MERCHANT BANKING AND FINANCIAL SERVICES Indian Financial system consists of four parts: 1) Financial Institutions 2) Financial markets

3) Financial Instruments 4) Financial Services Financial Institutions They mobilize the savings and transfer it to deficit units. They are divided into regulatory, intermediaries, non- intermediaries and others. They deal only in financial assets like deposits, securities, etc. They collect fund from those units having savings. Financial Markets 1. This is the place from where savings are transferred from surplus units to deficit units. There are two segments of financial market. They are money market and capital market. Money market is concerned with short-term funds or claims. 2. Capital market deals with those financial assets, which have maturity period of more than a year. 3. Another classification could be primary and secondary markets. 4. Primary market deals with new issues. The secondary market deals with outstanding securities. 5. Primary markets by issuing new securities mobilise the savings directly. Secondary markets provide liquidity to the securities. Financial Instruments 1. The products, which are traded in a financial market, are financial assets or financial instruments. The requirement of lenders and borrowers are varied. 2. Therefore, there is a variety of securities in the financial markets. Financial assets represent a claim on the repayment of principal at a future date. Financial Services Financial services include the services offered by both types of companies- Asset Management Companies and Liability Management Companies FUNCTIONS OF FINANCIAL SERVICES Financial services firms not only help to raise the required funds but also assure the efficient deployment of funds.

1. They assist in deciding the financing mix. 2. They extend their service up to the stage of servicing of lenders. 3. They provide services like bill discounting, factoring of debtors, parking of short-term funds in the money market, e-commerce, Securitisation of debts, etc. in order to ensure an efficient management of funds. 4. Financial services firms provide some specialised services like credit rating, venture capital financing, lease financing, factoring, mutual funds, merchant banking, stock lending, depository, credit cards, housing finance, book building, etc. REGULATING AUTHORITIES There are 3 main regulatory authorities. They are: 1. 2. 3. The Structural Regulation, The Prudential Regulation, and The Investor Protection Regulation.

FEATURES OF FINANCIAL SERVICES 1. It is a customer-intensive industry. 2. Financial services are intangible in nature. 3. Production and supply of financial services must be performed simultaneously. 4. Marketing of financial service is people intensive. 5. Financial services firms should always be proactive in visualizing in advance what the market wants, or reactive to the needs and wants of customers. 6. They must always be changing to the tune of the market. PROBLEMS of Indian financial Services 1. Indian financial industry hardly finds suitable personnel to deal with financial services. 2. Expensive physical accommodation is another problem being faced by the financial services firms. 3. The financial services firms lack core competence. 4. They cannot review their performance without a benchmarking. 5. They fully depend on fee-based business. 6. Lack of proper appreciation of the advantages that could be derived by using the advances 7. In computer and telecommunication technology has constrained the growth of the industry.

Merchant Banking – Meaning “Merchant banking means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying, underwriting or subscribing to the securities underwriter, manager, consultant, advisor or rendering corporate advisory services in relation to such issue management” Merchant Banking- Definition “Merchant banks mostly provide advisory services, issue management, portfolio management and underwriting, which require less capital but generate more income (non interest income).” Services Rendered by Merchant Banker 1. Corporate Counseling 2. Project Counseling and Pre-investment Studies 3. Capital Restructuring 4. Credit Syndication and Project Finance 5. Issue Management and Underwriting 6. Portfolio Management 7. Non-resident Investment 8. Working Capital Finance 9. Acceptance Credit and Bill Discounting 10. Mergers, Amalgamations and Takeovers 11. Venture Capital Financing 12. Lease Financing 13. Foreign Currency Finance 14. Fixed Deposit Broking 15. Mutual Funds Floatation and Management REGISTRATION OF MERCHANT BANKER 1. The applicant should be a body corporate.

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The applicant should not carry on any business other than those connected with the securities market. The applicant should have necessary infrastructure like office space, equipment, manpower, etc. The applicant must have at least two employees with prior experience in merchant banking.

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5. Any associate company, group company, subsidiary or inter connected company of the applicant should not have been a registered merchant banker. 6. The applicant should not have been involved in any securities scam or proved guilty for any offence. 7. The applicant should have a minimum net worth of Rs. 5 crores FUNCTIONS OF A MERCHANT BANKER 1. Management of debt and equity offerings 2. Promotional activities 3. Placement and distribution 4. Corporate advisory services 5. Project advisory services 6. Loan syndication 7. Providing venture capital and mezzanine financing 8. Leasing Finance 9. Bought out deals 10. Non-resident Investment 11. Advisory services relating to mergers and acquisitions 12. Portfolio management ISSUE MANAGEMENT Issue management refers to management of securities offering of clients to the general public and existing shareholders on right basis. Issue managers are known as Merchant Banker or Lead managers. Type of Issues

In an IPO. etc. 4. Around 15-20% of the fund realised is spent on raising the same. Marketing of the Issue 1. The reputation and visibility of the company increases. Public Issue-Disadvantages 1. 2. The profit earned by the company should be shared with its investors in the form of dividends. The IPO provides avenues for funding future needs of the company. 3. Timing of the Issue Retail Distribution Reservation of the Issue . As an exit route for existing investors. It provides liquidity for the existing shares. It commands better valuation for the company. To raise funds for financing capital expenditure needs like expansion. Public Issue-Advantages 1. They are as follows: (a) Public Issue. Additional incentive for employees in the form of the company’s stocks. The company has to invest substantial management time and effort. 3. To finance increased working capital requirement. 4. 2.Issues are of three types. diversification. For debt financing. 5. 3. the company has to disclose results of operations and financial position to the public and the Securities and Exchange Board of India (SEBI). 2. (b) Right Issue. 2. 3. and (c) Private Placements. 4. Public Issue-Reasons for Going Public 1. This also helps to attract potential employees. An IPO is a costly affair.

