Advanced Financial

Services and
Markets
Module I
Securities Exchange Board
of India
Dr.R.Seranmadevi
SEBI
⚫ The Securities and Exchange Board of India (frequently
abbreviated SEBI) is the regulator for the securities market in
India.
⚫ It was established in the year 1988 and given statutory powers on
12 April 1992 through the SEBI Act, 1992.
⚫ The Securities and Exchange Board of India is similar to the U.S.
SEC.
⚫ The SEBI is relatively new (1992) but is a vital component in
improving the quality of the financial markets in India, both by
attracting foreign investors and protecting Indian investors.
⚫ In this chapter we learn about various guidelines issued by SEBI.
Securities Contracts (Regulation)
Act
⚫ It was proved over time that the provisions in the Capital Issues
(Control) Act were totally inadequate to regulate the growing
dimensions of capital market activity.
⚫ The government realized the necessity of creating a broad based
and a more secure environment for the business to grow.
⚫ This led to the enactment of Companies Act and Securities
Contracts (Regulation) Act in 1956.
⚫ The legislations contained several provisions relating to the issue of
prospectus, disclosure of accounting and financial information,
listing of securities etc..
Securities and Exchange Board of
India
⚫ Under these circumstances, the government felt the need for setting
up of an apex body to develop and regulate the stock market in
India.
⚫ Eventually, the Securities and Exchange Board of India (SEBI) was
set up on April 12, 1988.
⚫ To start with, SEBI was set up as non – statutory body.

⚫ It took almost four years for the government to bring about a

separate legislation called Securities and Exchange Board of
India Act, 1992.
⚫ The Act, conferred SEBI comprehensive powers all aspects of
capital market operations
SEBI - Objectives
⚫ The objectives of SEBI are as follows:
⚫ 1. To protect the interest of investors so that there is a steady
flow of savings into the capital market.
⚫ 2. To regulate the securities market and ensure fair practices by
the issuers of securities so that they can raise resources at minimum
cost.
⚫ 3. To promote efficient services by brokers, merchant bankers
and other intermediaries so that they become competitive and
professional
SEBI - Functions
1. Regulatory Functions:
⚫ Regulation of stock exchange and self-regulatory organizations.

⚫ Registration and regulation of stock brokers, sub – brokers, registrar

to all issue, merchant bankers, underwriters, portfolio managers and
such other intermediaries who are associated with securities market.
⚫ Registration and regulation of the working of collective investment
schemes including mutual funds.
⚫ Prohibition of fraudulent and unfair trade practices relating to
securities market.
⚫ Prohibition of insider trading in securities

⚫ Regulating substantial acquisitions of shares and takeover of

companies.
SEBI - Functions
2. Developmental Functions:
⚫ a. Promoting investor’s education.

⚫ b. Training of intermediaries.

⚫ c. Conducting research and publish information useful to all market

participants.
⚫ d. Promotion of fair practices and code of conduct for self –
regulatory organizations.
⚫ e. Promoting self – regulatory organizations
SEBI - Powers
SEBI has been vested with the following powers:
⚫ To call periodical returns from recognized stock
exchanges.
⚫ To call any information or explanation from recognized
stock exchanges or their members.
⚫ To direct enquiries to be made in relation to affairs of
stock exchanges or their members.
⚫ To grant approval to bye – laws of recognized stock
exchanges.
⚫ To make or amend bye – laws of recognized stock
exchanges
SEBI Guidelines
⚫ SEBI has brought out a number of guidelines separately, from time
to time, for primary market, secondary market, mutual funds,
merchant bankers, foreign institutional investors, investor protection
etc.
⚫ Guidelines for Public Issue:
⚫ A bridged prospectus has to be attached with every application
⚫ A company has to highlight the risk factors in the prospectus.
⚫ Company’s management, past history and present business of the
firm should be highlighted in the prospectus.
⚫ Particulars in regard to company and other listed companies under
the same management which made any capital issues during the
last three years are to be stated in the prospectus.
⚫ Justification for premium, in case of premium is to be stated.
SEBI Guidelines
⚫ Subscription list of public issues should be kept open for a
minimum of three days and a maximum of 10 working days.
⚫ Collection agents are not to collect application money in cash.
⚫ A compliance report in the prescribed form should be submitted to
SEBI within 45 days from the date of closure of issue.
⚫ Issues by way of bonus, rights etc. to made in appropriate lots to
minimize odd lots.
⚫ If minimum subscription of 90% has not been received, the
entire amount is to be refunded to investors within 120 days.
⚫ The capital issue should be fully paid up within 120 days.
⚫ Underwriting has been made mandatory.
⚫ Limit of listing of companies issue in the stock exchange has been
increased from Rs.3 crores to Rs.5 crores.
SEBI Guidelines
⚫ The gap between the closure dates of various issues viz. rights and
public should not exceed 30 days.
⚫ Issues should make adequate disclosure regarding the terms and
conditions of redemption, security conversion and other relevant
features of the new instruments so that an investor can make
reasonable determination of risks, returns, safety and liquidity of the
instrument. The disclosure shall be vetted by SEBI in this regard.
⚫ SEBI has made grading of all IPO mandatory for which draft
documents are filled with it after April 30, 2007.
⚫ It shall be mandatory to obtain grading from at least one credit rating
agency.
⚫ The issues shall be required to disclose all grades obtained by it in
the prospectus, abridged prospectus, issue advertisements and
others places where the issues is advertising for the IPO.
Stock Exchange
⚫ 1. Board of Directors of stock exchange has to be reconstituted so
as to include non – members, public representatives, government
representative to the extent of 50% of total number of members.
⚫ 2. Capital adequacy norms have been laid down for members of
various stock exchanges depending upon their turnover of trade and
other factors.
⚫ 3. Working hours for all stock exchanges have been fixed
uniformly.
⚫ 4. All the recognized stock exchanges will have to inform about the
transaction within 24 hours.
⚫ 5. Guidelines have been issued for introducing the system of market
making in less liquid scripts in a phased manner in all stock
exchanges.
Brokers
⚫ 1. Registration of brokers and sub – brokers is made compulsory.
⚫ 2. In order to ensure that brokers are professionally qualified and
financially solvent, capital adequacy norms for registration of brokers
have been evolved.
⚫ 3. Compulsory audit of broker’s book and filling of audit report
with SEBI have been made mandatory.
⚫ 4. To bring about greater transparency and accountability in the
broker client relationship, SEBI has made it mandatory for brokers
to disclose transaction price and brokerage separately in the
contract notes issued client.
⚫ 5. No broker is allowed to underwrite more than 5% of public issue
Foreign Institutional Investors
(FII)
⚫ 1. Foreign institutional investors have been allowed to invest in all
securities traded in primary and secondary markets.
⚫ 2. There would be no restriction on the volume of investment for the
purpose of entry of FIIs.
⚫ 3. The holding of single FII in a company will not exceed the ceiling
of 5% of the equity capital of a company.
⚫ 4. Disinvestment will be allowed only through stock exchanges in
India.
⚫ 5. FIIs have to pay a concessional tax rate of 10% on large capital
gain (more than one year) and 30% on short term capital gains. A
tax rate of 20% on dividend and interest is prescribed
Bonus Issue
⚫ The guidelines relating to the issue of bonus shares have
undergone several changes since 1969. The latest set of guidelines
announced by SEBI was made effective from April 13, 1994. At
present, there are in all 10 guidelines laid down for bonus shares.

