Investment banking

INTRODUCTION

At a very macro level, ‘Investment Banking’ as term

suggests, is concerned with the primary function of assisting the
capital market in its function of capital intermediation, i.e., the
movement of financial resources from those who have them (the
Investors), to those who need to make use of them for generating
GDP (the Issuers). Banking and financial institution on the one
hand and the capital market on the other are the two broad
platforms of institutional that investment for capital flows in
economy. Therefore, it could be inferred that investment banks
are those institutions that are counterparts of banks in the capital
mark ets in the function of intermediation in the resource
allocation. Nevertheless, it would be unfair to conclude so, as
that would confine investment banking to very narrow sphere of
its activities in the modern world of high finance. Over the
decades, backed by evolution and also fuelled by recent
technologies developments, an investment banking has
transformed repeatedly to suit the needs of the finance
community and thus become one of the most vibrant and
exciting segment of financial services. Investment bankers have
always enjoyed celebrity status, but at times, they have paid the
price for the price for excessive status, but at times, they have
paid the price for the price for excessive as well.

To continue from the above words of John F. Marshall

and
[Link], ‘investment banking is what investment banks
do’
This definition can be explained in the context of how
investment banks have evolved in their functionality and how
history and regulatory intervention have shaped such an
evolution.

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. 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. I Investment banks may also
differ from brokerages, which in general assist in the operate as
both brokerages and investment banks; this includes some of the
purchase and sale of stocks, bonds, and mutual funds. However
some firms best known financial services firms in the world.
 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
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 sophisticated finance and corporate
development departments provide objectivity, a vitally interested
in seeing the transaction close.

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 required to initiate and
execute a major transaction, thereby empowering small to
medium sized companies with financial and transaction
experience without the addition of permanent overhead, an
investment bank provides objectivity, a valuable contact
network, allows for efficient use of client personnel, and is
vitally interested in seeing the transaction close.

Organizational structure of an investment bank:

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 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 Back Office.

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.

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.

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
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 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.

Research is the division which reviews companies and

writes
reports about their prospects, often with "buy" or "sell"
ratings.
In recent years the relationship between investment banking
and research has become highly regulated, reducing its
importance to the investment bank

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 analyzing the market and credit risk that
Trader’s 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 overall. Another key Middle Office role is
to ensure that the above mentioned economic risks are captured
accurately (as per standardized booking models in the most
appropriate systems) and per standardized booking models in the
most appropriate systems) and on time (typically within 30
minutes of trade execution).

Back Office
Operations involve data-checking trades that have been
conducted, ensuring that they are not erroneous, and transacting
the required transfers.

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.
New products with higher margins are constantly 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.

For example, Each OTC contract has to be uniquely

structured and could involve complex pay- off and risk profiles.
Listed option contracts are traded through major exchanges, such
as the CBOE, and are almost as commoditized as general equity
securities.
 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 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
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, expand existing
operations, or for specific project financing.
Mergers and Acquisitions
Investment banks often helping in mergers, acquisitions,
and divestitures of their clients . Example projects included in
the acquisition of a specific firm,
 Sales and Trading
These services are primarily relevant only to publicly trade
firms , which plan to go public in the near future. Specific
functions include making a market in a stock, placing new
offerings, and publishing research reports.

General Advisory Services:

Advisory services include assignments such as strategic
planning, business valuations, assisting in financial
restructurings, and providing an opinion as to the fairness of a
proposed transaction.

Terms Related To Investment Bank

 Buying and Selling

Buying
Deciding on the proper time to purchase a security that you
would like to add to your holdings can be a critical task. This is
because of that fluctuations in the market .If the price drops
immediately after you buy, it may seem as if you missed out on a
better buying opportunity. If the price rises right before you buy
you may feel as if you paid too much. As it turns out, you should
not consider these small fluctuations influence your decision too
much. As long as the fundamentals that led you to decide on the
purchase have not changed .The proper time to buy a security is
quite simply when it is available for less
The overall economic climate, changes in the industry or
even bad decisions by management can all cause a security
poised to ascend in value to become an under performer.
Therefore, it is essential to practice your analysis before going to
buy. putting your money into action. Make some mock
purchases based on your personal analysis. At this point, the
need to continuously monitor your investments does not
disappear. Both under performers and overachievers should be
studied carefully to fine-tune your strategy.

Selling:
 There comes a time when investments must be
liquidated and converted into cash. In a perfect world, selling
would only be necessary when investment goals have been
reached or time horizons have expired, but, in reality, decisions
about selling can be much more difficult. For one thing, it is
difficukt to decide when to buy and when to sell the secuirities.
Investors often seek to sell investments that have dropped in
value in the short term. However, if conditions have not
changed significantly, drops in price may actually represent an
opportunity to buy at a better price. If the tings are going down
quickly it is better to sell them.

Selling may also become necessary if investment goals

change over time. You may need to reduce the amount of risk in
your portfolio or you may have the opportunity to seek out
greater returns.

Managing risk and diversification are often more important

than capitalizing on short-term gains in a particular security.
Keeping in mind the initial goals

Principles of Investing:
 1. Start Investing Now
We say this not just to discourage who wants to invest , but
because an early start can make all the difference. In general,
every six years you wait doubles the intial investment.
Another statistic: If you contributed some amount each
month
for the next nine years, they contributed the sum amount
for next 41 years.

2. Know Yourself
For investing you must know following factors

Current Situation:
How healthy are you, financially?
What's your net worth right now? What's your monthly income?
What are your expenses (and where could they be reduced)?
How much debt are you carrying? At what rate of interest? How
much are you saving? How are you investing?
Goals What are your financial goals? How much will you
need to achieve them? Are you on the right track?

Risk Tolerance:
How much risk are you willing and able to accept for your
objective? The appropriate level of risk is determined by your
personally.

3. Get Your Financial House In Order

 Even though investing may be more safe than personal
finance, it makes you financially strong . if you don’t know
where the money goes each month, you shouldn't be thinking
about savings. Tracking your spending habits is the first step
toward improving them. If you're carrying debt at a high rate of
interest (especially credit and debit).

If you want to transformed from a debt situation to

paycheck-to-paycheck situation to a saving some money every
month situation, you’re ready to 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 safe
investment like a money market account, so you're prepared in
the event of an emergency.

4. Develop A Long Term Plan

Now that you know your

current situation, goals, and personality, you should have a pretty
good idea of what your long-term plan should be. It should detail
where the money will go: cars, houses, college, and retirement.

Review your plan periodically, and whenever your needs or

circumstances , changes.

