financial markets & intermediaries
TRANSCRIPT
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Financial Markets
&Intermediaries
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Financial Market..
Market ..
Products & Services
Buyers / Sellers
Supply / Demand
Price / Payment Terms
Middle-men
Organised/Un-organised Brick & Mortar/On-line
Regulations
Financial Market ..
Financial Products
Supply / Demand Investors / Investees
Price / Payment Terms
Merchant Bankers etc.
Organised/Un-organised
Brick & Mortar/On-line
Regulations
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Mutual
Funds
DerivativesLease &
Hire
Purchase
Loans
Shares
Financial
Products
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Financial System Financial Institutions / Intermediaries:
Central Bank / Commercial Banks (Public Sector / PrivateSector Banks) / Co-operative Banks / Rural Banks
Development Banks (Housing / Industrial / Agricultural)
Insurance Companies / Specialist Financial Institutions
Mutual Funds / AMC / Investment Companies Venture Capital Institutions
Factoring Institutions
Stock Eachanges, Brokerage Houses
Credit Rating Agencies Governance Structure / Regulatory Framework
Financial Services / Instruments / Derivatives Factoring / Futures / Options / Swaps
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Financial Intermediaries in India
Capital MarketIntermediaries
NBFCs(Hire Purchase /
Leasing / etc.
Organised Sector
Development
Banks
EXIM Bank
UTI
Insurance
Companies
Money MarketIntermediaries
Govt.Treasury
Bills
R B I
PO = Savings
Co-Op
Banks
CommercialBanks
Un-Organised Sector
R B I
CommercialBanks
Co-Op
Banks
R B I
CommercialBanks
NSC/PO-Savings
Co-Op
Banks
R B I
CommercialBanks
Traders /
Landlords
Indigenous Bank
Money Lenders
Pawn Brokers
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Objectives of Financial System
Additional
Employment
Result in
Investment
Channelise
Savings
Facilitate
Savings
Mobilise
Savings
Priority
Sector
Development
Develop
Production
& Trade
Plan /
Governance
Final Result :
Accelerated Economic Development
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Savings Avenues for Individuals
Provident Fund / Public Provident Fund
Life Insurance
Units of UTI / U L I P
Post Office Deposits NSC
Bank Deposits / Company Deposits
Bonds / Debentures Mutual Funds
Shares
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Role of Reserve Bank of IndiaRegulate the Operations of :
Commercial Banks Indian / Foreign / PSU / Private Banks Financial Institutions / Mutual Funds
LIC / GIC / UTI
Development Institutions IDBI / EXIM / NABARD Co-operative Banks
Central Co-op / State Co-op
NBFCs Nidhi / Chitfund
Ensure that Economic Development is achieved in line with the
countrys priorities maintaining sufficient liquidity in the system
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RBI - Functions
Governments Banker
Bankers Bank
Issue of Bank Notes
Forex Management & Control
Monetary Authority of India
Financial Policies, Guidelines
Promotional & Development Activities
RBI & SEBI regulate Capital Market
Ensure Economic Development
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Functions of Reserve Bank of India
Regulatory Function Bankers Bank
Supervision
Regulating Stock Each. Monetary Controls
Regulating Forex
Direct Investment
Inspection & Control
Regulate Fraudulent &
Unfair Practices
Development Function Deposit Insurance
Credit Guarantee
Credit Information Research
Promote Fair Practice
Revival of Sick Units
Investor Education
Promote Self-Employ.
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Role of Banks
Commercial Banking Collect Deposits
Pay Interest
Lend to Borrowers Collect Interest
Ensure that there is
sufficient liquidity
Investment Banking Under-write Securities
Manage Issue of Shares
Private Placement Trading in Securities
Lending against Shares
Banks which carry out both the above functions are called as
Universal Banks
They are generally influential banks and some are risky ones
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Functions of Commercial Banks
Primary Secondary
Deposits:
Fiaed
RecurringOthers
Loans:
ODCCLoansGuaranteeB/E
Agency:
Rent, Ins.