⚫ There should be a provision in the Articles of Association of the

Company for issue of bonus shares. If not, the company should
pass a resolution at the General Body Meeting.
⚫ The bonus is made out of free reserves built out of the genuine
profits or share premiums collected in cash only.
⚫ Reserves created by revaluation of fixed assets are not permitted to
be capitalized.
⚫ Bonus issues are not permitted unless the partly paid shares
existing are fully paid up.
Bonus Issue
⚫ No bonus issue will be permitted if there is a sufficient reason to
believe that the company has defaulted in respect of payment of
statutory dues to the employees such as provident fund, gratuity,
bonus, etc.
⚫ Further, no bonus issue is permitted if the company defaults in
payment of principal or interest on fixed deposits or on debentures.
⚫ No bonus issue can be made within 12 months of any public
issue/rights issue.
⚫ A company which announces bonus issue after the approval of the
Board of Directors must implement the proposals within a period of
six months from the date of such proposal and shall not have the
option of changing the decision.
Bonus Issue
⚫ Consequent to the issue of bonus shares, if the subscribed and paid
up capital exceed the authorized share capital, a resolution shall be
passed by the company at its general body meeting for increasing
the authorized capital.
⚫ Issue of bonus shares after any public/rights issue is subject to the
condition that no bonus shall be made which will dilute the value or
rights of holders of debenture, convertible fully or partly.
Rights Issue
⚫ SEBI has issued the following guidelines for the issue of
rights share.
⚫ 1. Composite Issue: A public and rights issue can be
made at different prices where these two kinds of issues
are made as a composite issue by existing listed
companies.
⚫ 2. Appointment of Merchant Banker: Appointment of
Merchant Banker is not mandatory, if the size of rights
issue by a listed company does not exceed Rs.50 lakh.
For issues of listed companies exceeding Rs.50 lakhs,
the issue is to be managed by an authorized merchant
banker.
Rights Issue
⚫ 3. Minimum Subscription: If the company does not receive
minimum subscription of 90% of the issue amount including
development of underwriters within 120 days from the date of
opening of issue, the company has to refund the entire subscriptions
within 128 days with interest at 15% p.a. for delay beyond 78 days
from the date of closure of the issue.
⚫ 4. Preferential Allotment: No preferential allotment shall be made
along with the rights issue. If a company wants to make preferential
allotment it should be made independent of rights issue by
complying the provisions of the Companies Act, 1956,
⚫ 5. Underwriting: Underwriting of rights issue is not mandatory but
as per SEBI (underwriter’s) Rules and Regulations, 1993, rights
issue can be underwritten.
Rights Issue
⚫ 6. Rights of FCD/PCD Holders: The proposed rights issue
should not dilute the value or rights of fully or partly
convertible debenture holders. If the conversion of
FCDs/PCDs is due within a period of 12 months from the
date of issue, reservation of shares out of rights issue is to
be made for tem in proportion to the convertible part of
FCDs/PCDs.
⚫ 7. Promoter’s Contribution: If the promoter’s shareholding
in the equity at the time of the rights issue is more than 20
percent of the issued capital the promoters have to ensure
that their equity holding do not fall below 20% of the
expanded capital.
Rights Issue
⚫ 8. Vetting of Letter of Offer by SEBI: The letter of offer pertaining
to rights issue has to be vetted by SEBI and the concerned lead
manager has to obtain SEBI clearance for the draft letter of offer
before approaching stock exchange for fixing the record date for the
proposed issue. A copy of letter of offer is forwarded to SEBI for
information if the rights issue is passed on Merchant Bankers in
1995.
⚫ 9. Disclosure in the Letter of Offer: The letter of offer like the
prospectus should conform to the disclosure prescribed under
Companies Act, 1956.
⚫ 10. Applicability of SEBI Guidelines: The above guidelines with
regard to rights issue apply only to rights issue made by existing
listed companies.
Debentures
⚫ 1. The amount of working capital debenture should not
exceed 20% of the gross current assets.
⚫ 2. The debt equity ratio should not exceed 2:1
⚫ 3. The rate of interest can be decided by the company.
⚫ 4. Credit rating is compulsory for all debentures
excepting debentures issued by public sector
companies, private placement of Non-Convertible
Debentures (NCD) with financial institutions and banks.
⚫ 5. Debentures are to redeemed after the expiry of seven
years from the date of allotment.
Debentures
⚫ 6. NCD is permitted to be redeemed at 5% premium.
⚫ 7. Normally debentures above seven years cannot be
issued.
⚫ 8. Debentures issued to public have to be secured and
registered.
⚫ 9. A Debenture Redemption Reserve is to be set up out
of profits of the company.
⚫ 10. Debentures Trustee and Debenture Trust Deed are
to finalized within six months of the public offer.
Investor’s Protection Measures
⚫ In order to sustain and promote investors’ confidence in
the capital market, many measures have been taken by
different agencies. They can be listed under the
following heads:
⚫ i. Measures taken by Stock Exchanges
⚫ ii. Measures taken by the Company Law Board
⚫ iii. Measures taken by SEBI
⚫ iv. Measures taken by the Court
⚫ v. Measures taken by the Central Government
⚫ vi. Measures taken by the Department of Company
Affairs (DCA)
Malpractices in Securities Market
⚫ With the growth of securities market, the number of malpractices
also increased in both the primary and secondary markets. The
malpractices were noticed in the case of companies, merchant
bankers and brokers who are all operating in the market.

⚫ A few examples of malpractices are as follows:

⚫ 1. Manipulation of Security Prices:
⚫ 2. Price – rigging:
⚫ 3. Insider Trading:
⚫ 4. Delay in Settlement:
⚫ 5. Delay in Listing
Financial Services
Introduction
⚫ Since 1990,there has been an upsurge in the financial services
provided by various banks and financial institutions.
⚫ Prior to the economic liberalization, the Indian Financial services
sector was characterized by many factors like excessive controls in
interest rates, money rates, etc., non-availability of financial
instruments on a large scale, absence of independent credit rating
and credit research agencies, etc., which restarted the growth of this
entire financial, after the economic liberalization the entire financial
sector has undergone change which has resulted in emergence of
new financial products and services.
Financial services
Financial Services - Meaning
⚫ Financial services means mobilizing and allocating savings.
⚫ It includes all activities involved in the transformation of saving into
investment.
⚫ It is also called ‘financial intermediation’.
⚫ It is a process by which funds are mobilized from a large number of
savers and make them available to all those are in need of it and
particularly corporate customers.
⚫ Thus financial services sector is a key area and it is very vital for
industrial developments.
⚫ A well-developed financial services industry is absolutely necessary
to mobilize the savings and to allocate them to various investable
channels and thereby to promote industrial development in India.
Financial Services - Features
⚫ Intangible
⚫ Heterogeneity
⚫ Dominance of Human element
⚫ Perishability
⚫ Information based
⚫ Fluctuation in Demand
⚫ Customers-oriented
⚫ Simultaneous performance (Direct Sale)
⚫ Protect customers Interest
Classification of Financial
Instruments
It refers to those documents which represent financial claims on
assets. Financial instruments may be classified on the basis of
the financial market in which they are instruments

Money market instruments Capital market instruments

⚫ Commercial bills ⚫ Ownership securities or capital
⚫ Treasury Bills (TBs) stock
⚫ Call and short notice money ⚫ Ordinary or equity
⚫ Certificate of Deposits (CDs) ⚫ Preference shares
⚫ Commercial Paper (CP) ⚫ No par stock
⚫ Repurchase Agreement ⚫ Deferred shares
(REPO) ⚫ Creditor ship securities -
⚫ ADRs/GDRs Debentures
Scope of Financial Services
I. Traditional Activities
⚫ It include a wide range of services encompassing both
capital and money market activities.
⚫ They can be grouped under two heads,

