of outstanding debits.
6. Systematic accounting since sales receipts are routed through banking channels.
7. Advertising and promotional support on national scale.
8. Development of prestigious clientele base.
Advantages of Plastic Money:
Plastic Money is a must need of our busy life. Today it is very easy to carry money without
having a lot of cash or gold. Keep Credit or Debit cards and forget the cash money. This is a
new idea of present life-style which has made money transition so easy that anybody can
carry it with him or her in a pocket. Today plastic money is the best alternative of the cash.
It is also safer to traveling with a plastic money card than cash. If it is stolen you may contact
to bank immediately and can block your money from getting stolen. It gives you also better
option as extra purchasing capacity, protection of money and much more. Like wise
advantage plastic money has disadvantages also. Now we would study of following
advantages as well as disadvantages:
Advantages:
Purchasing Power: Credit or Debit cards made it easier to purchase things. Now we
dont have any need to carry hard cash in a large amount. Plastic money is accepted
everywhere, anytime.
Time Saving: Through a credit card or debit card you can purchase anything from
anywhere without spend money on fare or cash transition. Just provide your card
details to seller store or companies and finalize your order. Now you dont have need
to worry about time wastes. Use internet for minimum time consuming.
Extra Safety: While you are not carrying cash, how can it be lost? But if your card
has lost, just contact to your bank or financial institution, which provide you cards. It
will block the account and nobody can draw a single coin without your permission. So
it is 100% safe without any tension.
Credit Limits: You get an extra amount to spend with your card. This extra spent
money you can return before a fix time schedule or you will have to pay a little

9
1
interest. So there is no problem to having less money. Just use money without any
tension and
A need of emergencies: Think, that you have no time to go to bank or someone to get
money, what will you do? Definitely you will use your credit or debit card which will
give you confidence for your difficult time. We can say it a true friend which help us
in need.
Additional features: Mostly credit card offer additional benefits, as discount from
some particular stores, bonus in airline fare, free insurance policies and much more.
This discounts and bonus encourages you to purchase more things as it is good for us
DISADVANTAGES OF CREDIT CARD

a) Some credit card transactions take longer time than cash transactions because of
various formalities.
b) The customer tends to overspend out of immerse happiness.
c) Discounts and rebates can rarely be obtained.
d) The cardholder is responsible for charges due to loss or theft of the card and the bank
may not be party for loss due to fraud or collusion of staff, etc
e) Customers may be denied cash discount for payment through card.
f) It might lead to spending habits and cardholders may end up in big debts
g) Avoid the entire cost and security problem involved in handling cash.
h) Losses to bad debts and reduced an additional liquidity is
i)
It also allows him to delegate spending power to add on members
j)
Credit card is considered as a status symbol.
STEPS FOLOWED IN CREDIT CARD TRANSACTION

1. Authorization
2. Merchant balancing
3. Capture
4. Clearing
5. Interchange (VS/MC Only)
6. Settlement
7. Merchant ACH
Authorization: For Internet Merchants, the shopping card is connected to or integrated with
a Payment Gateway. For Retail Merchants, the card is swiped through a magnetic reader on
the point of sale terminal the authorization is transmitted to the appropriate card issuer for
9
2
approval. The issuing bank of card issuer authenticates the card holder and approves or
declines the transaction amount. It is important to note that no money changes hands during
the authorization. Merchants must re-present the transaction to receive payment.
Merchant balancing: This is also known as batching out. Most pos terminals and all
payment gateway per firm an auto close functions at the and of the day and batch out
automatically.
Capture: The front end processor matches the authorization data to the settlement data and
transmits the card capture file to a back end processor for V/MC transactions or to the
appropriate card issuer for other card types.
Clearing: During this stage the back end processor performs compliance checks and risk
management procedures and transmits the transaction to V/MC or to the appropriate card
issuer for other card types.
Interchange (VS/MC Only): During this stage the V/MC Association sort the transactions
by issuing bank and transmit them to the appropriate issuing banks for settlement.
Settlement: During this stage the Issuing Bank calculates fees and deductions and routs the
net funds to the appropriate Card Issuer which determines the daily deposits for the
merchants.
Merchant ACH: During this stage the acquiring bank or card issuer transmits the merchant
deposit to the merchants checking account.
Different Types of Credit Cards
1. Low Interest Credit Cards
2. Instant Approval Credit Cards
3. Balance Transfer Cards
4. Rewards Credit Cards
5. Cash Back Credit Cards
6. Airline Credit Cards
7. Prepaid Debit Cards
8. Secured Credit Cards
9. Credit Cards for Bad Credit
10. Student Credit Cards
11. Business Credit Cards
Low Interest Credit Card: These types of credit cards offer very low interest. In some
cases, these cards just charge a few percent interests. The reasons for this are numerous. In
9
3
most cases, the low interest rate is for a limited time only. After a set number of months, you
will begin paying higher interest rates. In some cases, low interest credit cards are not really
credit cards at all - they are debit cards linked to a low-interest loan such as a line of credit.
Check your agreement to find out what type of card you have. If you need to consolidate
debts or if you like the idea of having low interest for a while, this type of credit card can be
perfect for you.
Instant Approval Credit Cards: These cards are really a product of our fast-paced society.
The idea behind this type of credit card is that once you fill out your application, you will be
told whether you are approved or not right away. The approval process only takes a few
minutes. Instant approval credit cards are very popular online and applicants can apply via
the internet or over the phone. If you are very impatient or need credit right away, these types
of cards can be for you. However, you should be aware that these cards do not guarantee that
you will be approved right away - sometimes, more time is needed to process your
application. Another drawback to these cards is that they rely heavily on your credit score. If
you have poor credit or any extenuating financial circumstances, these types of cards may not
be for you.
Balance Transfer Cards: Balance transfer cards are a type of temporary low-interest card
that is meant to help you consolidate your debt. They work this way: if you have several
credit cards with a balance, you can get a balance transfer card. You then transfer all your
credit card debt onto the new card and work to pay it off. Since the new card has a low
interest rate, you can quickly repay your bills. If you are in debt, a balance transfer card can
be a great way to get out of debt. It offers the convenience of one bill and low rates.
However, some cards have high fees. Also, if you run up your other cards after consolidating
your debts or if you are unable to pay off your new card in the limited time before the low
interest rate increases, you may find yourself even more in debt than before.
Rewards Credit Cards: Rewards credit cards offer you points, rewards, or bonuses for
every cash purchase made with your credit card over time. As you accumulate rewards or
points, you can redeem your bonus for entertainment events, purchases, travel, and other fun
prizes. Some cards even offer customers extra automatic-enter sweepstakes and draws. Each
time you use your card, you are entered into a draw to win specific prizes. These types of
cards are really a marketing tool for card companies. Companies know that customers love
rewards and prizes and so offer these enticements to lure customers. The major advantage of
9
4
these cards is that they can help you get more cash value for your money. They can also be
fun and rewarding for almost any credit card customer. However, not all reward credit cards
are a deal. Some charge high fees to offset the costs of the bonuses. Some also have very low
points systems, meaning that you need to spend a lot with your credit card to get any rewards
at all. Read the fine print carefully before signing.
Cash Back Credit Cards: Cash back credit cards give you money rewards. When you make
a purchase with this type of credit card, you get some points based on the amount of money
you have spent with your credit card. When you accumulate enough points, you get cash
back. On most cards, you can get back about 1% of your total purchases. These cards are
great for those who are budget-conscious as they give you some money back from your
purchases. However, there are several drawbacks to these types of cards. Some cards have
low cash-back percentage rates. Some charge high fees or have limits on how much money
you can get back each year. Most cards only offer you cash back advantages on purchases not on your balance. If you decide this card is right for you, do compare several card offers to
find the best cash back credit card option.
Airline Credit Cards: This type of card allows you to accumulate frequent flyer points on
all your credit card purchases. If you travel a lot or love to travel, this card can help you
accumulate points for a free trip or for a discount ticket. In many cases, these cards are great
because they allow you to gather points for every purchase. However, these cards can also
charge high fees. In some cases, your points will expire if you do not use them within a
specified time. Worse, some airline credit cards make use of a point system that is not very
user-friendly. You may have to slowly accumulate an enormous amount of points to qualify
for a trip. If you do not love to travel and if you do not use your Credit card a lot, then, your
ability to get rewards you like may be very limited.
Prepaid Debit Cards: These cards are sometimes called junior credit cards. They are not
truly credit cards at all, since you are not getting credit or loans from the credit card
company. Instead, these cards work by having you deposit some money into the card account.
You can then use your card to charge any amount up to the amount in the account. When you
add more money, you can charge more to your card.
Secured Credit Cards: Secured credit cards use collateral to ensure that the card company
will be paid back. Often, these cards are used by people with no credit or bad credit. With
secured credit cards, you can enjoy credit card convenience even if you do not qualify for