CollectionForeaTrustees
Utility:Locker
TransferTC / TTATMGift Chq.Credit Card
Department Store of Finance
Play a Very Important Role in Economic Development
Heart of the Indian Financial System
Link between availability of funds and requirement of funds
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Banking in India DevelopmentsObjective : Stability & Efficiency of the System
Strengthening Capital Adequacy Improve Operational Efficiency / Competition
Deregulation of Interest Credibility Linked Interest
Credit Appraisal Mechanism Stronger / Transparent
Proper Classification of Assets / NPA / Provisions Robust Mechanism for Credit Management
Development Banks becoming Universal Banks ( ICICI )
Current Account Convertibility
Automation Core Banking
HR Development in Banking System
Anywhere Banking/Net Banking/Phone Banking/ATMs
Electronic clearing / RTGS / NEFT
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Commercial Banks
Term Loans : Mid Term (3-5 Years) Long Term (>5 Years)
Working Capital : Clean Advance Eaport Finance ( Pre-Shipment / Post-Shipment ) Cash Credit (Pledge / Hypothecation) Overdraft Bills Discounting
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Development Banks
Sector Specific Development Catalyst for Development Schemes of Assistance :
Direct Assistance Indirect Assistance Consortium Approach
Refinance Bills Discounting Seed Capital Scheme Deferred Payment Schemes
Development Assistance :
Enterpreneurial Guidance Project Assistance
Technical Assistance Project Consultancy Market Study
Management Development
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Development Banks
Industrial : (Small / Medium / Large) SIDBI / SFC / IDBI / IFCI
Export / Import : EXIM / ECGC
Agriculture : NABARD / AFC
Housing :
HUDCO / HDFC / LICHFC Investment :
LIC / UTI / GIC
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Credit Rating
Credit Rating Agencies in India :
Credit Rating Information Services of India Ltd Invest Info & Credit Rating Agency of India Ltd
Credit Analysis & Research Ltd
Mandatory in India for :
Public Issue of Bonds / Debentures > 18 Months Commercial Papers Fixed Deposits
Credit Rating Methodology :
Business Analysis :Industry/Market/Operational Financial Analysis :A/c Quality/Fleaibility/Future Management :Track Record/Strategies/Capability Regulatory / Fundamental
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Credit Rating Current Opinion of the Rating Agency
Future ability of the concern Relative Capability to discharge Obligation Timely & Specific Instrument Quantitative / Qualitative Parameters considered Only Guidance & Not Recommendation
Process of Credit Rating
Review of Public Info Questionnaire Basic Research Meeting with Client Draft Report
Rating Meeting Assign Rating Rating & Rationale Publish Rating Periodic Surveillance
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Capital / Revenue
Capital Items Facilities / Assets
Generally Expensive
As and when Required
Has Long Life
Required for generation ofRevenue
New / Additional Assets :Land, Building, Plant,Machineries, Vehicles,
Computer (Hardware &Software), etc.
Appears in the Balance sheetFixed Assets Gross Block
Revenue Items Expenses / Costs
Not Very Expensive
Recurring in nature
Short Life < 1 Year
Integral part of cost, requiredfor using the assets
Raw Materials, Salaries, Rent,Communication, Travel,Insurance, Power & Fuel,
Interest, Depreciation etc. Charged to P/L A/C
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Types of Requirement for Funds
Short-Term
Up to 1 Year
Working Capital
Business Credit
Temporary
Urgent / Liquid
Long-Term
More than 1 Year;
New Business - Capital
Eapansion
More Permanent
Mostly Secured
Funding to match with the requirement
Mis-Match not to be there
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Money Market / Capital Market
Money Market Short Term
Working Capital / Business
Credit
B/E, TB, CP, Certificate ofDeposits
High Value
Reserve Bank of India /
Commercial Banks No Secondary Market
No formal place
Mostly no Brokers
Capital Market Long Term
Capital Requirement - Fixed
Capital
Share Capital, Debentures,Term Loan
Smaller Face Value
General Public, Dev. Banks,
Insurance Cos. Primary & Secondary Mkts.
Stock Exchanges
Involves Brokers also
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Money Market Instruments
Treasury Bill
Promissory Note issued by RBI / Govt. of India Issued at a Discount for a particular Period Payment by Govt. to the Bearer of the Bill Low Interest : High Liquidity / Short Term
Commercial Paper Un-secured Promissory Note issued by Companies RBI Clearance Subject to Norms Lower Transaction Cost / Cheaper for Companies Endorsement & Delivery Corporates, Banks, Individuals, NRIs,
Certificate of Deposit Banks & Financial Institutions Issued at a Discount to Face Value Fiaed Date Pmt
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Capital / Revenue Eapenditure
Capital Items Facilities / Assets
Generally Expensive
As and when Required
Has Long Life
Required for generation ofRevenue
New / Additional Assets :Land, Building, Plant,Machineries, Vehicles,
Computer (Hardware &Software), etc.