⚫ Fund based activities

⚫ Non-fund based or fee based activities

II. Modern activities

⚫ Most of the modern activities are in the nature if non0-
fund based activity.
Fund based activities
⚫ Underwriting of or investment in shares, debentures,
bonds, etc of new issues
⚫ Dealing in secondary market activities
⚫ Participating in money market instruments like
commercial papers, certificate of deposits, TBs,
discounting of bills, etc.
⚫ Involving in equipment leasing, hire purchase, venture
capital etc.
⚫ Dealing in foreign exchange market activities
Fee based Activities
⚫ Managing the capital issues, in accordance with the
SEBI guidelines
⚫ Making arrangements for the placement of capital and
debt instruments with investment institutions
⚫ Arrangement of funds from financial institutions for the
clients project cost or working capital requirements
⚫ Assisting in the process of getting all government and
other clearances
Modern Activities
⚫ Rendering project advisory services
⚫ Planning for mergers and acquisitions and assisting of
their smooth carryout
⚫ Guiding corporate customers in capital restricting
⚫ Acting as trustees to debenture holders
⚫ Healing of risks, promoting credit rating agencies, etc.,
New Financial Instruments
⚫ Merchant Banking
⚫ Loan syndication
⚫ Leasing
⚫ Mutual funds
⚫ Factoring
⚫ Forfeiting
⚫ Venture capital
⚫ Custodial services
⚫ Derivative security
⚫ Letter of Credit (LoC)
Innovative Financial Instruments
⚫ Zero interest convertible debenture / bonds
⚫ Deep discount bonds
⚫ Index linked guilt bonds
⚫ Medium term debentures
⚫ Retirement bonds
⚫ Carrot and stick bond
⚫ Dual currency bond
⚫ Flip-flop notes
⚫ Loyalty coupons
Challenges – financial services
sector
⚫ Lack of qualified personnel
⚫ Lack of investor awareness
⚫ Lack of transparency
⚫ Lack of recent data
 Module 2
DERIVATIVES, OPTIONS
AND HEDGING
Derivatives - introduction
⚫ The term Derivative indicates that instrument has no independent
value of underlying asset. Its value is entirely derived from the
underlying asset which can be
⚫ Securities
⚫ Bullion
⚫ Currency
⚫ Live Stock, Or
⚫ Anything else
⚫ In other words, derivatives mean a forward, future, option or any
other contract of pre—determined fixed duration, linked for the
purpose of contract fulfilment to the value of a specified real or
financial asset or to an index of securities.
Derivatives - Definition
⚫ Derivative has been included in the definition of Securities under
Securities law (Second Amendment) Act, 1999.
⚫ The term derivative has been defined in Securities Contract
(Regulation)Act as:
⚫ (a) A security derived from a debt instrument, share, loan, whether
secured or unsecured, risk instrument or contract for differences or
any other form of security.
⚫ (b) A contract which derives its value from the prices, or index of
prices of underlying securities or stocks.
⚫ Meaning - A derivative security is a financial contract whose value
is derived from the value of something else, such as a stock price, a
commodity price, an exchange rate, an interest rate, or even an
index of prices.
⚫ Some simple types of derivatives: forwards, futures, options and
swaps.
Reasons for Trading in
Derivatives
⚫ A derivative enables a trader to hedge some pre-existing
risk by taking positions in derivatives markets
⚫ Speculators face the risk of losing money from their
derivatives trades
⚫ A third type of trader, called arbitrageurs, profit from
discrepancies in the relationship, of spot and derivatives
prices, and thereby help to keep markets efficient.
Usage of Derivatives
Derivatives are used for the following:
⚫ 1. Hedge or mitigate risk in the underlying, by entering into a
derivative contract whose value moves in the opposite
direction to their underlying position and cancels part or all of
it out.
⚫ 2. Create option ability where the value of the derivative is
linked to a specific condition or event (e.g. the underlying
reaching a specific price level).
⚫ 3. Obtain exposure to the underlying where it is not
possible to trade in the underlying (e.g. weather derivatives).
⚫ 4. Provide leverage (or gearing), such that a small
movement in the underlying value can cause a large
difference in the value of the derivative.
Usage of Derivatives
⚫ 5. Speculate and make a profit if the value of the
underlying asset moves the way they expect (e.g.
moves in a given direction, stays in or out of a
specified range, reaches a certain level).
⚫ 6. Switch asset allocations between different asset
classes without disturbing the underlying assets, as
part of transition management.
⚫ 7. Avoid paying taxes. For example, an equity swap
allows an investor to receive steady payments, e.g.
based on LIBOR rate, while avoiding paying capital
gains tax and keeping the stock.
Introduction to Options
⚫ In finance, an option is a contract which gives the buyer
(the owner or holder of the option) the right, but not the
obligation, to buy or sell an underlying asset or
instrument at a specified strike price on a specified date,
depending on the form of the option.
⚫ The owner of an option may on-sell the option to a third
party in a secondary market, in either an over-the-
counter transaction or on an options exchange,
depending on the option.
⚫ The market price of an American-style option normally
closely follows that of the underlying stock, being the
difference between the market price of the stock and the
strike price of the option.
Introduction to Options
⚫ The actual market price of the option may vary
depending on a number of factors, such as a significant
option holder may need to sell the option as the expiry
date is approaching and does not have the financial
resources to exercise the option, or a buyer in the
market is trying to amass a large option holding.
⚫ The ownership of an option does not generally entitle
the holder to any rights associated with the underlying
asset, such as voting rights or any income from the
underlying asset, such as a dividend.
Strike Price
⚫ The strike price is the price at which a derivative can be
exercised, and refers to the price of the derivative’s underlying
asset.
⚫ In a call option, the strike price is the price at which the option holder can
purchase the underlying security.
⚫ For a put option, the strike price is the price at which the option holder
can sell the underlying security.
⚫ For instance, Heather pays $100 to buy a call option priced at
$1 on ABC Inc.’s shares, with a strike price of $50. The
option expires in six months. That means that any time in the
next six months Heather can exercise her option to buy 100
shares at $50 regardless of the current market price of ABC
shares.
Spot price
⚫ A spot price is the current price in the marketplace at
which a given asset such as a security, commodity or
currency can be bought or sold for immediate delivery.
⚫ While spot prices are specific to both time and place, in a
global economy the spot price of most securities or
commodities tends to be fairly uniform worldwide.
⚫ In contrast to spot price, a security, commodity or
currency's futures price is its expected value at a
specified future time and place.
Characteristics of Options
⚫ Both put and call options have three basic characteristics: exercise
price, expiration date and time to expiration.
1. The buyer has the right to buy or sell the asset.
2. To acquire the right of an option, the buyer of the option must pay a
price to the seller. This is called the option price or the premium.
3. The exercise price is also called the fixed price, strike price or just
the strike and is determined at the beginning of the transaction. It is
the fixed price at which the holder of the call or put can buy or sell
the underlying asset.
4. Exercising is using this right the option grants you to buy or sell the
underlying asset. The seller may have a potential commitment to
buy or sell the asset if the buyer exercises his right on the option.
Characteristics of Options
5. The expiration date is the final date that the option holder has to
exercise her right to buy or sell the underlying asset.
6. Time to expiration is the amount of time from the purchase of the
option until the expiration date. At expiration, the call holder will pay
the exercise price and receive the underlying securities (or an
equivalent cash settlement) if the option expires in the money.
7. The call seller will deliver the securities at the exercise price and
receive the cash value of those securities or receive equivalent
cash settlement in lieu of delivering the securities.
8. Defaults on options work the same way as they do with forward
contracts. Defaults on over-the counter option transactions are
based on counterparties, while exchange-traded options use a
clearing house.
Types of Options
⚫ Call option:
⚫ A call option is an agreement that gives an investor the right, but not
the obligation, to buy a stock, bond, commodity or other instrument
at a specified price within a specific time period.
⚫ It may help you to remember that a call option gives you the right to
call in, or buy, an asset. You profit on a call when the underlying
asset increases in price
⚫ Put Option:
⚫ A put option is an option contract giving the owner the right, but not
the obligation, to
⚫ sell a specified amount of an underlying security at a specified price
within a specified
⚫ time. This is the opposite of a call option, which gives the holder the
right to buy shares.
Types of Options
⚫ American Option:
⚫ An American option is an option that can be exercised anytime
during its life. American options allow option holders to exercise the
option at any time prior to and including its maturity date, thus
increasing the value of the option to the holder relative to European
options, which can only be exercised at maturity. The majority of
exchange-traded options are American.
⚫ European Option:
⚫ A European option is an option that can only be exercised at the end
of its life, at its maturity. European options tend to sometimes trade
at a discount to their comparable American option because
American options allow investors more opportunities to exercise the
contract. European options normally trade over the counter, while
American options usually trade on standardized exchanges.
Introduction to Hedging
⚫ A hedge is an investment to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of taking an
offsetting position in a related security, such as a futures contract.
⚫ Hedging is analogous to taking out an insurance policy.
⚫ If you own a home in a flood-prone area, you will want to protect that
asset from the risk of flooding – to hedge it, in other words – by
taking out flood insurance.
⚫ There is a risk-reward trade off inherent in hedging; while it reduces
potential risk, it also chips away at potential gains.
⚫ Put simply, hedging isn't free. In the case of the flood insurance
policy, the monthly payments add up, and if the flood never comes,
the policy holder receives no payout.
⚫ Still, most people would choose to take that predictable,
circumscribed loss rather than suddenly lose the roof over their
head.
Features of hedging
⚫ Futures and options are very good short-term risk-minimizing
strategy for long-term traders and investors.
⚫ Hedging tools can also be used for locking the profit.
⚫ Hedging enables traders to survive hard market periods.
⚫ Successful hedging gives the trader protection against
commodity price changes, inflation, currency exchange rate
changes, interest rate changes, etc.
⚫ Hedging can also save time as the long-term trader is not
required to monitor/adjust his portfolio with daily market
volatility.
⚫ Hedging using options provide the trader an opportunity to
practice complex options trading strategies to maximize his
return.
Hedge funds
⚫ Hedge funds are alternative investments using pooled funds that
employ numerous different strategies to earn active return, or alpha,
for their investors.
⚫ Hedge funds may be aggressively managed or make use of
derivatives and leverage in both domestic and international markets
with the goal of generating high returns (either in an absolute sense
or over a specified market benchmark).
⚫ It is important to note that hedge funds are generally only accessible
to accredited investors as they require less SEC regulations than
other funds.
⚫ One aspect that has set the hedge fund industry apart is the fact that
hedge funds face less regulation than mutual funds and other
investment vehicles
Hedge funds
⚫ Each hedge fund is constructed to take advantage of certain
identifiable market opportunities.
⚫ Hedge funds use different investment strategies and thus are often
classified according to investment style.
⚫ There is substantial diversity in risk attributes and investments
among styles.
⚫ Legally, hedge funds are most often set up as private investment
limited partnerships that are open to a limited number of accredited
investors and require a large initial minimum investment.
⚫ Investments in hedge funds are illiquid as they often require
investors keep their money in the fund for at least one year, a time
known as the lock-up period.
⚫ Withdrawals may also only happen at certain intervals such as
quarterly or bi-annually
Hedging and arbitrage
⚫ Hedging involves the concurrent use of more than one bet in
opposite directions to limit risk of serious investment loss.
⚫ Arbitrage is the practice of trading a price difference between more
than one market for the same good in an attempt to profit from the
imbalance.
⚫ These two concepts play important roles in finance, economics and
investments.
⚫ Each transaction relies involves two competing types of trades:
betting short versus betting long (hedging) and buying versus selling
(arbitrage).
⚫ Both are used by traders who operate in volatile, dynamic market
environments.
⚫ Other than these two similarities, however, they are very different
techniques that are used for very different purposes
Hedging and arbitrage
⚫ Arbitrage involves both purchase and sale within a very short period
of time.
⚫ If a good is being sold for $100 in one market and $108 in another
market, a savvy trader could purchase the $100 item and then sell it
in the other market for $108.
⚫ The trader enjoys a risk-free return of 8% ($8 / $100), minus any
transaction or transportation expenses.
⚫ With the proliferation of high-speed computing technology and
constant price information, arbitrage is much more difficult in
financial markets than it used to be.
⚫ Still, arbitrage opportunities can be found in the forex market, in
bonds, in futures markets and sometimes in equities.
Hedging and arbitrage
⚫ Hedging is not the pursuit of risk-free trades; instead, it is an attempt
to reduce known risks while trading.
⚫ Options contacts, forward contracts, swaps and derivatives are all
used by traders to purchase opposite positions in the market.
⚫ By betting against both upward and downward movement, the
hedger can ensure a certain amount of reduced gain or loss on a
trade.
⚫ Hedging can take place almost anywhere, but it has become a
particularly important aspect of financial markets, business
management and gambling.
⚫ Much like any other risk/reward trade, hedging results in lower
returns for the party involved, but it can offer significant protection
against downside risk.
 Module III
Initial Public Offering
Initial Public Offering and IPO
⚫ An initial public offering (IPO) is the first time that
the stock of a private company is offered to the
public.
⚫ IPOs are often issued by smaller, younger
companies seeking capital to expand, but they can
also be done by large privately owned companies
looking to become publicly traded.
⚫ In an IPO, the issuer obtains the assistance of an
underwriting firm, which helps determine what type
of security to issue, the best offering price, the
amount of shares to be issued and the time to
bring it to market.
Process of IPO
⚫ The Initial Public Offering IPO Process is where a previously
unlisted company sells new or existing securities and offers
them to the public for the first time.
⚫ Prior to an IPO, a company is considered to be private –
⚫ with a smaller number of shareholders,
⚫ limited to accredited investors (like angel investors/venture
capitalists and high net worth individuals) and/or
⚫ early investors (for instance, the founder, family, and friends).
⚫ After an IPO, the issuing company becomes a publically
listed company on a recognized stock exchange.
⚫ Thus, an IPO is also commonly known as “going public”.
Process of IPO
⚫ Below are the steps a company must
undertake to go public via an IPO process:
⚫ Step 1: Select an investment bank
⚫ Step 2: Due diligence and regulatory filings
⚫ Firm Commitment
⚫ Best Efforts Agreement
⚫ Syndicate of Underwriters
⚫ Step 3: Pricing
⚫ Step 4: Stabilization
⚫ Step 5: Transition to Market Competition
Merchant Bankers