 Private placement covers equity shares. they register themselves with SEBI. ISSUE MANAGER  Issue managers generally do issue management.  Merchant banker underwrites and invests in the issue lead managed by them. continue to hold and offer buy and sell quotes for the scrip's of the company after listing.  No prospectus is issued in private placement. . Advertising Campaign Post-issue Activities  Principles of Allotment  Formalities associated with Listing RIGHTS ISSUE Existing shareholders have pre-emptive right in taking part in the right issue.  A merchant banker is required to coordinate with a large number of institutions and agencies. It is the stipulation of SEBI. PRIVATE PLACEMENT  The direct sale of shares by a company to investors is called private placement.4.  They invest. preference shares and debentures. Roles of Issue Manager  Merchant banker floats the shares for and behalf of issuing company. capital gearing and financial planning for the company. His association with the company is not merely restricted to management of issue but continues throughout.  One of the important areas of issue management relates to capital structuring. Merchant banker acts as a master designer in performing these activities. In right issue.  Every merchant banker is expected to perform due diligence while managing a capital issue.  They are expected to interact and file offer documents with SEBI while managing issues. To be an issue manager. shares are offered to existing shareholders according to the proportion of their shareholding. It may be either right or public issue.

ensure proper care and exercise independent professional judgment. 3. which has come to his knowledge . CODE OF CONDUCT OF MERCHANT BANKERS A merchant banker shall not— (a) creation of false market. They have to revolve around SEBI. A new company set up by entrepreneurs without a track record will be permitted to issue capital to public only at par.  A merchant banker shall not make any statement or become privy to any act. CODE OF CONDUCT OF MERCHANT BANKERS  A merchant banker in the conduct of his business shall observe high standards of integrity and fairness in all his dealings with his clients and other merchant bankers. They file number of reports related to issues.  A merchant banker shall render at all times high standards of service. (b) price rigging or manipulation (c) passing of price sensitive information to brokers. whether oral or written.  Marketing of an issue is an essential component of issue management. 4. press or any other party any confidential information about his client. A new company set up by existing companies with a five-year track record of consistent profitability will be free to price its issue provided the participation of the promoting companies is not less than 50 per cent of the equity of the new company and the issue price is made applicable to all new investors uniformly. An existing listed company can raise fresh capita! by freely pricing further issue. to the client either about the qualification or the capability to render certain services or his achievements in regard to services rendered to other clients. 2. which is likely to be harmful to the interests of other merchant bankers. exercise due diligence. practice or unfair competition. An existing private/closely held company with a three-year track record of consistent profitability shall be permitted to freely price the issue. He puts him in the shoes of a dream merchant.  A merchant banker shall not make any exaggerated statement. PRICING OF PUBLIC ISSUES 1. (d) divulge to other clients. Merchant banker makes number of promises to the potential investors.

Category I Merchant Banker. bids to remain open for at least 5 days.A sum of Rs. only electronic bidding is permitted. 3. 2. . 1.(e) deal in securities of any client company without making disclosure to the Board. demand for the security is assessed and its price discovered. 2.5 lakhs to be paid annually for the first two years. investors can bid at any price. bidding demand is displayed at the end of everyday.000 to be paid annually for the first two years.2000. e-IPOS  A company proposing to issue capital to public through on-line system of the stock exchange has to comply with Section 55 to 68A of the Companies Act. REGISTRATION CHARGES 1. Book-Building  Book-building is a process of offering securities in which bids at various prices from investors through syndicate. Other Requirements of Book-building (a) (b) (c) (d) (e) (f) (g) issuer to provide indicative floor price and no ceiling price. members and based on bids. Category III Merchant Banker. 4. 5. Category II Merchant Banker. bids are submitted through syndicate members.A sum of Rs 1 lakh to be paid annually for the first two years.A sum of Rs.5 lakhs to be paid annually for the first two years. 1956 and SEBI (DIP) Guidelines.A sum of Rs. retail investors have option to bid at cut off price. Category IV Merchant Bankers. and (h) the lead manager analyses the demand generated and determines the issue price in consultation with the issuer. etc.

MUTUAL FUNDS  A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Mutual Funds  The following are some risks associated with investment in mutual funds:  Market Risk  Interest Rate Risk  Inflation Risk  Business Risk  Credit Risk  Political Risk  Liquidity Risk  Timing Risk Performance Measures of Mutual Funds The performance of a mutual fund.NAVT-1) + D1 + C1) / NAV T-1 . can be evaluated by using the beginning and the end period net asset values (NAV) as follows: 5) Others Rp= ((NAVt. in general. Types of Mutual Funds Schemes Based on Maturity Period: 1) Open End Scheme 2) Close End Scheme Based on Investment objective : 1) Growth 2) Income 3) Money Market 4) Gilt edged Special Schemes: 1) Tax Savings 2) Load 3) No-Load 4) Industry Specific 5) Sector Specific Risk vs.