Appears in the Balance sheetFixed Assets Gross Block
Revenue Items Expenses / Costs
Not Very Expensive
Recurring in nature
Short Life < 1 Year
Integral part of cost, requiredfor using the assets
Raw Materials, Salaries, Rent,Communication, Travel,Insurance, Power & Fuel,
Interest, Depreciation etc. Charged to P/L A/C
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Types of Requirement for Funds
Short-Term
Revenue/Recurring Items
Working Capital
Business Credit
Support Long-Term Req.
Temporary
Urgent / Liquid
Long-Term
Capital Items
New Business
Take-over / Consolidation
Massive Expansion
Automation
Replacement of facilities
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Long Term Funds
Borrowings / Others
Bonds
Debentures
Term Loans Leasing
Euro Convertible Bonds
Foreign Currency Loans
Securitisation
Shares
Equity Fresh Issue Public Issue
Rights Issue
Placement Offer for Sale
Venture Capital
G D R / A D R
Preference Shares
Primary Markets
Secondary Markets
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Types of Markets
Secondary
Stock Exchanges
Other than Fresh Issues
Market Traded Securities
No Additional Funds
Primary
Fresh Issues
All kinds of Securities
All Kinds of Issues
Additional Capital / Funds
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Short Term Funds
OD / Cash Credit
Fixed Deposits
Commercial Paper
Factoring
Forfaiting
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Underwriting
Guarantee Sale of Specified Number of Securities
Advantages to Issuing Companies :
Expert Advice on Type / Size / Timing / Pricing of Issues
Undertake specialised task of Distribution of Securities
Assured Minimum Subscription on time Reputed Underwriters : Public confidence enhanced /
Successful Issue
Different types of Underwriting :
Standing behind the issue Outright Purchase
Consortium Approach
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Underwriters .
To hold Certificate of Registration granted by SEBI
Total Obligation : Up to 20 times of Networth
Devolvement : To subscribe within 30 days
Within 6 months from end of Financial Year, info
To maintain books of accounts for 5 years
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Book-Building Process
Normally, issue price is determined and notified This ignores the effect of Supply & Demand
But, Book-Building takes care of the demand
Issue Price is not indicated in the Issue Document
Managers to the issue approach Institutional Investors
Institutional Investors indicate the Price Band & No. ofshares
If price is not agreeable, the issue is cancelled
If Company / Managers agree to the offer, shares issued, tothe highest bidder(s)
Trading can commence from the neat day
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Definitions
Retail Investor : Invest up to Rs. 1 lakh Qualified Institutional Buyer (QIB) : Financial
Institution, Mutual Fund, FII, Venture Capital
Offer Document : Prospectus / Letter of Offer
Cap / Floor / Cut-off Price : Lower / Higher / Strike Price Red Herring Prospectus :Number / Price of Shares not
indicated sought during Book Building Process
Green Shoe Option : Option to Allot shares in eacess of
shares floated as per the Offer Document
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Secondary Market
Most Important Intermediary Stock Exchanges
Deals in Govt., Semi-Govt., Companies Securities
Separate Section for Govt. / Semi Govt. : Gilt Edged
Market
All kinds of Shares / Debentures
Functioning of Secondary Market :
Recognition of Stock Exchanges
Registration of Brokers
Fix Rules for operation of the Exchange / Brokers
Dealing in Securities
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Stock Exchanges Recognition etc.
By Central Govt., under SEBI (Recognition & Renewal)
Either AOP or Companies Managed by Board of Directors elected by Member Brokers
Membership in Stock-Eachanges
Citizen of India > 21 Years of Age / Not adjudged as Insolvent
Not convicted for any offence involving dishonesty
Dealing in Securities
Listing of Securities
The process of admitting securities for trading in eachanges
Compulsory for all Public Issues with Prospectus
Subject to Regulatory Framework
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Listing
Advantages Facilitates easy Trading
Ensures Liquidity
Protects Investors
Enables Borrowing
Offers wide Publicity
Disadvantages Leads to Speculation
More Disclosure
Volatile Price Moves
Reputation : Fluctuating
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Over The Counter Exchange of India - OTCEI
Promoted by All India Financial Institutions
(UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Caps, CANFIN)
There is no activity in person in any stock exchanges Ring
National Ringless and Computerised Exchange
Transactions through Computer Networks Dealers quote, query and close deals
Small/Mid Sized company(Rs.30 lakhsRs. 25 Crs.)