⚫ A merchant bank is a company that deals

mostly in international finance, business
loans for companies and underwriting.
⚫ These banks are experts in international
trade, which makes them specialists in
dealing with multinational corporations.
⚫ A merchant bank may perform some of the
same services as an investment bank, but it
does not provide regular banking services to
the general public.
Differences Between Investment
Banks and Merchant Banks
⚫ A merchant bank typically works with
companies that may not be large enough to
raise funds from the public through an initial
public offering (IPO), and these banks use
more creative forms of financing.
⚫ Merchant banks help corporations issue
securities through private placement, which
require less regulatory disclosure and are
sold to sophisticated investors.
Differences Between Investment
Banks and Merchant Banks
⚫ Investment banks, on the other hand, underwrite and
sell securities to the general public through IPOs.
⚫ The bank’s clients are large corporations that are
willing to invest the time and expense necessary to
register securities for sale to the public.
⚫ Investment banks also provide advice to companies
regarding potential mergers and acquisitions, and
provide investment research to clients.
⚫ Both investment banks and merchant banks strive to
build relationships with corporations so that the
institution can provide a variety of services.
Registrar to the Issue
⚫ Registrar is an institution, often a bank or trust
company, responsible for keeping records of
bondholders and shareholders after an issuer
offers securities to the public.
⚫ When an issuer needs to make an interest
payment on a bond or a dividend payment to
shareholders, the firm refers to the list of
registered owners maintained by the registrar.
⚫ One role of the registrar is to make sure the
amount of shares outstanding does not exceed the
number of shares authorized in a firm’s corporate
charter
Registrar to the Issue
⚫ A corporation cannot issue more shares of stock
than the maximum number of shares that the
corporate charter discloses.
⚫ Outstanding shares are those that shareholders
currently hold.
⚫ A business may continue to issue shares
periodically over time, increasing the amount of
outstanding shares.
⚫ The registrar accounts for all issued and
outstanding shares, as well as the number of
shares owned by each individual shareholder.
Underwriters
⚫ An underwriter is any party that evaluates and
assumes another party's risk for a fee, such as a
commission, premium, spread or interest.
⚫ Underwriters operate in many aspects of the financial
world, including the mortgage industry, insurance
industry, equity markets, and common types of debt
securities.
⚫ Underwriters can play a variety of specific roles,
depending on the context of a financial situation.
⚫ Generally, they are considered to be the risk experts
of the financial world. Investors rely on them to
determine if a business risk is worth taking.
Underwriters
⚫ They can also contribute to sales-type
activities, as they do in the initial public
offering (IPO) process and in the reselling
of debt securities.
⚫ Below are the few types of
Underwriting
⚫ Pure Underwriting
⚫ Consortium Underwriting
⚫ Partial Underwriting.
ASBA
(Applications Supported by Blocked Amount)
⚫ ASBA (Applications Supported by Blocked Amount) is a process
developed by the India's Stock Market Regulator SEBI for applying
to IPO.
⚫ In ASBA, an IPO applicant's account doesn't get debited until shares
are allotted to them.
⚫ ASBA process facilitates retail individual investors bidding at a cut-
off, with a single option, to apply through Self Certified Syndicate
Banks (SCSBs), in which the investors have bank accounts.
⚫ SCSBs are those banks which satisfy the conditions laid by SEBI.
⚫ SCSBs would accept the applications, verify the application, block
the fund to the extent of bid payment amount, upload the details in
the web based bidding system of NSE, unblock once basis of
allotment is finalized and transfer the amount for allotted shares to
the issuer.
Escrow Account
⚫ Escrow is a legal concept in which a financial instrument or
an asset is held by a third party on behalf of two other parties
that are in the process of completing a transaction.
⚫ The funds or assets are held by the escrow agent until it
receives the appropriate instructions or until predetermined
contractual obligations have been fulfilled.
⚫ Money, securities, funds, and other assets can all be held in
escrow.
⚫ When parties are in the process of completing a transaction,
there may come a time when it is only interesting to move
forward for one party if it knows with absolute certainty that
the other party will be able to fulfill its obligations. This is
where the use of escrow comes into play.
Green Shoe Option
⚫ Companies wanting to venture out and sell shares to
the public can stabilize initial pricing through a legal
mechanism called the green shoe option.
⚫ A green shoe is a clause contained in the underwriting
agreement of an initial public offering (IPO) that allows
underwriters to buy up to an additional 15% of
company shares at the offering price.
⚫ Investment banks and underwriters that take part in
the green shoe process have the ability to exercise
this option if public demand exceeds expectations and
the stock trades above the offering price.
Listing
⚫ In corporate finance, a listing refers to the company's shares
being on the list (or board) of stock that are officially traded on
a stock exchange.
⚫ Some stock exchanges allow shares of a foreign company to
be listed and may allow dual listing, subject to conditions.
⚫ Normally the issuing company is the one that applies for a
listing but in some countries[which?] an exchange can list a
company, for instance because its stock is already being
traded via informal channels.
⚫ Stocks whose market value and/or turnover fall below critical
levels may be delisted by the exchange.
⚫ Delisting often arises from a merger or takeover, or the
company going private.
Listing
⚫ Each stock exchange has its own listing
requirements or rules.
⚫ Initial listing requirements usually include
supplying a history of a few years of financial
statements (not required for "alternative" markets
targeting young firms);
⚫ a sufficient size of the amount being placed
among the general public (the free float), both in
absolute terms and as a percentage of the total
outstanding stock;
⚫ an approved prospectus, usually including
opinions from independent assessors, and so on.
Merchant Banking
⚫ In London, merchant banker refers to
those who are members of British
Merchant Banking and Securities House
Association, who carry on consultation,
leasing, portfolio services, etc.,
⚫ In USA, it is concerned with mobilizing
savings of people and directing the funds
to business enterprise.
Definition and Meaning
⚫ Ministry of Finance defines, “any person
who is engaged in the business of issue
management either by making
arrangements regarding selling, buying or
subscribing to the securities as manager,
consultant, adviser or rendering corporate
advisory service in relation to such issue
management”.
Origin and Growth
⚫ It can be traced to 13th century when few family owned and
managed firms engaged in sale and purchase of commodities were
also found to be engaged in banking activity. In order to earn profits,
they invested their funds where they expected higher returns despite
high degree of risk involved.
⚫ Later merchant bankers were known as commission agents who
handled the coastal trade on commission and provided finance to
the owners or suppliers of goods.
⚫ During the Industrial Revolution in England, many people were
attracted to take up merchant banking activities to transfer the
machine made goods from Europe at nations to other nations and
colonies and bringing raw materials from any other nations and
colonies to Europe and to Finance such trade.
Origin and Growth
⚫ During the early 19th century merchants indulged
in overseas trade and earned good reputation.
They accepted bills of the lesser reputed traders
by guaranteeing the holder to receive full
payment on due date.
⚫ Over the period, of the extended their activities
to domestic business of syndication of long term
and short term finance, underwriting of new
issues, acting as registrars and share transfer
agents, etc.,
Origin and Growth
⚫ The origin of merchant banking can be traced to 13th century
when a few family owned and managed firms engaged in sale
and purchase of commodities were also found to be engaged
in banking activity.
⚫ These firms not only acted as bankers to the kings of
European states, financed coastal trade but also home
exchange risk.
⚫ In order to earn profits, they invested their funds where they
expected higher returns despite high degree of risk involved.
⚫ Later merchant bankers were known as commission agents
who handled the coastal trade on commission basis and
provided finance to the owners or suppliers of goods.
Merchant Banks in India
⚫ As planning and Industrial Policy envisaged the setting upof new
industries and technology, greater financial sophistication and
financial services are required.
⚫ According to Goldsmith, there is a well proven link between
economic growth and financial technology.
⚫ Economic development requires specialist financial skills:
⚫ Savings banks to marshal individual savings
⚫ Finance companies for consumer lending and mortgage finance,
⚫ Insurance companies for life and property cover, agricultural banks
for rural developments, and a range od specialized govt. and govt.
sponsored institutions.
⚫ MB serve a dual role within the financial sector, through deposits
and sales of securities they obtain funds for lending to their client
and act as agents in return for fee.
Services Rendered by Merchant
Banks
⚫ Corporate counselling
⚫ Project counselling
⚫ Capital restructuring services
⚫ Portfolio management
⚫ Issue management
⚫ Loan/Credit syndication
⚫ Arranging working capital finance
⚫ Bill discounting and Acceptance credit
⚫ Lease finance
⚫ Venture capital
⚫ Advisory services relating to merger and takeovers
⚫ Off shore finance (Foreign currency finance)
⚫ Mutual funds
Organization of MB Units
⚫ The structure of organization of MB,
⚫ A high proportion of professionals to total staff
⚫ A substantial delegation of decision making
⚫ A short chain of command
⚫ Rapid decision making
⚫ Flexible organization structure
⚫ Innovative approaches to problem solving
⚫ High level of financial sophistication
Regulators of Merchant banks
⚫ Guidelines of SEBI and Ministry of
Finance
⚫ Companies Act 2013,
⚫ Listing guidelines of stock exchanges
⚫ Securities Contracts (Regulation) Act,
1956
Management of Public Issues
⚫ As per SEBI guidelines it is mandatory that all public
issues should be managed by merchant bankers in the
capacity of lead mangers.
⚫ Only in case of right issues, not exceeding Rs. 50 Lakhs
such an obligation is not necessary.
⚫ The number of lead mangers to appointed by the issuing
company is always based its size of issue.
Size of the issue Max. no. of lead managers
Less than Rs. 50 c 2
Rs 50 c – Rs. 100 c 3
Rs. 100 – Rs. 200 c 4
Rs. 200 c – Rs. 400 c 5
Above Rs. 400 c 5 or more as SEBI order
Classification of Merchant
Bankers
⚫ Category I – these merchant bankers can act as
advisors; consultant, underwriter and portfolio
manager. They cannot act as issue manager but
can act as co-manager
⚫ Category II – they can acts as advisor consulted
and underwriting only
⚫ Category III – they can merely act as consultant
or advisor to and issue of capital
Duties and Responsibilities of a
Lead Manager
⚫ Lead managers should enter into an agreement with the
issuing companies stating the details regarding their
responsibilities, liabilities, functions, etc., and a copy of
this agreement should be submitted to the SEBI at least
one month before the opening of the issue for
subscription.
⚫ One MB cannot have association with another MB who
does not hold a certificate of registration with the SEBI.
⚫ A lead manager cannot undertake the work of issue
management is the issuing company is its associates.
Duties and Responsibilities of a
Lead Manager
⚫ A lead manger must accept a minimum underwriting
obligation of 5% of the total underwriting commission or
Rs. 25 lakhs whichever is less. If he fails, then he has to
make managements with another MB associated and
must be duly intimated to the SEBI.
⚫ He should verify the prospectus of letter of credit with
due care and diligence
⚫ He has to submit all the details of an issue, draft
prospectus or letter of offer etc., to the SEBI along with
due diligence certificate at least 2 weeks before the date
of filing with the Registrar of companies or Regional
stock exchanges or both.
Duties and Responsibilities of a
Lead Manager
⚫ In Case of any suggestion or modifications given
by the SEBI has to ensure that they are properly
incorporated.
⚫ He will be responsible for ensuring timely refund
of excess application money received from the
applicants.
⚫ He should mail the share/debenture certificate
immediately on allotment or inform it to the
depositor participant.
Problems of merchant bankers
⚫ SEBI authorized MB to undertake issue related activities
only with an exception of portfolio management, it has
restricted their activities
⚫ SEBI has stipulated a minimum net worth of Rs. 1 Crore
for authorization of merchant bankers. Small but
professional and specialized MBs who do not have a net
worth of Rs. 1 crore may have to close down their
business.
⚫ Non co-operation of the issuing companies in timely
allotment of securities and refund of application money is
another problem of MBs.
Scope of MB in India
⚫ Growth of New issue market
⚫ Entry of foreign investors
⚫ Changing policies of financial institutions
⚫ Development of Debt market
⚫ Innovations in Financial Instruments
⚫ Corporate Restructuring
⚫ Disinvestment
 MODULE IV
New Venture Financing
Introduction
⚫ Venture capital financing is a type of
financing by venture capital.
⚫ It is private equity capital provided as seed
funding to early-stage, high-potential, growth
companies (start-up companies) or more
often it is after the seed funding round as a
growth funding round (also referred to as
series A round).
⚫ It is provided in the interest of generating a
return on investment through an eventual
realization event such as an IPO or trade sale
of the company.
Introduction
⚫ To start a new company or to bring a new
product to the market, the venture needs
to attract funding. There are several
categories of financing possibilities.
⚫ Smaller ventures sometimes rely on family
funding, loans from friends, personal bank
loans or crowd funding.
Introduction
⚫ For more ambitious projects, some companies need
more than what was mentioned above, some ventures
have access to rare funding resources called angel
investors.
⚫ These are private investors who are using their own
capital to finance a venture's need.
⚫ The Harvard report by William R. Kerr, Josh Lerner,
and Antoinette Scholar tables evidence that angel-
funded start-up companies are less likely to fail than
companies that rely on other forms of initial financing.
⚫ Apart from these investors, there are also venture
capital firms (VC firms) who are specialized in
financing new ventures against a lucrative[citation
needed] return.
Angel Investors/Investing
⚫ Angel investors invest in small start-ups or entrepreneurs.
Often, angel investors are among an entrepreneur's family
and friends.
⚫ The capital angel investors provide may be a one-time
investment to help the business propel or an on-going
injection of money to support and carry the company through
its difficult early stages.
⚫ Angel investors provide more favorable terms compared to
other lenders, since they usually invest in the entrepreneur
starting the business rather than the viability of the business.
⚫ Angel investors are focused on helping start-ups take their
first steps, rather than the possible profit they may get from
the business.
⚫ Essentially, angel investors are the opposite of venture
capitalists.
Collective Investment scheme

