DRIVE SPRING 2014

PROGRAM
MBA SEM -4
SUBJECT CODE &
NAME
MF0017 & MERCHANT BANKING AND FINANCIAL SERVICES
NAME SHIVENDRA SINGH
ROLLNO. 1208005653




ASSIGNMENT













1-Explain the concept of book building and methods or guidelines of book building with 75 and 100
% of book building.

Book building is the process through which the prices of IPOs are obtained through the demand of market.
Through the mechanism of book building, companies can raise capital from the general public by offering
Initial Public Offers (IPOs) as well as by issuing Follow-on Public Offers (FPOs). In the process of book
building, the investors send their bids at the price which seems reasonable within a price range. The prices
quoted by both small investors and big investors are considered to identify the right price of security. There
is a closing date for the bid after which they are evaluated. The price thus obtained is the outcome of price
generated by the demand of public issue.

Methods and Guidelines for Book Building:

75 per cent book building:

A company is allowed 75 per cent book building of issue of capital to public by giving an offer in a
prospectus if it follows the following:
The Company must be eligible to issue capital to the public.
The Issuer Company can reserve book building for firm allotment as an option.
The issue of securities through book-building process shall be separately identified/ indicated as
placement portion category, in the prospectus.
A minimum limit of 25 per cent must be mentioned for public issue in the prospectus of the company
as net offer to public.
There must be a provision of underwriting for the pubic issue.
The prospectus of the public offer must give all information except for the price of security and this
information is to be filed with SEBI.

100 per cent book building:

A company can also make a 100 per cent of net offer to the public through book- building process if the
issue size is 25 crore or above this amount. The reservation of allotment is fixed as specified by the SEBI
guidelines. The reservation is available for:

(a) Permanent employees of the issuer company and in the case of a new company the permanent
employees of the promoting companies;
(b) shareholders of the promoting companies in the case of a new company and shareholders of group
companies in case of an existing company either on a competitive basis or on a firm allotment
basis.



2- Issue management is one of the important functions of merchant bankers and lead bankers.
Explain the two types of activities pre issue obligation and post issue obligation. Also write on the
concept of Application Supported by Blocked Amount (ASBA)


Pre-issue obligations:

The pre-issue obligations are detailed below:

(a) The lead merchant banker shall exercise due diligence.

(b) The standard of due diligence shall be such that the merchant banker shall satisfy himself about all the
aspects of offering, authenticity and adequacy of disclosure in the offer documents.
(c) The liability of the merchant banker shall continue even after the completion of the issue process.
(d) The lead merchant banker shall pay a requisite fee in accordance with regulation 24A of Securities and
Exchange Board of India (Merchant Bankers) Rules and Regulations, 1992, along with draft offer
documents filed with the Board.

Post-issue obligations

(a) Post-issue monitoring reports:

These reports shall be submitted within three working days from the due dates. The due date for submitting
post-issue monitoring report in the case of public issues by listed and unlisted companies:

Three-day monitoring report in the case of issue through book building route, for book built
portion: The due date of the report shall be the third day from the date of allocation in the book built
portion or one day prior to the opening of the fixed price portion whichever is earlier .
Three-day monitoring report in other cases, including fixed price portion of book built issue: The due
date for the report shall be the third day from the date of closure of the issue.
Final post-issue monitoring report for all issues: The due date for this report shall be the third day from
the date of listing or seventy-eight days from the date of closure of the subscription of the issue, whichever
is earlier.

(b) Co-ordination with intermediaries:

The post-issue lead merchant banker shall maintain close coordination with the registrars to the issue and
arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of
the issue to monitor the flow of applications from collecting bank branches and /or Self-Certified Syndicate
Banks, processing of the applications including application form for Applications.

(c) Underwriters:

If the issue is proposed to be closed at the earliest closing date, the lead merchant banker shall satisfy
himself that the issue is fully subscribed before announcing closure of the issue.


(d) Bankers to an issue:

The post-issue lead merchant banker shall ensure that money received pursuant to the issue and kept in a
separate bank (i.e. bankers to an issue), as per the provisions of section 73(3) of the Companies Act, 1956,
is released by the said bank only after the listing permission under the said section has been obtained from
all the stock exchanges where the securities were proposed to be listed as per the offer document.

(e) Post-issue advertisements:

Post-issue lead merchant banker shall ensure that in all issues, advertisement giving details relating to
oversubscription, basis of allotment, number, value and percentage of all applications released within ten
days from the date of completion of the various activities at least in an English national daily with wide
circulation, one Hindi national paper and a regional language daily circulated at the place where the
registered office of the issuer company is situated.


(f) Basis of allotment:

In a public issue of securities, the executive director/ managing director of the designated stock exchange
along with the post- issue lead merchant banker and the registrars to the issue shall be responsible to ensure
that the basis of allotment is finalized in a fair and proper manner.

