E V O L U T I O N O F   F I N A N C I A L   S E R V I C E S I N   I N D I A

The financial services industry in India is in the process of attaining full bloom. To reach the

present position, it has passed through a number of stages as mentioned below:

1. The Stage of Infancy

This existed between 1960 and 1980 and covered in its gamut merchant banking, insurance and

leasing services. Merchant Banking Services were unknown until the early 1960s. The policy

makers and researchers had lack of clarity about the term “merchant bankers”. Some one defined

them as institutions which were acting; neither as merchants nor as bankers. However the term

was used as an umbrella function, providing a wide range of services, starting from project

appraisal to arranging funds from bankers. The merchant bankers are expected to identify

projects, prepare feasibility reports, develop detailed project reports, and in doing so conduct

marketing, managerial, financial, and technical analyses. Having done this, they are approached

to garner project finance, and in order to do this resolve the problem’s of capital structuring.

They are asked to act as a bridge between the capital market and the fund-seeking institutions.

They underwrite the issues and become subject to developments in case such issues are not fully

subscribed. They assist the enterprises in getting listed on the stock exchanges. They offer legal

advice on registration of companies and removing legal tangles. They provide advice and help in

mergers and acquisitions. They give technical advice on leveraged - buyouts and takeovers.

Recently they have added the syndication activity in their portfolio, wherein they form

a syndicate or become a part of it to raise project finance. They arrange working capital loans

and manage the risk element present in the form of general risk which is covered by

the insurance policies of the General Insurance Company. Investment companies such as the

Unit Trust of India, the life insurance business initiated by the Life Insurance Corporation of

India, and the general insurance business, also made their mark in the first stage of financial

services. During this period, the Life Insurance Corporation of India has grown as a public

monopoly. Priorto its setting up, the private sector was operating the life insurance business. The

general insurance business was nationalised in the early 1970s. A holding company was set up

with four subsidiaries to handle the general insurance business in the public sector. Suggestions

were given very frequently to privatise the insurance business, as in no way could the insurance

business be considered as a national monopoly. Leasing made its mark in the closing years of the

1970s. Initially such companies were engaged in equipment lease financing. Later, they

undertook leasing operations of different kinds, including financial, operating and wet leasing.

During this period the number of leasing firms has shot up to a high of 400. The reorganisation

of such firms due to their non-viability later led to a contraction in their numbers.

2. Modern Financial Services

Financial services have entered the second rung during the later part of the 1980s.Over the

counter services, share transfers, pledging of shares, mutual funds, factoring, discounting,

venture capital, and credit rating, constitute some of the modern financial services. In the West,

these services emerged on the scene about100 years back. The mutual fund business is the major

provider of funds to industry anywhere in the developed countries. The mutual funds there have

been innovative in terms of schemes. They have been giving stable rate of return. Their asset and

liability management is transparent. The small investor is secure in their hands. Their business

policies are such that they create value for their investors. Investors are not victimised by shifts

in valuation policies, and efforts are made to harmonise the net asset valuation. The mutual funds

have their own code of conduct. Credit rating is another important financial service which

made its mark in India in themid-1980s. Credit rating boosts investor’ confidence in capital

market operations and prevents fly -by-night companies from making forays in the capital

market. There was one credit rating company initially and we have ended up with eight  finally.

In terms of spread of the credit rating function, initially only debt instruments issues were

covered. However later, instruments such as commercial papers and fixed deposits were brought

under the purview of credit rating. Incidentally, there is a sovereign credit rating assigned by

credit rating firms for the country. The Discount and Finance House of India Limited and

a number of factoring institutions, such as State Bank of India Factors and Can bank Factors Ltd.

Venture capital funds made their appearance in the late 1980s, Most of these firms have been

operating in the public sector.