9
5
traditional cards. However, you will also have to cope with the additional fees and low credit
limits that these credit cards have.
Credit Cards for Bad Credit: Bad credit cards are designed for people with poor credit
histories. These cards generally have very low credit limits and charge extra fees. This is
because they are designed for people who are considered far less likely to repay their debts. If
you have a bad credit rating, these types of credit cards can be a great way to rebuild your
credit history. These cards can also allow you to have credit even if you would be rejected for
most other cards due to your credit history.
Student Credit Cards: Student credit cards are cards meant to attract college and university
students. These cards often offer sign-up bonuses for students. They are also easier to apply
for, since credit card companies recognize that students have much shorter credit histories
than the average customer. If you are a student, student credit cards can be a great option.
They are simple to use and can help you build a good credit rating before you graduate.
However, there are some disadvantages to student credit cards. These cards may have no
reward programs and may have fewer benefits, including fewer bonuses and services, than
other cards.
Business Credit Cards: Business credit cards are created especially for business use. They
offer many of the same advantages as traditional credit cards, but also offer services that can
really help a business. With some business credit cards, for example, you can enjoy higher
interest rates, extra cards for business employees, monthly reports on your expenses, and
services that let you keep your personal and business expenses separate on the same card.
These advantages mean that using this card for your business is more convenient.
Types of Credit Cards offered by Indian Banks
1. Silver Cards
2. Gold and Platinum Cards
Silver Cards: Silver credit cards rank lowest among the metal named cards, and, because of
lower prestige when compared to gold and platinum cards, are commonly known as basic and
standard credit cards. Silver credit cards come with advantages such as lower annual
membership fees if there is any, and a lower threshold salary which banks use to evaluate
your application in case you should apply.
Silver credit cards will provide you with almost the same credit limit as other cards
provided you have a good credit history. You can also avail of 0% interest balance transfer
schemes which are made available for a period of 6-9 months for silver card holders.
9
6
There are also some disadvantages to using silver credit cards. One would be the
lower cash advance limits, less rewards and promotional packages, and less travel perks
compared to gold and platinum cards. HDFC Bank, ICICI offer silver credit cards through
their HDFC Bank Silver cards and ICICI Sterling Silver credit card
Gold and Platinum Cards : Gold and platinum credit cards are a status symbol for any
credit card holder, bringing prestige since getting gold and platinum cards usually require that
you have good credit rating and a higher income levels. Gold and platinum cards offer higher
limit for cash advance withdrawals and sometimes can provide higher credit limits as
compared to standard or silver cards. If you have a gold or platinum card, you also get better
perks and privileges such as travel insurance, extended warranties for appliance purchases
and special deals on specific products, and purchase protection insurance.
You can also engage in some loyalty schemes that are offered for gold and platinum credit
card holders which can sometimes involve cash back promos and reward points systems.
Some popular gold and platinum cards available are the American Express Gold card, and the
ICICI Solid Gold Credit Card.
It is not possible to cover them the exact offerings of these cards but I will highly
advice you to check all these websites of the banks to get all the info about the credit cards
they are offering. Also try to talk to your friends who are having credit cards to get more info.

