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Investment Banking

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Topics of Investment Banking:¾ Introduction ¾ Meaning ¾ Overview ~Evolution of Investment Banking ~Its Mechanism (statement of investment banking) ¾ Products/Services Offered ~Lists of explanation ~Special services ¾ How these services server the purpose of clients? ¾ Risks associated with investment banking? ~Types ~Explanation (example){problem impact} ¾ How the risks are managed effectively? ~Why risks management? ~Ways (example){problem action} ¾ Future Scenario ¾ Conclusion

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At a very macro level, ‘Investment Banking’ as term suggests, is with the primary function of assisting the capital market in its function concerned capital intermediation, i.e., the movement of financial resources from of who thosehave them (the Investors), to those who need to make use of them generating GDP (the Issuers). Banking and financial institution on the for hand one and the capital market on the other are the two broad platforms institutional that investment for capital flows in economy. Therefore, of could be inferred that investment banks are those institutions that it counterparts of banks in the capital markets in the function of are in the resource intermediation allocation. Nevertheless, it would be unfair to conclude so, that as would confine investment banking to very narrow sphere of its in the modern world of high finance. Over the decades, backed by activities and also fuelled by recent technologies developments, an evolution banking has investment transformed repeatedly to suit the needs of the community and thus become one of the most vibrant and exciting finance of financial services. Investment bankers have always enjoyed segment status, but celebrity at times, they have paid the price for the price for flamboyance as excessive well. To continue from the above words of John F. Marshall M.E. Eills, ‘investment banking is what investment banks do’. and This definition can be explained in the context of how investment banks evolved in their functionality and how history and regulatory have have shaped intervention such an evolution. Much of investment banking in its present owes its origins to the financial markets in USA, due o form, thus American investment banks have banks have been leaders in the which, and Euro Americanmarkets as well. Therefore, the term ‘investment banking’ can arguably be said to be of American origin. Their counterparts in UK termed were as ‘merchants banks’ since they had confined themselves to market capital intermediation until the US investments banks entered the UK and European markets and extended the scope of such businesses. Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.
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Investment banks also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. In recent years, however, the lines between the two types of structures have blurred, especially as commercial banks have offered more investment banking services. In the US, the Glass-Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities; GlassSteagall was repealed by the Gramm-Leach-Bliley Act in 1999. Investment banks may also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world.commonly used today to characterize what was traditionally More investment termed” banking” is “sells side." This is trading securities for cash securities (i.e., facilitating transactions, market-making), or the promotion or securities (i.e. underwriting, research, etc.). of The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Many firms have both buy and sell side components.

Definition An individual or institution, which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. Also called investment banker. Who needs an Investment Bank? Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have finance and corporate development departments provide objectivity, sophisticated a
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valuable contact network, allows for efficient use of client personnel, and vitally interested in seeing the transaction is close. Most small to medium sized companies do not have a large in-house and in staff, a financial transaction may be at a disadvantage versus competitors. A quality investment banking firm can provide the larger required services to initiate and execute a major transaction, thereby small to medium sized companies with financial and transaction empowering without the experience addition of permanent overhead, an investment bank objectivity, provides a valuable contact network, allows for efficient use of personnel, and is vitally interested in seeing the transaction close. client Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment-banking firm can provide the services

Organizational structure of an investment bank
The main activities and units The primary function of an investment bank is buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet An investment bank is split into the so-called Front Office, Middle Office and Back Office. The individual activities are described below: Front Office Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may
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involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin").

Investment management is the professional management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds) .

Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring.


Sales and Trading is often the most profitable area of an investment bank , responsible for the majority of revenue of most investment banks In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need.


Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.

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Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.

Middle Office Risk Management involves analysing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty) correctly (as per standardised booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now include measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation. Back Office
Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security of the divisions within an investment bank, it is a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. The staff in these areas are often highly qualified and need to understand in depth the deals and transactions that occur across all the divisions of the bank.

Recent evolution of the business
New products
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking,
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many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins. For example, trading bonds and equities for customers is not a commodity business but structuring and trading derivatives is highly profitable .Each OTC contract has to be uniquely structured and could involve complex payoff and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities. In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). Possible conflicts of interest Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and research and equities on the other.

Some of the conflicts of interest that can be found in investment banking are listed here: Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to
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competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running.

Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions. Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.

Investment banks provide four primary types of services: Raising capital, advising in mergers and acquisitions, executing sales and trading, and performing general advisory services. Most of securities the Wall Street firms are active in each of these categories. major investment banks may specialize in two or three of these Smaller categories. Raising Capital
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An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, existing expand operations, or for specific project financing. Capital can some combination of debt, common equity, preferred equity, and include securities hybrid such as convertible debt or debt with warrants. Although people many associate raising capital with public stock offerings, a great deal capital is actually raised through private placements with of specialized institutions,investment funds, and private individuals. The investment bankwork with the client to structure the transaction to meet will objectives specific while being attractive to investors. Mergers and Acquisitions Investment banks often represent firms in mergers, acquisitions, and divestitures. Example projects include the acquisition of a specific firm, sale the of a company or a subsidiary of the company, and assistance identifying, structuring, and executing a merger or joint venture. In in case, each the investment bank should provide a thorough analysis of the bought entity or sold, as well as a valuation range and recommended structure. Sales and Trading These services are primarily relevant only to publicly traded firms, or firms, plan to go public in the near future. Specific functions include which a market making in a stock, placing new offerings, and publishing research reports. General Advisory Services: Advisory services include assignments such as strategic planning, business assisting in financial restructurings, and providing an opinion valuations, to as the fairness of a proposed transaction.