⚫ A Collective Investment Scheme (CIS), as its name suggests,

is an investment scheme wherein several individuals come
together to pool their money for investing in a particular
asset(s) and for sharing the returns arising from that
investment as per the agreement reached between them prior
to pooling in the money.
⚫ The term has broader connotations and includes even mutual
funds. For instance, in UK, the unit trust scheme is a
collective investment scheme.
⚫ However, in India, as in US, the definition of CIS excludes
mutual funds or unit trust schemes etc and is given a strict
definition in Section 11AA of the SEBI Act, 1992.
⚫ CISs are regulated by the securities market regulator – SEBI -
under SEBI (Collective Investment Scheme) Regulations,
1999.
Qualified Institutional Buying
⚫ A qualified institutional buyer (QIB) is a corporation
that is deemed to be an accredited investor as defined
in the Securities and Exchange Commission’s (SEC)
Rule 501 of Regulation D.
⚫ A QIB owns and invests a minimum of $100 million in
securities on a discretionary basis; the broker-dealer
threshold is $10 million.
⚫ The range of entities deemed qualified institutional
buyers (QIBs) include savings and loans associations
(which must have a net worth of $25 million) and
banks, investment and insurance companies,
employee benefit plans and entities completely owned
by accredited investors.
Qualified Institutional Placement
⚫ Qualified institutional placement (QIP) is a capital-raising tool,
primarily used in India and other parts of southern Asia,
whereby a listed company can issue equity shares, fully and
partly convertible debentures, or any securities other than
warrants which are convertible to equity shares to a qualified
institutional buyer (QIB).
⚫ Apart from preferential allotment, this is the only other speedy
method of private placement whereby a listed company can
issue shares or convertible securities to a select group of
persons.
⚫ QIP scores over other methods because the issuing firm does
not have to undergo elaborate procedural requirements to
raise this capital.
Venture Capital
⚫ It is a private or institutional investment made into early-
stage / start-up companies (new ventures). As defined,
ventures involve risk (having uncertain outcome) in the
expectation of a sizeable gain. Venture Capital is money
invested in businesses that are small; or exist only as an
initiative, but have huge potential to grow. The people
who invest this money are called venture capitalists
(VCs). The venture capital investment is made when a
venture capitalist buys shares of such a company and
becomes a financial partner in the business.
Venture Capital
⚫ Venture Capital investment is also referred to
risk capital or patient risk capital, as it includes
the risk of losing the money if the venture
doesn’t succeed and takes medium to long term
period for the investments to fructify.
⚫ Venture Capital typically comes from institutional
investors and high net worth individuals and is
pooled together by dedicated investment firms.
Venture Capital
⚫ It is the money provided by an outside investor
to finance a new, growing, or troubled business.
The venture capitalist provides the funding
knowing that there’s a significant risk associated
with the company’s future profits and cash flow.
Capital is invested in exchange for an equity
stake in the business rather than given as a
loan.
Venture Capital
⚫ Venture Capital is the most suitable option for funding a
costly capital source for companies and most for
businesses having large up-front capital requirements
which have no other cheap alternatives. Software and
other intellectual property are generally the most
common cases whose value is unproven. That is why;
Venture capital funding is most widespread in the fast-
growing technology and biotechnology fields.
Features of Venture Capital
investments
⚫ High Risk
⚫ Lack of Liquidity
⚫ Long term horizon
⚫ Equity participation and capital gains
⚫ Venture capital investments are made in
innovative projects
⚫ Suppliers of venture capital participate in the
management of the company
Methods of Venture capital
financing
⚫ Equity
⚫ participating debentures
⚫ conditional loan
Structure of Venture Capital
Structure…
⚫ Venture capital firms are typically structured as partnerships, the
general partners of which serve as the managers of the firm and will
serve as investment advisors to the venture capital funds raised.
⚫ Venture capital firms in the United States may also be structured as
limited liability companies, in which case the firm's managers are
known as managing members.
⚫ Investors in venture capital funds are known as limited partners.
⚫ This constituency comprises both high-net-worth individuals and
institutions with large amounts of available capital, such as state and
private pension funds, university financial endowments, foundations,
insurance companies, and pooled investment vehicles, called funds
of funds
Role of Venture Capitalist

Position Role

General They run the Venture Capital firm and make the investment decisions
Partners or on behalf of the fund. GPs typically put in personal capital up to 1-2%
GPs of the VC Fund size to show their commitment to the LPs.

Venture partners are expected to source potential investment

Venture
opportunities ("bring in deals") and typically are compensated only for
partners
those deals with which they are involved.