9
7
Types of Credit
Cards offered
By
Indian Banks
Features of modern credit cards

1. Owner identification
2. Credit limit
3. Wide usage
4. Technology-dependent
Owner identification: A credit card identifies its owner as the one who is entitled to
purchase goods and services without physical money and is eligible for credit from
9
8
establishment. For this purpose, the card issuer enters into a tie-up with various merchant
establishments.
Credit limit: The issuer, for the purpose of convenience and scrutiny, set up a credit limit for
its cardholders and a floor limit for its merchant establishments. The convenience and safety
factors add value to these cards.
Wide usage: Bank credit is the most widely used payment device issued by banks. It is based
on the system of revolving credit whereby a credit limit is sanctioned to the customer and can
be availed in part or in full. Once the outstanding balance is paid, the credit limit is restoring
for further use. The credit card holder can use the credit cards at merchant locations to buy
goods or services. Special credit cards can also be used to obtain cash through ATMs. Going
by their popularity all over the world, credit cards have been a runaway success.
Technology-dependent: The credit card business is typically a high volume low value
business, with the potential to break-even only beyond a certain volume of cards issued. The
dependence on technology is inevitable to keep the operating cost to the minimum.
CLASSIFICATION OF CREDIT CARDS
1. Based on mode of credit recovery
2. Based on status of credit card
3. Based on geographical validity
4. Based on franchise/tie-up
5. Based on the issuer category
Based on mode of credit recovery
a. Revolving credit card
b. Charge card
Revolving credit card: This type of credit card follows the revolving credit principle. A
limit is set on the amount of money one can spend on the card for a particular period. The
cardholder has to pay a minimum percentage of the outstanding credit which may vary from
5-10 percent at the end of a particular period. Interest varying from 30-36 percent per annum
is charged on the outstanding amount.
Charge card: A charge card is not a credit instrument. It is a convenient mode of making
payment. This facility gives a consolidated bill for a specific period and bills are payable in
full on presentation. There is no interest liability and no pre-set spending limits either.
Based on status of credit card
a. Standard card
9
9
b. Business card
c. Gold card
Standard card: Credit cards that are regularly issued by all card-issuing banks are called
standard card. With these cards, it is possible for a cardholder to make purchase without
having to pay cash immediately. It, however, offers only limited privileges to cardholders.
Some banks issue standard cards under the brand name classic cards. These cards are
generally issued to salaried people.
Business card: Business card, also known as executive, cards are issued to small
partnership firms, solicitors, firms of chartered accountants, tax-consultants and others, for
use by executives on their business trips. The card enjoys higher credit limits and more
privileges than the standard cards. These cards are issued in the names of the executives of
the firms.
Gold card: The gold card offers high value credit for the elite. It offers many additional
benefits and facilities such as higher credit limits, more cash advance limits etc. that are not
available with standard or executive cards.
Based on geographical validity
a. Domestic card
b. International card
Domestic card: Cards that are valid only in India and Nepal are called domestic cards. All
transactions will be in rupees. These cards are issued by most of the banks in India.
International card: Credit cards that have international validity are called international
cards. They are issued to people who travel aboard frequently. These cards are honored in
every part of the world expect India and Nepal. The cardholder can make purchases in
foreign currencies subject to RBI sanction and FEMA rules and regulations.
Based on franchise/tie-up:
a. Property card
b. Master card
c. VISA card
d. Domestic tie-up card
Property card: Cards that are issued by the banks themselves, without any tie-up, are called
proprietary cards. A bank issues such cards under its own brand. Examples include SBI card,
cancard of Canara bank, etc.

10
0
Master card: This is a type of credit card issued under the umbrella of Mastercard
international. The issuing bank has obtained a franchise from the Mastercard Corporation of
USA. The franchised cards be honored in the mastercard network.
VISA CARD: This is a type of credit card, which can be issued by any bank having tie-up
with VIS international corporation, USA. The banks the issue VISA cards are said to have a
franchise of VISA international. The advantage of a VISA franchise is that one can avail the
facility of the VISA network for transaction.
Domestic tie-up cards: These are cards issued by a bank having a tie-up with domestic
credit card brands such as CanCard and indcard etc. For example, IOB has tie-up with
cancard. These banks issue cards to users through the original banks. However, they can have
their banks name engraved on the card. Credit is available on similar lines to the original
card.
Based on the issuer category
a. Individual cards
b. Corporate cards
Individual cards: These are the non-corporate credit cards that are issued to individuals.
Generally all brands of credit cards issue individual cards.
Corporate cards: These are credit cards issued to corporate and business firms. The
executives and top officials of the firms use these cards. The card bears the name of the firm
and the bills are paid by the firm.