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Terms Related To Investment Bank Buying and Selling
Buying Deciding on the proper time to purchase a security that you would like add to to your holdings can be a daunting task. If the price drops after you buy, immediately it may seem as if you missed out on a better opportunity. If the price jumps right before you make your move, you buying feel mayas if you paid too much. As it turns out, you should not let these fluctuations influence your decision too much. As long as the small that led you to fundamentals decide on the purchase have not changed, a few points either direction should not have a large impact on the long-term value in your of investment. Similarly, the fact that an investment has been increasing in value of late not is a sufficient reason for you to purchase it. Momentum can be very and recent movement is not necessarily an indicator of future fickle, Therefore, movement.buying decisions should be based on sound and thorough geared toward discerning the future value of a security relative to its research price. This analysis will probably not touch upon price movement in the current recent very past. As you learn more about investing you'll get better at when to buy, but most experts recommend that beginners avoid trying deciding to the market, and just get in as soon as they can and stay in for the time haul. long The proper time to buy a security is quite simply when it is available for than less its actual value. These undervalued securities are actually not as rare they as sound. However, the problem is simply that they are never sure bets.value of a security includes estimates of the future performance The factors underlying the value of the security. For stocks, these factors of things like earnings growth and market share. Changes can be predicted to include a egree, but they are subject to fluctuation due to forces both within d beyond the control of the and company. The overall economic climate, changes in the industry or even bad by management can all cause a security poised to ascend in value to decisions an under become performer. Therefore, it is essential to practice your analysis before
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putting your money into action. Make some mock purchases based on personal analysis technique and track the results. Not all of your your will lead decisionsto the results you were expecting, but if most of your choices out turnto be good and there are mitigating factors that you can learn from explain your missteps, then you may be ready to put your analysis to and investing strategy into technique action. At this point, the need to continuously monitor your investments does disappear. Both under performers and overachievers should be not carefully studied to fine-tune your strategy. You should also regularly look at securities to make sure that the fundamentals for success that led you to your in the buy first place are intact. If not, you may need to prepare to cash in start and looking for the next opportunity. One way to avoid the hassles of deciding when to buy altogether is practice dollar-cost averaging. This strategy advocates investing a to dollar fixed amount at regular intervals. The price when you first invest relatively unimportant (as long as the fundamentals are sound) because is will you be purchasing shares at a different price each time you buy. The of your success investment then lies not with short-term fluctuations, but with long-term movement of the value of the the security. Selling : There comes a time when investments must be liquidated and back into convertedcash. In a perfect world, selling would only be necessary investment goals have been reached or time horizons have expired, but, when in reality, decisions about selling can be much more difficult. For one thing, can it be just as hard to decide when to sell as it can be to decide when to No one buy. wishes to miss out on gains by selling too soon, but, at the same no one wishes to watch an investment peak in value and then begin time, decline to . Investors often seek to sell investments that have dropped in value in short-term. However, if conditions have not changed significantly, drops the price in may actually represent an opportunity to buy at a better price. If initial the research, which led to the purchase, was sound, a temporary decline preclude the success that was originally predicted. Of course, does not change, things and if the security no longer meets the criteria that led to purchase, selling may in fact be the best its option.
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Selling may also become necessary if investment goals change over You time.may need to reduce the amount of risk in your portfolio or you have may the opportunity to seek out greater returns. Additionally, a security have may increased in value to the point that it is overvalued. This creates excellent opportunity to cash in and seek out new undervalued an Often you will investments. need to make this type of sale in the course of rebalancing p a ortfolio necessitated by gains and losses in different areas. Selling can be especially difficult when an under performing stock must dumped. Some investors let their emotions dictate their actions and hold be onstocks that have fallen in value rather than to sell, thinking that selling at to l aoss is like admitting that they made a mistake. However, realizing the and loss moving on to better investments is often preferable to continuing to hold a loser in the hopes that it will somehow onto rebound. When considering any sale, you must factor in the costs of the sale itself.and taxes will eat into profits, so they must be subtracted from Fees increases in value to understand the true impact of the transaction. any gains taxes are higher for gains on investments held less than one year, Capital it's so often wise to invest for the long term rather than to buy and sell On the other hand, it can be dangerous to hold an investment longer than quickly. want you to, simply to reduce the tax burden. It is essential to remember that just because an investment increases in after valueit has been sold does not necessarily mean that it was sold Managing risk prematurely. and diversification are often more important than capitalizing gains in a particular security. Keeping in mind the initial on short-term for the goals investment and adjusting them to fit your present goals will you to allow make smarter decisions about selling. Principles of Investing 1. Start Investing Now We say this not just to discourage procrastination, but because an early can startmake all the difference. In general, every six years you wait doubles the required monthly savings to reach the same level of retirement Another income. motivational statistic: If you contributed some amount each for the month next nine years, and then nothing afterwards, or if you contributed
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nothing for the first nine years, then contributed the same amount month each for the next 41 years, you would have about the same Compounding is a beautiful thing. amount. 2. Know Yourself The right course of action depends on your current situation, your goals, future and your personality. If you don't take a close look at these, and them make explicit, you might be headed in the wrong direction. Current Situation: How healthy are you, financially? What's your net worth right now? What's your monthly income? What are expenses (and where could they be reduced)? How much debt are your carrying? At what rate of interest? How much are you saving? How you you are investing it? What are your returns? What are your expenses? Goals: What are your financial goals? How much will you need achieve them? Are you on the right to track? Risk Tolerance: How much risk are you willing and able to accept in pursuit of your objectives? The appropriate level of risk is determined your by personality, age, job security, health, net worth, amount of cash have you to cover emergencies, and the length of your investing horizon. 3. Get Your Financial House In Order Even though investing may be more fun than personal finance, it more sense to get started on them in the reverse order. If you don't makes where know the money goes each month, you shouldn't be thinking investing yet. Tracking your spending habits is the first step about improving them. If you're carrying debt at a high rate of interest toward credit card (especially debt), you should unburden yourself before you begin If you don't investing. know how much you save each month and how much you'll need to save to reach your goals, there’s no way to know what are right for investments you. If you've transitioned from a debt situation to paycheck-topaycheck
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situation to a saving some money every month situation, you’re ready begin investing what you save. You should start by amassing enough to cover three to six months of expenses, and keep this money in a very to investment like a money market account, so you're prepared in the event safe an of emergency. Once you've saved up this emergency reserve, you progress to higher risk (and higher return) investments: bonds for money can you that expect to need in the next few years, and stocks or stock mutual for the funds rest. Use dollar cost averaging, by investing about the same each month. This is always a good idea, but even more so with the amount fluctuations dramatic in the market in the past 10 years. Dollar cost averaging make will it easier to stomach the inevitable dips. And remember; never invest in anything you don't understand. 4. Develop A Long Term Plan Now that you know your current situation, goals, and personality, should you have a pretty good idea of what your long-term plan should be. should detail where the money will go: cars, houses, college, and It It should also retirement. detail where the money will come from. Hopefully numbers will be about the the same. Don't try to time the market. Get in and stay in. We don't know direction the next 10% move will be, but we do know what direction what next100% move will be. the Review your plan periodically, and whenever your needs or change. If you circumstances are not confident that your plan makes sense, talk to an investment advisor or someone you trust. 5. Buy Stocks Now that you've got a long term view, you can more safely invest in investments, which the market rewards (in general). This requires 'riskier' patience and discipline, but it increases returns. This approach reduces the universe entire of investment vehicles to two choices: stocks and stock funds. mutualIn the long run, they're the winners: In this century, stocks beat 8 out bondsof 9 decades, and they're well in the lead again. According to Ibbotson's Stocks, Bonds, Bills and Inflation 1995 Yearbook, here are average annual returns from 1926 to 1994 (before the inflation):
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Stocks: 10.2% (and small company stocks were 12.1%) Intermediate term treasury bonds: 5.1% 30-day T-bills: But is 3.7% worth the additional risk just for a few percentage points? it really answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years The only is 280%. Compounding is God's gift to long-term planners. If you buy outstanding companies, and hold them through the gyrations, market's you will be rewarded. If you aren't good at selecting stocks, some select mutual funds. If you aren't good at selecting mutual funds, go with index fund (like the Vanguard S&P an 500). 6. Investigate Before You Invest Always do your homework. The more you know, the better off you are. requires that you keep learning, and pay attention to events that might This you. Understand personal finance matters that could affect you (for affect proposed example, tax changes). Understand how each of your investments fits with in the rest of your portfolio and with your overall strategy. Understand risks the associated with each investment. Gather unbiased, information. Get a second opinion, a third opinion, etc. Be cautious objective evaluating the advice of anyone with a vested when interest. If you're going to invest in stocks, learn as much as you can about companies you’re considering. Understand before you invest. the Research,Read books. Consider joining an investment club or research, organization like the American Association of Individual an Experiment Investors. with various strategies before you put your own money on line. the Examine historical data or participate in a stock market simulation. a momentum portfolio, a technical analysis portfolio, a bottom Try portfolio, a dividend portfolio, a price/earnings growth portfolio, an fisher portfolio, intuition a mega trends portfolio, and any others you think of. In the you'll find process out which ones work best for you. Learn from your own and learn mistakes, from the mistakes of others. If you don't have time for all this work consider mutual funds, index funds. especially

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7. Develop the Right Attitude The following personality traits will help you achieve financial success: Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll become more confident that you're on the right track. your Alter asset allocation based on changes in your personal situation, because of some short-term market not fluctuation. Confidence: Let your intelligence, not your emotions; make your decisions for you. Understand that you will make mistakes and take even the losses; best investors do. Re-evaluate your strategy from time to but don't second-guess time, it. Patience: Don't let your emotions be ruled by today's performance. mostIn cases, you shouldn't even be watching the day-to-day unless you like performance, to. Also, don't ever feel like it's now or never. Don't pressured into an investment you don’t yet understand or feel be with. comfortable The following personality traits will hurt your chances of success financial : Fear: If you are unwilling to take any risk, you will be stuck investments that barely beat with inflation. Greed: As an investment class, 'get rich quick' schemes have worst returns. If your expectations are unrealistically high, you'll go for the big the scores, which usually don’t It work. is generally a good idea to avoid making financial decisions based on emotional factors. 8. Get Help If You Need It The do-it-yourself approach isn't for everyone. If you try it and it's working, or you're afraid to try it at all, or you just don't have the time not or
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desire, there's nothing wrong with seeking professional assistance. If you want others to handle your financial affairs for you, you nevertheless want to remain involved to some degree, to make sure will money your is being spent wisely.

Initial Public Offerings (IPOs) are the first time a company sells its stock the to public. Sometimes IPOs are associated with huge first-day gains; times, other when the market is cold, they flop. It's often difficult for an investor to individual realize the huge gains, since in most cases only investors have institutional access to the stock at the offering price. By the time general public can trade the stock, most of its first-day gains have the been made. However, a savvy and informed investor should still watch already IPO the market, because this is the first opportunity to buy these stocks. Reasons for an IPO When a privately held corporation needs to raise additional capital, it either can take on debt or sell partial ownership. If the corporation chooses sell to ownership to the public, it engages in an IPO. Corporations choose "go to public" instead of issuing debt securities for several reasons. The most common reason is that capital raised through an IPO does not have to repaid, whereas debt securities such as bonds must be repaid with be Despite interest. this apparent benefit, there are also many drawbacks to an IPO. A large drawback to going public is that the current owners of the held corporation lose a part of their ownership. Corporations weigh the privately and benefits of an IPO carefully before performing an costs IPO. Going Public If a corporation decides that it is going to perform an IPO, it will first hire an investment bank to facilitate the sale of its shares to the public. This is commonly called "underwriting"; the bank's role as the underwriter process according to the method of underwriting agreed upon, but its varies function primary remains the same.
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Initial Public Offerings

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In accordance with the Securities Act of 1933, the corporation will file r aegistration statement with the Securities and Exchange Commission The registration statement must fully disclose all material information to (SEC). SEC, the including a description of the corporation, detailed statements, financial biographical information on insiders, and the number of owned shares by each insider. After filing, the corporation must wait for the SEC investigate the registration statement and approve of the full to disclosure. During this period while the SEC investigates the corporation's filings, underwriter will try to increase demand for the corporation's stock. the investment banks will print "tombstone" advertisements that offer Many bones" "bare- information to prospective investors. The underwriter will also a preliminary prospectus, or "red herring", to potential investors. These issue herrings include much of the information contained in the red statement, but registration are incomplete and subject to change. An official summary the of corporation, or prospectus, must be issued either before or along with actual the stock offering. After the SEC approves of the corporation's full disclosure, the and the underwriter decide on the price and date of the IPO; the IPO is corporation conducted on the determined date. IPO’s are sometimes postponed or then withdrawn in poor market even conditions. Performanc e The aftermarket performance of an IPO is how the stock price behaves the day after of its offering on the secondary market (such as the NYSE or the NASDAQ). Investors can use this information to judge the likelihood that IPO an in a specific industry or from a specific lead underwriter will well in the perform days (or months) following its offering. The first-day gains of some IPO’s have made investors all too aware of the money to be had in investing. Unfortunately, for the small individual investor, realizing IPO much-publicized gains is nearly impossible. The crux of the problem is those that individual investors are just too small to get in on the IPO market before jump. the Those large first-day returns are made over the offering price of stock, the at which only large, institutional investors can buy in. The system one is of reciprocal back scratching, in which the underwriters offer the shares the clients who have brought them the most business recently. By first to time the the average investor gets his hands on a hot IPO, it's on the market, and secondary the stock's price has already shot up.
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SEBI Guidelines
The Government has setup Securities Exchange Board of (SEBI) in April 1988. For more then three years, it had no statutory India Its interim functions during the period powers. were: i. To collect information and advise the Government on matters relating and Capital to Stock Markets. ii. Licensing and regulatory and Merchant Banks, Mutual Fund, etc.. iii. To prepare the legal drafts for regulatory and developmental role of SEBI and iv. To perform any other functions as may be entrusted to it Government. by