Equity / Preference / Bonds / Debentures
Company listed in any other Stock Exchange : Can nottrade in OTCEI
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STOCK INDEX
Barometer of movement in Share Prices listedIndicative of Movement of rest of Scrips / MarketWould greatly help the Investors to know the trend
Otherwise, whole list of scrips need to be tracked
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History of Stock Indices
First Index : USA : 1896 : Dow Jones Index
4 Indices : Industrial / Utilities / Transportation / Average
DJIA : Still one of the Most Important Indices in the World
Original : Sugar, Tobacco, Leather, Gas, Rubber, Coal
Current : Retail, Oil, Tech, Pharmacy, Entertainment Only company which continues in list from 1896 : GE
S & P : 1920 : Average of 500 Companies
Most Accurate reflection of US Stock Exchange Prices
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Nasdaq Indea
National Association ofSecurities DealersAutomated Quotation System (Nasdaq) stock
market
Number of stocks on the Nasdaq has grown from100 to more than 5,500 today
Indea includes many technology companies
where market trends change quickly,
This indea can be volatile
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SENSEX ( BSE Sensitivity Index )
Price Index of Shares of 30 Companies listed on BSE
Sensex is dependant upon Market Price of these Shares
Base Price : 1978-79 where the Sensea was : 100
List of Shares included at Base level is different
Composition of 30 Companies List keeps changing
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SENSEX ( BSE Sensitivity Index )
30 Companies - Criteria
Listing History: On BSE for at least one year
Good Track record: Physical / Financial
Market capitalization:
One of the Top 100 market capitalizations of BSE > 0.5% of total market capitalization of BSE index
Frequency of Trading: Every day for the last one year
Industrial representation: Should be a leader in the
industry it represents.
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SENSEX - Market Capitalisation /
Free Float Market Capitalisation
Market Value of All Shares issued by the Company
No. of Shares issued a Market Price per share
Free Float :No. of Shares available in the market for Trade
Example : Total Number of Shares Issued: 10,000
Held by Government : 5,000
Held by Promoters : 3,000
Balance Available for Trade : 2,000 : Free Float Market Price per Share : Rs.100
Free Float Market Price : Rs.2,00,000/-
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SENSEX : Market Capitalisation /
Free Float Market Capitalisation
BSE considers shares other than following asfree float (open market) shares
Government holding shares as promoters
Holdings by Directors/ Founders
Holdings through the FDI route Stakes held by private corporate bodies or
individuals.
Any cross holdings i.e. equity held byassociate or group companies.
Equity held by employee welfare trust.
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SENSEX : Market Capitalisation /
Free Float Market Capitalisation
Calculation of the free float factor
Every listed company has to submit holdings information
Free Float factor for each company is calculated with this
info
Free float factor =
No of shares available for trading in the open marketTotal No of outstanding shares of the company.
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GDR (Global Depository Receipt)
Indian Securities
Denominated in USD
Overseas, other than USA
QIB / Institutional Investors
Traded in Luxemburg Availability of US $
International Regulations
Deal
Investors
US$Depository
Receipt
Deposited withCustodian Bank
Indian Companies
Shares / Securities in Rupees
Advantages of GDR Availability of US$ to Indian Companies
Popularity of Indian Companies outside India
Subject to International Regulatory Framework
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ADR (American Depository Receipt)
GDR issued in the USA - Negotiable Certificate Subject to American Listing Requirements - SEC
Recast their accounts in line with US GAAP
QIB / Institutional Investors / NRI
Listed / Traded in NASDAQ / NYSE
ADRs issued mostly by Private Placement
American Laws / Listing requirements are severe
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ECB ( Euro Convertible Bond )
Un-secured Debt Securities / Bonds Issued for : Import of Capital Items / Retiring Debts /Capitalising Indian JVs abroad / 25% Working Capital
Fixed Interest
Generally Bearer Securities
Call Option (by Issuer) / Put Option (by Investors)
Interest / Redemption : In US $
Can be converted into Depository Receipts / Shares At a Fixed Price after Minimum Lock-in Period
Generally at Premium
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Venture Capital
Economic Growth : Development of Country
Diversification / Eapansion :- Eaisting Companies
- Track Record
- Additional requirement of Funds : More Easy
- Many modes Available : Shares / Bonds / GDR etc. New Business :
- Generally First-Time Entrepreneurs
- Technocrats Not much Business Eaperience
- New Concept / New Product- Not Proven / Not Established
- No Track-Record / Shortage of Funds
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Venture Capital
Need for support for such ventures
Conventional Sources : May not be suitable Reasons :- No Balance Sheet : Credit Rating Difficult
- No Proven Product : Extent of Risk Not Known
- Conventional Norms : Un-suitable
- Project Evaluation Techniques : Need to be different
- Mostly Concepts : Mechanism for Evaluation ???