5. Buy Stocks
 Now that you've got a long term view, you can more safely
invest in 'riskier' investments, which the market rewards (in
general). This requires patience and discipline, but it increases
returns. This approach reduces the entire universe of investment i
to two choices: stocks and stock mutual funds. Both yield
different in shorterm , where as in long term both yields same.

6. Investigate Before You Invest

Always do your homework. The more you know, the better
off you are. This requires that you keep learning, and pay
attention to events that might affect you. Understand personal
finance matters that could affect you (for example, proposed tax
changes). Understand how each of your investments fits in with
the rest of your portfolio and with your overall strategy. If you're
going to invest in stocks, learn as much as you can about the
companies you’re considering. Understand before you invest.
7. Develop the Right Attitude
The following personality traits will help you achieve
financial success:
 Discipline
 Confidence
 Patience

The following personality traits will hurt your chances

of financial
 Fear:
 Greed

8. Get Help If You Need It

If you want others to handle your financial affairs for you,
you will
Contact the financial advisers (brokers) or any investor.

Initial Public Offerings

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

In accordance with the Securities Act of 1933, the

corporation will file a registration statement with the Securities
and Exchange Commission (SEC). The registration statement
must fully disclose all material information to the SEC, including
a description of the corporation, detailed financial statements,
biographical information on insiders, and the number of shares
owned by each insider. After filing, the corporation must wait for
the SEC to investigate the registration statement and approve of
the full disclosure.

During this period while the SEC investigates the

corporation's filings, the underwriter will try to increase demand
for the corporation's stock. Many investment banks will print
"tombstone" advertisements that offer "bare- bones" information
to prospective investors. The underwriter will also issue a
preliminary prospectus, or "red herring", to potential investors.
These red statement, but are incomplete and subject to change.
An official summary of the corporation, or prospectus, must be
issued either before or along with the actual stock offering.

Performance:
 The aftermarket performance of an IPO is how the stock
price behaves after the day of its offering on the secondary
market (such as the NYSE or the NASDAQ). Investors can use
this information to judge the likelihood that an IPO in a specific
industry or from a specific lead underwriter will perform well in
the 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 IPO investing. Unfortunately, for the small individual
investor, realizing those much-publicized gains is nearly
impossible. The crux of the problem is that individual investors
are just too small to get in on the IPO market before the jump.
Those large first-day returns are made over the offering price of
the stock, at which only large, institutional investors can buy in.
The system is one of reciprocal back scratching, in which the
underwriters offer the shares first to the clients who have brought
them the most business recently. By the
time the average investor gets his hands on a hot IPO, it's on
the secondary market, and the stock's price has already shot up.

SEBI Guidelines:
 The Government has setup Securities Exchange Board of
India
(SEBI) in April 1988. For more then three years, it had no
statutory powers. Its interim functions during the period were:
i. To collect information and advise the Government on
matters relating to Stock and Capital 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.
[Link] restrict the malpractices

As referred to earlier, malpractices have been reported in

both the primary market and secondary market. A few
examples of malpractices in the primary market are as
follows
Too may self styled Investment Advisers and Consultants.
Grey Market or unofficial premiums on the new issues.
Manipulation of markets before new issues is floated.
Delay in allotment letters or refund orders or in dispatch of
Share.

A few examples of malpractices in the Secondary

Market are as fallows:
 Lack of transparency in the trading operations and
prices charged to clients
  Poor service due to delay in passing contract notes or
not passing contracts notes, at all.

 Delay in making payments to clients or in giving

delivery of shares.
 Persistence of odd lots and refusal of companies to
stop this practice of allotting shares in odd lots, which
disappeared with the introduction of Demat form of
trading.
 Insider trading by agents of companies or brokers
rigging and manipulating [Link] bids to
destabilise management.

Objectives:
The SEBI has been entrusted with both the regulatory and
Development function. The objectives of SEBI are as follows:
a) Investor protection, so that there is a steady flow of savings into
the Capital Markets.
b) Ensuring the fair practices by the issuers of securities, namely,
companies so that they can raise resources at least cost.
c) Promotion of efficient services by brokers, merchant bankers
and others intermediaries so that they become competitive and
professional.
 SEBI AND FREE PRICING OF EQUITY
SHARES
With the repeat of Capital Issuers Control Act of 1947 in May
1992, the SEBI issued fresh guidelines for new Capital issues from
June 11, 1992. Pricing of Shares expect in case of new companies with
no track shares at par only. The existing unlisted companies if they desire
listing can record is left to free market forces. The new Companies have
to issues shares at par only. The existing unlisted companies if they
desire listing can make public issue upto 20% of equity and price can be
determined by free market forces, as determined by the issuer or the lead
manager. Similarly, an existing listed company can also fix the price of
issue depending on the markets forces. In all these cases, the reasons for
such price fixation, transparency and proper disclosers are insisted upon
by the SEBI. The draft letter of offer to the public is to be vetted by
SEBI, which was delegated to lead 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
promoters’ quota is not permitted. Merchant bankers held responsible for
ensuring that prospectus is fair and disclosures are full and correct and
that highlights and risk factors are slept out in all issues. Although free
pricing is permitted, the rationale of such fixation is to be provided to the
SEBI when it examines the drafts letter of offer.
 POWERS OF SEBI

The SEBI powers on stock exchanges and their member brokers

and sub brokers were exercised under SEBI (stock brokers and sub
brokers) Regulations of October 23 1992. These relate to registration,
licensing, code of conduct, and inspection of books accounts, etc. These
powers were exercised under Section 12 of SEBI Act.
SEBI was delegated more powers of administration of SC (R)
Act in respect of many provisions including recognition of stocks
exchanges (Sec.3, 4&5) and control and regulation of stocks exchanges
under Sections 7, 13, 18, 22 and 28 etc., These were concurrent powers
wielded by both Government and SEBI, effective from September1993.

Subsequently, by an ordinance in January 1995, the SEBI was

given further powers to impose penalties on insider trading and
capital markets intermediaries for violation of SEBI regulations and
companies for imposed in monetary terms, for failure to furnish books of
accounts, failure to enter into agreements with clients, failure to redress
investor grievances, defaults in case of mutual funds, and non-disclosures
of acquisition of shares and take over etc.