The need for setting up independent Government agency to regulate and develop the Stock and Capital Market in India as in developed countries was recognised since the Seventh Five Year many launched (1985) when some major industrial policy changes was opening up of the economy to out side the world and greater role like the to Private Sector were initiated. The rampant malpractices noticed the in Stock and Capital Markets stood in the way of infusing of investors, confidence which is necessary for mobilisation of large quantity funds from the public, and help the growth of the of industry. The malpractices were noticed in the case of companies, Merchant Bankers and Brokers who are all operating in Markets. Capital The need to curb the malpractices and to promote Capital healthy Market in India was felt. The security industry in India has develop on the right lines for which a competent Government to as in UK agency (SIB) or in USA (SEC) is needed.

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As referred to earlier, malpractices have been reported in both the primary market and secondary market. A few examples malpractices in the primary market are as of follows: a) Too may self styled Investment Advisers and Consultants. b) Grey Market or unofficial premiums on the new issues. c) Manipulation of markets before new issues is floated. d) Delay in allotment letters or refund orders or in dispatch of Certificate Share s e) Delay in listing and commencement of trading in shares. A few examples of malpractices in the Secondary Market are as fallows: a) Lack of transparency in the trading operations and prices charged to clients . b) Poor service due to delay in passing contract notes or not passing notes, at contracts all. c) Delay in making payments to clients or in giving delivery of shares. d) Persistence of odd lots and refusal of companies to stop this of allotting shares in odd lots, which disappeared with the practice of Demat form introduction of trading. e) Insider trading by agents of companies or brokers rigging and manipulating prices. f) Takeover bids to destabilise management.

The SEBI has been entrusted with both the regulatory development function. The objectives of SEBI are as and follows: a) Investor protection, so that there is a steady flow of savings the intoCapital Markets.
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b) Ensuring the fair practices by the issuers of securities, namely, so that they can raise resources at least companies cost. c) Promotion of efficient services by brokers, merchant and others bankers intermediaries so that they become competitive professional and .

With the repeat of Capital Issuers Control Act of 1947 in 1992, the SEBI issued fresh guidelines for new Capital issues from June May 1992. 11, Pricing of Shares expect in case of new companies with no record track is left to free market forces. The new Companies have to shares issues at par only. The existing unlisted companies if they desire listing make can public issue upto 20% of equity and price can be determined by market free forces, as determined by the issuer or the lead manager. Similarly, existing listed company can also fix the price of issue depending on an markets forces. In all these cases, the reasons for such price the transparency and proper disclosers are insisted upon by the SEBI. The fixation, letter draft of offer to the public is to be vetted by SEBI, which was delegated lead to merchant bankers by SEBI after 1996. As per SEBI guidelines, 12 months should elapse between bonus issue and public or rights issue. A private placement of quota is not promoters’ permitted. Merchant bankers held responsible for ensuring prospectus is fair and disclosures are full and correct and that highlights that and factors are slept out in all issues. Although free pricing is permitted, risk rationale of such fixation is to be provided to the SEBI when it examines the drafts the letter of offer.


The SEBI powers on stock exchanges and their member brokers and brokers were exercised under SEBI (stock brokers and sub sub Regulations of October 23 1992. These relate to registration, licensing, brokers) code of conduct, and inspection of books accounts, etc. These powers exercised under Section 12 of SEBI were Act.
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SEBI was delegated more powers of administration of SC Act in respect of many provisions including recognition of stocks (R) (Sec.3, 4&5) exchanges and control and regulation of stocks exchanges under 7, 13, 18, Sections 22 and 28 etc., These were concurrent powers wielded by Government and SEBI, effective from both September1993. Subsequently, by an ordinance in January 1995, the SEBI given furtherwas powers to impose penalties on insider trading and markets capital intermediaries for violation of SEBI regulations and companies not for complying with Listing agreement. In particular penalties can be imposed in monetary terms, for failure to furnish books of accounts, to enter failure into agreements with clients, failure to redress investor defaults in grievances,case of mutual funds, and non-disclosures of acquisition of shares over and take etc. Venture capital funds like mutual funds were brought under the control of SEBI. Earlier to that, the SEBI has started licensing regulations the underwriters, debenture trustees, collecting bankers, and and intermediaries in the capital all market.

SEBI in the New Millennium:
SEBI has got all the needed powers to regulate the Market including all affairs of listed Companies, Venture Funds, Capital MMMFs, it has been regulating the foreign agencies or a body etc. Already in the capital market and it has announced guidelines for all players operating markets, including a code of in conduct.

Institutional Agencies:
All the FIIs together can invest upto 24-30% of the company’s paid up capital, of which a limit of 50% is allowed to foreign individuals corporates investing in India through FIIs; this limit of 30% was raised and 40% to by the Central Budget for 2000-01. The SEBI has also allowed the domestic Mutual Funds to invest in foreign listed securities and to manage foreign portfolios. According to some
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amendments to Mutual Fund regulations of SEBI, the Mutual Funds required to send a complete statement of their portfolios to all unit are within holdersone month from the close of each half-year. In order to deter funds from delay in despatch of redemption warrants, SEBI has mutual mutual directedfunds to provide for payment of interest to the unit holders on delayed payment, wherever this applicable.

Latest Primary Markets Reforms
In pursuance with the recommendations of the Informal Group on Primary Markets, the SEBI has dispensed with the requirements issuing shares at fixed par value of Rs.10 and Rs.100. They are now free of issue to shares at any value of Rs.1 and above. The SEBI modified the framework existing for the book building. Some issues following the book process buildinghave already been issued in 19992000. In order to encourage Initial Public Offer, the SEBI has relaxed the guidelines stipulating “the ability to pay” criteria in place of criteria existingof “actual payment of dividend” by the issuing companies to eligible to make public offers. The regulations for Credit Rating be were finalised and published by the SEBI. The categories of promoters Agencies are eligible to promote CRA’s are laid who down.

Book Building Process:
The changes in book building guidelines: The modified framework makes display of demand at terminals optional. The reservation of 15% of issue size for individual bidding upto 10 marketable lots is no longer compulsory. Allotment in investors Building process should be in Demat form only and other requirements Book shall same as for any public issue. The issuer is allowed to disclose be the the issue either size or number of securities to be offered to the public. The regulatory mechanism on secondary market strengthened was during 1999-2000, through the rationalisation and of margin refinementsystem and through mark to market margins, volatility incremental carry forward margins, etc. The circuit breakers for the margins, volatility
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have been fixed by SEBI at 8% to 12% to be raised upto 16%. The limits for exposure members are also fixed.

Informal Group on Primary Market
As part of its efforts to receive the dressed primary market, the SEBI has relaxed the listed norms for I.T. sector companies to make public initial offers with a minimum offer of 10%, instead of 25% for all companies. Book building norms are to encourage new issues. The norm other 90% of subscription as the minimum for enabling the company offering issue to public make allotment was waived. Similarly, the stipulation of payment actual of dividend in three out of the past 5 years for the company to out with come a public issue was replaced by requirements of “ability to pay” dividends. As recommended Informal Group on primary market, the initiated measuresto improve the sentiment in the Primary Market. The SEBI given has freedom to the Companies to determine the par value of shares by them issued in accordance with section 13(4) of the Companies Act, 1956. companies with dematerialized shares have been allowed to alter the the value par of share indicated in the Memorandum and Articles of Reference was Association already to changes in Book Building Norms. SEBI has also accepted the introduction of a system of using the existing infrastructure of stocks Exchanges for marketing of IPOs NSE and has offered these services through its wide network terminals spread over all the country.

Demat Coverage:
From January 2000, the scrips for trading in Demat form raised to 200. With this, the compulsory trading in Demat form has was raised the proportion of market deliveries in Demat form to 90% of the deliverers. The physical deliverers of shares has come down drastically. total The
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transaction costs have been reduced and volume have phenomenally due to electronic form of trading and in demat increased form.

Committee on Market Making:
A committee on the Market Making under the Chairmanship of Shri G.P. Gupta was set by the SEBI to study the various facets of market making, including the merits and demerits of order driven the and quote system driven system. The committee was of the view that shares be classified into the categories namely liquid and illiquid and should making market facility should be provided to the illiquid category of shares. making Market should be made compulsory in such cases and market markers to give have two way quotes for each such scrip. The mechanism pf making market and risked involved in it are to be understood by market makers.

Legal Framework: the legal field, the securities Laws, 1999 was passed by In
the Parliament in December 1999. This has incorporated the instruments derivative in the definition of securities under Securities Regulation Contract Act, 1956, as also the units of Collective Investments with a view Schemes, to facilitating their transaction and regulation. The new provided for transfer of Appellate functions under the securities Act Securities Appellate Tribunal (SAT). The stamp duty payable on Laws derivative those in demat Form was withdrawn by necessary transactions changes. Banks now accept the ownership pf securities in Demat legal Form.