3. The Third Flush

The third flush in financial services includes the setting up of new institutions, and paving the

way innovating new instruments and also their flotation. The setting up of depositories has

brought the India financial services industry in line with the global financial services industry. It

has promoted the concept of paperless trading and resulted into dematerialisation of shares and

bonds. The stock-lending scheme approved by the Central Government in 1997-98 budget and

the setting up of a separate corporation to deal with the trading of the “Gilts” are innovative

measures. The steps initiated to popularise book building in order to help both the investors and

fund users. The online trading interface by the Bombay Stock Exchange, the Delhi Stock

Exchange, and computerisation of the National Stock Exchange, is acting as the fulcrum for the

development of financial services arid is another major advancement in the field of financial

services. This has given a fillip to paperless trading, save the investors from the onslaught of

jobbers and brokers, and reduce tax evasion. The guidelines from the Securities and

Exchange Board of India in relation to the capital adequacy ratio for the merchant bankers and

their categorisation into different groups is a major advancement. This will ensure investor

protection and create a differentiation in the market place. The creation of the Securities and

Exchange Board of India itself can be hailed as a path-breaking development in terms of

regulation, growth, and development of financial services. The ongoing efforts to revamp the

Companies Act, Income-Tax Act, etc. would also lead to the deliverance of effective financial

services. The guidelines about permitting foreign financial institutions to operate in the Indian

capital market will do a two-way good to the country in terms of enabling the foreign investors

to plug into the Indian capital market, and the Indian investors and financial institutions to study

the modus operandi of such firms. Public enterprise disinvestment are sure to prop up the state-

of-art in the realm of financial services. It would provide a fillip to the presence of foreign

financial firms in India, as well as result into creating pressure on the Indian financial firms to

master the disinvestment business. The financial services firms would have to gain expertise in

valuation, financial and legal restructuring, and taking the public sector firms to the commercial

and capital markets. During this period financial services firms scouted for funds abroad to

finance the Indian corporate sector. They have approached the European capital markets, the

most prominent of which belong to the UK and Luxembourg. These portfolio investments have

flowed to India through the GDR route. It requires an understanding of raising funds abroad and

also working together with world level financial services institutions, such as Lehman Brothers,

Arthur Anderson, and Glodman Sachs, to mention a few. With the passage of the

Insurance Regulatory and Development Authority (IRDA)Act, 1999, the Insurance Regulatory

and Development Authority was set up with statutory powers to function as the regulator for the

insurance sector in India. This act has opened the doors for private players including

foreign equity participation upto a prescribed limit of paid up capital. It has come out with

regulations on various aspects of insurance business such as licensing of agents, solvency margin

for insurers, accounting norms, investment norms and registration of Indian Insurance

Companies. RBI allowed banks to enter into the insurance business by issuing a notification

specifying insurance as a permissible form of business under section 6(1) (o) of the Banking

Regulation Act, 1949. Thus providing banks another avenue for generating fee based income.

REGULATION OF MUTUAL FUND

Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India.

SEBI is also apex regulator of capital markets. Issuance and trading of capital market

instruments and the regulation of capital market intermediaries is under the purview of SEBI.

Apart from SEBI, mutual funds follow the regulations of other regulators in limited manner.

1. RBI - RBI acts as regulator of sponsors of bank-sponsored mutual funds, especially in

case of funds offering guaranteed/assured returns. No mutual fund is allowed to bring

out a guaranteed returns scheme without taking approval from RBI

2. Companies Act, 1956 – Asset Management Company and Trustee Company will be

subject to the provisions of the Companies Act, 1956.

3. Stock Exchange – Closed-end funds might list their units on a stock exchange. In such

a case, the listings are subject to the listing regulation of stock exchanges. Mutual

funds have to sign the listing agreement and abide by its provisions, which primarily

deal with periodic notifications and disclosure of information that may impact the

trading of listed units.

4. Indian Trusts Act, 1882 – Recall that mutual funds are formed and registered as a

public trusts under the Indian trusts Act, 1882. Hence, they have to follow the

provisions of the Indian Trusts Act, 1882.