Venture capital funds like mutual funds were brought under the
control of SEBI. Earlier to that, the SEBI has started licensing and
regulations the underwriters, debenture trustees, collecting bankers,
and all intermediaries in the capital market

.
 SEBI in the New Millennium:
SEBI has got all the needed powers to regulate the Capital
Market including all affairs of listed Companies, Venture Funds,
MMMFs, etc. Already it has been regulating the foreign agencies or a
body operating in the capital market and it has announced guidelines for
all players in markets, including a code of 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 and corporates investing in India through FIIs; this limit of
30% was raised to 40% 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 amendments to Mutual Fund regulations of SEBI, the Mutual
Funds are required to send a complete statement of their portfolios to all
unit holders within one month from the close of each half-year. In order
to deter mutual funds from delay in despatch of redemption warrants,
SEBI has directed mutual funds to provide for payment of interest to the
unit holders on this delayed payment, wherever applicable.

Latest Primary Market Reforms

In pursuance with the recommendations of the Informal Group
on Primary Markets, the SEBI has dispensed with the requirements
of issuing shares at fixed par value of Rs.10 and Rs.100. They are now
free to issue shares at any value of Rs.1 and above. The SEBI modified
the existing framework for the book building. Some issues following the
book building process have already been issued in 1999-2000.
 In order to encourage Initial Public Offer, the SEBI has relaxed
the guidelines stipulating “the ability to pay” criteria in place of
existing criteria of “actual payment of dividend” criteria in place of
existing eligible to make public offers. The regulations for Credit Rating
Agencies were finalised and published by the SEBI. The categories of
promoters who are eligible to promote CRA’s are laid 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
investors bidding upto 10 marketable lots is no longer compulsory.
Allotment in Book Building process should be in Demat form only and
other requirements shall be the same as for any public issue. The issuer is
allowed to disclose either the issue size or number of securities to be
offered to the public.

The regulatory mechanism on secondary market was strengthened

during 1999-2000, through the rationalisation and refinement of margin
system and through mark to market margins, volatility margins, incre
mental carry forward margins, etc. The circuit breakers for the
volatility have been fixed by SEBI at 8% to 12% to be raised upto 16%.
The exposure limits for 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 initial public offers with a minimum offer of 10%, instead of 25%
for all other companies. Book building norms are to encourage new
issues. The norm of 90% subscription as the minimum for enabling the
company offering public issue to make allotment was waived. Similarly,
the stipulation of actual payment of dividend in three out of the past 5
years for the co mpany to come out with a public issue was replaced by
requirements of “ability to pay” the initiated to improve the sentiment in
the Primary Market. The SEBI has given freedom to the Companies to
determine the par value of shares issued by them in accordance with
section 13(4) of the Companies Act, 1956. The companies with
dematerialized shares have been allowed to alter the par value of share
indicated in the Memorandum and Articles of Association Reference was
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 and
NSE has offered these services through its wide network terminals
spread all over the country.

Demat Coverage:
 From January 2000, the scrip’s for trading in Demat form was
raised to 200. With this, the compulsory trading in Demat form has
raised the proportion of market deliveries in Demat form to 90% of the
total deliverers. The physical deliverers of shares has come down
drastically. The transaction costs have been reduced and volume have
increased phenomenally due to electronic form of trading and in demat
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
the market making, including the merits and demerits of order driven
system and quote driven system. The committee was of the view that
shares should be classified into the categories namely liquid and illiquid
and market making facility should be provided to the illiquid category of
shares. Market making should be made compulsory in such cases and
market markers have to give two way quotes for each such scrip. The
mechanism pf market making and risked involved in it are to be
understood by market makers.

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

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

SEBI Committee on Corporate Governance:

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

SEBI Guidelines on Listing:

In February 2000, the SEBI has asked the Stock Exchanges to
amend the listing agreement by adding clause 49, providing for corporate
governance mandatory for companies seeking listing for the first
time. The companies which are included Group A of BSE and in S&P
CNX Nifty Index have to comply with the requirements by March 31,
2001. Besides listed companies with paid up capital of Rs.10crores and
above or networth of Rs.25crores or more have to comply with this
requirement by March end 2003.

The SEBI has also directed the companies listed, to reduce the No-
delivery period to one week in the case of Demat shares. A
committee was set up to streamline the existing risk containment
measures namely the margin system and simplify it

SEBI’s Record:
The SEBI has set a creditable record of regulation for the
growth of a healthy Capital Market during the period of 1995-2000.
In the year 2000, it has set for itself the tasks of speeding up the
following measures

1) Pursuit of healthy Corporate Governance Regulations.

2) Introduction of Derivative Trading.
3) Development of the internet practices by brokers.
4) 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 risky
enterprises either as equity or debt capital. It may be in new
sunshine industries or older risk enterprises. The funds, which finance
such risky, venture capital funds.

Ventures capital was originated & popularised in USA in sixties. In

developed countries, this capital came from pension funds, insurance
companies & even large banks. Some large companies with excess funds
may provide this capital to achieve diversification, market expansion
 & ‘window on technology’ or to share in this result of R&D of
others.
In India, as the majority of the above institutions are in the public
sector, only the government or public financial institutions can provide
the funds for venture capital.

What is Venture Capital?

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

Venture Projects:
Proposals come to the venture capitalists in the form of business
plans. He appraises the same, giving due regard to the credentials of the
founders, the nature of the product or services to be developed, the
market to be saved & the financing required. If satisfied, he will invest
his own money in the equity shares of the new company, known as the
assisted company.

In addition to money, managerial & marketing assistance may also

be provided that is, the venture capitalist not only provides funds but also
on line operational advice. In short, he identifies himself with the project
as much as the innovator promoter & as such works hard to accomplish
ambitious targets & consequents higher appreciation of his capital.

Indian Position:
In India, most project financing schemes require at least 25 per cent
of the project cost to be contributed by the promoters, while the latter can
raise barely 5-10 percent. For long, there were a few agencies such as
IFCI’s subsidiary company, Risks Capital And Technology Foundation
of India, which provides finance to bridge the shortfall in the promoter’
contribution, but they could fulfill the requirements of a great many
budding entrepreneurs. As results of promoters not being able to bring in
those vital initial inputs of money, many of their good projects were
hanging fire. Venture capital could remedy this situation as well.

A beginning was made in this direction by the setting up of venture

capital divisions under the aegis of ICICI, IDBI & IFCI. Encouraged by
the response to technology financing, ICICI floated a separate company
---Technology Development and Information Company of India (TDICI)
includes, apart from venture capital financing, technology, consultancy
as well as entrepreneur escort services such as marketing, business
management, vendor development etc. The successful operation of this
fund will hopefully spark off some interest from the private sector ,
which will then consider entering this line of activity. Ultimately, it is
only when venture capital financing becomes more broad-based and
widespread that it will truly taking root in economy. In tune with its
tradition of pioneering new ideas, ICICI deviated from the beaten path to
usher in an unusual type of financial support. Addition to equity
participation (up to maximum of 49 percent) undertaken by typical
venture capital companies, TDICI offer the conditional loans. The
entrepreneur neither pays interest on it nor does he have to repay the
principal amount. If the venture capital succeeds, TDICI recoups its
investment in the form of royalty on sales which ranges between two and
eight percent. On the other hand, if the venture fails to take off even after
five years TDICI will consider writing off the loan.