10
1
BILL DISCOUNTING
Bill of exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of that instrument.
-Indian Negotiable instrument act 1881.
Features of commercial bills:
1. Written instrument
2. Negotiable instrument
3. Making a bill of exchange
4. Discounting a bill
Written instrument: A bill of exchange is a written instrument containing an unconditional
order, signed by the maker (called drawer), directing a certain person (called drawee) to pay a
certain sum of money specified in the instrument, only to, or to the order of, a certain person
(called payee), or to the bearer of the instrument, on demand or at the expiry of a specified
period.
Negotiable instrument: A bill of exchange is a negotiable instrument. The ownership can be
conveniently changed through negotiation and endorsement during the course of its
circulation. It is a self liquidating paper. Its liquidity is considered almost equivalent to
cash, call loans, and treasury bills, in that order. Bills acquire validity as financing
instruments, after being prepared and discounted, with proper documentation and acceptance
by a banker.
Making a bill of exchange: A buyer has two options for making payment. He may
immediately pay for goods purchased, or postpone the payment to some time in the future. If
the latter option is chosen, the seller is said to have sold goods on credit. The seller of goods
on credit, in order to have evidence of the sake transaction and in order to obtain due payment
after a specified future data, draws up a bill of exchange. The seller who makes a bill of
exchange is called the drawer and the buyer in whose name the bill is drawn is called the
drawee. The bill is then sent to the buyer for acceptance. The acknowledgement of the debt,
due from the buyer, is called acceptance of the bill. The acceptor could be the buyer or any
third party willing to take on the credit risk of the buyer.
Discounting a bill: When the seller/ maker of the bill is in need of cash to meet operating
expenses and cannot wait till the date of maturity, the bill, which are in custody with a
banker, is discounted to obtains a loan. Such a loan will be liquidated on or before maturity of
the bills, through a payment made by the drawee of the bill. The difference between bill value
of the sale transaction and the amount received by the drawer is known as the discount
charge.
TYPES OF BILLS
1. Demand bills
2. Usance bills
3. Documentary bills
4. D/A bills
5. D/P bills
6. Clean bills
7. Inland bills
8. Foreign bills
9. Accommodation bills
10. Supply bills
11. Hundis
Demand bills: Bills of exchange that are payable immediately, at sight or on
presentation to the drawee, are called demand bills. Time of payment or due date is not
specified on this type of bill.
Usance bills: Time-based bills are called Usance bills. The term Usance refers to the time
period recognized by custom or usage for payment of bills.
Documentary bills: Bills of exchange that are accompanied by documents confirming the
genuineness of a trade transaction between the buyer and the seller of goods are known as
documentary bills. These documents include invoices, railway receipt, lorry receipt, bill of
lading etc. a further classification of documentary bills is document against acceptance (D/A)
bills and documents against payment (D/P) bills.
D/A Bill: When the accompanying documents of bills are delivered to the drawee against
acceptance, such bills are called D/A bills. Accounting, the documentary bill becomes a clean
bill after delivery of the documents.
D/P Bills: When the accompanying documents of bills are delivered to the drawee against
payment of the bill, such bills are called D/P bills. Usually, documents are held by the
drawees banker and are released upon payment.
Clean bills: Bills that are not accompanied by any document and reflect the genuineness of
trade transactions between parties concerned are called clean bills. Due to the clean nature
of these bills, the interest rate charged is higher than that on documentary bills.
Inland bills: Bills that are drawn on Indian residents are called inland bills. Such bills may
be endorsed in foreign country, or may remain in circulation in foreign countries. A bill
drawn in a foreign country is considered an inland bill
Foreign bills: Bills that are payable outside India are called foreign bills. Some bills are
either
Drawn outside India and payable in India by a party outside India, or
Drawn outside India and payable outside India by a person resident in India, or
Drawn outside India and payable outside India by a person not resident in India, or
Drawn in India but made payable outside India.
Another classification of foreign bills is export and import bills. Bills that are drawn by
exporters on a party outside India are called export bills and when exporters outside India
draw bills on importers in India, it is called an import bill.
Accommodation bills: Accommodation bills, also called kite bills or wind bills, are those
bills that are created by borrowers and lenders simply to help each other, without the backing
of any trading transaction. It works essentially as a mutual financing arrangement, whereby
parties draw bills on each other for creating instruments, which are subsequently accepted
and discounted with their respective bankers. This way, the financial requirements of both the
parties are easily met. An accommodation bill may be defined as an arrangement where an
accommodating party accepts the bill free of any consideration, to accommodate another
person to help that person tide over temporary cash mismatches. Accommodation bills are
also raised when a payment are not coming in promptly, or as normally happens in the case of
government supplies, the buyer does not accept the documents.
Supply bills: Bills that are drawn by a supplier or contractor on a government or semigovernment department for supplies made are supply bills. These bills are not accepted by
government departments and therefore, do not enjoy the status of a negotiable instrument.
However, it is possible for the supplier to obtain an advance from commercial banks against
such bills in order to meet financial needs, pending payment from the government
department. Due to the non-negotiability character, these are eligible for clean advances by
banks.
Hundis: Indigenous bills of exchange and promissory notes are known as Hundis. These are
used for financing agricultural and inland trade. They are handled by various types of
indigenous bankers.
COMMERCIAL BILL DISCOUNTING
When the seller (drawer) deposits genuine commercial bills and obtains financial
accommodation from a bank or financial institutions, it is known as bill discounting. The
seller, instead of discounting the bill immediately, may choose to wait till the date of
maturity. Commercially, the option of discounting will be advantageous because the sller
obtains ready cash which can be used for meeting immediate business requirements.
However, in the process, the seller may lose a little by way of discount charged by the
discounting banker.
Features:
1. Discount charge
2. Maturity
3. Ready finance
4. Discounting and purchasing
Discount charge: The margin between advance granted by the bank and face value of the bill
is called the discount and is calculated on the maturity value at rate a certain percentage per
annum.
Maturity: Maturity data of a bill is defined as the data on which payment will fall due.
Normal maturity periods are 30, 60, 90 or 120 days. However, bills maturing within 90 days
are the most popular.
Ready finance: Banks discount and purchase the bills of their customers so that the customer
gets immediate finance from the bank. They need not want till the bank collects the payment
of the bill.
Discounting and purchasing: The term discounting of bills is used for demand bills. While
the term purchasing of bills is used for Usance bills. In both cases, the bank immediately
credits the accounts of the customer with the amount of the bill, less its charges. Charges are
less in case of purchasing of bill because the bank can collect the payment immediately by
presenting the bill to the drawee for payment. Charges are, however, higher in the case of
discounting of bill because the bank charges include not only the charges for services
rendered, but also the interest for the period from the date of discounting the bill to the date
of its maturity. In addition, there are also charges when bills are dishonored. In such
circumstances, the bank will debit the account of the customer with the amount of the bill
along with interest and other charges.
Advantages of bills discounting:

1. Easy access
2. Safety of funds
3. Certainty of payment
4. Profitability
5. Smooth liquidity
6. Higher yield
7. Ideal investment
8. Facility of refining
9. Relative stability of prices.
Advantages to investors:
1. Short-term sources of fianc;
2. Bills discounting in nature of a transaction is outside the purview of section 370 of the
Indian companies act 1956, that restricts the amount of loans that can be given by
group companies;
3. Since it is not a lending, no tax at source is deducted while making the payment
charges which is very convenient, not only from cash flow point of view, but also
from the point of view of companies that do not envisage tax liabilities;
4. Rates of discount are better than those available on ICD s;
5. Flexibility, not only in the quantum of investment but also in the duration of
investments.
Advantages to bankers:
1. Certainty of payment
2. Profitability
3. Evens out inter-bank liquidity problems
4. Discount rate and effective rate of interest
STEPS IN DISCOUNTING AND PURCHASING
1. Examination of bill
2. Crediting customer account

