financial services full final

8/13/2019 Financial Services Full Final

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FINANCIAL SERVICES 2

CHAPTER 1-INTRODUCTION TO FINANCIAL SERVICES

MEANING OF FINANCIAL SERVICES

Financial services refer to services provided by the financial institutions in a financial system.

The finance industry encompasses a broad range of organizations that deal with the management

of money. Among these organizations are Asset Management Companies like leasing

companies, merchant bankers and Liability Management Companies like discounting houses and

acceptance houses, and further general financial institutions like banks, credit card companies,

insurance companies, consumer finance companies, stock exchanges, and some government

sponsored enterprises. The term Financial Services in a broad sense means mobilizing andallocating savings. Thus, it includes all activities involved in the transformation of savings into

investment.

Financial servicesalso refer to services provided by the finance industry. The finance industry

encompasses a broad range of organizations that deal with the management of money. Among

these organizations are banks, credit card companies, insurance companies, consumer finance

companies, stock brokerages, investment funds and some government sponsored enterprises.

Financial Services is also a term used to refer to the services provided by the finance market.

Financial Services is also the term used to describe organizations that deal with the management

of money. Examples are the Banks, investment banks, insurance companies, credit card

companies and stock brokerages.

These are the types of firms comprising the market, that provide a variety of money and

investment related services. Financial services are the largest market resource within the world,

in terms of earnings.


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Classification of Financial Services Industry

The financial intermediaries in India can be classified as:

1. Capital Market Intermediaries which constitutes Term Lending Institutions and InvestingInstitutions which mainly provide long term funds.

2. Money Market Intermediaries which consists of commercial banks, Cooperative Banks,and other financial agencies which supply only short term funds.

DEFINITION OF FINANCIAL SERVICES

Financial servicescan be defined as the products and services offered by institutions like banks

of various kinds for the facilitation of various financial transactions and other related activities in

the world of finance like loans, insurance, credit cards, investment opportunities and money

management as well as providing information on the stock market and other issues like market

trends

Defining Financial Services can also be termed as, any service or product of a financial nature

that is the area under discussion to, or is governed by a measure maintained by a Party or by a

public body that exercises regulatory or supervisory authority delegated by law.

Functions of financial services

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

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

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

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

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

more willing to bear it).


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Characteristics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focused. The firms providing

these services, study the needs of their customers in detail before deciding their financial

strategy, giving due regard to costs, liquidity and maturity considerations. Financial services

firms continuously remain in touch with their customers, so that they can design products which

can cater to the specific needs of their customers. The providers of financial services constantly

carry out market surveys, so they can offer new products much ahead of need and impending

legislation. Newer technologies are being used to introduce innovative, customer friendly

products and services which clearly indicate that the concentration of the providers of financial

services is on generating firm/customer specific services.

ii) Intangibility: In a highly competitive global environment brand image is very crucial. Unless

the financial institutions providing financial products and services have good image, enjoying the

confidence of their clients, they may not be successful. Thus institutions have to focus on the

quality and innovativeness of their services to build up their credibility.

iii) Concomitant: Production of financial services and supply of these services have to be

concomitant. Both these functions i.e. production of new and innovative financial services and

supplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlikeany other service, financial services do tend to perish and hence

cannot be stored. They have to be supplied as required by the customers. Hence financial

institutions have to ensure a proper synchronization of demand and supply.

v) People based services: Marketing of financial services has to be people intensive and hence

its subjected to variability of performance or quality of service. The personnel in financial

services organization need to be selected on the basis of their suitability and trained properly, so

that they can perform their activities efficiently and effectively.

vi) Market Dynamics: The market dynamics depends to a great extent, on socioeconomic

changes such as disposable income, standard of living and educational changes related to the

various classes of customers. Therefore financial services have to be constantly redefined and


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Minimum depositrequirements may be too

high

Unfriendly staff Banks charge fees on

many accounts

Long lines in bank taketime

MFI

Access Proximity Speed If registered, operates

within laws

Social aspect/groupsupport

Loan size is typicallysmall

Cost of borrowing canbe high

Some offer no savingsservice

Some require groupmembership

Loan size istypically small

Cost ofborrowing can

be high

Some offer nosavings service

Some requiregroup

membership

Savings and

credit

associations

Access Proximity Frequency Social aspect/group

support

High risk (dueto dishonest

members or

group conflicts)

Unreliable


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Lump sum of money at aspecified time

High risk (due todishonest members or

group conflicts)

Unreliable Limited funds to meet

borrowing needs

Lack of financialknowledge

Limited funds tomeet borrowing

needs

Lack of financialknowledge

Retailers

Many available Safe Poor customer service Limited financial

knowledge

Interest can be high Banking not core

business

Poor customerservice

Limited financialknowledge

Interest can behigh

Banking not corebusiness

Mattress

account

Money easily available No bank costs No transportation costs Easy to manage Money doesntgrow Less incentive to save Money at risk for theft,

fire

No access to financialexperts

Money doesntgrow

Less incentive tosave

Money at risk fortheft, fire

No access tofinancial experts

No access toother banking


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No access to otherbanking products

No credit record Less control of spending No transaction records

products

No credit record Less control of

spending

No transactionrecords

Insurance

company

Security Peace of mind Insurance expertise

regarding variety of

products

Operates withininsurance laws

High monthly payments High increases each year Products difficult to

understand

Must read the conditions Long waiting period for

payment

High monthlypayments

High increaseseach year

Products difficultto understand

Must read theconditions

Long waitingperiod for

payment

Moneylender

Money availableimmediately

Available at yourdoorstep

Very expensive Riskyoperates by

intimidation

Not protected by

Very expensive Riskyoperates

by intimidation

Not protected bygovernment

laws

Easy to get intodeep debt


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government laws

Easy to get into deepdebt

Financial Services in India- CONTRIBUTION TO INDIAN

ECONOMY

The Indian financial services sector is one of the most complex, yet one of the most robust

service segments of the Indian economy. Spanning from insurance to capital markets, banking to

foreign direct investments (FDI) and from mutual funds to private equity (PE) investments, the

financial services sector covers all related segments under its umbrella. Having major effects in

its abstract as well as physical form post liberalization, the financial services segment is

undoubtedly the mainstay of Indian economy.

Today it is at par with the international financial frameworks and promises to surpass them in

terms of performance in the years to come. This is very much evident from the fact that Indian

financial services industry was amongst the least affected during the crisis the world faced in

2010-11.

Major developments pertaining to the sub-segments of Indian financial services industry are

discussed hereafter.