Public financing agencies:

It is to be noted that the floating venture capital companies are the
financial institutions or banks (the Andhra Pradesh Industrial
Development Corporation, Canara bank and others). This can be directly
attributed to the Government guidelines, which restrict private sector
participation in venture capital funds to a maximum of 20 percent.

But if the concept is to make a mark in the economy it needs

private sector initiative and not institutional or government patronage. In
fact, herein lies the strategic significance of the venture capital. It paves,
the way for the private sector to share the burden of industrial finance,
particularly risk finance with the public sector.
The activities of the venture capital fund of ANZ Grindlays bank
include making equity investments in new companies, which may or may
not involve any new technology or other such related risk. This activity
of the direct subscriptions by financial institutions and banks has been
going on for decades and cannot be termed as venture capital activity.
The difference in ANZ Grindlays bank activity id one of the
nomenclature and not of means of financing. Also, on the whole, venture
capital is provided more in the nature of mezzanine loans than equity.

Private Agencies:
 One Venture Capital fund set up the private sector in India is Credit
Capital Venture Capital (India) or CVF for the short, the principal
shareholders of which are Credit Capital Finance Corporation, Bank of
India, Asian Development Bank, and CommonWealth Development
Corporation. Another set up in the private sector jointly by the ICICI 20
Century Finance Corporation, bank of Baroda, Asian development Bank
and Asian Finance and investment Corporation is the 20th Century
Venture Capital Corporation Ltd. One reason why private capitalists are
generally shy may be the high rate of capital gains tax applicable to the
profit of Venture Capital Funds. Though the guidelines provide for a
concessional rate of capital gains tax, the move can hardly be deemed as
a ‘concession’ in view 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
long- term fiscal policy announced by him in 1985. A fresh reference to
the “difficulties faced by new entrepreneurs in raising equity capital”
made by the finance minister in his 1988-89 budget speech and detailed
made by the finance minister in his 1988-89 budget speech and
detailed guidelines for providing such finance by registered companies or
funds were announced.

In India, the government has set up a Venture Capital Funds with a

contribution of Rs.10crore. The fund was brought into operation April
1986 by the IDBI. For financing this fund, a levy was imposed on all
payments made by Indian industries for the acquisition of foreign
technologies. This fund finance projects with minimum and maximum
project costs of Rs.5lakhs and Rs.250lakhs respectively.

Grindlays Bank has set up the Indian Investment Fund to Finance

the start up cost of entrepreneurs. This fund was subscribed mainly by
Non-resident Indians. The Government of India also announced on 1989
a National Equity Fund for financing small-scale entrepreneurs setting up
units in rural areas and urban areas population of below Rs.5lakhs.
Institutions like ICICI, IFCI, SBI Capital Markets Can bank Financial
Services and others have also set up their own funds for providing
Venture Capital Finance.
The policy of Government with regard to Venture Capital
Funds has changed in 1999-2000. The Government has allowed a
free hand and transparency for I.T. Venture Funds Foreign Funds are
allowed freely into these Funds.

Difficulties in India:
Fundamentally, there are no private pools of the capital of finance
risk ventures in India. The financial institutions perforce occupy a
dominant position in the provision of long-term capital to Indian
industry. They and the State development agencies do provide limited
amount of equity finance to assist the development of new business but
there is no private, professionally managed investment capital sources.
There are no private sector insurance companies or the pension funds
gathering regular premium income and virtually no private banks willing
to devote a small portion of their resources to the venture capital niche. It
is unlikely that such enterprises will be created in the foreseeable future
to mobilise private saving for investments. As an answer the situation,
mutual funds and investment trusts are permitted to set up and to commit
the part of their resources to the venture capital area. As a part of the
broader equity investment fund, given suitable standards of the valuation
for unquoted investments, it should be possible for the fund managers to
commit the portion of there portfolios to venture capital situations. The
participation of the private sector in venture capital funding, as it has
come to be defined in the narrow Indian context, is not possible in
isolation from the opportunity to develop a broadly spread investment
business.
 Tax Treatment:
The tax treatment of the venture capital funds in India is
ungenerous and falls well short of what is required. Whereas the Mutual
Funds established by the government controlled financial institutions and
nationalized commercial bank suffer no tax on either income or capital
gains, a venture capital fund would suffer at 20 per cent on dividend
income and a similar rate on long-term capital gains. Given an adequate
investment spread and tax incentives, mutual funds step into the early
stage financing arena, professionally assess and the monitor investments
assist the launch of new medium size businesses. SBI Mutual Fund is
really undertaking investment work with its ‘brought deals’. The creation
of more funds to participate in this area of the market is now clearly seen.
Early stage financings could then be syndicated between number of
professionally managed funds and sound, competitive situation between
them might also be created.

The Government has since 1995-96 been treating the venture

funds like Mutual funds for tax benefits and brought them under
Regulation of SEBI. The SEBI has set out the guidelines for their
registration and control by itself a code of conduct for them to operate as
in the case of capital market mutual funds and for their investment and
operations on the fund. In the Central Budget for 2000-01 the income of
the Venture Capital Fund is taxed at the rate of 20%, although the
dividends declared in the hands of the investors are tax-free.
 Need for Growth of Venture Capital:
There is need for encouragement of risk capital in India, as this will
widen the industrial base of, high-tech industries and promote the growth
of technology.

The initial step might be to permit the launch of the mutual fund by
all those banks authorise to conduct business in India, at the same time
extending the investment range of such funds to embrace unquoted
stocks

Liberating the capital market would bring greater depth to the

capital market as a whole, introducing more genuine investors of
substance with long time horizons, provide avenues for the institutions to
realise their equity portfolios more easily (freeing funds for more new
investments), and generally improve market liquidity. This would
improve equity cult.

So moves towards a freer and less regulated market are important

in considering measures to simulate the entry of the private sector into
the risk capital formation.

Latest Policy Charges:

In the year of 2000 of new millennium, the I.T. industry along-
with many start up industries like Telecom, Biotech, Multimedia
etc…have experienced rapid growth potential but with Scarcity of the
Venture Funds. To encourage Venture Capital Funds to grow rapidly to
help these industries, the Government has announced the following
measures early in 2000.