Opportunity for High Networth Investors :
- Pooled funds
- Appointed specialists : Greenfield Industry knowledge
- Assistance from 3rd Party Consultancy firms
- Funding for Ideas !!
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Venture Capital
Types of Assistance :
- Very High Risk : Uncertain Return- Managerial Assistance / Statutory Compliance
- Provide Direction / Hand-holding / Nurturing
- Formulate Policies
- Partake in Operations
- Seed Capital : Initial Capital for Infrastructure
- Equity / Preference / Hybrid / Convertible Loan
- Even Working Capital Funding
- Concern becomes self-sufficient / Viable : Exit
- Return :
o Regular Return during involvement High %
o Capital Appreciation on Exit Load
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Venture Capital vis--vis Private Equity
Mostly mean the same
VC : New Ventures / PE for Existing Business Growth
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Mutual Fund in India
Company / Sponsor : Registered with SEBI Sound Track-Record / Reputation of Fairness / Integrity
Operate under the Trust Act; Trust Deed is a must
Registered under Indian Registration Act, 1908
Contain names / details of Trustees (2/3 : Independent)
An AMC with approval of SEBI appointed to manage
Sponsors to hold at least 40% of Networth of AMC
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Mutual Fund in India
Scheme of Mutual Fund is decided Money Collected from Investors on such scheme ( Units )
Scheme : Different Schemes
Portfolio Managers : Invest in Shares as per Scheme
Investors : Joint owners of Portfolio of Investment
2 Kinds of returns : Capital Appreciation / Dividend
Based upon the daily Market Value of the underlying
shares, the Net Asset Value (NAV) of each unit of investment is arrived at
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Mutual Fund in India Key Persons
Responsible for Investment
Formulate Schemes / Collect MoneyPromoter
Portfolio Manager
Fund ManagerSponsor
Responsible for Audit of Transactions
In whose name Documents are registered
Place where Documents are kept
Auditors
Trustees
Depositories
Responsible for managing TransfersAdministrators
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Mutual Fund in India-Advantages
Professional Portfolio Managers involved
Safety / Growth / Management of Fund ensured Even those with no info on Stock Market : Can Invest
Minimum Amount of Investment : Rs. 500
Systematic Investment Possible Monthly Investment
Choice of Multiple Schemes :
- Indian / Foreign
- Equity / Loan
- Industry Segment-wise- Growth / Yield / Re-investment
- Gold / Exchange Traded Funds
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Factoring Recent Tool in Receivable Management
Short Term arrangement for Funds Takes care of Working Capital Requirement
Receivables are Sold to Factor
Factor pays money in exchange for Receivables
Factor takes care of collection of Receivables
Fees / Charges / Commission : 2 Major Kinds :
Service Charges
Finance Charges
Other Services : Appropriate Charges
There are different kinds of Factoring
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Factoring Recent Tool in Receivable Management
Short Term arrangement for Funds Takes care of Working Capital Requirement
Receivables are Sold to Factor
Factor pays money in exchange for Receivables
Factor takes care of collection of Receivables
Fees / Charges / Commission : 2 Major Kinds :
Service Charges
Finance Charges
Other Services : Appropriate Charges
There are different kinds of Factoring
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Types of Factoring
Full Service Factoring (Without Recourse)
With Recourse (Re-factoring Charges)
Maturity Factoring (No immediate funding)
Disclosed / Notified / Bulk Factoring (Only Collection)
Invoice / Undisclosed / Confidential Factoring
(Funding on Invoices; No other activities by Factor)
Agency Factoring (Only Funding & Credit Risk)
International Factoring (Domestic : Extended) Limited (Only select Debtors)
Buyer Based (Initiated by Customers / Buyers)
Seller Based (Post Invoicing, all activities / Reputed Cust.)