5. Ministry of Finance (MoF) – The finance ministry is the supervisor of both the RBI

and SEBI. The MoF is also the appellate authority under SEBI regulations. Aggrieved

parties can make appeals to the MoF on the SEBI rulings relating to mutual funds.

REGULATION OF MUTUAL FUNDS IN INDIA

Immediately after its constitution , SEBI issued the mutual fund regulations in 1993 .

however ,with the growth of mutual funds , it was imperative that they should follow uniform

policies in respect of NAV , valuation of investment , accounting practices ,etc . SEBI prepared a

‘MUTUAL FUND 2000 REPORT’ and on the basis of this report , it prepared more stringent

and comprehensive regulations in 1996 , known as SEBI regulations ,1996. since then , there

have been number of amendments in regulations ,1996. besides SEBI has also issued several

guidelines in respect of working of mutual fund .some of the provisions of the SEBI

regulations ,1996 have been summarized hereunder:

1. The sponsor who wants to establish a mutual fund should have a sound track record and a

general reputation of fairness and integrity i.e. , must be in business of financial services for 5

years and must have contributed at least 40% of the net worth of the asset management company.

2. A mutual fund is constituted in the form of trust .The trust shall incorporate an asset

management company .the trustees shall ensure that the AMC has been managing the schemes

independently of other activities.

3. Two –third of trustees shall be independent persons and not be associated with sponsor.

4. The trustees shall ensure that activities of the AMC are in accordance with the regulation.

5. The trust shall periodically review the investors complaints received and shall be redressed by

the AMC.

6. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes.

The sponsor or its associate shall not have 50% or more 14. Detailed guidelines are prescribed

for valuation of investment for this purpose, the investment are classified into traded, thinly

traded and non–traded investment.

7. Advertisement in respect of every scheme shall be in conformity with with the advertisement

code.

8. Every close –ended scheme shall be listed at a recognized stock exchange, or there will be

repurchase facility.

9. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed by

the sponsor or the AMC.

10. An open-ended scheme shall be wound up after the expiration of the fixed period or in case,

75% of the unit holders decide so, after repaying the amount due to the unit holders.

11. The unquoted debt instruments shall not exceed 10% in case of growth funds and 40%in case

of income funds.

12. Funds under the same AMC should not lent or invest from one scheme to another unless the

funds are transferred at prevailing market price.

13. Mutual Funds are permitted to participate in the securities lending scheme of SEBI under

certain guidelines.

14. Detailed guidelines are prescribed for valuation of investment for this purpose, the

investment are classified into traded, thinly traded and non–traded investment.

15. Every close –ended scheme shall be listed at a recognized stock exchange.

CONSUMER FINANCE

The division of retail banking that deals with lending money to consumers. This includes a wide

variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used

to refer to loans taken out at either the prime rate or the subprime rate.

Consumer finance company

The division of retail banking that deals with lending money to consumers. This includes a wide

variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used

to refer to loans taken out at either the prime rate or the subprime rate.

Consumer finance in brief

Consumer finance has to do with the lending process that occurs between the consumer and a

lender. In some instances, the lender may be a bank or financial institution. At other times, the

lender may be a business that offers in house credit in exchange for the business of the consumer.

Consumer finance can include just about any type of lending activity that results in the extension

of credit to a consumer.

Most people have received financial assistance in obtaining desirable products through the use of

consumer finance methods. In retail banking, the lender extends secured and unsecured loans to

consumers who wish to purchase automobiles, homes, or engage in other activities that require

substantial financing, such as remodeling a home. Generally, consumer lending of this type

caries some degree of competition, since the consumer with a solid credit rating can often shop

around and secure superior interest rates and terms for the loan agreement.

At the same time, not all forms of consumer finance are in the best interests of the consumer. In

many parts of the world, institutions are in the business of lending money even to consumers

with poor credit ratings, or who lack a reasonable ability to repay the borrowed funds. This can

take the form of credit card offers, loans with extremely high rates of interest included in the

finance structure of the loan, and other terms that will be difficult if not impossible for the

consumer to meet.