3. Control over accounts
4. Sending bills for collection
5. Action by the branch
6. Dishonor
Examination of bill: The banker verifies the nature of the bill and the transaction. The
banker then ensures that the customer has supplied all required documents long with the bill.
Crediting customer account: After examining the genuineness of the bill, the banker brands
a credit limit, either on a regular or on an ad hoc basis. The customers account is credited
with the net amount of the bill .i.e. value of bill minus discount charges. The amount of
discount is the income earned by the bank on discounting/purchasing. The amount of the bill
is taken as a advance by the bank.
Control over accounts: To ensure that no customer borrows more than the sanctioned limit,
a separate register is maintained for determining the amount availed by each customer.
Separate columns are allotted to show the names of customers, limits sanctioned bills
discounted, bills collected, loans granted and loans repaid. Thus, at any given point in time
the extent of limit utilized by the customer can be readily known.
Sending bills for collection: The bill, together with documents duly stamped by the banker,
is sent to the bankers branch ( or some other banks branch if the banker does not have a
branch of its own) for presenting the bill for acceptance or payment, in accordance with the
instructions accompanying the bill.
Action by the branch: On receipt of payment, the collecting banker remits the payment to
the banker which has sent the bill for collection.
Dishonor: In the vent of dishonor, the dishonor advice is sent to the drawer of the bill. It
would be appropriate for the collecting banker to get the bill protested for dishonor. For this
purpose, the collecting banker or branch of the bank maintains a separate register in which
details such as date on which the bills are to be presented, the party to whom it is to be
presented etc are recorded. The banker then presents them for acceptance or payment, as
required. The banker debits the customers account with the amount of the bill and also all
charges incurred due to dishonor of the bill. Such a bill should not be purchased in the event
of its being presented again. However, the banker may agree to accept it for collection.
Exploring Real Estate Investments: Advantages and Disadvantages

Benefits:
Diversification Value - The positive aspects of diversifying your portfolio in terms of asset
allocation are well documented. Real estate returns have relatively low correlations with
other asset classes (traditional investment vehicles such as stocks and bonds), which adds to
the diversification of your portfolio.
Yield Enhancement - As part of a portfolio, real estate allows you to achieve higher returns
for a given level of portfolio risk. Similarly, by adding real estate to a portfolio you could
maintain your portfolio returns while decreasing risk.
Inflation Hedge - Real estate returns are directly linked to the rents that are received from
tenants. Some leases contain provisions for rent increases to be indexed to inflation. In other
cases, rental rates are increased whenever a lease term expires and the tenant is renewed.
Either way, real estate income tends to increase faster in inflationary environments, allowing
an investor to maintain its real returns.
Influence Performance - In previous chapters we've noted that real estate is a tangible asset.
As a result, an investor can do things to a property to increase its value or improve its
performance. Examples of such activities include: replacing a leaky roof, improving the
exterior and re-tenanting the building with higher quality tenants. An investor has a greater
degree of control over the performance of a real estate investment than other types of
investments.
Other Considerations
Real estate also has some characteristics that require special consideration when making an
investment decision:
Costly to Buy, Sell and Operate - For transactions in the private real estate market,
transaction costs are significant when compared to other investment classes. It is
usually more efficient to purchase larger real estate assets because you can spread the
transaction costs over a larger asset base. Real estate is also costly to operate because
it is tangible and requires ongoing maintenance.
Requires Management - With some exceptions, real estate requires ongoing
management at two levels. First, you require property management to deal with the
day-to-day operation of the property. Second, you need strategic management of the
property to consider the longer term market position of the investment. Sometimes the
management functions are combined and handled by one group. Management comes
at a cost; even if it is handled by the owner, it will require time and resources.
Difficult to Acquire - It can be a challenge to build a meaningful, diversified real

estate portfolio. Purchases need to be made in a variety of geographical locations and
across asset classes, which can be out of reach for many investors. You can, however,
purchase units in a private pool or a public security, and these units are typically
backed by a diverse portfolio.
Cyclical (Leasing Market) - Not unlike other asset classes, real estate is cyclical. Real
estate has two cycles: the leasing market cycle and the investment market cycle. The
leasing market consists of the market for space in real estate properties. As with most
markets, conditions of the leasing market are dictated by the supply side, which is the
amount of space available (or, vacancies), and the demand side, which is the amount
of space required by tenants. If demand for space increases, then vacancies will
decrease, and the resulting scarcity of space will cause an increase in market rents.
Once rents reach economic levels, it becomes profitable for developers to construct
additional space so that supply can meet demand.
Cyclical (Investment Market) - The real estate investment market moves in a different
cycle than the leasing market. On the demand side of the investment market are
investors who have capital to invest in real estate. The supply side consists of
properties that are brought to market by their owners. If the supply of capital seeking
real estate investments is plentiful, then property prices increase. As prices increase,
additional properties are brought to market to meet demand. Although the leasing and
investment market have independent cycles, one does tend to influence the other. For
instance, if the leasing market is in decline, then growth in rents should decrease.
Faced with decreasing rental growth, real estate investors might view real estate
prices as being too high and might therefore stop making additional purchases. If
capital seeking real estate decreases, then prices decrease to force equilibrium.
Although timing the market is not advisable, you should be aware of the stage of the
market when you are making your purchase and consider how the property will
perform as it moves through the cycles.

Performance Measurement - In the private market there is no high quality benchmark

to which you can compare your portfolio results. Similarly, it is difficult to measure
risk relative to the market. Risk and return are easy to determine in the stock market
but measuring real estate performance is much more challenging.
There Are Many Different Categories of Real Estate Investment

There are several ways investors can earn passive income from real estate investments:
Residential real estate investments are properties such as houses, apartment

buildings, townhouses, and vacation houses where a person or family pays you to live
in the property. The length of their stay is based upon the rental agreement, or lease
agreement.
Commercial real estate investments consist mostly of office buildings. If you were
to take some of your savings and construct a small building with individual offices,
you could lease them out to companies and small business owners, who would pay
you rent to use the property.
Industrial real estate investments consist of storage units, car washes and other
special purpose real estate that generates sales from customers who temporarily use
the facility. Industrial real estate investments often have significant "fee" and
"service" revenue streams, such as adding coin-operated vacuum cleaners at a car
wash, to increase the return on investment for the owner.
Retail real estate investments consist of shopping malls, strip malls, and other retail
storefronts. In some cases, the landlord also receives a percentage of sales generated
by the tenant store in addition to a base rent to incentivize them to keep the property
in top-notch condition.
Mixed-use real estate investments are those that combine any of the above
categories into a single project. I know of an investor in California who recently took
several million dollars in savings and found a mid-size town in the Midwest. He
approached a bank for financing and built a mixed-use three-story office building
surrounded by retail shops. The bank, which lent him the money, took out a lease on
the ground floor, generating significant rental income for the owner. The the other
floors were leased to a health insurance company and other businesses. The