1. SEBI to be the sole authority for the regulation of Venture

Capitals.
2. The single window clearance facility is extended without the
need for going for clearance with the government RBI and I.T.
Authorities.
 3. In the first Millennium Budget, 2000-2001, Venture Capital
have got “on par” Status with Mutual Funds for the purpose of the tax
treatment under section 10(23D) of I.T. Act. Tax exemption is
granted to Venture Capitals like those of Mutual Funds, so that double
hands of investors.
4. The IPO norms are liberalized for the Venture Capital Funds for
the purpose of listing. Appraisal and finding are allowed to extent of 10%
of the equity capital of a start-up company. The condition of 3
years track record of profitability is waived. Even a public issue of 10%
of paid up capital is enough for the I.T companies for the purpose of
listing.
5. The Government have set up a separate ministry of I.T and
started an I.T Venture Fund of Rs.100crores for the financing new start
up I.T properties.

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 are kept
on par. Foreign Venture funds are given a free hand tom flow in for the
investments permitted for foreign investment. During the first quarter of
2000, about $17 billon have flowed in as Venture Funds mostly invested
in the technology based small companies, according to a Survey
Conducted by price waterhouse coopers (PWC) Company.

Among the measures to promote the capital market banks are now
allowed to invest in equities and bonds on a discretionary basis and to
invest in Venture Capital Funds beyond the permitted ceiling of 5% of
their funds in shares and securities of the companies during 1999-2000.

Rules on Venture Capital Funds:

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

Merchant banking
What is Merchant Banking?
Merchant banks are issue houses rendering such services to
industrial projects or corporate units as floatation of new ventures and
new companies, preparation, planning and execution of new projects,
consultancy and advice in technical, financial, managerial and
organisational fields. A number of other function such as restructuring,
revaluation of assets, takeovers, acquisitions, etc, are also undertaken by
them. A major function of merchant banking is the issue management.
The issue can be public issue through prospectus, offer of sale, or private
placements etc.

Issue Management
The issue management involves the following functions in respect
of issue through prospectus:
(a) Obtaining approval for the issue from the SEBI
(b) Arranging underwriting for the proposed issue.
(c) Drafting and finalizing of the prospectus and obtaining its
clearance from the underwriters, stock exchanges, auditors, solicitors,
Registrar of Companies and other necessary consents required for filing
the prospectus(d) Drafting and finalization of other documents such as
application forms, stock exchanges.
(e) Selection of the registrar to the issue, printing press, advertising
agencies underwriters, brokers and bankers to the issue and finalisation
of the fees and charges to be paid to them.
(f) Arranging through the advertising agency the press, brokers and
investor's conferences.
(g) Co-coordinating the printing, and advertisements relating to the
issue, and work of the registrars to the issue, the receipt and processing
of applications and preparation of the basis of allotment, n egotiation of
the same with the stock exchanges and preparation of register of
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 issue attractive; and
(b) To assist in the finalisation of the relative security or mortgage
documents and obtaining approval there to from the Company's
solicitors and trustees
 Other Functions
Merchant banks in foreign countries undertake a larger number of
activities. They operate both in the money market and capital market,
undertake direct and indirect lending portfolio management for
institutions, trusts, charities, etc, funds management for existing
companies, underwriting for new and old companies etc. They are also
active in the money market for new and old companies etc market. In
India, these functions are carried on by banks themselves with the result
that their merchant banking divisions confine to underwriting,
consultancy, new issue business, involving management of issues and
related activities. The Indian merchant banking is still in its infancy and
their activities are, therefore, limited to a few selected activities of new
issues market at present such as project planning, financial consultancy,
advice and planning and execution of these projects, involving the
preparation for the public issue, observance of necessary formalities for
such issued applications to SEBI, RBI and for listing on the stock
exchange, collection and allotment of share application moneys,
underwriting etc .

Offer of Sale
Usu ally, when the closely-held companies, whose shares are not
listed on the stock exchange, approach the financial institutions for
assistance for the expansion of their existing operations or
diversification, the financial institutions stipulate a condition that the
company should get its shares listed. Where the capital base of the
company is already large and issuing further equity capital is not justified
from the servicing angle, the promoters can offer such part of their exist
holding for sale through a letter of offer to the members of the public as
Is necessary to get the equity shares of the company listed on the stock
exchange. Although the letter of offer is not governed by the provisions
of the Co mpanies Act, 1956, in practice, the letter of offer contains all
the similar provisions which are to be found in the research.

The offer for sale must give all material particulars relating to the
 company as if it were a prospectus issued under the Companies
Act. In particular, it should include information regarding the shares on
offer and the terms of sale, its capital structure, and capitalisation of
reserves, any revaluation of assets or schemes of arrangements or
reorganizations, last five years' profit and loss account summarized
accordance with the prescribed listing requirements.

Any document by which the offer for sale to the public is made
shall, for all purposes, be deemed to be a prospectus issued by the
company and all enactments and rules of law as to the contents of
prospectuses and as to the liabilities in respect of statement’s or
omissions from prospectuses otherwise relating to the prospectus, shall
apply as if the shares or debentures had been offered to the public for
subscription and as if the persons accepting the offer in respects of any
shares or debentures were subscribers for those shares or debentures.
The said letter of offer will have to be signed by the persons
offering the shares or debentures for sale in the same manner as the
directors of the company sign the prospectus in terms of Section 60 of
the Companies Act. 1956

The offers have to certify that neither the stock exchange to which
an application for official quotation is made nor the Central Government
or SEBI has any responsibility for the financial soundness of this offer,
or for the price at which the offer of sale is made, or for the statements
mad e or opinions expressed in the offer of sale.

Private Placement
 When the financial institutions directly subscribes to the
equity/preference shares and/or debentures issued by the company, the
company is said to have privately placed these securities with the
financial institutions. This does not require either a prospectus or letter
of offer. The terms and conditions subject to which the financial
institutions agree to subscribe to the privately placed shares or debentures
are usually incorporated in the debenture subscription agreement or the
investment agreement entered into between the financial institutions and
the company.