 

CONSUMER FINANCE

1. MEANING OF CONSUMERFINANCE

It refers to the raising of finance by individuals formeeting their personal expenditure or for

theacquisition of durable consumer goods and for thepurchase /creation of an assets.

Details about the Consumer Finance

T h i s   i s   d i r e c t l y   r e l a t e d   w i t h   t h e   m o n e y   l e n d i n g   t o   t h e   p e o p l e   o r  

t h e consumers . In Uni ted Sta tes i t refers to the branch that i s lending the

amount which is actually very low than the perfect credit. It is the part

of r e t a i l   b a n k i n g .   O n e   o f   t h e   b e s t   w a y s   t o  

Loans

• Indirect Finance

Loan shark is different than the consumer finance; it provides the high interest rate

on the loan which is higher than the other companies. This

c o n c e p t   i s   v e r y   w i s e   f o r   t h o s e w h o   a r e   n o t   i n v o l v e d   i n   t h e  

f i n a n c i a l m a r k e t s .   S o   t h i s   t h i n g   h a s   h e l p e d   m a n y   p e o p l e   i n   s u p p o r t i n g  

t h e i r businesses. Through consumer financing one can easily get the loans and can meet the

demands and the desires. There are many organizations working for the consumers to

gain stability in the financial matters. The consumer credit should be in a good state

and it is a very good point to

s e e   t h e   h i s t o r y   o f   t h e   c o n s u m e r   r e g a r d i n g   t h e   f i n a n c i a l  

m a t t e r s . C o n s u m e r   c r e d i t   c o u n s e l i n g   i s   v e r y   e s s e n t i a l   o n   t h e  

p a r t   o f t h e organization so that this thing improves to decrease the debt status

and

a l s o   i t   c a n   i n c r e a s e   t h e   f i n a n c i a l   s t a b i l i t y   t o   i t s   p e a k .   A C C C   i s  

t h e organization which is giving the knowledge about the consumer debt and offers the way

to the consumer to again cope the s tabi l i ty .

Advantages of consumer credit

Convenient

One advantage of consumer credit is the convenience it provides. With lightweight credit cards,

it is not always necessary to carry around a large wallet or purse filled with cash. You can

purchase items without carrying your checkbook everywhere. Credit cards are accepted in most

retail and grocery stores.

Emergencies

Many people live paycheck to paycheck. If the car breaks down or a child becomes ill, these

families could quickly find themselves in a financial crisis. One small emergency could ruin a

family's finances. With consumer credit, you can have the purchasing power that can see you

through these emergencies. Handled responsibly, credit cards can keep you from stress and

worry about how your family's financial needs will be met.

Large Purchases

Without consumer credit, large purchases would not be possible for many people. The ability to

pay cash for a car or other big-ticket items isn't available to everyone. Consumer credit allows a

family to afford the necessities and use the purchased item while paying for it. If the family car

breaks down, consumer credit allows you to replace it immediately instead of saving for years

and doing without the transportation you need.

Builds Credit

For young people, using a small amount of consumer credit helps to establish a good credit

rating. A good credit rating becomes important if you need to borrow money for a financial

emergency or large purchase. In some instances, a poor credit rating can also cost you a shot at a

job or apartment. A good credit rating helps you to stay out of financial trouble, and you can

build your credit by making small credit card purchases and paying the bill in full every month.

 

ROLE OF MERCHANT BANKER IN PRE ISSUE MANAGEMENT.

1. Documents to be submitted

I. MOU between merchant banker and issuer company.

ii. Due diligence certificate by lead merchant banker.

iii. Certificate signed by the company secretary or company accountantin case of listed companies

making further issue of capital.

iv.  A list of persons who constitute the promoters group and their individual shareholdings.

v. Draft prospectus in computer floppy in prescribed format.

vi. Ten copies of draft offer document.

vii. The issuer shall submit an undertaking to the Board within 24 hoursof the transaction.