The one period rate of return for a mutual fund (Rp) is defined as the change in net asset value (NAV) plus its cash disbursements (D) and capital gains disbursements (C). Rm is average market return during the given period.Rf) where. Stress free investment . The most important and widely used measures of performance are: 1. Rf is risk free rate of return and Bi is beta of the fund. Reduced Risk 2. Diversified investment 3.Rf)/Bi where. Net asset values of the fund are adjusted for bonus and rights. Si is standard deviation of the fund. 4. 2. Ri represents return on fund. Sharpe Measure Sharpe Index (Si) = (Ri . Eugene Fama Model Required return can be calculated as : Ri = Rf + Si / Sm (Rm . 3. Advantages of Mutual Funds 1. The Treynor Measure The Sharpe Measure Jenson Model Eugene Fama Model Treynor Measure Treynor’s Index (Ti) = (Ri . Sm is standard deviation of market returns.Rf) where. Jenson Model Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm .Rf)/Si where.

Tax benefits 10. Moderate Returns Mutual Fund Taxation  Tax provisions applying to fund investments and funds themselves in respect of various matters are listed below:  Capital Gains  Tax Deducted at Source (TDS)  Wealth Tax  Income from Units  Income Distribution Tax  Section 88 Growth of Mutual Funds There are several yardsticks available to measure the performance of a fund sector. Wide investment opportunities 7. (b) Number of Unit Schemes in Operation. Low investment and easy liquidity 9. Selection and timings of investment 6. Revolving type of investment 5.4. They are: (a) Asset Under Management (AUM). (c) Net Asset Value (d) Return and (e) Volume of Investment expressed in Rupee Value . Investment care 8.

or bargain option purchase price). Thus. service of anything of value.  Single Investor Lease and Leveraged Lease. a ship. It is a commercial arrangement where:  the lessee (customer or borrower) will select an asset (equipment.  Periods 99yrs or 999yrs . The consideration may be a price or a rent.  the lessee will pay a series of rentals or installments for the use of that asset. operating lease  An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner. to be rendered periodically by the transferee to the transferor.  Sale and Lease Back and Direct Lease. Finance lease  A finance lease or capital lease is a type of lease.) being leased. Conveyance-type lease  It is a very long tenure lease applicable to immovable properties. etc. or share of crops.LEASE FINANCE “A Lease is a transfer of a right to enjoy the property.  Domestic Lease and International Lease. for example.  the lessee has the option to acquire ownership of the asset (e. an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.g.” Classification of Lease  Finance Lease and Operating Lease. paying the last rental. vehicle. software).  the lessor (finance company) will purchase that asset. The rent may be either money. An operating lease is commonly used to acquire equipment on a relatively short-term basis.  the lessee will have use of that asset during the lease.  The intention is to convey title in property.  the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee.

Accounting transaction for the Lessee:  A lessee should disclose assets taken under a finance lease by way of a note to the accounts. Accounting Treatment of Lease Accounting transaction for the Lessor:  Assets under financial leases should be disclosed as “assets given on lease” as a separatesection under the head “fixed assets” in the balance sheet of the lessor. the lessor provides an equity portion (often 20% to 50%) of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessee makes payments to the lessor. higher in the middle.Leveraged lease  A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. The lessor receives the tax benefits of ownership. disclosing the future obligations of the lessee as per the agreement.  Lease rentals should be accounted for on an accrual basis over the lease period to recognise an appropriate charge in this respect in the income statement.  There would be a lease equalization charge where the annual lease charge is more than the  minimum statutory depreciation. Leasebacks sometimes provide taxbenefits. who makes payments to the lender  In this type of lease. . with a separate disclosure thereof. and low again at the end of the term. Sale and leaseback  Arrangement in which one partysells a property to a buyer and the buyer immediately leases the property back to the seller.also called leaseback Balloon lease  Arrangement in which rent is low at the beginning. The classification of the assets should correspond to that adopted for other fixed assets.  Lease rentals should be shown separately under gross income in the income statement of the relevant period. This arrangement allows the initial buyer to make full use of the asset while not having capital tied up in the asset.

1972  Income Tax Act. either in terms of assets held by the lessor or joined with assets for which payment in full has not been received. 1930  Sick Industrial Companies (Special Provisions) Act. now replaced with Foreign Exchange Management Act. Regulatory Authority There is no specific Act or legislation governing leasing in India. All legislations or Acts referring to assets and management of assets encompass leased assets. 1872  Indian Stamp Act. 1908  Reserve Bank of India Act. 1899  Manufacturing and Other Companies (Auditor’s Report) Order. 1988  Recovery of Debts due to Banks and Financial Institutions Act. 1934  Sale of Goods Act. 1993  Registration Act. 1986  Easements Act. 1988  Motor Vehicles Act. 2000. Some of the Acts include:  Companies Act. 1956  Consumer Protection Act. 1962  Indian Contract Act. 1973. 1882g Advantages of Leasing  Flexibility  Leased With User Oriented Variants  Tax-Based Benefits . 1882  Foreign Exchange Regulation Act. 1985  Transfer of Property Act. The excess of lease rentals paid over the amount accrued in respect thereof should be treated as pre-paid lease rental and vice versa.  Hire Purchase Act.