Negotiated Deals:

A negotiated deal in listed company has to be reported to stock exchange within 15 minutes and information in such deals has to disseminated to all Stock Exchanges. A negotiated deal is defined as be transaction which has on order value of 25 lakhs or trade volume of not any than less 10,000shares at one price, not formed on Stock Exchanges and the order through matching system. But with a view to enhance the price discovery
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process and improve the transparency, SEBI made such deals permissible in 1999. Guidelines were issued to permit negotiated deals not if they only are executed on the screen of Stock Exchange, following the and order matching system of the price exchange.

SEBI Committee on Corporate Governance: committee on Corporate Governance, set up by SEBI The
reported and has report was accepted by SEBI and implemented. The the Exchanges listing agreement was amended to include a clause on Stock governance corporate to be observed by listed companies. It is an important tool corporates listed on Stock Exchange. The SEBI code on for Governance Corporate was released in January 2000 for adoption by listed It is expected companies. that this measures may raise the standard of governance corporate in India and improve the disclosure standards and protection investor .

SEBI Guidelines on Listing: February 2000, the SEBI has asked the Stock Exchanges to In
amend the listing agreement by adding clause 49, providing for governance corporate mandatory for companies seeking listing for the first time. companies which are included Group A of BSE and in S&P CNX The Index Nifty have to comply with the requirements by March 31, 2001. listed companies with paid up capital of Rs.10crores and above or Besides of Rs.25crores or more have to comply with this requirement by March networth end Other listed companies with a paid up capital of Rs.3crores and 2002. have to above comply with this requirement of corporate governance by March 2003. end The SEBI has also directed the companies listed, to reduce the Nodelivery period to one week in the case of Demat shares. A committee set wasup to streamline the existing risk containment measures namely margin system and simplify the it.

SEBI’s Record:
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The SEBI has set a creditable record of regulation for the growth of a healthy Capital Market during the period of 1995-2000. In year the 2000, it has set for itself the tasks of speeding up the measures following . 1) Pursuit of healthy Corporate Governance Regulations. 2) Strengthening of Rolling Settlement System by adding 500 more to scrips its. 3) Introduction of Derivative Trading. 4) Development of the internet practices by brokers. 5) Promotion of trading in debt market and in securities debt instruments .

Products and Services
Venture Capital:
Venture capital is risks money, which is used in enterprises either as equity or debt capital. It may be in new risky industries sunshine or older risk enterprises. The funds, which finance such risky, capital venture funds. Ventures capital was originated & popularised in USA sixties. In developed countries, this capital came from pension in funds, insurance companies & even large banks. Some large companies with funds excessmay provide this capital to achieve diversification, market & ‘window expansion on technology’ or to share in this result of R&D of others. In India, as the majority of the above institutions are in public sector, only the government or public financial institutions the can provide the funds for venture capital.

What is Venture Capital?

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Venture capital is a post-war phenomenon in the world, mainly developed as a sideline activity of the rich in USA. business connote the risk & adventure & some element of investment, the To name of generic ‘venture capital’ was coined. In the late 1960’s a new breed professional investors called venture capitalists emerged whose of was to combine risk capital with entrepreneurial management & to specialty advance technology to launch new products and companies in the use place. Undoubtedly, it was ‘venture capitalists’ astute ability to assess markets manage enormous risks & export from them tremendous returns and changed the face of that America. Innovative, hi-tech ideas are necessarily risky. It is here that concept of venture capital steps in. Venture Capital provides long start the costs up to high risks & returns project. Typically, these projects have rates and mortality therefore are unattractive to risks-averse bankers & private companies sectors .

Venture Projects:
Proposals come to the venture capitalists in the form business plans. He appraises the same, giving due regard to the of of the founders, the nature of the product or services to be developed, credentials market to be saved & the financing required. If satisfied, he will invest the his money in the equity shares of the new company, known as the own company. assisted In addition to money, managerial & marketing assistance also be provided that is, the venture capitalist not only provides funds may also but on line operational advice. In short, he identifies himself with the project as much as the innovator promoter & as such works hard accomplish ambitious targets & consequents higher appreciation of to capital his .

Indian Position:

In India, most project financing schemes require at least 25 cent of the project cost to be contributed by the promoters, while the per latter can raise barely 5-10 percent. For long, there were a few agencies such as
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IFCI’s subsidiary company, Risks Capital And Technology Foundation India, which provides finance to bridge the shortfall in the of contribution, promoter’ but they could fulfill the requirements of a great many entrepreneurs. As results of promoters not being able to bring in those budding initial vital inputs of money, many of their good projects were hanging Venture capital could remedy this situation as fire. well. A beginning was made in this direction by the setting up venture capital divisions under the aegis of ICICI, IDBI & of Encouraged by the response to technology financing, ICICI floated IFCI. s aeparate company ---Technology Development and Information Company India of (TDICI) includes, apart from venture capital financing, consultancy technology, as well as entrepreneur escort services such as business management, vendor development etc. The successful operation marketing, this of fund will hopefully spark off some interest from the private which sector, will then consider entering this line of activity. Ultimately, it is when only venture capital financing becomes more broad-based and that it will widespreadtruly taking root in economy. In tune with its tradition pioneering new ideas, ICICI deviated from the beaten path to usher in of unusual type of financial support. Addition to equity participation (up an maximum of 49 percent) undertaken by typical venture capital to TDICI offer companies, the conditional loans. The entrepreneur neither pays interest it onnor does he have to repay the principal amount. If the venture succeeds, capital TDICI recoups its investment in the form of royalty on sales ranges between two and eight percent. On the other hand, if which venture fails to take off even after five years TDICI will consider writing the the off loan.

Public financing agencies :
It is to be noted that the floating venture capital companies the financial are institutions or banks (the Andhra Pradesh Industrial Development Corporation, Canara bank and others). This can be directly
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attributed to the Government guidelines, which restrict private participation in venture capital funds to a maximum of 20 sector percent. But if the concept is to make a mark in the economy it private sector initiative and not institutional or government patronage. needs fact, In herein lies the strategic significance of the venture capital. It paves, way the for the private sector to share the burden of industrial particularly risk finance with the public finance, sector. The activities of the venture capital fund of ANZ bank includeGrindlays making equity investments in new companies, which may may or not involve any new technology or other such related risk. This of the direct subscriptions by financial institutions and banks has been activity on for going decades and cannot be termed as venture capital activity. difference in ANZ Grindlays bank activity id one of the nomenclature The not and of means of financing. Also, on the whole, venture capital is more in the provided nature of mezzanine loans than equity.

Private Agencies:
One Venture Capital fund set up the private sector in India Credit Capital Venture Capital (India) or CVF for the short, the is shareholders of which are Credit Capital Finance Corporation, Bank principal of India, Asian Development Bank, and CommonWealth Corporation. DevelopmentAnother set up in the private sector jointly by the ICICI th Century Finance Corporation, bank of Baroda, Asian development Bank 20 and Finance and investment Corporation is the th Century Asian Capital Corporation Ltd. One reason why private capitalists are 20 Venture shy may generallybe the high rate of capital gains tax applicable to the profit of Venture Capital Funds. Though the guidelines provide for a rate of capital concessional gains tax, the move can hardly be deemed as a ‘concession’ view in of the enormous risks involved in the activity.

Policy Initiatives:

The idea of providing venture capital finance (VCF) to the new entrepreneurs in India was mooted by the then finance minister in the term long-fiscal policy announced by him in 1985. A fresh reference to the
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“difficulties faced by new entrepreneurs in raising equity capital” made was by the finance minister in his 1988-89 budget speech and guidelines detailed for providing such finance by registered companies or funds announced. were In India, the government has set up a Venture Capital with a contribution of Rs.10crore. The fund was brought into Funds st operation on 1 April 1986 by the IDBI. For financing this fund, a levy imposed on all payments made by Indian industries for the acquisition was foreign technologies. This fund finance projects with minimum of maximum project costs of Rs.5lakhs and Rs.250lakhs and respectively. Grindlays Bank has set up the Indian Investment Fund Finance the start up cost of entrepreneurs. This fund was to mainly by subscribedNon-resident Indians. The Government of India announced on 1989 a National Equity Fund for financing smallalso entrepreneurs setting up units in rural areas and urban areas population scale below Rs.5lakhs. Institutions like ICICI,IFCI,SBI Capital of Canbank Markets Financial Services and others have also set up their own for providing Venture Capital funds Finance. However, in general, the experience is that the Indian institutions financial are yet to reorient their financing policies to meet the Capital Venturemaxims. The traditional conservation of these organisations makes their approach unacceptable. They fail to recognise that criteria normal of debt-equity ratio, existence of security etc., are not the for evaluating venture capital criteria projects. The policy of Government with regard to Venture Funds hasCapital in 1999-2000. The Government has allowed a changed free and transparency for I.T. Venture Funds Foreign Funds are hand freely into allowed these Funds.