(g) Proportionate allotment procedure:

Allotment shall be on proportionate basis within the specified categories, rounded off to the nearest integer
subject to a minimum allotment being equal to the minimum application size as fixed and disclosed by the
issuer.


Application Supported by Blocked Amount (ASBA):

Application Supported by Blocked Amount (ASBA) is an application containing an authorization to block
the application money in the bank account, for subscribing to an issue. If an investor is applying through
ASBA, his application money shall be debited from the bank account only if his/her application is selected
for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.

3- Write short notes on:

(a)-Foreign Direct Investment (FDI) and its role

Foreign Direct Investment (FDI) is an integral part of an open and effective international economic system
and a major catalyst to development. According to the International Monetary Fund (IMF) and
Organization for Economic Co-operation and Development (OECD) definitions, direct investment reflects
the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise
that is resident in another economy the direct investment enterprise).Direct investment involves both the
initial transaction establishing the relationship between the investor and the enterprise.

Role of foreign investment

FDI plays a vital role in the development of a countrys economy. Some of the essential benefits are as
follows:


1. Availability of scarce factors of production:

FDI brings in various factors of production that are found short in a particular country. In this manner,
FDI facilitates the pace of economic development.

2. Promotion of economic ties:

Presence of foreign firms generates demands in a particular country. This in turn leads to employment of
labour force to meet the demand and supply. Quality goods get manufactured and are made available at
competitive prices due to the presence of a large number of enterprises.

3. Government budget is strengthened:

Presence of foreign firms in a country implies the payment of income tax and import tariffs to the
countrys exchequer. Also, these foreign firms provide investment in infrastructure activities, thus, easing
the burden on the government in power.

4. Foreign investors help to develop a support base for quick industrialization.





(b)- Foreign Currency Convertible Bonds (FCCB)

Foreign Currency Convertible Bond (FCCB) is a type of convertible bond that is issued in a currency
different than the issuers domestic currency. It means that bonds issued under FCCB are subscribed by a
non-resident in foreign currency .It helps companies to raise money in the form of foreign currency by
issuing FCCB bonds. The maximum tenure of the bond is five years. A convertible bond is a mix between
a debt and equity instrument. A convertible bond is, in fact, a quasi-debt instrument, which can be
converted into equity shares at the choice of investors either immediately after issue, or on maturity, or
during a set period, at a predetermined strike rate or a conversion price. It acts like a bond by making
regular interest and principal payments. These bonds also give the bondholder an option to convert the
bond into shares, either in whole or in parts. The investor makes a significant gain if the conversion price is
higher than the traded price and suffers a loss if the traded price is higher than the conversion price.

4- Depository helps in the transfer of securities from one investor to another in an electronic form.
Write the differences between Bank and Depository. Explain the functions performed by Depository.





Bank vs. Depository


Bank Depository
1. Holds funds in an account 1. Holds securities in an account
2. Transfers funds between accounts on the
instructions of the account holder
2. Transfers securities between accounts
on the instructions of the beneficiary
owner account holder.
3. Renders services like safe keeping of the
money (funds) of customers in book
entry form.
3. Renders services like safe keeping of
securities (shares, bonds, debentures etc.)
of the customers in book entry form.
4. A bank needs written consent of the
customer (like a cheque) for debiting his
account.
4. A depository needs written consent
(debit instruction slip) of the account
holder for debiting his account.


A depository functions like a bank as banks deal with the funds of the clients and depository deals with the
holding of the security accounts. Both maintain their respective accounts in obedience with the prevailing
rules and by-laws.
Details of securities eligible for dematerialization and securities dematerialized
Details of securities rematerialized
All records of transaction related to transfer of securities, i.e., names of transferor, transferee, and the
schedules of transfer of securities.
Details of beneficial owners and day-to-day record of securities held by beneficial owners
Details of depository participants


Functions Performed by a Depository

Several functions are performed by a depository. Some of them are mentioned below:
1. Dematerialization: The main function of a depository is to provide the facility of
dematerialization of securities and elimination of physical securities in the market. The
dematerialization of securities is necessary to increase transparency in the working of stock
exchanges and to reduce several types of risk associated with paper form of securities.
2. Account opening/modification/closure: An investor cannot deal with a depository directly. He has
to deal with the depository through its authorized agents known as depositary participants who are
registered with a depository. Opening an account with a depository participant is like opening an
account in a bank.
3. Account transfer: The depository records all the transactions resulting due to various settlements of
trades between various beneficial owners.
4. Transfer and registration: The depositories play a significant role in speeding up the transfer as the
ownership is registered with the depository and the transfer of securities takes place by a simple entry
in the books of depositories .Clearing system: The depositories and clearing system is electronically
linked as actual delivery of the securities to the clearing system from the selling brokers and delivery
of securities from the clearing system to the buying broker is done by the depository.