This is a mid-level investment professional position, and often

considered a "partner-track" position. Principals will have been
promoted from a senior associate position or who have
Principal
commensurate experience in another field, such as investment
banking, management consulting, or a market of particular interest to
the strategy of the venture capital firm.
Role of Venture Capitalist
Position Role

This is typically the most junior apprentice position within a

venture capital firm. After a few successful years, an
associate may move up to the "senior associate" position and
Associate
potentially principal and beyond. Associates will often have
worked for 1–2 years in another field, such as investment
banking or management consulting.
Entrepreneurs-in-residence (EIRs) are experts in a particular
industry sector (e.g., biotechnology or social media) and
perform due diligence on potential deals. EIRs are hired by
Entrepreneu
venture capital firms temporarily (six to 18 months) and are
r-in-
expected to develop and pitch startup ideas to their host firm,
residence
although neither party is bound to work with each other. Some
EIRs move on to executive positions within a portfolio
company.
THE FUNDING PROCESS
Idea generation and submission of
the Business Plan
⚫ The initial step in approaching a Venture Capital is to
submit a business plan. The plan should include the
below points:
⚫ There should be an executive summary of the business
proposal
⚫ Description of the opportunity and the market potential and size
⚫ Review on the existing and expected competitive scenario
⚫ Detailed financial projections
⚫ Details of the management of the company
⚫ There is detailed analysis done of the submitted plan, by
the Venture Capital to decide whether to take up the
project or no.
Introductory Meeting
⚫ Once the preliminary study is done by the
VC and they find the project as per their
preferences, there is a one-to-one meeting
that is called for discussing the project in
detail. After the meeting the VC finally
decides whether or not to move forward to
the due diligence stage of the process.
Due Diligence
⚫ The due diligence phase varies depending upon
the nature of the business proposal. This
process involves solving of queries related to
customer references, product and business
strategy evaluations, management interviews,
and other such exchanges of information during
this time period.
Term Sheets and Funding
⚫ If the due diligence phase is satisfactory, the VC
offers a term sheet, which is a non-binding
document explaining the basic terms and
conditions of the investment agreement. The
term sheet is generally negotiable and must be
agreed upon by all parties, after which on
completion of legal documents and legal due
diligence, funds are made available.
Types of Venture Capital funding
⚫ The various types of venture capital are classified as per their applications
at various stages of a business. The three principal types of venture capital
are early stage financing, expansion financing and acquisition/buyout
financing.
⚫ The venture capital funding procedure gets complete in six stages of
financing corresponding to the periods of a company’s development
⚫ Seed money: Low level financing for proving and fructifying a new idea
⚫ Start-up: New firms needing funds for expenses related with marketingand
product development
⚫ First-Round: Manufacturing and early sales funding
⚫ Second-Round: Operational capital given for early stage companies which
are selling products, but not returning a profit
⚫ Third-Round: Also known as Mezzanine financing, this is the money for
expanding a newly beneficial company
⚫ Fourth-Round: Also calledbridge financing, 4th round is proposed for
financing the "going public" process
Early Stage Financing:
⚫ Early stage financing has three sub divisions seed
financing, start up financing and first stage financing.
⚫ Seed financing is defined as a small amount that an
entrepreneur receives for the purpose of being eligible
for a start up loan.
⚫ Start up financing is given to companies for the purpose
of finishing the development of products and services.
⚫ First Stage financing: Companies that have spent all
their starting capital and need finance for beginning
business activities at the full-scale are the major
beneficiaries of the First Stage Financing.
Expansion Financing:
⚫ Expansion financing may be categorized into second-
stage financing, bridge financing and third stage
financing or mezzanine financing.
⚫ Second-stage financing is provided to companies for the
purpose of beginning their expansion. It is also known as
mezzanine financing. It is provided for the purpose of
assisting a particular company to expand in a major way.
Bridge financing may be provided as a short term
interest only finance option as well as a form of monetary
assistance to companies that employ the Initial Public
Offers as a major business strategy.
Acquisition or Buyout Financing:
⚫ Acquisition or buyout financing is categorized
into acquisition finance and management or
leveraged buyout financing. Acquisition
financing assists a company to acquire certain
parts or an entire company. Management or
leveraged buyout financing helps a particular
management group to obtain a particular
product of another company.
Advantages of Venture Capital
⚫ They bring wealth and expertise to the company
⚫ Large sum of equity finance can be provided
⚫ The business does not stand the obligation to
repay the money
⚫ In addition to capital, it provides valuable
information, resources, technical assistance to
make a business successful
Disadvantages of Venture Capital
⚫ As the investors become part owners, the
autonomy and control of the founder is lost
⚫ It is a lengthy and complex process
⚫ It is an uncertain form of financing
⚫ Benefit from such financing can be realized in
long run only
Exit route
⚫ There are various exit options for Venture
Capital to cash out their investment:
⚫ IPO
⚫ Promoter buyback
⚫ Mergers and Acquisitions
⚫ Sale to other strategic investor
Examples of venture capital
funding
⚫ Kohlberg Kravis & Roberts (KKR), one of the top-tier
alternative investment asset managers in the world, has
entered into a definitive agreement to invest USD150
million (Rs 962crore) in Mumbai-based listed polyester
maker JBF Industries Ltd. The firm will acquire 20%
stake in JBF Industries and will also invest in zero-
coupon compulsorily convertible preference shares with
14.5% voting rights in its Singapore-based wholly owned
subsidiary JBF Global Pte Ltd. The fundingprovided by
KKR will help JBF complete the ongoing projects.
Examples of venture capital
funding
⚫ Pepperfry.com, India’s largest furniture e-marketplace,
has raised USD100 million in a fresh round of funding
led by Goldman Sachs and Zodius Technology Fund.
Pepperfry will use the fundsto expand its footprint in Tier
III and Tier IV cities by adding to its growing fleet of
delivery vehicles. It will also open new distribution
centres and expand its carpenter and assembly service
network. This is the largest quantum of investmentraised
by a sector focused e-commerce player in India.
 MODULE V
Crypto currencies
Introduction
⚫ Crypto currencies, or virtual currencies, are digital
means of exchange created and used by private
individuals or groups.
⚫ Because most crypto currencies aren’t regulated
by national governments, they’re considered
alternative currencies – mediums of financial
exchange that exist outside the bounds of state
monetary policy.
⚫ Bitcoin is the preeminent cryptocurrency and first
to be used widely.
⚫ However, hundreds of cryptocurrencies exist, and
more spring into being every month.
Meaning
⚫ Cryptocurrencies use cryptographic protocols, or
extremely complex code systems that encrypt
sensitive data transfers, to secure their units of
exchange.
⚫ Cryptocurrency developers build these protocols on
advanced mathematics and computer engineering
principles that render them virtually impossible to
break, and thus to duplicate or counterfeit the
protected currencies.
⚫ These protocols also mask the identities of
cryptocurrency users, making transactions and fund
flows difficult to attribute to specific individuals or
groups.
Features of Cryptocurrency
Decentralized Control
⚫ Cryptocurrencies are also marked by
decentralized control.
⚫ Cryptocurrencies’ supply and value are controlled
by the activities of their users and highly complex
protocols built into their governing codes, not the
conscious decisions of central banks or other
regulatory authorities.
⚫ In particular, the activities of miners –
cryptocurrency users who leverage vast amounts
of computing power to record transactions,
receiving newly created cryptocurrency units and
transaction fees paid by other users in return – are
critical to currencies’ stability and smooth function.
Exchange With Fiat Currencies
⚫ Importantly, cryptocurrencies can be
exchanged for fiat currencies in special online
markets, meaning each has a variable
exchange rate with major world currencies
(such as the U.S. dollar, British pound,
European euro, and Japanese yen).
⚫ Cryptocurrency exchanges are somewhat
vulnerable to hacking and represent the most
common venue for digital currency theft by
hackers and cybercriminals.
Finite Supply
⚫ Most, but not all, cryptocurrencies are characterized
by finite supply.
⚫ Their source codes contain instructions outlining the
precise number of units that can and will ever exist.
⚫ Over time, it becomes more difficult for miners to
produce cryptocurrency units, until the upper limit is
reached and new currency ceases to be minted
altogether.
⚫ Cryptocurrencies’ finite supply makes them inherently
deflationary, more akin to gold and other precious
metals – of which there are finite supplies – than fiat
currencies, which central banks can, in theory,
produce unlimited supplies of.
Advantages of Cryptocurrency
Built-in Scarcity May Support
Value
⚫ Most cryptocurrencies are hardwired for
scarcity – the source code specifies how
many units can ever exist.
⚫ In this way, cryptocurrencies are more like
precious metals than fiat currencies.
⚫ Like precious metals, they may offer
inflation protection unavailable to fiat
currency users.
Loosening of Government
Currency Monopolies
⚫ Cryptocurrencies offer a reliable means of
exchange outside the direct control of
national banks, such as the U.S. Federal
Reserve and European Central Bank.
⚫ This is particularly attractive to people who
worry that quantitative easing (central banks’
“printing money” by purchasing government
bonds) and other forms of loose monetary
policy, such as near-zero inter-bank lending
rates, will lead to long-term economic
instability.
Loosening of Government