” . the chances of the lessee disinvesting is restricted. 2. The lease rentals are structured to recover the entire investment cost during the primary period. HIRE PURCHASE A hire purchase can be defined: “as a contractual arrangement under which the owner lets his goods on hire to the hirer and offers an option to the hirer for purchasing the goods in accordance with the terms of the contract. 4. leasing may be costlier than other forms of borrowing. and different methods of leasing and owning by tax authorities. Lease rates. 2. 4. The non-cancelable nature is a disadvantage where equipments have uncertain technology and market life. Operating leases are very limited as the resale market for the used capital equipment is Nil. 3.g. Since. Less Paper Work and Quick Disbursement  Convenience  Financing for the Total Requirements  Scope for Better Use of Own Funds  Off-Balance Sheet Financing  Miscellaneous Benefits Disadvantages of Leasing 1.. as it will turn out to be a hire-purchase transaction from tax angle. Lease agreements do not provide for transfer of ownership to the lessee either during the lease period or at the end of the lease. most of the equipment lease transactions are finance leases. Lease rentals for the secondary period are very nominal. Lease contracts may have terms restricting use of leased assets resulting in under-utilisation of operating capacity. e. 3. ‘Off-balance sheet financing’ through leasing exposes the firm to high financial risks as they tend to be highly geared (high debt equity ratios). In an imperfect financial market. Indian Context Salient Features of the Lease Structured In The Indian Context 1. The leases structured in the Indian context are only ‘finance lease’.

This means that a certain rate of interest (usually around 10%) is charged on the initial investment (made by the hire-vendor) and not on the diminishing balance. the title of the asset is transferred from the hire vendor to the hirer.  Risk is very high in HP due to technological Obsolescence.  After the repayment vehicle is transferred to the owner but in leasing after the lease period the vehicle may not be transferred to the user.  The hire-vendor charges interest on a flat basis.  The hirer is required to make a down payment of around 20 per cent of the cost of the equipment and repay the balance in regular hire purchase installments over a specified period of time. But it is less in leasing. Law & Accounting on HP & Leasing  Motor vehicles law in India contains specific provisions relating to lease and hire purchase transactions. which is not in HP. Hire Purchase And Lease Compared  Ownership of the vehicle is with the owner in HP but it is with the lessor in leasing.  Basic Tax Treatment of Hire Purchase and Lease Transactions.  When the hirer pays the last installment.  Theoretically the hirer can exercise the cancelable option and cancel the contract after giving due notice to the finance company.Features of Hire Purchase  The hire-vendor (the counterpart of lessor) gives the asset on hire to the hirer (the counterpart of lessee).  Cancellation of lease is possible.  Depreciation Allowance on Hire Purchase  Accounting for Hire Purchase Transactions  Indian and International Accounting Standards Problems  Taxation  Shortage of Low-cost Funds .

1949. and 3. and then collects the amounts from the customers to whom the company has supplied goods.. a Factor is. Takes responsibility for collection of payments. That buys invoices of a manufacturer or a trader. (April.  Banking Regulation Act. 1991)  CanBank Factors Ltd. 1. Supplier or Seller (Client) . The parties involved in the factoring transaction are:1.  Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. at a discount.  Factoring is defined as an asset-based means of financing by which the factor buys up the book debts of a company on a regular basis.  Factoring is essentially a financial service designed to help firms manage their trade credit or receivables effectively. the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client. was amended in 1991 for Banks setting up factoring services.  SBI/Canara Bank have set up their Factoring Subsidiaries: SBI Factors Ltd. A Financial Intermediary 2. paying cash down against receivables. (August.  Kalyana Sundaram Committee recommended introduction of factoring in 1989..  RBI has permitted Banks to undertake factoring services through subsidiaries. 1991). Normally. Slow Market Growth  Less Number of Players  Increasing Conservatism in the Market FACTORING  Factoring is of recent origin in Indian Context. So.

g. c. Purchase of Receivables with or without recourse. h. It helps to pay suppliers timely or take cash discounts or increase credit limits with suppliers. It has flexible funding programme that increases as seller increases his sales (the goal of factoring). Sorting out disputes. It increases sales. Help in getting information and credit line on customers (credit protection) 4. It facilitates to have funds for payroll and taxes. It helps to buy equipment or inventory on demand. Clients can extend credit to customers on large orders without having to ask them pay Cash on Delivery (COD). Mechanism of Factoring . It expands client’s business or fills more orders. Financial Intermediary (Factor) SERVICES OFFERED BY A FACTOR 1. 3. j. d. i. e. due to his relationship with Buyer & Seller. It helps to obtain a source of working capital. 2. Buyer or Debtor (Customer) 3. Follow-up and collection of Receivables from Clients. b. Reasons to Factor a.2. if any. Factor has a professional credit checking and collection payment system f. It eliminates the risk of credit losses on client’s customers.

 Till the payment of bills. Interest is higher than rate of interest charged on Working Capital Finance by Banks. it is called discount.  The Factor. The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary). the Factor follows up the payment and sends regular statements to the Client. to the Factor. Types Of Factoring  Recourse Factoring  Non-recourse Factoring . This is also called Factor Reserve.  Once the invoice is honoured by the buyer on due date. If interest is charged up-front.50%) Commission is collected up-front.  The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts. allows payment (. after scrutiny of these papers.usually upto 80% of invoice value). the Retention Money credited to the Client’s Account. interest charged.50% to 1. CHARGES FOR FACTORING SERVICES Factor charges Commission (as a flat percentage of value of Debts purchased) (0.  The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer. The balance is retained as Retention Money (Margin Money). For making immediate part payment.

 Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client. if the debt turns out to be non-recoverable.  Pays on guaranteed payment date or on collection of Receivables. factoring is commonly done without recourse.  In USA/UK. Advance Factoring  Invoice Discounting  Full Factoring  Bank Participation Factoring  Supplier Guarantee Factoring  Cross-border Factoring  Maturity Factoring RECOURSE FACTORING  Upto 75% to 85% of the Invoice Receivable is factored.  Factor does not participate in the credit sanction process.  Factor participates in credit sanction process and approves credit limit given by the Client to the Customer.  Interest is charged from the date of advance to the date of collection. .  Credit Risk is with the Client.  Credit risk is with the Factor.  In India. factoring is done with recourse. MATURITY FACTORING  Factor does not make any advance payment to the Client.  Higher commission is charged. NON-RECOURSE FACTORING  Factor purchases Receivables on the condition that the Factor has no recourse to the Client.

FACTORING vs BILLS DISCOUNTING BILL DISCOUNTING 1. CROSS . 2. Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. Bills discounting is usually done with recourse. viz. Bill is separately examined and discounted.  Where foreign currency is involved.  Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance.  Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. No notice of assignment provided to customers of the Client.  Notation is made on the invoice that importer has to make payment to the Import Factor. . 4. Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts.  It is also called two-factor system of factoring. Factor covers exchange risk also. c) Import Factor. if any.  No risk to Factor.  Nominal Commission is charged.BORDER FACTORING  It is similar to domestic factoring except that there are four parties.  Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables. Financial Institution can get the bills re-discounted before they mature for payment. and d) Importer. a) Exporter. 5. 3. b) Export Factor..

there is no need for factor services separately. Factoring can be done without or without recourse to client. 5. They a. themselves as they have large size of business and well-organised credit and receivable management. it is done with recourse. Large firms having access to similar sources of funds function like factors. (d) Factoring also helps the firms to explore and exploit opportunities. Notice of assignment is provided to customers of the Client. Advantages Factoring offers the following advantages from the firm’s point of view: (a) There will be no liquidity problem if firms effectively use the improves the cash flow. one should meet two types of expenses. Factor cannot re-discount the receivable purchased under advanced factoring arrangement. Therefore. Pre-payment made against all unpaid and not due invoices purchased by Factor. . 4. Factoring commission.FACTORING 1. This will contribute towards cost savings. factoring services. running and improving business. and b. 3. In India. (c) Division of work is effectively carried out if a firm hires a factor. This tends to have a negative effect on the creditworthiness of the company in the market. Interest on funds advances. Factor has responsibility of Sales Ledger Administration and collection of Debts. Financial Aspects of Factoring To use the services of a factor. (e) The improved cash flows and speedy collection will bring down the cost of debt. The factoring (b) Factoring is invaluable as it leads to a higher level of activity resulting in profitability.  Factoring is perceived as an expensive form of financing and also as finance of the last resort. 2. The management has more time for planning. Disadvantages  Factoring could prove to be costlier to in-house management of receivables.

e) Foreign Exchange Regulation Act. Factoring requires assignment of debt which attracts Stamp Duty.  Credit Sale gets converted as Cash Sale.  Exporter under Forfaiting surrenders his right for claiming payment for services rendered or goods supplied to Importer in favour of Forefaiter.  Forefaiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfaiter) without recourse to him.  Forfaiting is arrangement without recourse to the Exporter (seller)  Operated on fixed rate basis (discount) . WHY FACTORING HAS NOT BECOME POPULAR IN INDIA Banks’ reluctance to provide factoring services Bank’s resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). while Factoring deals with short term receivables.  It is different from International Factoring in as much as it deals with receivables relating to deferred payment exports. Cost of transaction becomes high.STATUTES APPLICABLE TO FACTORING Factoring transactions in India are governed by the following Acts:a) Indian Contract Act b) Sale of Goods Act c) Transfer of Property Act d) Banking Regulation Act. Forfaiting “Forfait” is derived from French word ‘A Forfait’ which means surrender of fights.  Bank (Forefaiter) assumes default risk possessed by the Importer. Problems in recovery.

CHARACTERISTICS OF FORFAITING Converts Deferred Payment Exports into cash transactions.” ESSENTIAL REQUISITES OF FORFAITING TRANSACTIONS Exporter to extend credit to Customers for periods above 6 months. It is a technique of trade finance. arising from deliveries of goods and services—mostly export transactions— without recourse to any previous holder of the obligation. unless the Exporter is a Government Agency or a Multi National Company.  Forfaiter holds the notes till maturity or securitises these notes and sells the Short Term Paper either to a group of investors or to investors at large in the secondary market. This is certainly due to the fact that in many cases it has proven to be the most efficient instrument when it comes to export finances. Finance available upto 100% of value (unlike in Factoring)  Introduced in the country in 1992. Exporter to raise Bill of Exchange covering deferred receivables from 6 months to 5 years.  Avalled notes are returned to the Importer. providing liquidity and cash flow to Exporter. Repayment of debts will have to be avallised or guaranteed by another Bank.  Avalled notes sent to Exporter. IN FORFAITING: Promissory notes are sent for avalling to the Importer’s Bank.  Avalled notes sold at a discount to a Forefaiter on a NON-RECOURSE basis.  Exporter obtains finance. which has attracted growing interest in the banking sector and the financial press of export-orientated countries over the last years. Definition of Forfaiting  “Forfaiting is the term generally used to denote the purchase of obligations falling due at some future date. Co-acceptance acts as the yard stick for the Forefaiter to credit quality and marketability of instruments accepted. .