11
0
surrounding shops were quickly leased by a Panera Bread, a membership gym, a

Quiznos, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real
estate investments are popular for those with significant assets because they have a
degree of built-in diversification, which is important for controlling risk.
Real Estate Investment Trusts or REITs trade like stocks and own a portfolio of
underlying real estate or real estate mortgages. Understanding the differences,
advantages, and drawbacks of REITs is so important that I wrote a five page article,
Real Estate Investing through REITs to help you understand them.
Technically, lending money for real estate is also considered real estate investing but I
think it is more appropriate to consider this as a fixed income investment just like a bond,
because you are lending money with property securing the debt. You have no underlying
interest in the appreciation or profitability of a property beyond the interest income to
which you are entitled.
Likewise, buying a piece of real estate or a building and then leasing it back to a tenant,
such as a restaurant, is more akin to fixed income investing rather than a true real estate
investment. You are essentially financing a property, although this somewhat straddles
the fence of the two because you will eventually get the property back and presumably
the appreciation belongs to you.
Venture capital:
Venture capital provides long-term, committed share capital, to help unquoted companies
grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buyout a business in which he works, turnaround or revitalize a company, venture capital could
help do this. Obtaining venture capital is substantially different from raising debt or a loan
from a lender. Lenders have a legal right to interest on a loan and repayment of the capital,
irrespective of the success or failure of a business. Venture capital is invested in exchange for
an equity stake in the business. As a shareholder, the venture capitalist's return is dependent
on the growth and profitability of the business. This return is generally earned when the
venture capitalist "exits" by selling its shareholding when the business is sold to another
owner.
Venture capital in the UK originated in the late 18th century, when entrepreneurs found
wealthy individuals to back their projects on an ad hoc basis. This informal method of
11
1
financing became an industry in the late 1970s and early 1980s when a number of venture
capital firms were founded. There are now over 100 active venture capital firms in the UK,
which provide several billion pounds each year to unquoted companies mostly located in the
UK.
Some of the unique features of a VC firm are:
1. Investment in high-risk, high-returns
ventures
2.
Participation
management
in
3. Expertise in managing
funds
4.
Raises funds from several

sources
5.
Diversification of the
portfolio
6. Exit after specified

time
Investment in high-risk, high-returns ventures: As VCs invest in untested, innovative

ideas the investments entail high risks. In return, they expect a much higher return than
usual. (Internal Rate of return expected is generally in the range of 25 per cent to 40 per
cent).
Participation in management: Besides providing finance, venture capitalists may also
provide technical, marketing and strategic support. To safeguard their investment, they
may also at times expect participation in management.
Expertise in managing funds: VCs generally invest in particular type of industries or some
of them invest in particular type of businesses and hence have a prior experience and contacts
in the specific industry which gives them an expertise in better management of the funds
deployed.
Raises funds from several sources: A misconception among people is that venture
capitalists are rich individuals who come together in a partnership. In fact, VCs are not
necessarily rich and almost always deal with funds raised mainly from others. The various
sources of funds are rich individuals, other investment funds, pension funds, endowment
funds, et cetera, in addition to their own funds, if any.
Diversification of the portfolio: VCs reduce the risk of venture investing by developing a
portfolio of companies and the norm followed by them is same as the portfolio managers, that
is, not to put all the eggs in the same basket.
11
2
Exit after specified time: VCs are generally interested in exiting from a business after a prespecified period. This period may usually range from 3 to 7 years.
TYPES OF FUNDING