Currency Monopolies
⚫ In the long run, many economists and
political scientists expect world governments
to co-opt cryptocurrency, or at least to
incorporate aspects of cryptocurrency (such
as built-in scarcity and authentication
protocols) into fiat currencies.
⚫ This could potentially satisfy some
cryptocurrency proponents’ worries about the
inflationary nature of fiat currencies and the
inherent insecurity of physical cash.
Self-Interested, Self-Policing
Communities
⚫ Mining is a built-in quality control and
policing mechanism for cryptocurrencies.
⚫ Because they’re paid for their efforts,
miners have a financial stake in keeping
accurate, up-to-date transaction records –
thereby securing the integrity of the
system and the value of the currency.
Robust Privacy Protections
⚫ Privacy and anonymity were chief concerns for
early cryptocurrency proponents, and remain so
today.
⚫ Many cryptocurrency users employ pseudonyms
unconnected to any information, accounts, or
stored data that could identify them.
⚫ Though it’s possible for sophisticated community
members to deduce users’ identities, newer
cryptocurrencies (post-Bitcoin) have additional
protections that make it much more difficult.
Harder for Governments to Exact
Financial Retribution
⚫ When citizens in repressive countries run
afoul of their governments, said governments
can easily freeze or seize their domestic bank
accounts, or reverse transactions made in
local currency.
⚫ This is of particular concern in autocratic
countries such as China and Russia, where
wealthy individuals who run afoul of the ruling
party frequently find themselves facing
serious financial and legal troubles of dubious
provenance.
Harder for Governments to Exact
Financial Retribution
⚫ Unlike central bank-backed fiat currencies,
cryptocurrencies are virtually immune from
authoritarian caprice.
⚫ Cryptocurrency funds and transaction records are
stored in numerous locations around the world,
rendering state control – even assuming
international cooperation – highly impractical.
⚫ It’s a bit of an oversimplification, but using
cryptocurrency is a bit like having access to a
theoretically unlimited number of offshore bank
accounts.
Harder for Governments to Exact
Financial Retribution
⚫ Decentralization is problematic for governments
accustomed to employing financial leverage (or
outright bullying) to keep troublesome elites in check.
⚫ In late 2017, CoinTelegraph reported on a
multinational cryptocurrency initiative spearheaded by
the Russian government.
⚫ If successful, the initiative would have two salutary
outcomes for those involved: weakening the U.S.
dollar’s dominance as the world’s de facto means of
exchange, and affording participating governments
tighter control over increasingly voluminous and
valuable cryptocurrency supplies.
Generally Cheaper Than Traditional
Electronic Transactions
⚫ The concepts of blockchains, private keys, and wallets
effectively solve the double-spending problem, ensuring that
new cryptocurrencies aren’t abused by tech-savvy crooks
capable of duplicating digital funds.
⚫ Cryptocurrencies’ security features also eliminate the need for
a third-party payment processor – such as Visa or PayPal – to
authenticate and verify every electronic financial transaction.
⚫ In turn, this eliminates the need for mandatory transaction
fees to support those payment processors’ work – since
miners, the cryptocurrency equivalent of payment processors,
earn new currency units for their work in addition to optional
transaction fees.
⚫ Cryptocurrency transaction fees are generally less than 1% of
the transaction value, versus 1.5% to 3% for credit card
payment processors and PayPal.
Fewer Barriers and Costs to
International Transactions
⚫ Cryptocurrencies don’t treat international transactions
any differently than domestic transactions.
⚫ Transactions are either free or come with a nominal
transaction fee, no matter where the sender and
recipient are located.
⚫ This is a huge advantage relative to international
transactions involving fiat currency, which almost
always have some special fees that don’t apply to
domestic transactions – such as international credit
card or ATM fees and
⚫ direct international money transfers can be very
expensive, with fees sometimes exceeding 10% or
15% of the transferred amount.
Disadvantages of Cryptocurrency
Lack of Regulation Facilitates
Black Market Activity
⚫ Probably the biggest drawback and regulatory concern
around cryptocurrency is its ability to facilitate illicit activity.
⚫ Many gray and black market online transactions are
denominated in Bitcoin and other cryptocurrencies.
⚫ For instance, the infamous dark web marketplace Silk Road
used Bitcoin to facilitate illegal drug purchases and other illicit
activities before being shut down in 2014.
⚫ Cryptocurrencies are also increasingly popular tools for
money laundering – funneling illicitly obtained money through
a “clean” intermediary to conceal its source.
⚫ The same strengths that make cryptocurrencies difficult for
governments to seize and track allow criminals to operate with
relative ease – though, it should be noted, the founder of Silk
Road is now behind bars, thanks to a years-long DEA
investigation.
Potential for Tax Evasion in Some
Jurisdictions
⚫ Since cryptocurrencies aren’t regulated by national governments
and usually exist outside their direct control, they naturally attract tax
evaders.
⚫ Many small employers pay employees in bitcoin and other
cryptocurrencies to avoid liability for payroll taxes and help their
workers avoid income tax liability, while online sellers often accept
cryptocurrencies to avoid sales and income tax liability.
⚫ According to the IRS, the U.S. government applies the same
taxation guidelines to all cryptocurrency payments by and to U.S.
persons and businesses.
⚫ However, many countries don’t have such policies in place and the
inherent anonymity of cryptocurrency makes some tax law
violations, particularly those involving pseudonymous online sellers
(as opposed to an employer who puts an employee’s real name on a
W-2 indicating their bitcoin earnings for the tax year), difficult to
track.
Potential for Financial Loss Due
to Data Loss
⚫ Early cryptocurrency proponents believed that, if
properly secured, digital alternative currencies
promised to support a decisive shift away from
physical cash, which they viewed as imperfect and
inherently risky.
⚫ Assuming a virtually uncrackable source code,
impenetrable authentication protocols (keys) and
adequate hacking defenses (which Mt. Gox
lacked),
⚫ it’s safer to store money in the cloud or even a
physical data storage device than in a back pocket
or purse.
Potential for Financial Loss Due
to Data Loss
⚫ However, this assumes that cryptocurrency users
take proper precautions to avoid data loss.
⚫ For instance, users who store their private keys on
single physical storage devices suffer irreversible
financial harm when the device is lost or stolen.
⚫ Even users who store their data with a single
cloud service can face loss if the server is
physically damaged or disconnected from the
global Internet (a possibility for servers located in
countries with tight Internet controls, such as
China).
Potential for High Price Volatility
and Manipulation
⚫ Many cryptocurrencies have relatively few
outstanding units concentrated in a handful of
individuals’ (often the currencies’ creators and
close associates) hands.
⚫ These holders effectively control these currencies’
supplies, making them susceptible to wild value
swings and outright manipulation – similar to thinly
traded penny stocks.
⚫ However, even widely traded cryptocurrencies are
subject to price volatility: Bitcoin’s value doubled
several times in 2017, then halved during the first
few weeks of 2018.
Often Can’t Be Exchanged for
Fiat Currency
⚫ Generally, only the most popular cryptocurrencies –
those with the highest market capitalization, in dollar
terms – have dedicated online exchanges that permit
direct exchange for fiat currency.
⚫ The rest don’t have dedicated online exchanges, and
thus can’t be directly exchanged for fiat currencies.
⚫ Instead, users have to convert them into more
commonly used cryptocurrencies, such as Bitcoin,
before fiat currency conversion.
⚫ By increasing exchange transactions’ cost, this
suppresses demand for, and thus the value of, some
lesser-used cryptocurrencies.
Limited to No Facility for
Chargebacks or Refunds
⚫ Although cryptocurrency miners serve as quasi-intermediaries for
cryptocurrency transactions, they’re not responsible for arbitrating
disputes between transacting parties.
⚫ In fact, the concept of such an arbitrator violates the decentralizing
impulse at the heart of modern cryptocurrency philosophy.
⚫ This means that you have no one to appeal to if you’re cheated in a
cryptocurrency transaction – for instance, paying upfront for an item
you never receive.
⚫ Though some newer cryptocurrencies attempt to address the
chargeback/refund issue, solutions remain incomplete and largely
unproven.
⚫ By contrast, traditional payment processors and credit card
networks such as Visa, MasterCard, and PayPal often step in to
resolve buyer-seller disputes.
⚫ Their refund, or chargeback, policies are specifically designed to
prevent seller fraud.
Adverse Environmental Impacts
of Cryptocurrency Mining
⚫ Cryptocurrency mining is very energy-
intensive.
⚫ The biggest culprit is Bitcoin, the world’s most
popular cryptocurrency.
⚫ According to estimates cited by Ars Technica,
Bitcoin mining consumes more electricity
than the entire country of Denmark – though,
as some of the world’s largest Bitcoin mines
are located in coal-laden countries like China,
without that progressive Scandinavian state’s
minute carbon footprint.
Adverse Environmental Impacts
of Cryptocurrency Mining
⚫ Though they’re quick to throw cold water on the most
alarmist claims, cryptocurrency experts acknowledge
that mining presents a serious environmental threat at
current rates of growth.
⚫ Ars Technica identifies three possible short- to
medium-term solutions:
⚫ Reducing the price of Bitcoin to render mining less
lucrative, a move that would likely require concerted
interference into what’s thus far been a laissez-faire market
⚫ Cutting the mining reward faster than the currently
scheduled rate (halving every four years)
⚫ Switching to a less power-hungry algorithm, a controversial
prospect among mining incumbents
How Cryptocurrencies Work
⚫ The source codes and technical controls that support
and secure cryptocurrencies are highly complex.
⚫ However, laypeople are more than capable of
understanding the basic concepts and becoming
informed cryptocurrency users.
⚫ Functionally, most cryptocurrencies are variations on