Saves on cost as ECGC Cover is eliminated.payable to Exim Bank. Provides Fixed Rate Finance and hence risk of interest rate fluctuation does not arise. Commission:. Hence. It does not reflect as debt in Exporter’s Balance Sheet. . Simple Documentation as finance is available against bills. Documentation Fee:.Ranges from 0. Forfait transactions are confidential. Acts as additional source of funding and hence does not have impact on Exporter’s borrowing limits.where elaborate legal formalities are involved. Finance available upto 100% (as against 75-80% under conventional credit) without recourse.Absolves Exporter from Cross-border political or conversion risk associated with Export Receivables. COSTS INVOLVED IN FORFAITING Commitment Fee:.5% per annum.5% to 1. Forfait financer is responsible for each of the Exporter’s trade transactions. Service Charges:.Discount rate based on LIBOR for the period concerned. no need to commit all of his business or significant part of business. Exporter is freed from credit administration. Discount Fee:.Payable to Forfaiter by Exporter in consideration of forefaiting services. Provides long term credit unlike other forms of bank credit.

No services are provided Services provided Recourse Sales Always without recourse By Bills COMPARATIVE ANALYSIS BILLS DISCOUNTED 1. Term 6. Charge Creation Not Done Short Term Hypothecation Not Done Medium Term Assignment . Extent of Finance 3.FACTORING vs. Recourse With or Without Recourse Done Short Term Assignment 4. Scrutiny Individual Sale Transaction Upto 75 – 80% With Recourse FACTORING FORFAITING Service of Transaction Upto 80% Sale Individual Transaction Upto 100% Without Recourse Sale 2. Sales Administration 5. FORFAITING POINTS OF DIFFERENCE Extent of Finance FACTORING Usually 75 – 80% of the value of the invoice Factor does the credit rating in case of non-recourse factoring transaction Day-to-day administration of sales and other allied services With or without recourse By Turnover FORFAITING 100% of Invoice value Credit Worthiness The Forfaiting Bank relies on the creditability of the Avalling Bank.

 Facilitator obtains quote from Forfaiting Agencies abroad and communicates to Exporter. Exim Bank alone does.  Exporter has to confirm the Firm Quote. . Lack of awareness. STAGES INVOLVED IN FORFAITING: Exporter approaches the Facilitator (Bank) for obtaining Indicative Forfaiting Quote. Very few institutions offer the services in India. Long term advances are not favoured by Banks as hedging becomes difficult. Depreciating Rupee No ECGC Cover High cost of funds High minimum cost of transactions (USD 250. Exporter approaches the Bank (Facilitator) for obtaining quote from Forfaiting Agencies.  Exporter approaches importer for finalising contract duly loading the discount and other charges in the price.  If terms are acceptable.Advantages of Forfaiting  100 % Risk Cover  Country Risk (Political and Transfer Risk)  Currency Risk  Commercial Risk  Interest Rate Risk  Instant Cash  Flexibility and Simplicity WHY FORFAITING HAS NOT DEVELOPED Relatively new concept in India.000/-) RBI Guidelines are vague.

viz.  Export Contract to provide for Importer to furnish avalled BoE/DPN.  Export Documents are submitted to Bank duly assigned in favour of Forfaiter  Importer’s Bank confirms their acceptance of BoE/DPN to Forfaiter. Otherwise. address and credit limit required to the Export Factor. Forfaiting Agency presents the instruments to the Bank and receives payment STAGES INVOLVED IN EXPORT FACTORING Exporter (Client) gives his name. Export Factor submits the details of Buyer to the Import Factor.  Export Documents are submitted to Bank duly assigned in favour of Forfaiter.  Execution of Forfaiting Agreement with Forefaiting Agency.  Importer’s Bank confirms their acceptance of BoE/DPN to Forfaiter.  Forfaiter commits to forefait the BoE/DPN only against Importer Bank’s Co-acceptance. Import Factor decides on the credit cover and communicates decision to Export Factor. only against Importer Bank’s Co-acceptance.  Forfaiter commits to forefait the BoE/DPN. Exporter is then free to ship the goods to Buyers directly.. invoice and shipping documents duly assigned and receives advance there-against (upto 80%). . Export Factor enters into Factoring Agreement with Exporter. Exporter has to enter into commercial contract. Forfaiter presents the instrument to the Bank and receives payment.  Forfaiter remits the amount after deducting charges.  On maturity of BoE/DPN.  On maturity of BoE/DPN.  Bank sends document to Importer's Bank and confirms assignment and copies of documents to Forefaiter. Overseas Buyer is notified of this arrangement.  Forfaiter remits the amount after deducting charges. LC would be required to be established. Otherwise. Exporter submits original documents. LC would be required to be established.