Insurance Sector

Indian life insurance sector collected new business premiums worth Rs 11,742.7 crore(US$ 1.96 billion) for April-May 2013, according to data from the Insurance Regulatory

and Development Authority (IRDA). Life insurers collected Rs 1, 07, 010.7 crore (US$

17.84 billion) worth of new premiums for the financial year ended March 31, 2013

Meanwhile, the general insurance industry grew by 19.6 per cent in April-May period ofFY14, wherein the non-life insurers collected premium worth Rs 13,552.46 crore (US$

2.26 billion)


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Banking Services

According to the Reserve Bank of India (RBI)s Quarterly Statistics on Deposits andCredit of Scheduled Commercial Banks, September 2012,Nationalized Banks accounted

for 52.0 per cent of the aggregate deposits, while the State Bank of India (SBI) and its

Associates accounted for 22.3 per cent. The share of New Private Sector Banks, Old

Private Sector Banks, Foreign Banks, and Regional Rural Banks in aggregate deposits

was 13.6 per cent, 4.8 per cent, 4.3 per cent and 2.9 per cent, respectively

Nationalized Banks accounted for the highest share of 50.9 per cent in gross bank credit

followed by State Bank of India and its Associates (22.1 per cent) and New Private

Sector Banks (14.7 per cent). Foreign Banks, Old Private Sector Banks and Regional

Rural Banks had shares of around 4.9 per cent, 4.9 per cent and 2.6 per cent, respectively

India's foreign exchange (forex) reserves stood at US$ 280.167 billion for the weekended July 5, 2013, according to data released by the central bank. The value of foreign

currency assets (FCA) - the biggest component of the forex reserves stood at US$

252.103 billion, according to the weekly statistical supplement released by the RBI

Mutual Funds Industry in India

Indias asset management companies (AMCs) have witnessed growth for the fifth consecutive

quarter wherein their average assets under management (AUM) during April-June 2013

increased by 3.68 per cent. The AUMs value touched a new high of Rs 8.47 lakh crore (US$

141.17 billion), according to the latest statistics available from industry body Association of

Mutual Funds in India (AMFI).

Private Equity, Mergers & Acquisitions in India

Private equity (PE) firms upped their investments in India Inc by a hefty 42 per cent toUS$ 5.4 billion through 197 deals during the first half of 2013; major deal being the US$


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1.2 billion-Bharti Airtel deal, according to a report by EY India (formerly Ernst &

Young).

Meanwhile, Merger and acquisition (M&A) activity in India was also quite intense inApril-June 2013 period. The deal tally stood at US$ 10.9 billion across 130 transactions,

according to global deal tracking firm Merger market.

Foreign Institutional Investors (FIIs) in India

Foreign investors have immense faith in Indian financial markets. The fact issubstantiated through statistics which show that they pumped massive US$ 10 billion in

Indian markets in January-March 2013 quarter. Moreover, FII ownership in top 500

companies is highest at 21.2 per cent for the reported quarter. It increased by 1.28 percent in the January-March quarter alone and 2.87 per cent in 2012-13.

The number of registered FIIs in India stood at 1,757 in FY 2012-13 while the number ofFII sub-accounts rose to 6,335, from 6,322 at the end of 2011-12.

Financial Services in India: Recent Developments

Tata Communications 100 per cent subsidiary Tata Communications Payment Solutions(TCPS) has launched Indias first white label ATM (WLA) at Chandrapada, a tier-V

town near Mumbai. The WLA has been branded 'Indicash' by the company. TCPS

already operates about 27, 000 ATMs for 37 banks in India.

Meanwhile, US-based Customers Bancorp Inc (CUBI) has plans to infuse US$ 51 millionin multiple securities of Religare Enterprises Ltd. Religare is currently aspiring for a

banking license to enter the banking industry.

The investments will take place through a combination of primary and secondary markettransactions.


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Financial Services: Government Initiatives

The Finance Ministry has constituted a standing council of experts to assess theinternational competitiveness of the Indian financial sector. The council, to be headed by

the Secretary, Department of Economic Affairs, will analyze various monetary and non-

monetary transaction costs (of doing business in the Indian market), and make

recommendations for improving its competitiveness.

The council will also examine related policies and operating frameworks and the

performance of various segments of the Indian capital market. It will also study and

suggest possibilities for reform measures aimed at improving transparency, promoting

development and strengthening governance in the Indian capital markets, while ensuring

that risks are limited and investor interests are sustained.

Also, the RBI has, for the time being, relaxed the norm that stipulates non-bankingfinance companies (NBFCs) to have a minimum gap of six months between two non-

convertible debentures (NCDs) issues. The move is aimed at streamlining the process of

moving into a more robust asset-liability management framework in a non-disruptive

manner.


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Road Ahead

Foreign investments fuel Indian financial markets in a big way. Experts believe that India has

fared really well over the past few years and the similar macroeconomic trends would continue

in 2013. This would result in steady FII equity flows that would enhance stock valuations,

strengthen investment cycle, and sustain consumption growth (especially at low-income levels).

Moreover, portfolio fund flows are anticipated to be higher in 2013 than those in 2012, on the

back of Government reforms like passing bills that would escalate foreign investment limits in

insurance, having a uniform goods and services tax, and reconciling subsidies.

Moreover, with the Parliament passing the much awaited Banking Laws Amendment Bill

recently, the face of the Indian banking industry is set to get a lift in the coming years as thepassage of the bill has paved the way for more banks. This will not only create a healthy

competition among the players in the industry, but will also escalate the style of operation and

technology.


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LEASING

A lease transaction is a commercial arrangement whereby an equipment owner or

Manufacturer conveys to the equipment user the right to use the equipment in return for a rental.

In other words, lease is a contract between the owner of an asset (the lessor) and its user (the

lessee) for the right to use the asset during a specified period in return for a mutually agreed

periodic payment (the lease rentals)

Leasingis a process by which a firm can obtain the use of a certain fixed assets for which it must

pay a series of contractual, periodic, tax deductible payments.

Thelessee is the receiver of the services or the assets under thelease contract and the lessor is

the owner of the assets. The relationship between the tenant and the landlord is called a tenancy,

and can be for a fixed or an indefinite period of time (called theterm of the lease).

Theconsideration for the lease is calledrent.Agross lease is when the tenant pays a flat rental

amount and the landlord pays for all property charges regularly incurred by the ownership from

lawnmowers and washing machines to handbags and jewelry.

DISCOUNTING

Discountingis a financial mechanism in which adebtor obtains the right to delay payments to

acreditor,for a defined period of time, in exchange for a charge or fee. Essentially, the party that

owes money in the present purchases the right to delay the payment until some future

date. The discount, or charge, is simply the difference between the original amount owed in the

present and the amount that has to be paid in the future to settle the debt.

BILL DISCOUNTING

Bill discounting is a major activity with some of the smaller Banks. Under this type of lending,

Bank takes the bill drawn by borrower on his (borrower's) customer and pays him immediately

deducting some amount as discount/commission. The Bank then presents the Bill to the

borrower's customer on the due date of the Bill and collects the total amount. If the bill is
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delayed, the borrower or his customer pays the Bank a pre-determined interest depending upon

the terms of transaction.