Bitcoin, the first widely used cryptocurrency.
⚫ Like traditional currencies, cryptocurrencies’ express
value in units – for instance, you can say “I have 2.5
Bitcoin,” just as you’d say, “I have $2.50.”
⚫ Several concepts govern cryptocurrencies’ values,
security, and integrity.
Blockchain
⚫ A cryptocurrency’s blockchain (sometimes written “block
chain”) is the master ledger that records and stores all prior
transactions and activity, validating ownership of all units of
the currency at any given point in time.
⚫ As the record of a cryptocurrency’s entire transaction history
to date, a blockchain has a finite length – containing a finite
number of transactions – that increases over time.
⚫ Identical copies of the blockchain are stored in every node of
the cryptocurrency’s software network – the network of
decentralized server farms, run by computer-savvy individuals
or groups of individuals known as miners, that continually
record and authenticate cryptocurrency transactions.
Blockchain
⚫ A cryptocurrency transaction technically isn’t finalized until it’s
added to the blockchain, which usually occurs within minutes.
⚫ Once the transaction is finalized, it’s usually irreversible.
⚫ Unlike traditional payment processors, such as PayPal and
credit cards, most cryptocurrencies have no built-in refund or
chargeback functions, though some newer cryptocurrencies
have rudimentary refund features.
⚫ During the lag time between the transaction’s initiation and
finalization, the units aren’t available for use by either party.
⚫ Instead, they’re held in a sort of escrow – limbo, for all intents
and purposes.
⚫ The blockchain thus prevents double-spending, or the
manipulation of cryptocurrency code to allow the same
currency units to be duplicated and sent to multiple recipients.
Private Keys
⚫ Every cryptocurrency holder has a private key that
authenticates their identity and allows them to
exchange units.
⚫ Users can make up their own private keys, which
are formatted as whole numbers between 1 and
78 digits long, or use a random number generator
to create one.
⚫ Once they have a key, they can obtain and spend
cryptocurrency.
⚫ Without the key, the holder can’t spend or convert
their cryptocurrency – rendering their holdings
worthless unless and until the key is recovered.
Private Keys
⚫ While this is a critical security feature that reduces
theft and unauthorized use, it’s also draconian.
⚫ Losing your private key is the digital equivalent of
throwing a wad of cash into a trash incinerator.
⚫ While you can create another private key and start
accumulating cryptocurrency again, you can’t recover
the holdings protected by your old, lost key.
⚫ Savvy cryptocurrency users are therefore maniacally
protective of their private keys, typically storing them in
multiple digital (though generally not Internet-
connected, for security purposes) and analog (i.e.,
paper) locations
Wallets
⚫ Cryptocurrency users have “wallets” with unique information
that confirms them as the temporary owners of their units.
⚫ Whereas private keys confirm the authenticity of a
cryptocurrency transaction, wallets lessen the risk of theft for
units that aren’t being used.
⚫ Wallets used by cryptocurrency exchanges are somewhat
vulnerable to hacking.
⚫ For instance, Japan-based Bitcoin exchange Mt. Gox shut
down and declared bankruptcy a few years back after hackers
systematically relieved it of more than $450 million in Bitcoin
exchanged over its servers.
⚫ Wallets can be stored on the cloud, an internal hard drive, or
an external storage device.
⚫ Regardless of how a wallet is stored, at least one backup is
strongly recommended.
⚫ Note that backing up a wallet doesn’t duplicate the actual
cryptocurrency units, merely the record of their existence and
current ownership.
Miners
⚫ Miners serve as record-keepers for cryptocurrency
communities, and indirect arbiters of the
currencies’ value.
⚫ Using vast amounts of computing power, often
manifested in private server farms owned by
mining collectives comprised of dozens of
individuals, miners use highly technical methods to
verify the completeness, accuracy, and security of
currencies’ block chains.
⚫ The scope of the operation is not unlike the search
for new prime numbers, which also requires
tremendous amounts of computing power.
Miners
⚫ Miners’ work periodically creates new copies of the blockchain,
adding recent, previously unverified transactions that aren’t included
in any previous blockchain copy – effectively completing those
transactions.
⚫ Each addition is known as a block. Blocks consist of all transactions
executed since the last new copy of the blockchain was created.
⚫ The term “miners” relates to the fact that miners’ work literally
creates wealth in the form of brand-new cryptocurrency units.
⚫ In fact, every newly created blockchain copy comes with a two-part
monetary reward:
⚫ a fixed number of newly minted (“mined”) cryptocurrency units, and
⚫ a variable number of existing units collected from optional transaction
fees (typically less than 1% of the transaction value) paid by buyers.
Types of Cryptocurrencies
⚫ The three types of cryptocurrencies are
⚫ Bitcoin
⚫ Altcoins
⚫ Tokens
Cryptocurrency Exchanges
⚫ Many lesser-used cryptocurrencies can only be exchanged through
private, peer-to-peer transfers, meaning they’re not very liquid and
are hard to value relative to other currencies – both crypto- and fiat.
⚫ More popular cryptocurrencies, such as Bitcoin and Ripple, trade on
special secondary exchanges similar to forex exchanges for fiat
currencies. (The now-defunct Mt. Gox is one example.)
⚫ These platforms allow holders to exchange their cryptocurrency
holdings for major fiat currencies, such as the U.S. dollar and euro,
and other cryptocurrencies (including less-popular currencies).
⚫ In return for their services, they take a small cut of each
transaction’s value – usually less than 1%.
⚫ Cryptocurrency exchanges play a valuable role in creating liquid
markets for popular cryptocurrencies and setting their value relative
to traditional currencies. However, exchange pricing can still be
extremely volatile.
⚫ Bitcoin’s U.S. dollar exchange rate fell by more than 50% in the
wake of Mt. Gox’s collapse, then increased roughly tenfold during
2017 as cryptocurrency demand exploded.
Cryptocurrency Examples
⚫ Cryptocurrency usage has exploded since Bitcoin’s
release.
⚫ Though exact active currency numbers fluctuate and
individual currencies’ values are highly volatile, the
overall market value of all active cryptocurrencies is
generally trending upward.
⚫ At any given time, hundreds of cryptocurrencies trade
actively.
⚫ The cryptocurrencies described here are marked by
stable adoption, robust user activity, and relatively
high market capitalization (greater than $10 million, in
most cases, though valuations are of course subject to
change):
Bitcoin
⚫ Bitcoin is the world’s most widely used cryptocurrency,
and is generally credited with bringing the movement
into the mainstream.
⚫ Its market cap and individual unit value consistently
dwarf (by a factor of 10 or more) that of the next most
popular cryptocurrency.
⚫ Bitcoin has a programmed supply limit of 21 million
Bitcoin.
⚫ Bitcoin is increasingly viewed as a legitimate means
of exchange.
⚫ Many well-known companies accept Bitcoin payments,
though most partner with an exchange to convert
Bitcoin into U.S. dollars before receiving their funds.
Litecoin
⚫ Released in 2011, Litecoin uses the same
basic structure as Bitcoin.
⚫ Key differences include a higher programmed
supply limit (84 million units) and a shorter
target blockchain creation time (two-and-a-
half minutes).
⚫ The encryption algorithm is slightly different
as well.
⚫ Litecoin is often the second- or third-most
popular cryptocurrency by market
capitalization.
Ripple
⚫ Released in 2012, Ripple is noted for a “consensus ledger”
system that dramatically speeds up transaction confirmation
and blockchain creation times – there’s no formal target time,
but the average is every few seconds.
⚫ Ripple is also more easily converted than other
cryptocurrencies, with an in-house currency exchange that
can convert Ripple units into U.S. dollars, yen, euros, and
other common currencies.
⚫ However, critics have noted that Ripple’s network and code
are more susceptible to manipulation by sophisticated
hackers and may not offer the same anonymity protections as
Bitcoin-derived cryptocurrencies.
Ethereum
⚫ Launched in 2015, Ethereum makes some noteworthy
improvements on Bitcoin’s basic architecture.
⚫ In particular, it utilizes “smart contracts” that enforce
the performance of a given transaction, compel parties
not to renege on their agreements, and contain
mechanisms for refunds should one party violate the
agreement.
⚫ Though “smart contracts” represent an important move
toward addressing the lack of chargebacks and
refunds in cryptocurrencies, it remains to be seen
whether they’re enough to solve the problem
completely.
Dogecoin
⚫ Dogecoin, denoted by its immediately recognizable
Shiba Inu mascot, is a variation on Litecoin.
⚫ It has a shorter blockchain creation time (one minute)
and a vastly greater number of coins in circulation –
the creators’ target of 100 billion units mined by July
2015 was met, and there’s a supply limit of 5.2 billion
units mined every year thereafter, with no known
supply limit.
⚫ Dogecoin is thus notable as an experiment in
“inflationary cryptocurrency,” and experts are watching
it closely to see how its long-term value trajectory
differs from that of other cryptocurrencies.
Coinye
⚫ Coinye, a semi-defunct cryptocurrency, is worth mentioning
solely for its bizarre backstory.
⚫ Coinye was developed under the original moniker “Coinye
West” in 2013, and identified by an unmistakable likeness of
hip-hop superstar Kanye West.
⚫ Shortly before Coinye’s release, in early 2014, West’s legal
team caught wind of the currency’s existence and sent its
creators a cease-and-desist letter.
⚫ To avoid legal action, the creators dropped “West” from the
name, changed the logo to a “half man, half fish hybrid” that
resembles West (a biting reference to a “South Park” episode
that pokes fun at West’s massive ego), and released Coinye
as planned.
Coinye
⚫ Given the hype and ironic humor around its
release, the currency attracted a cult following
among cryptocurrency enthusiasts.
⚫ Undaunted, West’s legal team filed suit,
compelling the creators to sell their holdings and
shut down Coinye’s website.
⚫ Though Coinye’s peer-to-peer network remains
active and it’s still technically possible to mine the
currency, person-to-person transfers and mining
activity have collapsed to the point that Coinye is
basically worthless.
Thank You