 

2. Appointment of Intermediaries-

In case a public or rights issue ismanaged by more than one merchant banker, the rights obligationsand

responsibilities of each merchant banker shall be demarcated asspecified in Schedule II. Other intermediaries such

as advisor, bankersto the issue, registrar, underwriters etc. shall be appointed inconsultation with lead merchant

banker. 

 3. Underwriting

- Underwriting of public issue is not mandatory. However,if an issue is underwritten, the unsubscribed

portion has to purchased by the underwriters.

 4. Offer documents to be made public-

The draft offer document filed with the Board shall be made public for a period of 21 days from

thedate of filing the offer document. The lead merchant banker shall also fill the draft

offer document with the stock exchange where thesecurities are proposed to be listed and make it available

to the public.

 5. Appoinment of compliance officer-

An issuer company shall appointa compliance officer who have direct link with the Board with regard

tocompliance with various laws, rules, regulations and other directivesissued by the Board.

6. Mandatory Collection centres-

The minimum number of collectioncentres for issue of capital shall be (a) four metropolitan

citiessituated at Mumbai, Delhi, Calcutta and Chennai; (b) all such centreswhere the stock exchanges are located in

the region in which registered office of the company is situated.

7. Final offer document-

The lead manager shall certify that all amendments, suggestions or observation made by SEBI

have beencarried out. He has to furnish a new due diligence certificate. Final  prospectus is to be

submitted with Registrar of Companies and theoffer document with regional stock exchange. A

computer floppy of  final prospectus offer shall be submitted to SEBI.

 

8. Application forms-

 Application form must be accompanied by abridged  prospectus. Disclaimer clause of SEBI

should be printed in bold.Highlights and risk factor should be given same prominence. The

formshall contain provision for mentioning name and address of bank and account number of the

applicant.

 9. Minimum application amount-

 Minimum application money to be paid along with application shall not be less than 25% of

issue price. Application for shares or debentures should be for such a number thatthe total amount

payable is not less than Rs.2000.

 10. Listing of securities-

The securities offered to public shall be listed ina stock exchange. In case these are not listed, entire

application moneybecomes refundable.

 11. Period of subscription-

Subscription for public issues shall be keptopen atleast 3 working days and not more than 10

working days. In caseof an infrastructure company, it may be kept open for 21 working days.Rights issue

shall be kept open for atleast30 days and not more than 60days.

 12. Oversubscription-

The quantum of issue trough a rights or a publicissue, shall not exceed the amount specified in the prospectus of

offer,however an oversubscription to the extent of 10% of the net offer to public is permissible.

OBJECTIVES OF MERCHANT BANKING

Merchant bankers render their specialized assistance in achieving the main objectives

which are presented below:

I. To carry on the business of merchant banking, assist in the capital formation, manage advice,

underwrite, provide standby assistance, securities and all kinds of investments issued, to be

issued or guaranteed by any company, corporation, society, firm, trust person, government,

municipality, civil body, public authority established in India.

II. The main object of merchant banker is to create secondary market for billsand discount or re-

discount bills and acts as an acceptance house.

III. Merchant banker‟s another objective is to set up and p

rovide services for the venture capital technology funds.

IV. They also provide services to the finance housing schemes for the construction of houses and

buying of land.

V. They render the services like foreign exchange dealer, money exchange, and authorized dealer

and to buy and sell foreign exchange in all lawful ways incompliance with the relevant laws of

India.

VI. They will invest in buying and selling of transfers, hypothecate and deal with dispose of

shares, stocks, debentures, securities and properties of any other company.

CHARACTERISTIC OF MERCHANT BANKING:

High proportion of decision makers as a percentage of total staff.

Quick decision process.

High density of information.

Intense contact with the environment.

Loose organizational structure.

Concentration of short and medium term engagements.

Emphasis on fee and commission income.

Innovative instead of repetitive operations.

Sophisticated services on a national and international level.

Low rate of profit distribution.