P j t
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Projects New Business / Expansion / Automation / Replacement
Funds Required Long Term Funds
Project Report is required to be compiled :
- Introduction / Description of the Project
- Complete Details of Requirement
- Location of Factory / Country / State Land / Building / Machineries / Facilities / Services
Special Tools / Jigs & Fixtures
Raw Material / Skill-sets of Employees
Technologies / Level of Automation Market Potential / Competition
Working Capital Requirement
- Time-Bound Plan Financial Plan
Assumptions Basis
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Assumptions - Basis" Basis for Capital Items / Tooling Items
" Basis for Capacity / Productivity Factor / Automation" Basis for Material Cost, Labour & Overheads (Hourly Rate)
" Reason for Locating the Facilities in a particular country
" Price Level EC Level
" Foreign Currency Rupee Conversion Rate" Sourcing / Outsourcing Plans
" Returns / Profits / Surplus
" Financing Cost / Interest Rate & its effect
" Market Potential / Basis / Firm Commitments / Competition
" Commitment from Customers for Funding / Orders
" Duties / Taxes / Exemptions & their effect
"
ToT Partner / Basis of identification
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Activity Chart
Y-1 Y-2 Y-3 Y-4 Y-5 Y-6 Y-7
Construction of Factory
Purchase of Machinery
Erection & Commissioning
Key Document for Project Planning /
Monitoring / Management
To Ensure Infrastructure is in place on time
Cash-Flow Statement (Rs Lakhs)
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Cash-Flow Statement (Rs. Lakhs)DETAILS Y-1 Y-2 Y-3 Y-4 Y-5 Total
RECEIPTS:
BORROWING 150 350 250 100 50 900
SALES - - 100 200 250 550
TOTAL 150 350 350 300 300 1450
PAYMENTS:
CAPITAL ITEMS 80 200 50 - 330
DRE ITEMS 60 75 50 - 185
RECURRING EaP. 5 50 100 200 250 605
LOAN REPAYMENT 50 100 150
TOTAL 145 325 200 250 350 1270
BALANCE: 5 25 150 50 -50 180
CUMULATIVE 5 30 180 230 180
Fi i l E l ti
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Financial Evaluation Match Cash flows : (Present and Proposed)
- Type of Availability with Requirement- Time of Availability with Requirement
Repayment with Surplus from New Project
Timing of Cash Flows : Activity Chart
To Ensure Money is fully utilised as planned
Present Value of Money to be factored
Requires Strict Monitoring / Control
Credit Rating Methodology Data furnished for Credit Rating
Industry Analysis
Present Scenario : Global Trends
C il ti / E l ti
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Compilation / Evaluation Compilation : Primary responsibility of Company
Credit Rating Agencies : Review and accord Rating
Merchant Bankers : Co-ordinate (For Share Issue)
Financial Institutions : Complete Review
Consultants / Auditors : Provide Guidance
Other Factors :
International Business Trends
National Trends
Stock Market Movements
Leasing / Hire Purchase
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Leasing / Hire-Purchase
Hiree LtdLessor LtdAsset Ownership
Hiree LtdAs per ContractInsurance
Hiree LtdLessee LtdClient
Hirer LtdLessor LtdName
Hire-PurchaseLeasingCriteria
Hiree LtdLessor LtdDepreciation
Not DeductibleTax DeductiblePeriodic Payment
Hiree LtdAs per ContractMaintenance
Asset Retention As per Contract Hiree Ltd
Decision on Capital Structure
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Decision on Capital Structure Quantum of Fund Requirement is Frozen Project Report
Assets : Funding : Lease / Buy / Hire-Purchase Cash-flow in Project Report adopts funding pattern
Options : Equity / Preference / Debentures / Bond / Loan
o Many factors : National / International
o Market Conditions / Sentiments / Govt. Guidelineso Promoter / Group Company Reputation
o Gestation Period of the Project
o New Project : Loan will be Difficult; Shares
o Loan : Revenue / Surplus / Repayment / Interesto Pricing of Shares is another factor : Market / Timing
o Bonds / ECBs / ADRs / GDRs / Loans
Merchant/Investment Banker
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Merchant/Investment Banker Earlier Role : Press Coverage, Applications, Subscriptions
Current Role : Covers Lots of additional activities :o Corporate Advisory Services
o Technical / Commercial Advice on Joint Ventures
o Project Formulation / Promotion / Finance