Purchasing and discounting of bills of exchange is another short term method of profitable

instrument of banks funds. Bills of exchange can be discounted on rebate before its due date. The

rebate or discount is earning of the bank. The bills of exchange usually mature within 90 days. In

case a bill, say of rupees 2000 due 90 days hence is discounted today at 20 percent per annum,

the borrower is paid rupees 1900. The bank however collects the full amount of rupees 2000 of

the bill from drawer on maturity. The drawer or maker of the bill is expected to pay the bill

on maturity.

The bank by discounting the clean or documentary bill advances the amount to the payee.On maturity of the bill the amount is collected from the drawer. The discount is the safe earning

of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is

dishonored the payee is responsible to make the full payment of the bill to the bank. On

the maturity of the bill there is certainly of payment to the bank. It is thus a short term advance

with certainly of payment. As the date of payment to the bank is sure the short term advance is

quite liquid.

Business activities across borders are done through letter of credit. Letter of credit is an

instrument issued in the favor of the seller by the buyer bank assuring that payment will be made

after certain timer frame depending upon the terms and conditions agreed, it could be either

sight, 30 days from the Bill of Lading or 120 days from the date of bill of lading. Now when the

seller receives the letter of credit through bank, seller prepares documents and presents the same

to the bank.

The most important element in the same is the bill of exchange which is used to negotiate a letter

of credit. Seller discounts that bill of exchange with the bank and gets money. Discounting bill

terminology is used for this purpose. Now it is seller's bank responsibility to send documents and

bill of exchange to buyer's bank for onward forwarding to the buyer for the acceptance and the


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buyer finally, accepts bill of exchange drawn by the seller on buyer's bank because he has

opened that LC. Buyers bank than get that signed bill of exchange from the buyer as guarantee

and release payment to the sellers bank and waits for the time span will buyer will pay the bank

against that bill of exchange.

INVESTMENT BANKING

An investment bankis a financial institution that assists individuals, corporations, and

governments in raising capital byunderwriting and/or acting as the client's agent in the issuance

ofsecurities. An investment bank may also assist companies involved inmergers and

acquisitions and provide ancillary services such asmarket making, trading

ofderivatives andequity securities, and FICC services (fixed income instruments,currencies,andcommodities).

There are two main lines of business in investment banking. Trading securities for cash or for

other securities (i.e. facilitating transactions, market-making), or the promotion of securities (i.e.

underwriting, research, etc.) is the "sell side", whilebuy side is a term used to refer to advising

institutions concerned with buying investment services. Private equity funds, mutual funds, life

insurance companies, unit trusts, and hedge funds are the most common types of buy side

entities.

An investment bank can also be split into private and public functions with aninformation

barrier which separates the two to prevent information from crossing. The private areas of the

bank deal with privateinsider information that may not be publicly disclosed, while the public

areas such as stock analysis deal with public information.
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B) NON FUND BASED SERVICES

PORTFOLIO MANAGEMENT

An investor considering investment in securities is faced with the problem of choosing from

among a large number of securities and how to allocate his funds over this group of securities.

Again he is faced with problem of deciding which securities to hold and how much to invest in

each. The risk and return characteristics of portfolios. The investor tries to choose the optimal

portfolio taking into consideration the risk return characteristics of all possible portfolios.

As the risk return characteristics of individual

securities as well as portfolios also change. This callsfor periodic review and revision of investment

portfolios of investors.

An investor invests his funds in a portfolio expecting

to get good returns consistent with the risk that he has

to bear. The return realized from the portfolio has to

be measured and the performance of the portfolio has

to be evaluated.

It is evident that rational investment activity involves creation of an investment portfolio.

Portfolio management comprises all the processes involved in the creation and maintenance of

an investment portfolio. It deals specifically with the security analysis, portfolio analysis,

portfolio selection, portfolio revision & portfolio evaluation. Portfolio management makes use of

analytical techniques of analysis and conceptual theories regarding rational allocation of funds.

Portfolio management is a complex process which tries to make investment activity more

rewarding and less risky.


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LOAN SYNDICATION

A loan offered by a group of lenders (called a syndicate) who work together to provide funds for

a single borrower. The borrower could be a corporation, a large project, or a sovereignty (such as

a government). The loan may involve fixed amounts, a credit line, or a combination of the two.

Interest rates can be fixed for the term of the loan or floating based on a benchmark rate such as

the London Interbank Offered Rate (LIBOR).

Mainly used in extremely large loan situations, syndication allows any one lender to provide a

large loan while maintaining a more prudent and manageable credit exposure, because the lender

isn't the only creditor. Loan syndication is common in mergers, acquisitions and buyouts, where

borrowers often need very large sums of capital to complete a transaction, often more than a

single lender is able or willing to provide.

Typically there is a lead bank or underwriter of the loan, known as the "arranger", "agent", or

"lead lender". This lender may be putting up a proportionally bigger share of the loan, or perform

duties like dispersing cash flows amongst the other syndicate members and administrative tasks.

The main goal of syndicated lending is to spread the risk of a borrower default across multiple

lenders (such as banks) or institutional investors like pensions funds and hedge funds. Because

syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower

defaulting could cripple a single lender. Syndicated loans are also used in the leveraged buyout

community to fund large corporate takeovers with primarily debt funding.

Syndicated loans can be made on a "best efforts" basis, which means that if enough investors

can't be found, the amount the borrower receives will be lower than originally anticipated. These

loans can also be split into dual tranches for banks (who fund standard revolvers or lines ofcredit) and institutional investors (who fund fixed-rate term loans).


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CAPITAL RESTRUCTURING

Capital restructuring is a type of business operational strategy that is employed to make changes

to the capital structure of a company, usually as a way to deal with shifts in the marketplace that

have impacted the financial stability of the business. This same approach may also be used to

rearrange capital assets in order to position the business so that company owners can take

advantage of a growth opportunity. Essentially, this type of process seeks to make changes to

company finances and holdings so that the business is able to operate more efficiently and move

toward its stated goals.

A significant modification made to the debt, operations or structure of a company. This type of

corporate action is usually made when there are significant problems in a company, which are

causing some form of financial harm and putting the overall business in jeopardy. The hope is

that through restructuring, a company can eliminate financial harm and improve the business.

When a company is having trouble making payments on its

debt, it will often consolidate and adjust the terms of the

debt in a debt restructuring. After a debt restructuring, the

payments on debt are more manageable for the company

and the likelihood of payment to bondholders increases. A

company restructures its operations or structure by cutting

costs, such as payroll, or reducing its size through the sale

of assets. This is often seen as necessary when the current situation at a company is one that may

lead to its collapse.


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CHAPTER 3- FINANCIAL SERVICES RELATED TO CAPITAL

MARKET

BOOK BUILDING

Book buildingrefers to the process of generating, capturing, and recording investor demand for

shares during an Initial Public Offering (IPO), or othersecurities during theirissuanceprocess, in

order to support efficient price discovery.Usually, theissuer appoints a majorinvestment bank

to act as a majorsecurities underwriter orbook runner.The book is the off-market collation of

investor demand by the book runner and is confidential to the book runner, issuer, and

underwriter.Where shares are acquired, or transferred via a book build, the transfer occurs off

market, and the transfer is not guaranteed by an exchanges clearing house. Where an

underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or

non-delivery by the seller.