The company could, if it so desires, approach, in the place of

financial institutions, a well-identifiable body of persons like merchant
banks for private placement. The provision of the Act are to be
interpreted strictly and therefore, if the company sends the offer to Mr. X
and the offer is accepted by Mrs. X to whom the allotment is finally
made, it could deem to be the public offer necessitating compliance of
requirements of the prospectus. This exercise is, therefore, to be
undertaken with great caution to see that the final transfer takes place
only to those for whom the original offer was made. In practice, till
recently the companies hardly took any recourse to this 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 to be sent much in advance and its is thereafter necessary that the
company should send offers to the same persons as per the list approved
by the Company with a clear-cut instructions to the officers that the
securities offered are strictly to be subscribed for by them and them alone
and the officers are not supposed to pass on the offer of the company to
someone offered are strictly to be subscribed for by them and them alone
and the officers are not supposed to pass on the offer of the company to
someone else. He would also ensure that the company would receive
subscription only from those persons to whom the original offers had
been sent by the company and finally, the company would allot securities
to the same company and finally, the company would allot securities to
the same persons
 Services of Merchant Banks
Merchant banking is normally considered to be related only to the
services associated with public issue management but they also offer
domestic project finance syndication. Large merchant banks in the
country offer a wide range of services. Merchant banks offer generally
the following services.

Pre-investment studies for investors:

These are in the nature of financial feasibility explorations in

selected areas of interest of the client. They include such studies for
foreign companies wishing to participate in joint adventures in India, and
often involve a package covering advice on the nature of participation
and Government regulatory factors.
Project finance:
Once the decision embark on a particular
project/expansion/modernization scheme has been taken, assistance in
working out a comprehension package for the project funding and pattern
of financing is available from the merchant banks. They work in close
liaison with the client, his technical consultants, and the funding
institutions, prepare and submit complete e financial dossiers, and
arrange for the various sources of finance. Assistance in legal
documentation for the finance arranged is also provided.

Working capital:
Finance for working capital, particularly for new ventures, often
needs to be syndicated on behalf of the promoters, and merchant banks
assist in this as well. For existing companies, non/traditional sources
such as through the issue of debentures for this purpose, and others have
been successfully tapped by merchant bankers.
 Foreign currency finance:
Of late, India has become increasingly active in the international
money markets, and this trend is likely to continue. For import of capital
goods and services from overseas, the arrangement of various kinds of
export credits from different countries is also required.
In addition to this wide range of services, some of the larger banks
are also involved in areas such as the arrangement of lease finance,
and assistance in acquisitions and mergers etc.

Why Merchant Banks?

The following are some of the reasons why specialist merchant
banks have a crucial role to play in India:

1. Growing industrialization and increase of technologically

advanced industries.
2. Need for encouragement of small and medium industrialists,
who require specialist services.
3. Growing complexity in rules and procedures of the
Government.
4. Need to develop backward areas and states which require
different criteria.
5. Exploring the possibility of joint ventures abroad and foreign
markets

6. Promoting the role of New Issue Market in mobilizing savings

from of public.
Functions
With increasing industrialization of the country and the growing
emphasis in the Five Year Plans on industrialization, merchant banking
in India has a very extensive role to play. The National & Gsrindlays
Bank was the first to set up merchant banking division in India followed
by the State Bank of India and other banks.
 Functions of the merchant banking divisions are as follows:
1 advice and liaison obtaining consent of the Central and Stat e
Government, for the project if necessary;
2. Preparation of economic, technical and financial feasibility
reports;
3. Initial project preparation, pre-investment survey, and market
studies

4. Help in raising rupee resources from financial institutions and

commercial banks;
5. Underwriting and also for subscription, if necessary, to the new
issues or syndication of loans, etc;
6. Assistance in raising foreign exchange resources so as to enable
the industrial concerns to import machinery and technical know-
how and secure foreign collaboration.
7. Advice on setting up turnkey project s in foreign countries and
locating foreign markets;
8. Help in financial management and in designing proper capital
structure and debt-equity ratio, etc, for the company.
9. Advice on restructuring of capital, amalgamation, mergers,
takeovers, etc;
10. Management of investment trust, charitable trusts etc;
11. Management aid and entrepreneurial aid (management audit
providing designs of the complete system, operational research and
management consultancy); and
12. Recruitment (selection of technical and managerial personnel),
Etc.

Role of Merchant Banks

To promote the new issue market there is need for a qualitative
improvement in the offer of new issues both in terms of time taken
and the cost of floatation. The time taken for organising a new
issue is between 12 to 18 months and the cost of raising new capital
varied from 3% to 8% and sometimes even 20%. This has been brought
down relatively by specialized merchant banking institutions by
catering to the requirements of both large and small industrial units. Cost
of floatation of equity and preference capital is higher for new companies
than for existing companies, indicating thereby the difficulties
experienced by new companies in making a new issue. Merchant banks
help saving in the cost of new companies and of small companies.

The new issue market has not succeeded fully in mobilizing

savings partly due to the preferences of the public to company
deposits and partly due to low yields on equities as compared to
those on fixed interest securities. There has been a decline in the
proportion of share capital in the total capital employed due to the steep
rise in the cost of new issues. There are certain minimum m costs to be
incurred in respect of fees to brokers, promoters' expenses,
underwriting commission etc, irrespective of the size of the project.
While bigger companies are able to manage this, small units find it
While bigger companies are able to manage this, small units find it
extremely difficult to meet this minimum cost with uncertain
prospects of their own internal resources in order to avoid the high
cost of making public issues.

Underwriting
The main work of merchant banks relates to underwriting of new
issues and rising of new capital for the corporate sector. Of the
amount underwritten, some part devolves on the underwriters,
which varies depending on the state of the capital market, and the
intrinsic worth of the project. The SEBI has made underwriting
Compulsory for all issues offered to Public first but later it was made
 optional. SEBI made it necessary for merchant bank to undertake
or make a firm commitment for 5% of issued amount to the public.