High liquidity ratio.

 

REGULATORY FRAMEWORK FOR MERCHANT BANKERS

1. Operational Guidelines 2. Pre- Issue Obligations 3. Post – Issue Obligations 4. Guidelines

for Unlisted companies.

1. Operational Guidelines Submission of offer document Dispatch of issue material

Underwriting Compliance obligations A. association of resource personnel B. redressal of

investor grievances C. submission of post issue monitoring reports D. issue of no objection

certificate E. registration of merchant bankers F. reporting requirements G. impositions of

penalty points

2. Pre- Issue Obligations 1. Obligations 2. Documents to be submitted A. Memorandum of

Understanding B. Due Diligence Certificate C. Certificates Signed by Professionals D.

Undertaking E. List of Promoters’ Group 3. Appointment of Intermediaries 4. Underwriting 5.

Offer document to be made public 6. No complaints certificate 7. Mandatory collection Center

8.Authorised collection agents 9. Advertisement for rights post issue 10. Appointment of

compliance officer 11. Agreements with depositories

4. Post – Issue Obligations 1. post – Issue monitoring reports 2. Redressal of investor grievances

3. Coordinating with intermediaries 4. Stock – Investment 5. Underwriters 6. Bankers to an

Issue 7. Post- Issue Advertisement 8. Basis of Allotment 9. Reservation for small individual

investors 10. Other Responcibilities

5. Guidelines for Unlisted companies 1. Listing of Shares 2. Market Makers 3. Listing of pure

Debt/Convertible Instruments 4. Disclosures 5. Net Offer 6. Offer by IT Sector companies 7.

Reservations 8. Capital Structure 9. Firm Allotment and Reservations.

What is project appraisal ?

Project appraisal refers to the systematic and comprehensive process

of analysing the aspects of a project to determine if meets its

objectives. The aspects include financial, social, technical and

economic feasibility of the project. Project appraisal is important since

it reduces chances of project failures.

A project appraisal is an important stage in project management. The project sponsors look at

various aspects of the project to decide whether or not it should proceed. They consider factors

such as outcome, feasibility, use of resources, funding, management requirements, payback and

sustainability. In a situation where sponsors are considering a number of projects competing for

the same funds, the winning project must demonstrate that it delivers the best outcome for the

most effective use of resources.

Resources

Projects use scarce resources such as money, people, materials and time. Project appraisal

ensures that a project is using those resources effectively. According to consultant Kostas

Sillignakis, the decision on whether a project goes ahead or not is "a choice between alternative

ways of using resources."

Appraisal Model

The larger the project, the more complex the appraisal process. The European Investment Bank

has developed a model that ensures sponsors appraise all aspects of a project thoroughly. The

main elements of the model include: eligibility by meeting important criteria, such as

regeneration or environmental protection; investment cost in terms of cost justification;

economic viability in terms of payback period and cost effectiveness; and promoter's standing in

relation to financial robustness and management capability.

Benefits

The aim of a project is to deliver benefits. The appraisal team assesses the project to see whether

it will succeed in delivering outcomes that meet the original objectives. The UK's New Deal for

Communities program manages a range of projects aimed at regenerating areas of social or

economic deprivation. Their project appraisal considers factors such as value for money, piloting

new ideas, involving the local community in project development and delivering planned

outcomes.

Sustainability

Increasingly, sponsors look beyond the completion of the project to see whether it delivers

sustainable, long-term benefits. The ProVention Consortium Secretariat, which supports projects

in areas affected by natural disasters, puts sustainability as one the most important criteria in its

project appraisal.

Payback

Finance is an important consideration in project appraisal. The European Investment Bank

assesses the rate of return on the project, the phasing of expenditure and financial risk in terms of

possible cost variations. According to consultant Kostas Sillignakis, sponsors rank projects with

shorter payback periods higher than those with longer paybacks. This is based on the assumption

that a short project involves less financial risk and also allows the sponsor to reinvest funds in

other projects.