Book building is a common practice in developed countries and has recently been making

inroads into emerging markets as well. Bids may be submitted on-line, but the book is

maintained off-market by the book runner and bids are confidential to the book runner. Unlike a

public issue, the book building route will see minimum number of applications and large order
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size per application. The price at which new shares are issued is determined after the book is

closed at the discretion of the book runner in consultation with the issuer. Generally, bidding is

by invitation only to high-net worth clients of the book runner and, if any, lead manager, or co-

manager. Generally, securities laws require additional disclosure requirements to be met if the

issue is to be offered to all investors. Consequently, participation in a book build may be limited

to certain classes of investors. If retail clients are invited to bid, retail bidders are generally

required to bid at the final price, which is unknown at the time of the bid, due to the

impracticability of collecting multiple price point bids from each retail client. Although bidding

is by invitation, the issuer and book runner retain discretion to give some bidders a greater

allocation of their bids than other investors. Typically, large institutional bidders receive

preference over smaller retail bidders, by receiving a greater allocation as a proportion of their

initial bid. All book building is conducted off-market and most stock exchanges have rules that

require that on-market trading be halted during the book building process.

The key differences between acquiring shares via a book build (conducted off-market) and

trading (conducted on-market) are: 1) bids into the book are confidential vs. transparent bid and

ask prices on a stock exchange; 2) bidding is by invitation only (only high-net worth clients of

the book runner and any co-managers may bid); 3) the book runner and the issuer determine the

price of the shares to be issued and the allocations of shares between bidders in their absolute

discretion; 4) all shares are issued or transferred at the same price whereas on-market

acquisitions provide for a multiple trading prices.

The book runner collects bids from investors at various prices, between the floor price and the

cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping

both wholesale and retail investors. The final issue price is not determined until the end of the

process when the book has closed. After the close of the book building period, the book runner

evaluates the collected bids on the basis of certain evaluation criteria and sets the final issueprice.

If demand is high enough, the book can be oversubscribed. In these cases the green shoe option

is triggered.
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Book building is essentially a process used by companies raising capital through public

offeringsboth initial public offers (IPOs) and follow-on public offers (FPOs) to aid price and

demand discovery. It is a mechanism where, during the period for which the book for the offer is

open, the bids are collected from investors at various prices, which are within the price band

specified by the issuer. The process is directed towards both the institutional as well as the retail

investors. The issue price is determined after the bid closure based on the demand generated in

the process.

Book Building Issues

Offer Price: A 20 % price band is offered by the issuer within which investors areallowed to bid and the final price is determined by the issuer only after closure of the

bidding.

Demand: Demand for the securities offered , and at various prices, is available on a realtime basis on the BSE website during the bidding period

Payment: 10 % advance payment is required to be made by the QIBs along with theapplication, while other categories of investors have to pay 100 % advance along with theapplication.

Reservations: 50 % of shares offered are reserved for QIBS, 35 % for small investors andthe balance for all other investors.


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Book Building Process:

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the

investors.

The syndicate members input the orders into an 'electronic book'. This process is called'bidding' and is similar to open auction.

The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis

of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall beissued.

Generally, the numbers of shares are fixed; the issue size gets frozen based on the finalprice per share.

Allocation of securities is made to the successful bidders. The rest get refund orders.

BSE's Book Building System

BSE offers the book building services through the Book Building software that runs onthe BSE Private network.

This system is one of the largest electronic book building networks anywhere spanningover 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs

and Campus LANS


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The software is operated through book-runners of the issue and by the syndicate memberbrokers. Through this book, the syndicate member brokers on behalf of themselves or

their clients' place orders.

Bids are placed electronically through syndicate members and the information iscollected on line real-time until the bid date ends.

In order to maintain transparency, the software gives visual graphs displaying price v/squantity

PUBLIC ISSUE

Every Company needs funds for its business. Funds requirement can be for short term or for long

term. To meet short term requirements, the may approach banks, lenders & may even accept

fixed deposits from public/shareholders. To meet its long term requirements, funds can be raised

either through loans from lenders, Banks, Institutions etc. (which carry financial burden) or

through issue of capital. Capital can be raised through private placement of shares, public issue,

right issue etc. Public issue means raising funds from public. Promoters of the Company may

have plans for the Company, which may require infusion of money. The main purpose of the

public issue, amongst others, is to raise money through public and get its shares listed at any of

the recognized stock exchanges in India.

ADVANTAGES OF PUBLIC ISSUE

Money non-refundable except in the case of winding up or buy back of shares. No financial burden i.e. no fixed rate of interest payable. However, in order to service the

equity, dividend may be paid.

Enhance shareholders value if the Company performs well. Greater Transferability. Trading & Listing of securities at stock exchanges.


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Better liquidity of securities. Helps building reputation of promoters, Company & its products/services, provided the

Company performs well.,

DIS-ADVANTAGES OF PUBLIC ISSUE

Time consuming process. Expensive. Several legal formalities. Involvement of many intermediaries.

Transparency requirements and public disclosure of information may lead to lack ofprivacy.

Continuous compliance of provisions of listing agreement and other legal requirements. Constant scrutiny of performance by investors. May lead to takeover of the company Securities of the Company may be made subjective to speculative attacks.


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RIGHT ISSUE

A rights issue is an issue of rights to buy additional

securities in acompany made to the company's existing

security holders. When the rights are for equity

securities, such as shares, in apublic company, it is a

way to raise capital under a seasoned equity offering.

Rights issues are sometimes carried out as a shelf

offering. With the issued rights, existing security-

holders have the privilege to buy a specified number of

new securities from the firm at a specified price within

a specified time. In a public company, a rights issue is a form ofpublic offering (different from

most other types of public offering, where shares are issued to the general public).

Rights issues may be particularly useful for Closed-End Companies, which cannot retain

earnings, because they distribute essentially all of their realized income and capital gains each

year; therefore, they raise additional capital through rights offerings. As equity issues are

generally preferable to debt issues from the company's viewpoint, companies usually opt for a

rights issue when they have problems raising equity capital from the general public and choose

to ask their existing shareholders to buy more shares.