Difficulties in India:

Fundamentally, there are no private pools of the capital of finance ventures in India. The financial institutions perforce occupy a risk position in dominant the provision of long-term capital to Indian industry. They the andState development agencies do provide limited amount of equity finance the development of new business but there is no to assist private,
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professionally managed investment capital sources. There are no sector privateinsurance companies or the pension funds gathering regular income and premium virtually no private banks willing to devote a small portion their of resources to the venture capital niche. It is unlikely that enterprises will be created in the foreseeable future to mobilise such saving private for investments. As an answer the situation, mutual funds investment trusts are permitted to set up and to commit the part of and resources to the venture capital area. As a part of the broader their investment fund, given suitable standards of the valuation for equity investments, it should be possible for the fund managers to commit unquoted portion of there portfolios to venture capital situations. The participation the the of private sector in venture capital funding, as it has come to be defined the in narrow Indian context, is not possible in isolation from the opportunity develop a broadly spread investment to business.

Tax Treatment:

The tax treatment of the venture capital funds in India ungenerous and falls well short of what is required. Whereas the is Funds Mutualestablished by the government controlled financial institutions nationalised commercial bank suffer no tax on either income or and gains, capitala venture capital fund would suffer at 20 per cent on dividend income and a similar rate on long-term capital gains. Given an adequate spread and investment tax incentives, mutual funds step into the early stage arena, professionally assess and the monitor investments assist the launch financing of medium size businesses. SBI Mutual Fund is really new investment undertakingwork with its ‘brought deals’. The creation of more funds participate in this area of the market is now clearly seen. Early to stage financings could then be syndicated between number of managed funds professionally and sound, competitive situation between them might also created be . The Government has since 1995-96 been treating the funds like Mutual funds for tax benefits and brought them under venture Regulation SEBI has set out the guidelines for their registration of SEBI. The control by itself a code of conduct for them to operate as in the case and capital market mutual funds and for their investment and operations on of fund. the In the Central Budget for 2000-01 the income of the Venture Capital
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Fund is taxed at the rate of 20%, although the dividends declared in hands the of the investors are taxfree.

Need for Growth of Venture Capital:
There is need for encouragement of risk capital in India, as will widen the industrial base of, high-tech industries and promote this growth of technology. the The initial step might be to permit the launch of the fund by all those banks authorise to conduct business in India, at the mutual sameextending the investment range of such funds to embrace time stocks unquoted . Liberating the capital market would bring greater depth to capital market as a whole, introducing more genuine investors of the with long substance time horizons, provide avenues for the institutions to realise equity their portfolios more easily (freeing funds for more new investments), generally improve market liquidity. This would improve equity and cult. So moves towards a freer and less regulated market important in are considering measures to simulate the entry of the private into the sector risk capital formation.

Latest Policy Charges:
In the year of 2000 of new millennium, the I.T. industry alongwith many start up industries like Telecom, Biotech, Multimedia etc… experienced rapid growth potential but with Scarcity of the Venture have To encourage Venture Capital Funds to grow rapidly to help Funds. these industries, the Government has announced the following measures early 2000. in 1. SEBI to be the sole authority for the regulation of Venture 2. Capitals. window clearance facility is extended without the need The single going for for clearance with the government RBI and I.T. Authorities.
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3. In the first Millennium Budget, 2000-2001, Venture Capital have “on got par” Status with Mutual Funds for the purpose of the treatment under section 10(23D) of I.T. Act. Tax exemption is tax to Venture Capitals like those of Mutual Funds, so that granted taxation double is avoided and tax is levied only at one level, namely at hands the of 4. investors.norms are liberalised for the Venture Capital Funds for The IPO purpose of listing. Appraisal and finding are allowed to extent of the of the 10% equity capital of a start-up company. The condition of 3 track years record of profitability is waived. Even a public issue of 10% paid of up capital is enough for the I.T companies for the purpose listing of 5. . The Government have set up a separate ministry of I.T and started I.T an Venture Fund of Rs.100crores for the financing new start up projects I.T 6. . Venture Funds were set up by ICICI, UTI, IDBI, Tatas etc.

Venture Capital Vs. Mutual Fund
In the matters of tax, venture capital funds and mutual fund kept on par. Foreign Venture funds are given a free hand tom flow in for are investments permitted for foreign investment. During the first quarter the 2000, about $17 billon have flowed in as Venture Funds mostly invested of in technology based small companies, according to a Survey Conducted the price by waterhouse coopers (PWC) Company. Among the measures to promote the capital market banks now allowedare invest in equities and bonds on a discretionary basis and to invest in Venture Capital Funds beyond the permitted ceiling of 5% of to their in shares and securities of the companies during 1999funds 2000.

Rules on Venture Capital Funds:
The norms of Venture Capital Funds are liberalized early January 2000. While earlier, a Venture Capital Funds could not more than acquire 40% of equity of a high risk business or a start up now there company, is no such ceiling and Venture Capital Funds is free to as it likes. However, the only restriction that remains is that the invest Venture
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Capital Funds cannot invest more than 25% of its own Fund base in one any company. Now Venture Capital Funds can hold upto even 100% equity of a start up the company as that ceiling of 40% is now of but it can removed, now hold up to 25% of its own fund in any company’s equity. Foreign Venture Capital is made eligible to participate in building process since July 2001. There is no lock in period for the book issue pre share capital of an unlisted company held by Venture Capital and FVCFs. Mutual Funds are now eligible to invest in units of Funds Venture Capital Funds, like investments in listed and unlisted the There has securities. been a considerable liberalisation in investments by Capital VentureFunds as much as investments in Venture Capital Funds.

Merchant banking
What is Merchant Banking? Merchant banks are issue houses rendering such services to projects or corporate units as floatation of new ventures and new industrial preparation, companies, planning and execution of new projects, consultancy and in technical, financial, managerial and organisational fields. A number advice other of function such as restructuring, revaluation of assets, takeovers, etc, are also undertaken by acquisitions, them.A major function of merchant banking is the issue management. issue The be public issue through prospectus, offer of sale, or can private placements etc. Issue Management The issue management involves the following functions in respect issue through of prospectus: approval for the issue from the (a) Obtaining (b) Arranging underwriting for the proposed SEBI (c) Drafting and finalizing of the prospectus and obtaining its clearance issue. the underwriters, stock exchanges, auditors, solicitors, Registrar from of Companies and other necessary consents required for filing the (d) Drafting prospectus. and finalization of other documents such as application stock forms, exchanges.
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(e) Selection of the registrar to the issue, printing press, advertising underwriters, brokers and bankers to the issue and finalisation of the agencies and fees charges to be paid to them. (f) Arranging through the advertising agency the press, brokers investor's and conferences. (g) Co-coordinating the printing, and advertisements relating to the and work of the issue, registrars to the issue, the receipt and processing of applications preparation of the basis of allotment, negotiation of the same with the and exchanges and preparation of register of stock allotment. In the case of management of debentures, apart from the Managers to the issue have to do the following things: (a) To finalize the terms of the issue which will make the debenture attractive; issue (b) and To assist in the finalisation of the relative security or documents mortgage and obtaining approval there to from the Company's and solicitors trustees Other Functions Merchant banks in foreign countries undertake a larger number activities. They operate both in the money market and capital of market, direct and indirect lending portfolio management for undertake trusts, charities, etc, funds management for existing companies, institutions, for new and underwritingold companies etc. They are also active in the money market and discount market operations in undertaking bills discounting investing the short-term funds in treasury bills, commercial bills and and money other market instruments. In India, these functions are carried on by banks themselves with the result that their merchant banking divisions confine underwriting, consultancy, new issue business, involving management to issues and related activities. The Indian merchant banking is still in of infancy and their activities are, therefore, limited to a few selected its activities of new issues market at present such as project planning, consultancy, advice and planning and execution of these projects, financial the preparation for the public issue, observance of necessary formalities involving for
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such issued applications to SEBI, RBI and for listing on the stock collection exchange, and allotment of share application moneys, underwriting etc .s Offer of Sale Usually, when the closely-held companies, whose shares are not on the stock exchange, approach the financial institutions for assistance listed the for expansion of their existing operations or diversification, the institutions financial stipulate a condition that the company should get its listed. shares Where the capital base of the company is already large and further issuing equity capital is not justified from the servicing angle, the can offer such part of their exist holding for sale through a letter of offer promoters the to members of the public as Is necessary to get the equity shares of company listed on the stock exchange. Although the letter of offer is the governed by the provisions of the Companies Act, 1956, in practice, not letter the of offer contains all the similar provisions which are to be found in prospectus the . The offer for sale must give all material particulars relating to company as if it were a prospectus issued under the Companies Act. the particular, it should include information regarding the shares on offer In the andterms of sale, its capital structure, and capitalisation of reserves, revaluation of assets or schemes of arrangements or reorganizations, last any years' five profit and loss account summarised accordance with the prescribed listing requirements. Any document by which the offer for sale to the public is made shall, all for purposes, be deemed to be a prospectus issued by the company and enactments and rules of law as to the contents of prospectuses and as to all liabilities in respect of statement’s or omissions from prospectuses the otherwise the prospectus, shall apply as if the shares or debentures relating to been had offered to the public for subscription and as if the persons accepting offer the in respects of any shares or debentures were subscribers for those or shares debentures. The said letter of offer will have to be signed by the persons offering shares or debentures for sale in the same manner as the directors of the the company sign the prospectus in terms of Section 60 of the Companies Act. The offers collectively and individually accept full responsibility for the
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accuracy of the information given in this offer of sale and confirm that to best the of their knowledge and belief there are no other facts, the of which makes any statement in the offer for sale misleading, and commission further they confirm that they have made all reasonable inquiries to ascertain facts such . The offers have to certify that neither the stock exchange to which application for official quotation is made nor the Central Government an SEBI has any responsibility for the financial soundness of this offer, or or the for price at which the offer of sale is made, or for the statements made opinions expressed in the offer of or sale. The initial issues should normally be at par and if further issues are at amade premium, this has to be justified by acceptable norms by the bankers. merchant Private Placement When the financial institutions directly subscribes to equity/preference shares and/or debentures issued by the company, the company is said to have privately placed these securities with the the institutions. This does not require either a prospectus or letter of offer. financial terms The and conditions subject to which the financial institutions agree subscribe to the privately placed shares or debentures are to usually incorporated in the debenture subscription agreement or the agreement investmententered into between the financial institutions and the company. The company could, if it so desires, approach, in the place of institutions, a well-identifiable body of persons like merchant banks financial private placement. The provision of the Act are to be interpreted strictly for and therefore, if the company sends the offer to Mr. X and the offer is by Mrs.X accepted to whom the allotment is finally made, it could deem to be public offer necessitating compliance of requirements of the the prospectus. is, therefore, to be undertaken with great caution to see that This exercise final the transfer takes place only to those for whom the original offer made. was In practice, till recently the companies hardly took any recourse this to mode of private placement of their securities due to these restrictions. The company has to agree upon the list of persons to whom the offer is be to much in advance and its is thereafter necessary that the sent company
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should send offers to the same persons as per the list approved by Company with a clear-cut instructions to the officers that the the offered are securities strictly to be subscribed for by them and them alone and officers are not supposed to pass on the offer of the company to the else. He someonewould also ensure that the company would receive only from those persons to whom the original offers had been sent by subscription company and finally, the company would allot securities to the the persons. same