Type of Expertise Required

The type of staff required for a merchant bank will depend upon its
functions which are themselves flexible. The merchant bank should
have an organization large enough to deal with a number of
applications at a time. The issue house which acts as the merchant banker
normally pays visits to the company's plant, warehouses, and other
physical assets and if a company is making its first issue, it might secure
independent reports from Chartered Accountants, industrial consultants,
technical experts etc. The issue house, which is a merchant bank also,
requires, plant, management, labour , competitors, profit margins,
taxations, etc. They have to keep ready all the information needed in the
form of dossiers with respect to the affairs of the company generally
enquired into by the investing public, lending financial institutions and
the government.
Secondly, a merchant bank has to suggest an appropriate time of
issue and provisional terms. Once these terms are settled the share
certificates, prospectus and other documents are drafted by the
merchant bank with the assistance of lawyers, accountants and
others. They have to satisfy the Companies Act and other SS
requirements of law. Subsequently, the merchant bank may have to get
ready the application to the SEBI for the public issues. This requires
familiarity with the regulations under the Companies Act and the
SEBI guidelines and the procedures to be followed and the
authorities to be approached. The provisions under the MRTP Act
regulating monopoly practices and other activities of big industrial
houses should also be looked into.
Thirdly, they may have to make an application to the appropriate
stock exchange for quotation and satisfy the stock exchange
requirements are to be observed and familiarity with the stock exchange
rules and bye-laws as well as the provisions of the have to advise on the
desirability or otherwise of listing on the stock exchange rules and bye-
laws as well as the provisions of the Securities Contracts Regulations)
Act would be essential. They may have to advise on the desirability or
otherwise of listing on the stock exchange as well as help the companies
go through the process of getting their shares listed. Advertisements
containing all the information legally required to be given in the
prospectus must be published in all the leading proposed date of opening
and closing, a which a reference was made earlier. Once the issue made,
the work of the merchant bank relates to arranging for the allotment of
shares in consultation with the company and the stock exchange
authorities with the help of Registrars.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

MERCHANT BANKING -ROLE & FUNCTIONS

(a) Authorisation
Any person or body proposing to engage in the business of
Merchant Banking would need authorisation by SEBI in the
prescribed format. This will apply to those presently engaged in the
Merchant Banking activity, including as Manager, Consultants or
Advisers to issues.

(b) Authorised Activity

(i) Issue Management
(ii) Corporates Advisory services relating to the issue
(iii) Underwriting
(iv) Portfolio Management Services
(v) Managers, Consultants or Advisers to the issue
(c) Authorisation Criteria
All Merchant Bankers are expected to perform with high standards
of integrity and fairness in all their dealings. A code of conduct for the
Merchant Bankers is prescribed by SEBI which will take into account
the following:

(i) Professional Competence

(ii) Personnel, their adequacy and quality and other infrastructure
(iii) Capital Adequacy
 (iv) Past track record, experience, general reputation and fairness .
In all their transactions.
(d) Terms of Authorisation
(i) All Merchant bankers shall have a minimum net worth of
Rs.5crore.

(ii) The Authorisation will be for an initial period of 3 years.

(iii) All issues should be managed by at least one authorised to

Merchant banker functioning as the Lead Manager or sole manager.

Issue Amount No. of Lead

Managers

Up to Rs. 50crores Not

more than 2

Over Rs. 50 crores not more Not

more than 3
Over Rs.100 crores Not
more than 4

(iv) The Merchant Bankers shall exercise due diligences

independently verifying the contents of the prospectus. The Merchant
Bankers of the issues shall certify to this effect to SEBI.
(v) In respect of issues managed by the Merchant Bankers, they
would be required to accept a minimum 5% underwriting
obligation in the issue subject to a ceiling of Rs. 25 lakh.
(vi) Lead managers would be responsible for ensuring timely
 refunds and allotment of securities to the investor.
(vii) The merchant banker’s involvement will continue till the
complete on of essential follow-up steps including listing of the
shares and dispatch of certificates and refund.
(viii) The Merchant Banker shall make available to SEBI such
information, returns and reports as may be called for.
(ix) Merchant Bankers shall adhere to the code of conduct which
shall prepared by SEBI.
(x) Merchant Bankers to ensure that Publicity / Advertisement
material accompanying the application form to the issue meets the
requirement of GOI/SEBI.
(xi) SEBI shall be informed well before the opening of the issue
the Inter allocation of activities/sub-activities, among lead managers to
the 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

---------------------------------------------------------------------------------
---
-----------------------------------
Category Requirement
Authorised to Act as
(1) (2) (3)
-----------------------------------------------------------------------------
------------------------------------------
Category 1 Minimum Net worth Rs.50 crore Lead
Manager/[Link]

Adviser/consultant to an issue,
Portfolio
manager and
underwriter
 to an issue 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 co
mpetence.
(ii) Track record of the promoters and their co mpetence.
(iii) Disclosure about Demand - Supply position, Market and
Marketing arrangements, Raw materials availability and
infrastructural facility.
(iv) Disclosure of Risk factors.
(v) Objective assessment of Business prospects and profitability.:

If highlights are provided the following deficiencies will attract

negative points:
1. Absence of Risk Factor
2. Absence of Listing
3. Extraneous contents in 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 8
A
More than or equal to 4 but less than 6
B
Less than 4
C

(g) Penalty Point System

SEBI has introduced penalty point system for Merchant Bankers
who fail to comply with the various provisions. The areas of non-
compliance/defaults have been categorised into following four
categories. The activities are classified within these four
categories:

Type Nature Penalty Points

---------------------------------------------------------------------------------
--------------------------------------
I General Defaults 1
II Minor Defaults 2
III Major Defaults 3
IV Serious Defaults 4
 INVESTOR PROTECTION
Introduction
The term "Investor Protection” is a wide term encompassing
various measures designed to protect the investors from malpractices of
companies, brokers, merchant bankers issue managers, Registrars of new
issues, etc. "Investors Beware" should be the watchword of all
programmes for mobilisation of savings for investment. As all
investment has some risk element, this risk factor should be borne in
mind by the investors and they should take all precautions to protect their
interests in the first place. If caution is thrown to the winds and they
have only to blame themselves. But if there are malpractices by
companies, brokers, etc, they have every reason to complain. Such
grievances have been increasing in number in more recent 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, agents,
merchant bankers, issue managers, etc, which cannot be entertained
against registered sub-brokers can be entertained.

Complaints against Members

Investors have complaints against brokers regarding the price,
quantity etc. at which transactions are put through, defective
delivery or delayed delivery, delayed payment or non-payments etc, non-
settlement of vyaj badla ducs, non-payment of agreed brokerage to
authorised assistants, etc. In the event of default of a member
broker, the dues of clients are also to be looked into.

There is a Grievance Cell in many Stock Exchanges which attends

to investor complaints. Of the total, nearly 95% are against
companies and they are more difficult to settle, as many companies do
not attend to the complaints promp tly despite reminders and
warnings by the stock exchange, in view of the fact that penal powers of
the Exchange are limited SEBI has been given these penal powers in
respect of listed companies by an amendment to the SEBI Act in 1995
and many other subsequent a amendments including the latest in 2002

The grievance procedure in respect of complaints against

members 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 bye-laws.
(c) Special committee appointed by the Executive Director for
settlement
(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 of
sale proceeds, non-settlement of accounts etc. Of the total
complaints against members, about 85% are settled during the year,
itself.