How it works

A rights issue is directly offered to all shareholders of record or through broker dealers of record

and may be exercised in full or partially. Subscription rights may either be transferable, allowing

the subscription-rights holder to sell them privately, on the open market or not at all. A rights

issue to shareholders is generally made as a tax-free dividend on a ratio basis (e.g. a dividend ofone subscription right for one share of Common stock issued and outstanding). Because the

company receives shareholders' money in exchange for shares, a rights issue is a source of

capital in an organization.
http://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Seasoned_equity_offeringhttp://en.wikipedia.org/wiki/Shelf_offeringhttp://en.wikipedia.org/wiki/Shelf_offeringhttp://en.wikipedia.org/wiki/Public_offeringhttp://en.wikipedia.org/wiki/Closed-End_Companieshttp://en.wikipedia.org/wiki/Capital_%28economics%29http://en.wikipedia.org/wiki/Capital_%28economics%29http://en.wikipedia.org/wiki/Closed-End_Companieshttp://en.wikipedia.org/wiki/Public_offeringhttp://en.wikipedia.org/wiki/Shelf_offeringhttp://en.wikipedia.org/wiki/Shelf_offeringhttp://en.wikipedia.org/wiki/Seasoned_equity_offeringhttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Equity_%28finance%29http://en.wikipedia.org/wiki/Companyhttp://en.wikipedia.org/wiki/Securities


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Considerations

Issue rights the financial manager has to consider:

Engaging a Dealer-Manager or Broker Dealer to manage the Offering processes Selling Group and broker dealer participation Subscription price per new share Number of new shares to be sold The value of rights vs. trading price of the subscription rights The effect of rights on the value of the current share The effect of rights to shareholders of record and new shareholders and rights holders

Underwriting

Rights issues may be underwritten. The role of the

underwriter is to guarantee that the funds sought by

the company will be raised. The agreement between

the underwriter and the company is set out in a

formal underwriting agreement. Typical terms of an

underwriting require the underwriter to subscribe for

any shares offered but not taken up by shareholders.

The underwriting agreement will normally enable the

underwriter to terminate its obligations in defined circumstances. A sub-underwriter in turn sub-

underwrites some or all of the obligations of the main underwriter; the underwriter passes its risk

to the sub-underwriter by requiring the sub-underwriter to subscribe for or purchase a portion of

the shares for which the underwriter is obliged to subscribe in the event of a shortfall.

Underwriters and sub-underwriters may be financial institutions, stock-brokers, majorshareholders of the company or other related or unrelated parties.
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Basic example

An investor:Mr. A had 100 shares of company X at a total investment of $40,000, assuming

that he purchased the shares at $400 per share and that the stock price did not change between

the purchase date and the date at which the rights were issued.

Assuming a 1:1 subscription rights issue at an offer price of $200, Mr. A will be notified by a

broker dealer that he has the option to subscribe for an additional 100 shares of common stock of

the company at the offer price. Now, if he exercises his option, he would have to pay an

additional $20,000 in order to acquire the shares, thus effectively bringing his average cost of

acquisition for the 200 shares to $300 per share ((40,000+20,000)/200=300). Although the price

on the stock markets should reflect a new price of $300 (see below), the investor is actually notmaking any profit nor any loss. In many cases, the stock purchase right (which acts as an option)

can be traded at an exchange. In this example, the price of the right would adjust itself to $100

(ideally).

The company:Company X has 100 million outstanding shares. The share price currently quoted

on the stock exchanges is $400 thus the market capitalization of the stock would be $40 billion

(outstanding shares times share price).

If all the shareholders of the company choose to exercise their stock option, the company's

outstanding shares would increase by 100 million. The market capitalization of the stock would

increase to $60 billion (previous market capitalization + cash received from owners of rights

converting their rights to shares), implying a share price of $300 ($60 billion / 200 million

shares). If the company were to do nothing with the raised money, its Earnings per share (EPS)

would be reduced by half. However, if the equity raised by the company is reinvested (e.g. to

acquire another company), the EPS may be impacted depending upon the outcome of the

reinvestment.
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Private Placements of Securities

A private placement is a direct private offering of securities to a limited number of sophisticated

investors. It is the opposite of a public offering. Investors in privately placed securities include

insurance companies, pension funds, mezzanine funds, stock funds and trusts. Securities issued

as private placements include debt, equity, and hybrid securities. In the United States, private

placements are exempt from public registration under the Securities Act of 1933. The exemption

from registration for a private offering is contained in Regulation D of the Securities Act of

1933. While the procedure for conducting a private placement pursuant to the exemption is less

stringent than for that of a public offering, the process requires a careful compliance with the

terms and restrictions of Regulation D.

Those requirements typically require the use of a private placement memorandum, which

is similar to a prospectus which is required in public offerings. The important aspects of the

offering are covered: a description of the terms of the offering, the company's business, risk

factors, additional terms (i.e., ant dilution protection, registration rights, controls features),

expenses of the transaction and summary financial information. The purpose of the summary is

to make the offering easy to read and understand. As stated, suppliers of capital are inundated

with business plans and private placement memoranda; the sales-conscious issuer must get all

the salient facts in as conspicuous a position as possible if he hopes to have them noticed.


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CHAPTER 4-MUTUAL FUNDS

INTRODUCTION TO MUTUAL FUNDS

A Mutual Fund is a financial intermediary that

pools the savings of investors for collective

investments in a diversified portfolio of

securities. According to SEBI (Mutual Funds)

Regulations, 1996, a mutual fund is a fund

established in the form of a trust to raise money

through the sale' of units to the public or a section

of the public under one or more schemes for investing in securities including money market

instruments."

Mutual funds raise money by selling shares / units of funds to the public. Mutual funds use this

money to purchase various assets such as stocks, bonds and money market instruments. The

mutual fund industry in India has been witnessing an annual growth rate of 9% for past five

years and is expected to grow better.

Mutual funds play an important role in promoting a healthy capital market. They provide active

support to secondary market and increase liquidity of capital market and bring stability in

financial market.

FEATURES OF MUTUAL FUNDS

1. Mobilizes Savings:-

Mutual funds play an important role in mobilizing savings of millions of investors across the

country. In mutual funds, savings of small investors are mobilized, invested and returns are

distributed in the same proportion to the unit holders.


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2. Instrument Of Investing Money:-

Now-a-days bank rates have become very low so, keeping large amount of money in bank does

not give higher returns. People can invest in stock market. But a common investor is not well

informed about the complexities involved in stock market movements. Here mutual funds play

an important role in helping common public to get higher returns.

3. Protection to Small Investors:-

A small investor is not safe in share market. In mutual industry there is no such risk. Mutual

funds help to reduce the risk of investing in stocks by spreading or diversifying investments.

Small investors enjoy the benefit of diversification.

4. Tax Benefit:-

Investors in mutual funds enjoy tax benefits. Dividend received by investors is tax free. Tax

exemption is allowed on income received on units of mutual funds and UTI. Investment in

mutual funds enjoy wealth tax exemption within the overall limit of Rs. 5 lakh.. No tax shall be

charged on gifts of mutual fund units up to Rs. 30,000.

5. Diversification:-

Investment in mutual funds enables investors to spread out and minimize the risks up to certain

extent. Mutual fund invests in a diversified portfolio of securities. This diversification helps to

reduce risk since all the stocks do not fall at same time. Thus investors are assured of average

income which is not possible in other sources.

6. Multi - Purpose Service:-

Mutual funds introduce variety of innovative schemes containing various benefits. Innovative

schemes are designed to meet the needs of different types of investors in terms of investment,

dividend distribution, liquidity etc.


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7. Boost to Capital Market:-

Mutual fund has become a capital market intermediary. It bridges the gap between retail

investors and capital market. The rapid growth of mutual fund industry leads to increased

vibrancy of capital market.