 The Risk Capital Foundation (RCF) sponsored by the Industrial Finance Corporation of India (IFCI) was inaugurated. Import Factor follows up and receives payment on due date and remits to Export Factor. Meaning  Venture capital is a private equity investment in entrepreneurial companies used to finance the working capital requirement and asset needs of growing businesses. VENTURE CAPITAL Evolution  R. Venture Capital Funds generally: (a) (b) (c) Finance new and rapidly growing companies. Mechanism of Venture Capital .Export Factor despatches all the original documents to Importer/Buyer after duly affixing “Assignment Clause” in favour of the Import Factor. (e) (f) (g) Add value to the company through active participation. the chairman of Bhat Committee highlighted the problems of new entrepreneurs and technologists in setting up industries in 1972. The concept of Venture Capital was introduced in India by the All India Financial Institutions in 1975.S. up-scaleable companies. Export Factor. on receipt of payment. The purpose of establishing the institution was to supplement promoters’ equity with a view to motivate technologists and professionals to promote new firms. Invest in typically knowledge-based. Have a long-term orientation. Till 1984. Export Factor sends copy of invoice to Import Factor in the Debtor’s country. Purchase equity or quasi-equity securities. Take higher risks with the expectation of higher rewards. (d) Assist in the development of new products or services. The objectives of risk capital were different to those understood under venture capital today. releases the balance of proceeds to Exporter. Bhat. sustainable. the concept of venture capital was known as ‘Risk Capital’ and “Seed Capital’. Industrial Development Bank of India (IDBI) introduced Seed Capital Scheme in 1976.

(B) Investing in. (A) Raising of venture fund. adding value to firms. The flow of venture capital from the investor to a Start-up Company and back can be thought of as a cycle that runs through several phases. monitoring of. Mechanism of Venture Capital Types of Venture Capitalist  The types of venture investors are classified based on (a) the investment strategy and (b) their specialization. Based on the Investment Strategy  Gen era lists  Venture Capitalists of Early Stage  Specialists  Venture Capitalists of Expansion Stage Financing  Later Stage Investors  Turnaround Investors  Diverse Investors  Synergetic Venture Investment Based on their Specialization  Incubators . (C) Exiting successful companies. returning capital to investors.

(b) Venture capital can help you achieve your ambitions for your company and provide a stable base for strategic decision making. which sets it apart from other forms of finance. This is made possible by the provision of a combination of capital and experienced personal input from venture capital executives. Although you may have a smaller “slice of cake”. Angel Investors  Venture Capitalists (VCs)  Private Equity Players Types of Venture Capital Firms  Limited Partnership Firms  Independent Venture Firms  Affiliates or Subsidiaries  Affiliates of Government  Corporate Venturing Benefits of Venture Capital (a) Venture backed companies have been shown to grow faster than other types of companies. without taking dayto-day management control. within a few years your “slice” should be worth considerably more than the whole “cake” was to you before. (d) Venture capital firms often work in conjunction with other providers of finance and may be able to help you to put a tats funding package together for your business. (c) The venture capital firms will seek to increase a company’s value to its owners. Types of Investors  Informal Investors  Formal Investors Venture Capital Fund Stages .

It is closely linked with the process of overall socio-economic development of a country. The proportion of the retail share in the lending portfolio is slated to close in at around 40% by 2005-2006. Reasons for lending housing loan .Problems With Vcs in India  License Raj  Scalability  Valuation  Mindsets  Enforceability  Exit  Returns.  The retail lending business is growing at an outstanding rate of over 30% every year. Banks in India have gone a long way since 1990s where the retail portfolio was less than 5% to the current level of around 18%. Taxes and Regulations HOUSING FINANCE Housing Vs Retail Lending  Housing is one of the basic human needs of the society.

• • • • Relatively less risk for retail borrowers. Widespread of risk among large number of borrowers and • Developments in technology which have reduced transaction costs on a large number of borrower accounts. commercial and other traditionally industrial sector.• • Poor credit off take of companies. Rising disposable income and changing life style aspiration of a sizable section of the Population. Increased governmental incentives by way of tax relief or concessions on certain types of Loans. Housing Finance organisations Housing Finance Institutions . Continuous softening of lending rates which has improved the borrowers’ ability to repay. Growing risk of lending to industry on account of recession. • Growing financial disintermediation process enabling many triple A rated companies to access the market directly. • • Availability of better spread to banks. • Improved liquidity with banks following a reduction in Cash Reserve Ratio (CRR) and low credit off take in the face of continued accretion of deposits.

Cent Bank Home Finance Limited. It is a principal agency promoting housing finance institutions both at local and regional levels and provides financial and other support to such institutions. Private Sector Finance  HDFC (Housing Development Finance Corporation)  DHFCL (Dewan Housing Finance Corporation Limited)  GHFCL (Global Housing Finance Corporation Limited)  BHFL (Birla Home Finance Limited)  Maharishi Housing  Others Other key housing finance providers in the private sector are Sundaram Home Finance. Grihaa Finance. Hometrust Housing. The Housing Finance Institutions can be segregated into three categories: • Public Sector Finance • Banks • Private Sector Finance Public Sector Institutions  HUDCO (Housing and Urban Development Corporation Limited)  LICHFL (Life Insurance Corporation Housing Finance Limited)  GICHFL (General Insurance Corporation Housing Finance Limited)  PNBHFL (Punjab National Bank Housing Finance Limited)  SBIHF (State Bank of India Housing Finance)  The other major players in the public sector are the Indian Housing. etc. Types of Home Loans  Home Purchase Loan . National Housing Bank  The National Housing Bank was setup in 1988 as a subsidiary of Reserve Bank of India. Weizmann Homes. Corp bank Homes. GLFL Housing. etc.