11
3
The first professional investor to a deal at the start-up stage is referred to as the Series A
investor. This investment is followed by middle and later stage funding the Series B, C, and
D rounds. The final rounds include mezzanine, late stage and pre-IPO funding. A VC may
specialize in provide just one of these series of funding, or may offer funding for all stages of
the business life cycle. Its important to know the preferences of the VC youre approaching,
and to clearly articulate what type of funding youre seeking:
Seed Capital If youre just starting out and have no product or organized company yet, you
would be seeking seed capital. Few VCs fund at this stage and the amount invested would
probably be small. Investment capital may be used to create a sample product, fund market
research, or cover administrative set-up costs.
Startup Capital At this stage, your company would have a sample product available with at
least one principal working full-time. Funding at this stage is also rare. It tends to cover
recruitment of other key management, additional market research, and finalizing of the
product or service for introduction to the marketplace.
Early Stage Capital Two to three years into your venture, youve gotten your company off
the ground, a management team is in place, and sales are increasing. At this stage, VC
funding could help you increase sales to the break-even point, improve your productivity, or
increase your companys efficiency.
Expansion Capital Your company is well established, and now you are looking to a VC to
help take your business to the next level of growth. Funding at this stage may help you enter
new markets or increase your marketing efforts. You should seek out VCs that specialize in
later stage investing.
Late Stage Capital At this stage, your company has achieved impressive sales and revenue
and you have a second level of management in place. You may be looking for funds to
increase capacity, ramp up marketing, or increase working capital.
You may also be looking for a partner to help you find a merger or acquisition opportunity, or
attract public financing through a stock offering. There are VCs that focus on this end of the
business spectrum,
specializing in
initial public offerings
(IPOs), buyouts, or
recapitalizations. If you are planning an IPO, a VC may also assist with mezzanine or bridge
financing short-term financing that allows you to pay for the costs associated with going
public.
THE FUNDING PROCESS
Step 1: Business Plan Submission
11
4
The first step in approaching a VC is to submit a business plan. At minimum, your plan
should include:
A description of the opportunity and market size;
Resumes of your management team;
A review of the competitive landscape and solutions;
Detailed financial projections; and
A capitalization table.
You should also include an executive summary of your business proposal along with the
business plan. Once the VC has received your plan, it will discuss your opportunity internally
and decide whether or not to proceed. This part of the process can take up to three weeks,
depending on the number of business plans under review at any given time. Dont be passive
about your submission. Follow up with the VC to check the status of your proposal and to
find out if theres additional information you could be providing that might help the VC with
its decision. If you are asked for further information, respond quickly and effectively. If
possible, always try to get a face-to-face meeting with the VC. Keep in mind that most VCs
receive an average of 200 business plans each month. Of those, less than five percent will be
invited to meet with the VCs partners. Just two percent will reach the due diligence phase,
and less than one percent will be offered a term sheet. Some 0.3 percent of those submitting a
business plan will ultimately obtain VC funding.
Step 2: Introductory Conversation/Meeting
If your firm has the potential to fit with the VCs investment preferences, you will be
contacted in order to discuss your business in more depth. If, after this phone conversation, a
mutual fit is still seen, youll be asked to visit with the VC for a one- to two hour meeting to
discuss the opportunity in more detail. After this meeting, the VC will determine whether or
not to move forward to the due diligence stage of the process.
Step 3: Due Diligence
The due diligence phase will vary depending upon the nature of your business proposal. The
process may last from three weeks to three months, and you should expect multiple phone
calls, emails, management interviews, customer references, product and business strategy
evaluations and other such exchanges of information during this time period.
Step 4: Term Sheets and Funding
If the due diligence phase is satisfactory, the VC will offer you a term sheet. This is a nonbinding document that spells out the basic terms and conditions of the investment agreement.
11
5
The term sheet is generally negotiable and must be agreed upon by all parties, after which
you should expect a wait of roughly three to four weeks for completion of legal documents
and legal due diligence before funds are made available.
SEBI Venture Capital Funds (VCFs) Regulations, 1996
A Venture Capital Fund means a fund established in the form of a trust/company; including
a body corporate, and registered with SEBI which (i) has a dedicated pool of capital raised in
a manner specified in the regulations and (ii) invests in venture capital undertakings (VCUs)
in accordance with these regulations.
A Venture Capital Undertaking means a domestic company (i) whose shares are not listed
on a recognized stock exchange in India and (ii) which is engaged in the business of
providing services/production/manufacture of articles/things but does not include such
activities/sectors as are specified in the negative list by SEBI with government approvalnamely, real estate, non-banking financial companies (NBFCs), gold financing, activities not
permitted under the industrial policy of the Government and any other activity which may be
specified by SEBI in consultation with the Government from time to time.
Registration
All VCFs must be registered with SEBI and pay Rs.25,000 as application fee and Rs.
5,00,000 as registration fee for grant of certificate.
Recommendations of SEBI (Chandrasekhar) Committee, 2000 SEBI appointed the
Chandrasekhar Committee to identify the impediments in the growth of venture capital
industry in the country and suggest suitable measures for its rapid growth. Its report was
submitted in January, 2000. The recommendations pertain to
1. Harmonization of multiplicity of regulations
2. VCF structures
3. Resource rising
4. Investments
5. Exit
6. SEBI regulations
7. Company law related issues and
8. Other related issues.
Types of Venture Capital Funds
Generally there are three types of organized or institutional venture capital funds: venture
capital funds set up by angel investors, that is, high net worth individual investors; venture
11
6
capital subsidiaries of corporations and private venture capital firms/ funds. Venture capital
subsidiaries are established by major corporations, commercial bank holding companies and
other financial institutions. Venture funds in India can be classified on the basis of the type of
promoters.
VCFs promoted by the Central govt. controlled development financial institutions such
as TDICI, by ICICI, Risk capital and Technology Finance Corporation Limited (RCTFC) by
the Industrial Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI.
VCFs promoted by the state government-controlled development finance institutions
such as Andhra Pradesh Venture Capital Limited (APVCL) by Andhra Pradesh State Finance
Corporation (APSFC) and Gujarat Venture Finance Company Limited (GVCFL) by Gujarat
Industrial Investment Corporation (GIIC)
VCFs promoted by Public Sector banks such as Canfina by Canara Bank and SBI-Cap by
State Bank of India
VCFs promoted by the foreign banks or private sector companies and financial
institutions such as Indus Venture Fund, Credit Capital Venture Fund and Grindlay's India
Development Fund.
The Venture Capital Investment Process:
The venture capital activity is a sequential process involving the following six steps.
1. Deal origination
2. Screening
3. Due diligence Evaluation
4. Deal structuring
5. Post-investment activity
6. Exist

11
7
Venture Capital Investment Process

Deal origination:
In generating a deal flow, the VC investor creates a pipeline of deals or investment
opportunities that he would consider for investing in. Deal may originate in various ways.
referral system, active search system, and intermediaries. Referral system is an important
source of deals. Deals may be referred to VCFs by their parent organisaions, trade partners,
industry associations, friends etc. Another deal flow is active search through networks, trade
fairs, conferences, seminars, foreign visits etc. Intermediaries is used by venture capitalists in
developed countries like USA, is certain intermediaries who match VCFs and the potential
entrepreneurs.
Screening:
VCFs, before going for an in-depth analysis, carry out initial screening of all projects on the
basis of some broad criteria. For example, the screening process may limit projects to areas in
which the venture capitalist is familiar in terms of technology, or product, or market scope.
The size of investment, geographical location and stage of financing could also be used as the
broad screening criteria.
Due Diligence:
Due diligence is the industry jargon for all the activities that are associated with evaluating an
investment proposal. The venture capitalists evaluate the quality of entrepreneur before
appraising the characteristics of the product, market or technology. Most venture capitalists
ask for a business plan to make an assessment of the possible risk and return on the venture.
Business plan contains detailed information about the proposed venture. The evaluation of
ventures by VCFs in India includes;
Preliminary evaluation: The applicant required to provide a brief profile of the proposed
venture to establish prima facie eligibility.
Detailed evaluation: Once the preliminary evaluation is over, the proposal is evaluated in
greater detail. VCFs in India expect the entrepreneur to have:- Integrity, long-term vision,
urge to grow, managerial skills, commercial orientation.
VCFs in India also make the risk analysis of the proposed projects which includes: Product
risk, Market risk, Technological risk and Entrepreneurial risk. The final decision is taken in
terms of the expected risk-return trade-off as shown in Figure.
Deal Structuring:
11
8
In this process, the venture capitalist and the venture company negotiate the terms of the
deals, that is, the amount, form and price of the investment. This process is termed as deal
structuring. The agreement also include the venture capitalist's right to control the venture
company and to change its management if needed, buyback arrangements, acquisition,
making initial public offerings (IPOs), etc. Earned out arrangements specify the
entrequreneur's equity share and the objectives to be achieved.
Post Investment Activities:
Once the deal has been structured and agreement finalised, the venture capitalist generally
assumes the role of a partner and collaborator. He also gets involved in shaping of the
direction of the venture. The degree of the venture capitalist's involvement depends on his
policy. It may not, however, be desirable for a venture capitalist to get involved in the day-today operation of the venture. If a financial or managerial crisis occurs, the venture capitalist
may intervene, and even install a new management team.
Exit:
Venture capitalists generally want to cash-out their gains in five to ten years after the initial
investment. They play a positive role in directing the company towards particular exit routes.
A venture may exit in one of the following ways
1.
Initial Public Offerings (IPOs)
2.
Acquisition by another company
3.
Purchase of the venture capitalist's shares by the promoter, or
4. Purchase of the venture capitalist's share by an outsider.
Methods of Venture Financing