8. Arrival of Foreign Capital:-

Mutual funds attract foreign capital. Indian Mutual Fund Industries open offshore funds in

various foreign countries and secure safe investment avenues abroad to domestic savings. These

funds enable NRIs and foreign investors to participate in Indian Capital Market.

9. Savings for Retirement and Education:-

Various schemes of funds with their tax benefits can help the households to save for the

retirements and education of their children

TYPES OF MUTUAL FUNDS

1) Open - Ended Scheme:-

An open-ended fund is that which is available for subscription all through the year. The investors

can enter and exit the scheme any time during the life of the fund. This scheme has high

liquidity. It does not have fixed maturity period. Investors can conveniently buy and sell units at

Net Asset Value (NAV). The buying and selling of this mutual fund can be only done through

the mutual fund.

2) Close - Ended Scheme:-

These schemes have a fixed maturity period. Investors can invest directly at the time of initial

issue. After the closing of subscription, the units are listed on stock exchange. Trading in the

scheme can be done through stock exchanges. The market price on stock exchange could differ

from the Net Asset Value (NAV) on account of demand and supply situation. The fund has no

interaction with investors till redemption except for paying dividends / bonus


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3) Phase III (19931996) Emergence Of private sector Funds:-

In 1993, government allowed private sector funds including foreign fund management

companies to enter the mutual fund industry. This provided a wide range of choice to investors

and more competition to industry. Assets under mutual fund management rose to about Rs.

86,000 crore by March 1997.

4) Phase IV (1996-2004) SEBI Regulation and Growth:-

In 1996 SEBI introduced Mutual Funds Regulations. The regulations brought about uniform

standards in mutual funds industry. Investors interests were safeguarded by SEBI and

government tax benefits to investors in mutual funds. The number of players increased

considerably At the end of March 2004, the assets under management of mutual funds stood at

Rs1,39,615 crore.

5) Phase V (2004 Onwards) Growth and Consolidation:-

After 2004 the industry witnessed several mergers and takeovers. For e.g. : Birla Sun Life took

over the scheme of Alliance Mutual Fund. Also number of foreign players entered Indian mutual

funds industry like Fidelity, Franklin, Templeton Mutual Fund etc. The assets under management

of mutual funds was Rs. 4, 17,300 crore.

IMPORTANCE OF MUTUAL FUNDS

Mutual fund is a single and large professionally managed investment organization which

combines the funds of many individual investors having similar investment objectives. They

form an important part of capital market. The importance of mutual funds arises due to its many

benefits. Let us explain:-

1) Professional Management:-

Investors purchase units in mutual funds because they do not have time or expertise to manage

their own portfolio. Mutual funds are managed by professional managers who have requisite

knowledge and skill to make organized investment strategy. Thus small investors invest in

mutual funds to maximize their returns on investment.


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2) Economies of Scale:-

Mutual funds buy and sell large amount of securities at a time, this reduces, transaction cost.

Investors gain on account of low transaction costs.

3) Product Innovation:-

From time to time new products are introduced by mutual fund industry to its investors. Schemes

like children funds, commodity based funds, fixed maturity plans, exchange traded funds hybrid

funds (fund for funds) etc. all have attracted huge investments.

4) Safety and Liquidity:-

Mutual funds are controlled and regulated by SEBI hence they are safe. Further, investors can

easily encash their investments by selling their units to fund if it is an open-ended scheme or

selling them on stock exchange if it is a close-ended scheme.

5) Convenience and Flexibility:-

Mutual funds permit flexibility. If an investor is not satisfied with one mutual fund, he can

switch over to another. There are least formalities to invest in mutual funds.

6) Portfolio Diversification:-

Due to lack of resources an individual investor may not be able to invest in a diversified portfolio

of securities. Mutual funds invest in a number of companies across various sectors and

industries. Currently there are about 38 mutual funds offering different products. This

diversification reduces the risk of investment.

7) Reduction in Risk:-

Mutual funds help to reduce risk through diversification and professional management. All funds

are not invested in same investment avenue. Holding a portfolio that is diversified across

investment avenues is a wise way to manage risk.


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8) Transparency:-

There is greater transparency in investment in mutual funds. They declare their portfolio of

investment every month. The investors can know where their funds are invested. In case they are

not happy with the portfolio, of fund they can withdraw their money at a short notice.

9) Services to Investors:-

Mutual funds offer systematic withdrawal plans which are convenient to retired people. The

dividend and capital gains are reinvested automatically. Automatic reinvestment is a type of

forced savings which brings cumulative benefits to investors.

10) Stability to stock market:-

Mutual funds invest in huge amounts in securities. They can easily absorb certain losses in stock

market. They regularly invest in stock market, which provides stability to stock market.

11) Equity Research:-

Mutual funds also invest in equity research. This gives a lot of information and data for

investments. They also help them to get a good portfolio.

12) AncilliaryServices:-

Mutual funds also provide ancillary services such as:-

a) Saving schemes for regular monthly investments in units.

b) Life Insurance Schemes.

c) Automatic reinvestment of dividend.


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CHAPTER 5-VENTURE CAPITAL

INTRODUCTION

Venture Capital is the fund/initial capital provided to

businesses typically at a start-up stage and many times for

new/ untested ideas. Venture capital normally comes in

where the conventional sources of finance do not fit in.

Venture capital funds are mutual funds that manage venture

capital money i.e. these funds aggregate money from several investors who want to provide

venture capital and deploy this money in venture capital opportunities.

Typically venture capital funds have a higher risk/ higher return profile as compared to normal

equity funds and whether you should invest in these would depend on your specific risk profile

and investment time-frame.

Venture capital(VC) isfinancial capitalprovided to early-stage, high-potential, high

risk,growthstartup companies.The venture capitalfund makes money by owningequity in the

companies it invests in, which usually have a novel technology orbusiness model in high

technology industries, such asbiotechnology,IT andsoftware. The typical venture capitalinvestment occurs after theseed funding round as growth funding round (also referred to

asSeries A round) in the interest of generating a return through an eventual realization event,

such as anIPO ortrade sale of the company. Venture capital is a subset ofprivate equity.

Therefore, all venture capital is private equity, but not all private equity is venture capital.
http://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Growth_investinghttp://en.wikipedia.org/wiki/Startup_companyhttp://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Equity_(finance)http://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Biotechnologyhttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Softwarehttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Series_A_roundhttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Mergers_and_acquisitionshttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Series_A_roundhttp://en.wikipedia.org/wiki/Seed_fundinghttp://en.wikipedia.org/wiki/Softwarehttp://en.wikipedia.org/wiki/Information_technologyhttp://en.wikipedia.org/wiki/Biotechnologyhttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Equity_(finance)http://en.wikipedia.org/wiki/Collective_investment_schemehttp://en.wikipedia.org/wiki/Startup_companyhttp://en.wikipedia.org/wiki/Growth_investinghttp://en.wikipedia.org/wiki/Financial_capital


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TYPES OF FUNDING IN VENTURE CAPITAL

1. 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.