Services of Merchant Banks Merchant banking is normally considered to be related only to services associated with public issue management but they also the domestic project finance syndication. Large merchant banks in offer country offer a wide range of services. Merchant banks the generally the following offer services. (a) Pre-investment studies for investors: These are in the of financial feasibility explorations in selected areas of interest of nature client. They include such studies for foreign companies wishing the participate in joint adventures in India, and often involve a to covering package advice on the nature of participation and Government regulatory factors. (b) Project finance: Once the decision embark on a particular project/expansion/modernisation scheme has been taken, assistance working out a comprehension package for the project funding in pattern of financing is available from the merchant banks. They and work liaison with the client, his technical consultants, and in close funding institutions, prepare and submit complete e financial the and arrange dossiers, for the various sources of finance. Assistance in legal documentation for the finance arranged is also provided. (c) Working capital: Finance for working capital, particularly new ventures, often needs to be syndicated on behalf of the for promoters, banks assist in this as well. For existing and merchant non/traditional sources such as through the issue of debentures for companies, purpose, and others have been successfully tapped by this merchant
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bankers. (d) Foreign currency finance: Of late, India has increasingly active in the international money markets, and this become is likely trend to continue. For import of capital goods and services overseas, the arrangement of various kinds of export credits from different countries is also from required. In addition to this wide range of services, some of the larger arebanks also involved in areas such as the arrangement of lease and assistance in acquisitions and mergers finance, etc. Why Merchant Banks? The following are some of the reasons why specialist banks have a crucial role to play in merchant India: 1. Growing industrialisation and increase of advanced technologically industries. for encouragement of small and medium 2. Need who require specialist industrialists, services. 3. Growing complexity in rules and procedures of Government. the 4. Need to develop backward areas and states which different require criteria. 5. Exploring the possibility of joint ventures abroad and markets foreign . 6. Promoting the role of New Issue Market in mobilising from of public. savings Functions With increasing industrialisation of the country and the emphasis in the Five Year Plans on industrialisation, growing banking in merchant India has a very extensive role to play. The National G &srindlays Bank was the first to set up merchant banking division India followed by the State Bank of India and other in banks. Functions of the merchant banking divisions are as follows: 1 advice and liaison obtaining consent of the Central and Stat e
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Government, for the project if necessary; 2. Preparation of economic, technical and financial feasibility 3. Initial reports; project preparation, pre-investment survey, and studies market ;4. Help in raising rupee resources from financial institutions commercial and banks; 5. Underwriting and also for subscription, if necessary, to the issues or syndication of loans, new etc;Assistance in raising foreign exchange resources so as to 6. the industrial concerns to import machinery and technical knowenable and howsecure foreign collaboration. setting up turnkey project s in foreign countries 7. Advice on locating foreign and markets;in financial management and in designing proper 8. Help structure and debt-equity ratio, etc, for the capital company. on restructuring of capital, amalgamation, 9. Advice takeovers, mergers, etc; Management of investment trust, charitable trusts 10. 11. Management aid and entrepreneurial aid (management etc; providing designs of the complete system, operational research audit management consultancy); and 12. and Recruitment (selection of technical and managerial etc personnel), . Role of Merchant Banks To promote the new issue market there is need for a improvement in the offer of new issues both in terms of time qualitative and the taken cost of floatation. The time taken for organising a new is between 12 to 18 months and the cost of raising new capital issue from 3% varied to 8% and sometimes even 20%. This has been down relatively by specialised merchant banking institutions brought catering to the requirements of both large and small industrial by Cost units.of floatation of equity and preference capital is higher for companies than for existing companies, indicating thereby new difficulties experienced by new companies in making a new the Merchant banks help saving in the cost of new companies and issue. of small companies. The new issue market has not succeeded fully in mobilising
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savings partly due to the preferences of the public to deposits companyand partly due to low yields on equities as compared to on fixed those interest securities. There has been a decline in the of share capital in the total capital employed due to the steep rise proportion the in cost of new issues. There are certain minimum costs to incurred in respect of fees to brokers, promoters' be underwriting commission etc, irrespective of the size of the expenses, While bigger companies are able to manage this, small units find project. extremely difficult to meet this minimum cost with it prospects uncertain of their own internal resources in order to avoid the cost high of making public issues. Underwritin g The main work of merchant banks relates to underwriting of issues and rising of new capital for the corporate sector. Of new amount underwritten, some part devolves on the underwriters, the varies which depending on the state of the capital market, and the worth of intrinsic the project. The SEBI has made Compulsory underwriting for all issues offered to Public first but later it was optional. SEBI made it necessary for merchant bank to undertake made make a firm commitment for 5% of issued amount to the or public. Type of Expertise Required The type of staff required for a merchant bank will depend upon functions which are themselves flexible. The merchant bank its should organisation large enough to deal with a number have an applications at a time. The issue house which acts as the of banker normally pays visits to the company's plant, warehouses, merchant and physical assets and if a company is making its first issue, other might secure independent reports from Chartered it industrial consultants, technical experts etc. The issue house, which Accountants, ismerchant bank also, requires, plant, management, a competitors, profit margins, taxations, etc. They have to keep ready labour, the all information needed in the form of dossiers with respect to affairs of the company generally enquired into by the investing the public, financial institutions and the lending government. Secondly, a merchant bank has to suggest an appropriate time of
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issue and provisional terms. Once these terms are settled the certificates, prospectus and other documents are drafted by share merchant bank with the assistance of lawyers, accountants and the They have to satisfy the Companies Act and other SS requirements others. law. of Subsequently, the merchant bank may have to get ready application to the SEBI for the public issues. This the familiarity requires with the regulations under the Companies Act and SEBI the guidelines and the procedures to be followed and the to be approached. The provisions under the MRTP Act authorities monopoly regulating practices and other activities of big industrial houses also be should looked into. Thirdly, they may have to make an application to the stock exchange for quotation and satisfy the stock appropriate authorities exchange with respect to the terms of issue and requirements are to prospectus.Listing be observed and familiarity with the exchange rules and bye-laws as well as the provisions of stock Securities Contracts Regulations) Act would be essential. They the have may to advise on the desirability or otherwise of listing on the exchange as well as help the companies go through the process stock getting their shares listed. Advertisements containing all of information legally required to be given in the prospectus must the published in all the leading proposed date of opening and closing, be s aummary of the company’s business history, balance sheet, etc, to which a reference was made earlier. Once the issue made, the work the of merchant bank relates to arranging for the allotment of shares consultation with the company and the stock exchange in authorities of with the help Registrars.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) MERCHANT BANKING -ROLE & FUNCTIONS (a) Authorisation Any person or body proposing to engage in the business Merchant Banking would need authorisation by SEBI in of prescribed format. This will apply to those presently engaged in the the
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Merchant Banking activity, including as Manager, Consultants Advisers to or issues. (b) Authorised Activity (i) Issue (ii) Corporates Advisory services relating to the Management (iii) issue (iv) Portfolio Underwriting Management (v) Managers, Consultants or Advisers to the Services issue (c) Authorisation Criteria All Merchant Bankers are expected to perform with high of integrity and fairness in all their dealings. A code of conduct for standards Merchant Bankers is prescribed by SEBI which will take into the the account following: (i) Professional (ii) Personnel, Competence their adequacy and quality and other (iii) Capital infrastructure (iv) Past Adequacytrack record, experience, general reputation and fairness all in their transactions. (d) Terms of Authorisation (i) All Merchant bankers shall have a minimum net worth of Rs.5 crore (ii) The Authorisation will be for an initial period of 3 . (iii) years.All issues should be managed by at least one authorised to Merchant banker functioning as the Lead Manager or Manager sole . Issue Manager Amount s Up to Rs. 50crores more than 2 No. of Lead Not

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Over Rs. 50 crores not more than 3 more Than Rs.100 crores Over Rs.100 crores than 4 more