o Advice on Nature of Funding / Arrangement
o New-Issues Management / Marketing / Underwriting
o Syndication of Credit / Leasing / Hire-Purchase
o Providing Venture Capital Assistanceo Bought-out Deals
o Commercial Paper Issue / Management
o Investment / Portfolio Management Services
Merchant Bankers SEBI Guideline 7
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Merchant Bankers SEBI Guideline - 7
D
D
D
D
D
D
D
D
D
D
Rs. 5Crs
I
D
D
D
D
D
Rs. 50Lakhs
II
D
D
D
Rs. 20Lakhs
III
Portfolio Manager
Underwriter
Manager
Consultant
Advisor
Final Allotment
Tie-up of FinanciersDetermining Financial Structure
Other info on Issue
Preparation of Prospectus
Networth Required
Type of Merchant Bankers
D
D
Nil
IV
T Bills / Call Mone
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T-Bills / Call Money Treasury Bills (T-Bills): Short Term Central Govt. Securities
Issued by RBI on behalf of Central Government Period : 91 days 364 days : Highly Liquid Instruments
Issued through Auction RBIs Fixed Auction Calendar
Competitive : Banks; Non-Competitive : PF etc.
Issued at Discount & Redeemed at Par
Call Money : Money Market : Day-to-Day Surplus invested
Overnight Money; 1 14 Days; Interest Rate : Call Rate
Call Rate Varies every day / Even within the day
High rate : Low Liquidity; Low Rate : High Liquidity
Used by Banks to meet the CRR requirement
Commercial Paper
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Commercial Paper Unsecured Debt Instrument
Supported only by Promissary Note Directly to Investors
Corporate Entities ( Companies / Banks )
Highly Credit Worthy Entities
Short Term Source ( 15 Days 1 Year ) Cheaper source of Funds
SEBI Guidelines
Interest is deducted up-front
o Company A issues CP on 1st Dec 2009; for 365 Dayso Rs.10 Crs.; Rate of Interest : 10%
o Rs. 9 Crs. will be collected
o Rs.10 Crs. will have to be repaid on maturity
Certificate of Deposit
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Certificate of Deposit
Issued by Banks Used for investing Surplus Funds
Makes available to Bank Short Term Funds
Individuals / Corporates
RBI Guidelines
Repayment with Interest
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Money Market / Capital Market
Money Market No Primary/Secondary
Market
Short Term Funds
Call Money, Short TermDeposits, CP, T-Bills
Participants : Banks, RBI,Financial Institutions,
Government
Capital Market Primary & Secondary
Markets
Long Term Funds
Shares, Debentures Participants : Investors,Mutual Funds, FinancialInstitutions, Banks,Corporates
Non Banking Financial Companies
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Non Banking Financial Companies
Companies / Other Entities
Acceptance of Deposit / Invest as per Scheme Could be Investment / Lending
Type of NBFCs :
o Loan Companies
o Investment Companies
o Hire Purchase finance Companies
o Leasing Companies
o Housing finance companies
o Mutual Benefit / Chit Fund Companies
o Other Operations
Regulated by RBI
Bought Out Deals (Offer for Sale)
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Bought-Out Deals (Offer for Sale)New Mechanism of Issuing Securities
Securities first offered to Sponsors(Merchant Banker, Commercial Banker, Institutions) Wholesale of Securities by issuing company :
o Company allots shares to Sponsoro Sponsor passes on consideration to Companyo After specified period as agreed, issued to Publico Issue to public could be at premiumo Shares then listed by Sponsor in Stock Exchangeso Listed companies cannot resort to thiso Private / Closely Held Public Companyo Lacks Transparencyo Premium : Not to company but to Sponsor
Securitisation
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Securitisation
Cash
Sell
Create an
S P VBundle / PackageEMIs together
Regular Stream of
EMIs / RepaymentsPortfolio of Loans
(Home Loans / Car Loans)
Securitisation
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Securitisation Illiquid Assets re-cycled into Liquid Funds
EMIs on Original Loan : Repaying Securitised Debt Additional Funds : More Loans / Growth in Business
More Securitisation possible on additional loans EMIs
Securitisation Propels Accelerated GrowthGrowth needs to be managed
To be cautious against Over Trading
LehmanBrothers
Forex Rates
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Forex Rates .