2.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 productor service for introduction to the marketplace.

3.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.

4. 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

5.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.


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MODES OF FINANCING BY VENTURE CAPITALIST

Venture capitalists provide funds for long-term in any of the following modes

1. Equity - Most of the venture capital funds provide financial support to entrepreneurs in the

form of equity by financing 49% of the total equity. This is to ensure that the ownership and

overall control remains with the entrepreneur. Since there is a great uncertainty about the

generation of cash inflows in the initial years, equity financing is the safest mode of financing. A

debt instrument on the other hand requires periodical servicing of debt.

2. Conditional loan - From a venture capitalist~ point of view, equity is an unsecured

instrument and hence a less preferable option than a secured debt instrument. A conditional loan

usually involves either no interest at all or a coupon payment at nominal rate. In addition, a

royalty at agreed rates is payable to the lender on the sales turnover. As the units picks up in

sales levels, the interest rate are increased and royalty amounts are decreased.

3. Convertible loans - The convertible loan is subordinate to all other loans, which may be

converted into equity if interest payments are not made within agreed time limit.


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Features of Venture Capital

Venture capital combines the qualities of a banker, stock market investor and entrepreneur in

one.

The main features of venture capital can be summarized as follows:

High Degrees of Risk

Venture capital represents financial investment in a highly risky project with the objective of

earning a high rate of return.

Equity Participation

Venture capital financing is, invariably, an actual or potential equity participation wherein the

objective of venture capitalist is to make capital gain by selling the shares once the firm becomes

profitable.

Long Term Investment

Venture capital financing is a long term investment. It generally takes a long period to encash the

investment in securities made by the venture capitalists.

Participation in Management

In addition to providing capital, venture capital funds take an active interest in the management

of the assisted firms. Thus, the approach of venture capital firms is different from that of a

traditional lender or banker. It is also different from that of a ordinary stock market investor who

merely trades in the shares of a company without participating in their management. It has been

rightly said, venture capital combines the qualities of banker, stock market investor andentrepreneur in one.


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Achieve Social Objectives

It is different from the development capital provided by several central and state level

government bodies in that the profit objective is the motive behind the financing. But venture

capital projects generate employment, and balanced regional growth indirectly due to setting up

of successful new business.

Investment is liquid

A venture capital is not subject to repayment on demand as with an overdraft or following a loan

repayment schedule. The investment is realized only when the company is sold or achieves a

stock market listing. It is lost when the company goes into liquidation.


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ORIGIN OF VENTURE CAPITAL

Origin

Venture capital is a post-war phenomenon in the business world mainly developed as a sideline

activity of the rich in USA. The concept, thus, originated in USA in 1950s when the capital

magnets like Rockfeller Group financed the new technology companies. The concept became

popular during 1960s and 1970s when several private enterprises started financing highly risky

and highly rewarding projects. To denote the risk and adventure and some element of

investment, the generic term Venture Capital was developed. The American Research and

Development was formed as the first venture organization which financed over 100 companies

and made profit over 35 times its investment. Since then venture capital has grown vastly in

USA, UK, Europe and Japan and has been an important contribution in the economic

development of these countries.

Of late, a new class of professional investors called venture capitalists has emerged whose

specialty is to combine risk capital with entrepreneurs management and to use advanced

technology to launch new products and companies in the market place. Undoubtedly, it is the

venture capitalists extraordinary skill and ability to assess and manage enormous risks andextort from them tremendous returns that has attracted more entrants. Innovative, hi-tech ideas

are necessarily risky. Venture capital provides long-term start-up costs to high risk and return

projects. Typically, these projects have high mortality rates and therefore are unattractive to risk

averse bankers and private sector companies.

Venture capitalist finances innovation and ideas, which have potential for high growth but are

unproven. This makes it a High risk, high returns investment. In addition to finance, venture

capitalists also provide value-added services and business and managerial support for realizing

the ventures net potential.


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VENTURE CAPITAL FIRMS IN INDIA

IDBI VENTURE CAPITAL FUND

FINANCIAL ASSISTANCE BETWEEN 5 LAKHS TO 2.5 CRORE

ASSIST WITH EQUITYOR LOAN PARTICIPATION

RATE OFINTEREST DURING DEVELOPMENT STAGE IS 9%

ONCE PRODUCTISLAUNCHED IN THE MARKET RATE OF INTEREST IS 17% PROVIDES ASSISTANCE TO NON CONVENTINAL ENERGY PLANTS,

COMPUTER SOFTWARE COMPANIES, CHEMICAL PLANTS,

BIOTECHNOLOGY.

GUJARAT VENTURE FINANCE LIMITED

FIRST STATE LEVEL FINANCE COMPANY SINCE 1990

FINANCIAL SUPPORT BETWEEN 25 LAKH TO 2 CRORE

FINANCES THROUGH EQUITY PARTICIPATION

PROVIDES FINANCIAL ASSISTANCE TO FOOD PROCESSING INDUSTRIESAND SURGICAL INSTRUMENT COMPANIES


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SBI FUND

SUBSIDIARY OF SBI

PROVIDES FINANCIAL ASSISTANCE TO TECHNICAL ENTREPRENEURS ANDEXPORT BUSINESS

FINANCES THROUGH DIRECT SUBSCRIPTION OF SHARES ORUNDERWRITING OF SHARES

DIRECT SUBSCRIPTION WITH 49% CAPITAL

CANARA BANK VENTURE CAPITAL FUND

SUBSIDIARY OF CANARA BANK

PROVIDES FINANCIAL ASSISTANCE UPTO 10 CRORES

PROVIDES FINANCIAL ASSISTANCE TO CHEMICAL PLANTS ANDMACHINERIES


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TECHNOLOGY DEVELOPMENT AND INFORMATION COMPANY OF INDIA LTD

ESTABLISHED IN 1988

JOINT VENTURE OF ICICI AND UTI

PROVIDES FINANCIAL ASSISTANCE TO PROFESSINAL TECHNOCRATS ANDSMALL AND MEDIUM INDUSTRIES

FINANCES THROUGH CONDITIONAL LOAN SYSTEM AND EQUITYPARTICIPATION


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CHAPTER 6 -CREDIT RATING AGENCIES

INTRODUCTION TO CREDIT RATING

A credit rating is a grade that is attributed to a person, an institution or a state in order to measure

their ability to repay their debt at a specific point in time. This grade can improve or deteriorate

depending on the financial health of the borrower. Because credit rating is a way to assess the

riskiness of a borrower, it affects several factors like the minimum interest rate lenders will

demand.

Credit ratings are determined bycredit ratings agencies.The credit rating represents the credit

rating agency's evaluation of qualitative and quantitative information for a company or

government; including non-public information obtained by the credit rating agencies analysts.

A poor credit rating indicates a credit rating agency's opinion that the company or government

has a high risk ofdefaulting,based on the agency's analysis of the entity's history and analysis of

long term economic prospects.