 Home Improvement Loan  Home Construction Loan  Home Extension Loan  Home Conversion Loan  Land Purchase Loan  Bridge Loan  Balance Transfer Loan  Refinance Loan  Stamp Doty Loan  Loans to WRXs CREDIT RATING  “Credit ratings help investors by providing an easily recognizable. It involves series of steps. The main points are described as below:  Mandate  Team  Information  Secondary Data  Meetings and Visits  Preview/Meeting  Committee Meeting  Rating Communication  Rating Reviews .” Rating Process  Rating is an interactive process with a prospective approach. simple tool that couples a possibly unknown issuer with an informative and meaningful symbol of credit quality.

in 1998. in July 1999.  In consultation with Government. the issues are pay masters. Regulations  In India.  Credit ratings change infrequently since the rating agencies are unable to constantly monitor developments.  Ratings may lead to herding behaviour thereby increasing the volatility of capital flows.. Financial risk drivers Funding policies Financial flexibility New projects CONSUMER FINANCE . Business risk drivers Industry characteristics Market position Operational efficiency Management quality Credit Rating Agencies in India  Credit Rating Information Services of India Limited (CRISIL)  Investment Information and Credit Rating Agency of India (ICRA)  Credit Analysis and Research Limited (CARE) Criticisms  Since issuers are charged for ratings by CRAs. Surveillance Rating Framework  These factors can be conceptually classified into business risk and financial risk drivers. SEBI constituted a Committee to look into draft regulation for CRAs that were prepared internally by SEBI. i. SEBI issued a notification bringing the CRAs under its regulatory ambit in exercise of powers conferred on it by Section 30 read with Section 11 of the SEBI Act 1992. SEBI Act 1992 should be amended to bring CRAs outside the purview of SEBI for a variety of reasons.the independence of ratings becomes questionable. The Committee held the view that in keeping with international practice.  CRAs are not accountable for the ratings given by them.e.

 Consumer Finance includes all asset-based financing options provided to investors for acquiring consumer durables. In a consumer finance transaction. cars. Consuming Class in India Structure of the Indian consumer market Characteristics of Consumer Finance  Parties and Structure of the transaction . an individual initially pays a fraction of the cash on purchase while promising to pay the balance with interest over a specified time period. personal computers and four-wheelers too.  Consumer finance is available for a large number of durables like televisions. refrigerators. air conditioners. two-wheelers. washing machines.

CREDIT CARD Credit card is a monetary instrument that enables the cardholder to obtain goods and services without actual payment at the time of purchase. every district has at least one Consumer Redressal Forum. Payment for the transaction  Rate of Interest and Repayment Period  Security  Eligibility Criteria for Borrowers Importance of Consumer Finance  Increasing Risk of Disintermediation in Corporate Lending  Housing Loans  Consumer Durables  Reduction in Interest Rates Impact of Consumer Finance Growth on Consumer Durables Market  Passenger Cars and Two-wheelers  Key Issues and Success Factors  Innovative Solutions  Credit Constraint in Rural India for Consumer Durables  Consumer Preferences  Consumer Finance by GE Countrywide Consumer Protection  Complaint Procedure  Under the Consumer Protection Act.more commonly called a Consumer Court. . It is also popularly known as plastic money.

(c) The card carries a predetermined limit up to which the holder can spend. the cardholder has to pay only 5-10% of the outstanding value and the rest can be paid in installments over the next few months/years.52 days). usually a month. a nominal rate of 2-3% per month is charged as interest. and payments for purchases are deducted from your bank account. Benefits of Holding Credit Card (a) Credit can be availed for a period of 30-45 days (Max.The value of purchases made by the cardholder using the card is recovered at the end of a specified period. Some of them are: (a) One can plan Budget within the savings instead of going for credit (b) He can access his own money 24 hours a day (c) He saves fee and other service changes on cash withdrawals. It can be said that a credit card is basically a “Pay Later” card that is provided to a customer. called the billing cycle. (e) An outstanding balance. The retailer swipes the card over an electronic terminal at this outlet. (f) Regular use of the credit card by the user earns him additional points that provide the cardholder with discounts on purchases. (b) A cardholder need not have the required amount in his account to the extent of the transaction made. Open an account with a bank that offers a debit card. (d) At the end of each billing cycle. you enter the personal identification number on a PIN pad and the money is immediately debited at the bank. (d) He can carry one card to use both at ATMs and at merchant locations . Benefits of Debit Cards  Debit cards offer wide range of benefits to the customers. Mechanism of a Credit Card Transaction Every transaction made on a credit card involves three parties: (a) The Card Issuer (b) The Cardholder (c) The Merchant Establishment (ME) Debit Card It is the accountholder’s mobile ATM.

Types of Cards  MasterCard  VISA Card  Affinity Cards  Standard Card  Classic Card  Gold Card or Executive Card  Platinum Card  Titanium Card  Secured Card  Charge Card  Rebate Card  Co-branded Card  Travel Card  Laghu Udyarni Credit Card (LUCC) Scheme New Types of Credit Card 1. Smart Cards 3. Corporate Credit Cards 2. Global Credit Cards Eligibility To Get A Card  Place of Residence  Telephone  Profession  Place of Work  Age .

(d) “Add-On” Facility. (b) Cash Withdrawal Facility.Costs of Credit Card Payment  Renewal  Interest-free period on ‘every bill’  Purchases on credit  Fuel on credit  Billing period  Cash advance Choosing The Right Card  Acceptability  Eligibility  Fees  Other Charges  Credit Period  Cash Advance  Insurance Cover Uses of Credit Cards (a) Personal Accident Insurance. (c) Increase in Credit.. (e) Leveraged Investment Facility. .

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