Venture capital is typically available in three forms in India, they
are:
Equity: All VCFs in India provide equity but generally their contribution does not exceed 49
percent of the total equity capital. Thus, the effective control and majority ownership of the
firm remains with the entrepreneur. They buy shares of an enterprise with an intention to
ultimately sell them off to make capital gains.
Conditional Loan: It is repayable in the form of a royalty after the venture is able to
generate sales. No interest is paid on such loans. In India, VCFs charge royalty ranging
between 2 to 15 percent; actual rate depends on other factors of the venture such as gestation
period, cost-flow patterns, riskiness and other factors of the enterprise.
11
9
Income Note: It is a hybrid security which combines the features of both conventional loan
and conditional loan. The entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.
Other Financing Methods: A few venture capitalists, particularly in the private sector, have
started introducing innovative financial securities like participating debentures, introduced by
TCFC is an example.
A Case on Technology Development & Information Company Of India Ltd.
TDICI was incorporated in January 1988 with the support of the ICICI and the UTI. The
country's first venture fund managed by the TDICI called VECAUS ( Venture Capital Units
Scheme) was started with an initial corpus of Rs.20 crore and was completely committed to
37 small and medium enterprises. The first project of the TDICI was loan and equity to a
computer software company called Kale Consultants.
Present Status: At present the TDICI is administering two UTI mobilised funds under
VECAUS-I and II, totaling Rs.120 crore. the Rs.20 crore invested under the first fund,
VECAUS-I, has already yielded returns totaling Rs. 16 crore to its investors.
Some of the projects financed by the TDICI are discussed below.
MASTEK, a Mumbai based software firm, in which the TDICI invested Rs.42 lakh in equity
in 1989, went public just three years later, in November 1992. It showed an annual growth of
70-80 percent in the turnover.
TEMPTATION FOODS, located in PUNE, which exports frozen vegetables and fruits,
went public in November 1992. The TDICI invested Rs.50 lakh in its equity.
RISHABH INSTRUMENTS of Nasik got Rs.40 lakh from the TDICI. It manufactures a
range of meters used in power stations in collaboration with the ABB Metra Watt of
Germany. After making cash losses totaling Rs.25 lakh in two bad years, it turned around in
1989 and showed an increase of over 70 percent in the turnover.
SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and
plans to set up in Pune and Delhi too, had received Rs.25 lakh from the TDICI as convertible
loans which were converted into equity on march 31, 1994. Most of this money has been used
for the company's innovative art library scheme at least paintings to corporate clients.

12
0


Ba7022 Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ba7022 Notes

Uploaded by

Copyright:

Available Formats

1

Sri rama jayam

BA9161 Merchant Banking And Financial Services

Constituents of a Financial System:

Primary Dealers Satellite Money Market

company and handle share

Till 18 century moneylenders, moneychangers, village merchants (maharanis), &

Prepared by: R.Kumara Kannan Assistant Professor Department of

FUNCTIONS OF MERCHANT BANKERS:

SERVICES OF MERCHANT BANKS:

Covers the entire field of merchant banking, Ltd to giving

Preparing project report for govt. approval , financial assistance

Assistance rendered to get term loan for project, help client

Marketing corporate securities, intermediary in transfer of

Guarantee given by the underwriter, make raising of external

Drafting, completion of formalities, appoint Registrar etc

Investment in different kind of securities

Middlemen in setting negotiation

Help in areas involving foreign currency

Provide help in better and smooth trade to Non-Resident

(B) SECURITIES CONTRACT REGULATION ACT 1956

xiv. Efficient channeling of savings

Canbank Financial Services Ltd.

Prepared by: R.Kumara Kannan Assistant Professor Department of

DDeeppaarrtt agement studies Francis

FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

BENEFITS / FUNCTIONS OF UNDERWRITING MECHANISMS

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

Penalty for violation

does not want more capital than

companies or pension funds.

Export Import Bank (Exim Bank)

funds, other securities, and/or commodities such as precious metals).

The mutual fund

during the said period.

Development (OECD) countries are trying to stamp out competition.

has been associated in the past with the underground

Over the counter placement

of identification of investment opportunities, selection of securities, portfolio

PAN card assistance

POST ISSUE ACTIVITIES

Prepared by: R.Kumara Kannan Assistant Professor Department of

2) Earning value approaches

A way of broadening the financing options available to local companies;

7. Fillip to capital market

P-[M (1-t) + I.P.t +

n = primary lease period.

5. To pay the lease rental

LEASING FINANCING VS HIRE PURCHASE FINANCING

College, Tirunelveli http://www.francisxavier.ac.in

lessor in the case of operating lease

TAX ASPECTS OF THE HIRE PURCHASE

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

Prepared by: R.Kumara Kannan Assistant Professor Department of

NBFCs: Non-banking finance companies constitute other important sources of consumer

Aspirational changes in the life styles

f. The DINK(double income no kid) factor