Machine Imported : US $ 10 Million
1st July 09 : US $ 1 = Rs. 42; Rs.42 Crs.
Payable in 2 Annual Installments (1st Jan)
Current Rate : US $ 1 = Rs. 45
1st Jan 2010 & 2011 Rates : Unknown
If increases : Additional Pay-out : Loss
Forex Rates
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Forex Rates .
ECB : US $ 100 Million
1st Jan 09 : US $ 1 = Rs. 40; Rs.400 Crs.
Interest Payment : 1st July every year
Repayable in 5 Annual Installments (1st Jan)
Current Rate : US $ 1 = Rs. 45
1st Jan 2010, 2011, 2012, 2013 Rates : Unknown
If increases : Additional Pay-out : Loss
Forex Rates
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Forex Rates .
Export : Collection in Forex
Infosys : Software Maintenance : Euro 500 Million
10 Year Contract : Annual Payout : Euro 50 M
1st Jul 09 : Euro 1 = Rs. 54;
Payment : 1st July every year
Exchange Rate is Falling
Current Rate : Euro 1 = Rs. 52 If decreases : Less Collection : Loss
Hedging : Choices
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Hedging : Choices . Natural Hedge
Spot contract Forwards
Futures
Cross Currency Forward Cross Currency Roll-over
Cross Currency Options
Currency & Interest Rate Swaps Arbitrage
Hedging : Forwards / Futures
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Hedging : Forwards / FuturesHedging :
To cover against risk / Insurance against future uncertainty Businesses are increasingly International
Purchase / Sales / Funds : Forex .
Forex Rates : Highly Volatile / Uncertain Future
Competitive Price Pressures : Need for minimising Loss Tools : Forwards / Futures / Options ..
Natural Hedging : Overseas Receivables & Payables Forwards : Any Future Date
Futures : Specific Dates every week
Forwards / Futures
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Forwards / Futures
Forwards : Delivery at Future date Any future date working day
Exchange of Specific amount of 2 currencies
Buy one and Sell another
Can be combination of more than 2 currencies
Rate of Exchange decided in advance
Futures : Delivery at specific Future Dates
Can be out of a range of Dates
Transactions put through specific Exchanges
Generally closed prior to maturity
Forward / Futures Contracts
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Forward / Futures Contracts
Particulars Forward Futures
Trading
Personal :
Telephone /otherwise
Competitive
Arena
Size of Contract
Individually
tailored
Standardised in
terms ofQuantity /
Amount
Place of Dealing
Over the
Counter
Market
Organised
Exchanges
SettlementAt agreed
dates Possible daily
Delivery Date
At agreed
dates
Fixed Dates /
Cyclical Basis
Transaction cost
Bid - Ask
Spread
Brokerage on
Buy / sellOrders
Margins Not required
Required-As
decided byExchange
Marking to Market Not done Done daily
Particulars Forward Futures
Trading Telephone / otherwise Competitive Arena
Size of Contract Individually tailored Standardised Qty / Amount
Place of Dealing Over the Counter Organised Exchanges
Settlement At agreed dates Possible dailyDelivery Date At agreed dates Fixed Dates / Cyclical
Transaction cost Bid - Ask Spread Brokerage on Buy / sell
Margins Not required Required
Marking to Mkt Not done Done daily
Options
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Options
A Right to Enforce Contract Not an Obligation
No Compulsion
Depending upon market condition.. May enforce / May not enforce
Types :
American
European
Exotic
Swaps
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Swaps
Exchange one financial instrument for another Popular Ones : Interest Rate Swaps
Higher Interest Rate to Lower Rate
Different Repayment Terms Exchange for Different Period
Fixed Rate to Floating Rate
Depending upon market condition
Swap one currency obligation for another
II Internal
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II Internal
Underwriting
Mutual Funds
Sensex / NASDAQ
Cashflow Statement