5- Every investor has his own risk perceptions and objectives of investment. Write about Mutual
funds also write down about the benefits and disadvantages of Mutual funds which is very essential
for all the investors to know.

A mutual fund is an investment company which pools together the funds of investors having a common
objective. The funds collected under one common objective are invested in various investment avenues
(equity, bond, preference shares, real estate, gold, off shore funds etc.) and managed by professional fund
managers. The whole investment in a mutual fund is divided into various units and each investor is known
as a unit holder. The income generated from a fund is distributed among its unit holders after meeting the
fund management expenses and in consideration with the objectives of the schemes under the rules and
regulations set by the regulatory body.

Benefits of Investing in Mutual Funds

Following are some of benefits investors get.


Every mutual fund scheme invests in a good number of investment securities diversified within and
among the industrial segments which gives the benefits of reduced risk to the investors.
Mutual fund schemes are managed by professional managers which results in higher returns on these
schemes.
Most of the mutual fund schemes are listed on stock exchanges, therefore, these schemes provide
adequate liquidity to the investors depending on the structure of such scheme
The investors can get tax advantage in two ways. One by buying an ELSS the investors can save tax as
his taxable incomes get reduced.
By simply buying a mutual fund scheme the investors funds are invested in various securities of
different companies because the mutual fund pools together the small savings of large number of
investors and then these funds are collectively invested in stock market products.

Disadvantages of Investing in Mutual Funds

Disadvantages of investing in mutual funds are mentioned below:

Mutual funds make huge payment to the AMC for the management of fund.
The mutual funds charge money from investors whenever they buy and sell the units of mutual fund,
known as entry load and exit load.
The individual investors tax liability is not considered by fund managers.
Various evidences are available when the mutual funds have shown poor performance while other
avenues are giving better results
There is no provision or charge against the non- performance of a fund leading to reduction in the
total assets of the fund.

6- Rating methodology is used by the major Indian credit rating agencies. Explain on the main
factors that are analyzed in credit rating agencies and also on the limitations on the limitations of
credit rating.

The following are the main factors that are analyzed in detail by the credit rating agencies:

1. Business risk analysis

Business risk analysis focuses on analyzing the industry hazards, market position of the company,
operating competence and legal position of the company. The industry risk consideration various factors
like strength of the industry prospect, nature and basis of competition, demand and supply position,
structure of industry, pattern of business cycle etc.

2. Financial analysis:

Financial analysis aims at determining the financial strength of the issuer company through ratio analysis,
cash flow analysis and study of the existing capital structure. The analytical framework involves the
analysis of business risk, technology risk, operational risk, industry risk, market risk, financial risk and
management risk.




3. Management evaluation:

A companys performance is largely influenced by the aims and objectives of the management, its plans
and policies, ability to prevail over adverse conditions, employees experience and skills, planning and
control system among others. The managements strong points and weak points are evaluated for rating a
debt instrument.


4. Geographical analysis:

Geographical analysis facilitates in ascertaining the vocational advantages enjoyed by the issuer company.
An issuer company whose business covers a large geographical region avail the advantage of
diversification and as a result, gets an improved credit rating.

5. Regulatory and competitive environment:

Credit rating agencies assess the composition and regulatory structure of the financial system in which it
operates. CRAs have to assess the bearing of regulation/ deregulation on the issuer company, while
allotting rating symbols.

6. Fundamental analysis:

Fundamental analysis includes an analysis of liquidity management, profitability and financial position,
interest and tax rates sensitivity of the company. This includes an analysis of liquidity management,
profitability and financial position, interest and tax rates sensitivity of the company. Fundamental analysis
is undertaken for rating debt instruments of financial institutions, banks and non-banking finance
companies.

Limitations of Credit rating:

Not a recommendation to buy, hold or sell any shares, bonds, debentures or other instruments issued
by the rated entity, or derivatives thereof. A rating is one of the many inputs that is used by investors to
make an investment decision.

Not intended to measure many other factors that debt investors must consider in relation to risk - such
as yield offered, liquidity risk, pre-payment risk, interest rate risk, taxation aspects, risk of secondary
market loss, and exchange loss risk among others.

Not a general-purpose credit or performance evaluation of the rated entity, unless otherwise specified.
The rating is usually specific to the instrument and is not the rating of the issuer.

Not an opinion on associate, affiliate or group companies of the rated entity, or on promoters, directors
or officers of the rated entity.

Not a statutory or non-statutory audit of the rated entity.

Not an indication of compliance or otherwise with legal or statutory requirements.