Credit ratings for borrowers are based on substantial due diligence conducted by the rating

agencies. While a borrower will strive to have the highest possible credit rating since it has a

major impact on interest rates charged by lenders, the rating agencies must take a balanced and

objective view of the borrowers financial situation and capacity to service/repay the debt.

Credit Rating is an alphabetical or alphanumerical representation of the credit worthiness of the

individual, business or instrument of a business. However Ratings merely express an opinion on

the credibility of the entity and cannot be considered to be a recommendation. The evaluation of

the credit worthiness of the anything is based on several premises, most important of them being:

Ability to pay

Willingness topay
http://en.wikipedia.org/wiki/Credit_rating_agencyhttp://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Credit_rating_agency


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STEPS INVOLVED IN CREDIT RATING PROCESS

Receipt of the request:

The rating process begins, with the receipt of formal request for rating from a company desirous

of having its issue obligations under proposed instrument rated by credit rating agencies. An

agreement is entered into between the rating agency and the issuer company.

Assignment to analytical team:

On receipt of the above request, the CRA assigns the job to an analytical team. The team usually

comprises of two members/analysts who have expertise in the relevant business area and are

responsible for carrying out the rating assignments.

Obtaining information:

The analytical team obtains the requisite information from the client company. Issuers are

usually provided a list of information requirements and broad framework for discussions. These

requirements are derived from the experience of the issuers business and broadly confirms to all

the aspects which have a bearing on the rating. The analytical team analyses the information

relating to its financial statements, cash flow projections and other relevant information.

Plant visits and meeting with management:

To obtain classification and better understanding of the clientsoperations, the team visits and

interacts with the companysexecutives. Plants visits facilitate understanding of the production

process, assess the state of equipment and main facilities, evaluate the quality of technical

personnel and form an opinion on the key variables that influence level, quality and cost of

production.

A direct dialogue is maintained with the issuer company as this enables the CRAs to incorporate

non-public information in a rating decision and also enables the rating to be forward looking.

The topics discussed during the management meeting are wide ranging including competitive

position, strategies, financial policies, historical performance, risk profile and strategies in

addition to reviewing financial data.


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Presentation of findings:

After completing the analysis, the findings are discussed at length in the Internal Committee,

comprising senior analysts of the credit rating agency. All the issue having a bearing on rating is

identified. An opinion on the rating is also formed. The findings of the team are finally presented

to Rating Committee.

Rating committee meeting:

This is the final authority for assigning ratings. The rating committee meeting is the only aspect

of the process in which the issuer does not participate directly. The rating is arrived at after

composite assessment of all the factors concerning the issuer, with the key issues getting greater

attention.

Communication of decision:

The assigned rating grade is communicated finally to the issuer along with reasons or rationale

supporting the rating. The ratings which are not accepted are either rejected or reviewed in the

light of additional facts provided by the issuer. The rejected ratings are not disclosed and

complete confidentiality is maintained.

Dissemination to the public:Once the issuer accepts the rating, the credit rating agencies disseminate it through printed

reports to the public.

Monitoring for possible change:

Once the company has decided to use the rating, CRAs are obliged to monitor the accepted

ratings over the life of the instrument. The CRA constantly monitors all ratings with reference to

new political, economic and financial developments and industry trends. All this information is

reviewed regularly to find companies for major rating changes. Any changes in the rating are

made public through published reports by CRAs.


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LIMITATIONS OF CREDIT RATING AGENCIES

Limitations of Credit Rating are as follows:

(1) Biased rating and misrepresentations:

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying

out detailed analysis of the company, should have no links with the company or the persons

interested in the company so that the reports impartial and judicious recommendations for rating

committee.

The companies having lower grade rating do not advertise or use the rating while raising funds

from the public. In such cases the investor cannot get information about the riskiness of

instrument and hence is at loss.

(2) Static study:

Rating is done on the present and the past historic data of the company and this is only a static

study. Prediction of the companys health through rating is momentary and anything can happen

after assignment of rating symbols to the company.

Dependence for future results on the rating, therefore defeats the very purpose of risk

indicativeness of rating. Many changes take place in economic environment, political situation,

government policy framework which directly affects the working of a company.

(3) Concealment of material information:

Rating Company might conceal material information from the investigating team of the credit

rating company. In such cases quality of rating suffers and renders the rating unreliable.

(4) Rating is no guarantee for soundness of company:

Rating is done for a particular instrument to assess the credit risk but it should not be construed

as a certificate for the matching quality of the company or its management. Independent views

should be formed by the user public in general of the rating symbol.


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CREDIT RATING AGENCIES IN INDIA

ICRA (INFORMATION AND CREDIT RATING AGENCY OF INDIA)

ICRA ltd was incorporated in 1991 as an independent and professional company. It is leading

provider of investment information and credit rating services of India. ICRAS major

shareholders include Moodys investor services and leading Indian financial institutions and

banks. With growth and globalization of Indian financial markets leading to an exponential

surge in demand for professional credit risk analysis, ICRA has been proactive in widening its

service offerings, executing assignments including credit ratings, equity grading, specialized

performance gradings and mandated studies spanning diverse industrial sectors.

CRISIL

CRISIL (CREDIT RATING INFORMATION SERVICES OF INDIA LTD) was the first credit

rating agency floated on 1stJanuary, 1988. It was started jointly by ICICI and UTI with an equity

capital of rs.4 crores. Each of them holds 18% of the capital. The other promoters are Asian

Development Bank(15%), LIC,GIC and SBI(5%), HDFC(6.2%), nine public sector and private

sector banks(19.25%) and 10 foreign banks.

CARE

CARE was promoted in 1993 jointly with investment companies, banks and finance companies.

Services offered by care are credit rating, information service equity research, rating of parallel

market of LPG and kerosene.

DCR

Duff and Phelps credit rating agency has played an important role in rating Indias foreign

exchange debt obligations. Duff and Phelps credit rating India rated foreign exchange debt

obligations of India as BBB-. Such ratings are important for Indian economy and credibility of

government.


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CONCLUSION

Financial services are backbone of financial system of any economy. Financial services play an

important role in orderly growth and development of country like India. Financial services assist

in sources of funds, funding, advisory and procedural assistance in deployment of funds.

Financial services deal with management of funds.

Financial services are increasingly important in todays complex economy where financial

services are not only provider of finance but also departmental store of finance.


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BIBLIOGRAPHY

FINANCIAL SERVICESSHRADHA BHOMEFINANCIAL SERVICESM.Y.KHANMANAGEMENT OF FINANCIAL SERICESB.S.BHATIA

WEBLIOGRAPHY

SEARCH ENGINES: WWW.GOOGLE.CO.IN

WWW.YAHOO.IN

INVESTOPEDIA.COM

WISE GEEK.COM

NSE INDIA.COM

BSE INDIA.COM

RBI.ORG.IN

MONEY CONTROL.COM
http://www.google.co.in/http://www.yahoo.in/http://www.yahoo.in/http://www.google.co.in/

financial services full final

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