(iv) The Merchant Bankers shall exercise due independently verifying the contents of the prospectus. The diligences Bankers of Merchant the issues shall certify to this effect to SEBI. (v) In respect of issues managed by the Merchant Bankers, would they be required to accept a minimum 5% underwriting obligation the in issue subject to a ceiling of Rs. 25 lakh. (vi) Lead managers would be responsible for ensuring refunds timely and allotment of securities to the investor. (vii) The merchant banker’s involvement will continue till complete on of essential follow-up steps including listing of the the and dispatch of certificates and shares refund. (viii) The Merchant Banker shall make available to SEBI information, returns and reports as may be called such for. (ix) Merchant Bankers shall adhere to the code of conduct shall prepared by which SEBI. (x) Merchant Bankers to ensure that Publicity / material accompanying the application form to the issue meets Advertisement the requirement of GOI/SEBI. (xi) SEBI shall be informed well before the opening of the issue the allocation of activities/sub-activities, among lead managers Inter the to issue. (xii) Merchant Bankers performing or planning to perform portfolio management services shall furnish the details in the prescribed format. (e) Classification of merchant Bankers
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-------------------------------------------------------------------------------------------------------------------Category Requiremen Authorised to Act t as (1) (2) (3) ----------------------------------------------------------------------------------------------------------------Category 1 ---Minimum Net worth Rs.50 Lead Manager/co.manage crore r Adviser/consultant to an Portfolio issue, manager and underwrite to an issue r is Mandatory required . -------------------------------------------------------------------------------------------------------------------(f) Grading of Prospectus Grading of Prospectus will be done by SEBI using the following parameters : (i) Objective description of the project, its status and implementation ( . ii) Track record of the promoters and their (iii) Disclosure about Demand - Supply position, Market competence. and Marketing arrangements, Raw materials availability infrastructural and (iv) Disclosure of Risk facility. factors. (v) Objective assessment of Business prospects and profitability.

If highlights are provided the following deficiencies will negative attract points:
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1. Absence of Risk 2. Absence of Factor 3. Extraneous contents in Listing prospectus The Maximum grading points of prospectus will be 10 Points Category More than or Equal to 8 +A More than or equal to 6 but less than A 8 More than or equal to 4 but less than B 6 Less than C 4 (g) Penalty Point System SEBI has introduced penalty point system for Merchant who fail to comply with the various provisions. The areas of Bankers compliance/defaults have been categorised into following nonfour categories. The activities are classified within these four categories: Natur Penalty e Points -------------------------------------------------------------------------------------------------------------------I General 1 Defaults II Minor Defaults 2 II I Major Defaults 3 Type

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Serious Defaults

Introductio n


The term "Investor Protection” is a wide term various measures designed to protect the investors from encompassing of companies, malpractices brokers, merchant bankers issue managers, Registrars of new issues, etc. "Investors Beware" should be the watchword of programmes for mobilisation of savings for investment. As all investment has some risk element, this risk factor should be borne all mind by the investors and they should take all precautions to in their interests in the first place. If caution is thrown to the winds protect they and invest in any venture without a proper assessment of the they risk, have only to blame themselves. But if there are malpractices companies, brokers, etc, they have every reason to complain. by grievances have been increasing in number in more recent Such years. The complaints of investors come from two major sources: (i) Against member brokers of Stock Exchanges; (ii) Against companies listed for trading on the Stock Exchanges. Besides, there can be complaints against sub-brokers, merchant bankers, issue managers, etc, which cannot be agents, by the stock entertained exchanges as per their rules. However, against registered sub-brokers can be complaints entertained. Complaints against Members Investors have complaints against brokers regarding the quantity etc. at which transactions are put through, defective price, or delayed delivery delivery, delayed payment or non-payments etc, nonUploaded for
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settlement of vyaj badla ducs, non-payment of agreed brokerage authorised assistants, etc. In the event of default of a member to the dues broker, of clients are also to be looked into. There is a Grievance Cell in many Stock Exchanges which to investor complaints. Of the total, nearly 95% are attends companies and they are more difficult to settle, as many companies against not do attend to the complaints promptly despite reminders and by the stock warnings exchange, in view of the fact that penal powers of Exchange are limited SEBI has been given these penal powers the respect of listed companies by an amendment to the SEBI Act in in and many other subsequent a amendments including the latest 1995 2002. in

The grievance procedure in respect of complaints members against is as follows: (a) Joint meeting of member’s vis-à-vis the clients for an amicable settlement. (b) Arbitration proceedings by the committee under the byelaws. (c) Special committee appointed by the Executive Director for settlemen t (d) Disciplinary proceedings including warnings, fines penalties, etc. particularly in cases of fraud, cheating, etc. by the members . Grievances Cell Complaints against members were in the nature of non-payment saleof proceeds, non-settlement of accounts etc. Of the total against members, about 85% are settled during the year, complaints itself.

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Complaints against Companies The complaints against companies are in the nature of nonof allotment Letters, refund orders, non receipt of dividends, receipt etc., delay interest in transfer of shares and in splitting and consolidation. clearance of these complaints is also attended to by the Cell by The to the companies, follow-up telexes, etc. and finally by warning writing delist the companies concerned. But the clearance of these to is slow due complaints to the non-compliance or slow compliance by companies to the References made by the Cell. The powers of the Stock the Exchange are limited to warnings and delisting of shares and such as compliance by the companies was poor. Customers' Protection Fund The Customers' Protection Fund is constituted by all Exchange to safeguard the interests of the investor clients Stock defaults from of the stock brokers. The Fund is financed by way of a on the levy turnover of members and from out of the listing earmarked by the fees, Exchanges. Investors Investors in stock and capital market need a word of Beware Firstly,caution. these investments are more risky, returns are uncertain share and values are subjected to wide fluctuations. Secondly, investments require an art and expertise to pick up the right such failing stocks, which the investors would burn their fingers. Thirdly, players in the market namely, Brokers and issuers of the companies’ securities, etc are not rated high for their honesty with the result the thatinvestor’s complaints against stock brokers and companies been have increasing over the years. Specific Goals The investor should be clear in the objectives of the income, capital appreciation, short term gains or long term gains etc. He should have made already enough investments housing and for a regular income to meet his minimum needs and comforts of life. Even in all if the stock market investments are wiped out due to a market crash, the investor should not
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be pauper on the streets. Besides, if the investor spends sleepless nights on the fall of prices, share he cannot be a good stock market investor. Pre-requisites of Investor The investor should have abundant common sense and a strong heart to the vicissitudes of fortune. He need not be a holder of high academic degrees like an withstand from MBAHarvard or a finance graduation from the Wharton School. Nor does he need to hereditary characteristics or family tradition of investment. The only requirement he have have is should abundant logic and common sense and strong nerves and develops the art investment on a scientific of basis. Preparing to Investors desiring to invest in stocks require a lot of preparation. The weak hearted Invest risk -averter should first make an entry by buying only debentures, particularly and debentures convertible of good companies, or subscribe to new issues of promising and wellcompanies. established After sufficient study and preparation, the investor should act like stagin the market, picking up scripts on a selective basis. That means selected companies pickers promising and growing industries should be picked up after collection of all from information and data on the companies and scientific analysis of their fundamentals. relevant undervalued scripts should be purchased at the right time with the help of technical The Rumors analysis.and advices: of so-called consultants have to be carefully scrutinized. As the investment is both a science and an art, it requires both expertise and intuition. There market need is for prior preparation and a lot of home works before investments are undertaken. high A degree of caution and planning is necessary but the scientific basis and knowledge arebe acquired by a proper to study.

Balance Sheet Study
Investors entering the stock market should also get into habit of detailed and careful study of the balance sheets of companies the which they wish to invest. Similarly, they should examine carefully in the detailed prospectus before subscribing to the new issues of companies. habit The of relying on rumours, or advice of brokers or friends should replaced by habit of self-study of balance sheets and prospectus of be the companies .

Choice of a Broker
Investors should as far as possible deal only with registered members of recognised stocks exchanges. In place where no stock
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exchanges are; they may deal with those sub-brokers who have with registered connections brokers. An honest and dependable broker is too through chosen proper introduction and orders should be placed with him in manner proper with limits on prices at which sales or purchases can be made. and As when a transaction is completed, he should insist on a contract note due in time.

Protection in the New Issues Market

The main sources of information on which investors depend the new issues market is the prospectus, which should contain in statements of fats. Any false statements, fraud, etc. are punishable under correct Companies Act. Under Section56 of the Companies Act, the Directors the subject to civil liability for any misstatement facts or untrue are statements. Under Section 63 and 68 of the companies Act, the directors also liable criminally for any fraud of false statement in the are Companies’ prospectus. liability for misstatements arises from statements statements, which are material to the investors and the particulars on and investors which depend to make investments. The directors or promoters of company are thus subject to both criminal and civil liability under the the for Actnay misstatements in the prospectus. Even so, the small investors afford cannot to go to court and, should therefore, carefully read and examine the prospectus for the viability of the project and marketability of the and for product integrity and dependability of the promoters. The investors have a responsibility to assess the prospectus and risk involved in the also projectmaking any before investment. Protection for Fixed Deposits Section 58A of Companies Act, deals with the subject of Deposits. There are some rules, which apply to non-banking Fixed companies, private limited companies, who wish to raise deposits from the public. No deposits can be invited from investors or the public unless the companies follow the rules and guidelines made by the Department company Affairs in consultation with the RBI. Interest rates, maturity of of deposits, and the amounts permissible to be raised by the companies period all aregiven in the form of guidelines by the Department of Company Affairs. The companies have to follow these guidelines while accepting deposits
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from the public. Renewal and repayments are also regulated by Companies Act and the rules framed by the Department of the Affairs. When the company fails to repay the deposit, the depositor Company complain to the Company Law Board (CLB) in the specified form can filled duly in together with the fees for non-payment of the interest or payment of deposits. The order of the CLB is final and binding on noncompany and the company has to comply with it. Any non-law would the penalty invite of imprisonment and fine. This provision however, does not apply sick to companies. All NBFCs been registered and licensed by the RBI since 1997 and guidelines for them have been issued by the RBI early in July The raising of deposits by them is subject to credit rating and a host of 1998. requirements other .

Guidelines to Investors
1. Deal with a registered member of the stock exchange. If you


3. 4. 5. 6.


dealing with a sub-broker, make sure that all bills and are are made contracts in the name of a registered broker and sub-broker also is registered with the Insist SEBI.that all your deals are done in the trading ring or the through exchange. Give specific orders to buy or sell within the fixed price and/or limits time periods within which orders have be Insist on executed.contacts notes to be passed on to you on the dates. the orders are When Make sure executed. that your deal is registered with the stock In the case exchange. of a dispute, this will help trace the details of the deal Collect easily. a settlement table from the stock exchange the pay-in and mentioning payout days. Each stock exchange has its one trading periods, which are called settlements. All done within transactions this period are settled at end of it. All payments the for shares bought and share deliveries take place on the payin An awareness of pay-in and payout days is use full when day. b a roker tries to make Keep separate records of dealings in specified shares (Group excuses. and A) non-specified shares (Group B1 and B2). The settlementson different days with the present for each is compulsory

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rolling settlements system, deliveries and payments are quicker made with in three to five 8. days. periodic settlements of dues and delivery of shares Execute avoid accumulation of to 9. transactions. Insist on delivery. If the company returns your papers shares and with objections, contact your broker 10.Ensure that shares bought are transferred in your name immediately. the company’s book closure date. This is necessary to before sure that you receive benefits like dividend, interest and make shares. bonus All companies have a book closure date on which list the of shareholders in the company is 11.Complain if broker does not deliver the shares bought in finalised. name. your Proceed to contact another broker with the bill/ given to contact you by the earlier broker and the latter will the shares purchase on your behalf. In such an event, the first broker have will to pay the difference in 12.Do not sell shares that are transferred in your name after price. book the closure, as there are not valid in the 13.Do not sell/deal in shares where even one of the holders market. passed away. In cases where the holder has died, a has certificate successionis necessary. In cases where one of the joint passed holdersaway, the surviving holder should send the shares with alongthe death certificate to the company. Only after the of the name deceased has been deleted from the shares, can they be transferred 14.Do not expect the money shares to come immediately. It . take will at least 7 to 15 days from the date of transaction, which is made quicker in, demat form of now 15.Unless you have special arrangements with the broker, do trading. expect the adjustments of purchases and sales against not one another. One pays first and receives 16.Do not take delays or harassment lying down. You have later. complain to the Grievance Cell of the stock exchanges to or Securities and Exchanges Broad of the India (SEBI) in case delay or of harassment.

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A list of all those services and facilities that are provided by a portfolio manager to its clients, relating to the management administration of portfolio of securities or the funds of clients, is and to as ‘portfolio management services’. The term ‘portfolio’ means referred total the holdings of securities belonging to any person.

Portfolio Manager: According to SEBI, ‘Portfolio Manager’ means any person

who pursuant to contract or arrangements with a clients, advices or directs undertakes on behalf of the clients the management or administration of or p a ortfolio of securities or the funds of client, as the case may be

Discretionary Portfolio Manager: According to SEBI, ‘discretionary portfolio manager’ means
a portfolio manager who exercises or may, under a contract relating portfolio management, exercises any degree of discretion as to to investments or management of the portfolio of securities or the funds the the of clients, as the case may be.

FUNCTION S The objective of portfolio management is to develop a

portfolio that has maximum return at whatever level of risk the investor appropriate deems . Risk Diversification An essential function of portfolio management is spread risk akin investment of assets. Diversification could take place across to different and across different industries. Diversification achieved securities different industries is an effective way of diversifying the risk in in investment. Simple diversification reduces risk within categories an stocks that all have the same quality of rating. The portfolio managers could as well adopt the ‘Markotiwz model’ whereby portfolio risk are sought to be reduced through assets, which combining are less than perfectly positively correlated. Efficient Portfolio:
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A portfolio manager aims at building ‘dominant investment’ called ‘efficient portfolio’. An efficient portfolio consists of combination assets that maximizes return and maximizes the risk level of of return. The expected objective of portfolio management is to analyze individual different assets and delineate efficient portfolios. A group of of efficient portfolio portfolios is called ‘efficient set of portfolios’. The set of portfolio comprises efficient efficient frontier. Asset allocation An important function of portfolio management is asset allocation. It deals with attaining proportion of investments from categories. managers Portfolio basically aim at stock-bond mix. For this purpose weighted equally categories of assets are used. Beta Estimation Another important function of a portfolio manger is to make an estimate of beta coefficient. It measures and ranks the systematic risk of assets. Beta different coefficient is an index of the systematic risk. This is useful making ultimate selection of securities for investment by in manager portfolio . Rebalancing Portfolios: Rebalancing of portfolio involves the process of periodically adjusting the portfolios to maintain the original conditions of portfolio. adjustments may be made either by way of ‘constant The portfolio’ proportionor by way of ‘constant beta portfolio’. In constant portfolio, adjustments are made in such a way as to maintain the proportion weighting relative in portfolio components according to the change in Under prices. the constant beta portfolio, adjustments are made to the values of accommodatecomponent betas in the portfolio.


A Portfolio manager may adopt any of the following strategies part as of an efficient management:
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Buy and Hold Strategy Under the ‘buy and hold’ strategy, the portfolio manager builds a ortfolio of stock, which is not disturbed at all for a long period of p This time.practice is common in case of perpetual securities such as stock. common Indexing Another strategy employed by portfolio managers is ‘ indexing’. Indexing involves an attempt to replicate the investment characteristics a ofpopular measure of the bond market. Securities that are held in known best- bond indexes are basically high-grade issues. Laddered Portfolio Under the laddered portfolio, bonds are selected in such a way that their maturities are spread uniformly over a long period of time. This way p a ortfolio manager aims at distributing the funds throughout the curve. yield Barbell Portfolio Under this portfolio strategy, less investment of funds is made in maturities middle .


Following are steps involved in the registration of managers portfolio :

Application for Grant of Certificate by portfolio manager for grant of a certificate shall An application
made be to the Board in ‘Form A’. Any application is made by portfolio prior to coming into force of these regulations containing manager particulars or as near thereto as mentioned in the Form A shall be such as an application made in pursuance of sub-regulation (1) and dealt treated accordingly with .

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Conformance to Requirements
Any application, which is not complete in all respects and does not conform to the instructions specified in the form, shall be rejected by Board. Before rejecting any such application, the applicant shall be the an opportunity to remove within the time specified such objectives given may as be indicated by the Board.

Furnishing of Further Information, ETCboard may require the applicant to furnish further information . The

or clarification regarding matters relevant to his activity of a manager portfolio for the purpose of disposal of application. The applicant or principal officer shall, if so required, appear before the Board its personal for representation.

Consideration of Application

For the consideration the grant of certificate of registration to the applicant, the Board takes into account all matters, which it relevant deems to activities relating to the activities to portfolio The Board considers the following in this management. regard: 1. Whether the applicant is a body corporate. 2. Whether the applicant has the necessary infrastructure like adequate office space, equipments and the manpower to discharge effectivelythe activities of a portfolio manager. 3. Whether the principal officer of the applicant has the professional in finance, law, accountancy or qualifications management from an institution recognized by the business Government. 4. Whether the applicant has in its employment a minimum of two persons who, between them, have at least five years of as portfolio experience manager or stock broker or investment manager or the in areas related to fund management. 5. Whether any previous application for grant of certificate made by any person directly or indirectly connected with the applicant been has rejected by the Board.
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6. Whether any disciplinary action has been taken by the Board against a person directly or indirectly connected with the has been applicant under the Act or the Rules or the Regulations thereunder made . 7. Whether the applicant fulfills the Capital adequacy requirements regulation as specified in 7 8. Whether the applicant, its director, principal officer or employee as specified in clause (d) is involved in any the connected litigation with securities markets which has an adverse bearing the on business of the applicant. 9. Whether the applicant, its director, principal officer or the employee as specified in clause (d) has at any time been for any offence involving moral turpitude or has been found convicted of any guilty economic offence. 10.Whether the applicant is a fit and proper person. 11.Whether the granting of certificate to the applicant is in the interests of investors.

Capital Adequacy Requirement
The capital adequacy requirement shall not be less than the net worth of lakhs rupees. For the purpose of this regulation, “net worth” fifty the “aggregate value of paid up equity capital value of paid up means capital equity plus free reserves reduced by the aggregate value of losses and deferred expenditure not written off, including accumulated expenses not written miscellaneous off.”

Procedure for Registration being satisfied that the applicant and on receipts of The Broad on

payment of fees as specified in Schedule II, then grants a certificate the ‘Form B’. in

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