Complaints against Companies

The complaints against companies are in the nature of non-receipt
of allotment Letters, refund orders, non receipt of dividends, interest etc.,
delay in transfer of shares and in splitting and consolidation. The
clearance of these complaints is also attended to by the Cell by writing to
the companies, follow-up telexes, etc. and finally by warning to delist the
companies concerned. But the clearance of these complaints is slow due
to the non-compliance or slow compliance by the companies to the
References made by the Cell. The powers of the Stock Exchange are
limited to warnings and delisting of shares and as such compliance by the
companies was poor.

Customers' Protection Fund

The Customers' Protection Fund is constituted by all Stock
Exchange to safeguard the interests of the investor clients from defaults
of the stock brokers. The Fund is financed by way of a levy on the
turnover of members and from out of the listing fees, earmarked by the
Exchanges.
Investors Beware
Investors in stock and capital market need a word of caution.
Firstly, these investments are more risky, returns are uncertain and
share values are subjected to wide fluctuations. Secondly, such
investments require an art and expertise to pick up the right stocks,
failing which the investors would burn their fingers. Thirdly, the
players in the market namely, Brokers and issuers of securities,
companies’ etc are not rated high for their honesty with the result
that the investor’s complaints against stock brokers and companies have
been 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 in housing and for a regular income to
meet his minimum needs and comforts of life. Even if all the stock
market investments are wiped out due to a market crash, the investor
should not be pauper on the streets. Besides, if the investor spends
sleepless nights on the fall of share prices, he cannot be a good stock
market investor.
Pre-requisites of Investor
The investor should have abundant common sense and a strong
heart to withstand the vicissitudes of fortune. He need not be a holder of
high academic degrees like an MBA from Harvard or a finance
graduation from the Wharton School. Nor does he need to have
hereditary characteristics or family tradition of investment. The only
requirement he should have is abundant logic and common sense and
strong nerves and develops the art of investment on a scientific basis.

Preparing to Invest
Investors desiring to invest in stocks require a lot of preparation.
The weak hearted and risk -averter should first make an entry by buying
only debentures, particularly convertible debentures of good companies,
or subscribe to new issues of promising and well-established companies.
After sufficient study and preparation, the investor should act like stag-
pickers in the market, picking up scripts on a selective basis. That means
selected companies from promising and growing industries should be
picked up after collection of all relevant information and data on the
companies and scientific analysis of their fundamentals. The
undervalued scripts should be purchased at the right time with the help of
technical analysis. Rumors and advices: of so-called consultants have to
be carefully scrutinized. As the market investment is both a science and
an art, it requires both expertise and intuition. There is need for prior
preparation and a lot of home works before investments are undertaken.
A high degree of caution and planning is necessary but the scientific
basis and knowledge are to be acquired by a proper study.
Balance Sheet Study
Investors entering the stock market should also get into the habit of
detailed and careful study of the balance sheets of companies in which
they wish to invest. Similarly, they should examine carefully the detailed
prospectus before subscribing to the new issues of co mpanies. The habit
of relying on rumours, or advice of brokers or friends should be replaced
by habit of self-study of balance sheets and prospectus of 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
exchanges are; they may deal with those sub-brokers who have
connections with registered brokers. An honest and dependable broker is
too chosen through proper introduction and orders should be placed with
him in proper manner with limits on prices at which sales or purchases
can be made. As and when a transaction is completed, he should insist on
a contract note in due time.
Protection in the New Issues Market
The main sources of information on which investors depend in the
new issues market is the prospectus, which should contain correct
statements of fats. Any false statements, fraud, etc. are punishable under
the Companies Act. Under Section56 of the Companies Act, the
Directors are subject to civil liability for any misstatement facts or untrue
statements.

Under Section 63 and 68 of the companies Act, the directors are

also liable criminally for any fraud of false statement in the prospectus.
Companies’ liability for misstatements arises fro m statements and
statements, which are material to the investors and the particulars on
which investors depend to make investments. The directors or promoters
of the company are thus subject to both criminal and civil liability under
the Act for nay misstatements in the prospectus. Even so, the small
investors cannot afford to go to court and, should therefore, carefully
read and examine the prospectus for the viability of the project and
marketability of the product and for integrity and dependability of the
promoters. The investors have also a responsibility to assess the
prospectus and risk involved in the project before making any
investment.

Protection for Fixed Deposits

Section 58A of Companies Act, deals with the subject of Fixed
Deposits. There are some rules, which apply to non-banking 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 of
company Affairs in consultation with the RBI. Interest rates, maturity
period of deposits, and the amounts permissible to be raised by the
companies are all given in the form of guidelines by the Department of
Company Affairs. The co mpanies have to follow these guidelines while
accepting deposits from the public. Renewal and repayments are also
regulated by the Companies Act and the rules framed by the Department
of Company Affairs. When the company fails to repay the deposit, the
depositor can complain to the Company Law Board (CLB) in the
specified form duly filled in together with the fees for non-payment of
the interest or non- payment of deposits. The order of the CLB is final
and binding on the company and the company has to comply with it. Any
non-law would invite penalty of imprisonment and fine. This provision
however, does not apply to sick companies.

All NBFCs been registered and licensed by the RBI since July 1997
and guidelines for them have been issued by the RBI early in 1998. The
raising of deposits by them is subject to credit rating and a host of other
requirements.

Guidelines to Investors
1)Deal with a registered member of the stock exchange. If you are
dealing with a sub-broker, make sure that all bills and contracts
are made in the name of a registered broker and sub-broker is also
registered with the SEBI.

2)Insist that all your deals are done in the trading ring or through
the exchange.

3. Give specific orders to buy or sell within the fixed price limits
and/or time periods within which orders have be executed.

4. Insist on contacts notes to be passed on to you on the dates.

When the orders are executed.
5. Make sure that your deal is registered with the stock exchange.
In the case of a dispute, this will help trace the details of the deal
easily.

6. Collect a settlement table from the stock exchange mentioning

the pay-in and payout days. Each stock exchange has its one
trading periods, which are called settlements. All transactions done
within this period are settled at end of it. All payments for the shares
bought and share deliveries take place on the pay-in day. An awareness
of pay-in and payout days is use full when a broker tries to make
excuses.
7. Keep separate records of dealings in specified shares (Group A)
and non-specified shares (Group B1 and B2). The settlements
for each is on different days with the present compulsory
rolling settlements system, deliveries and payments are made
quicker with in three to five days.
8. Execute periodic settlements of dues and delivery of shares to
avoid accumulation of transactions.
9. Insist on delivery. If the company returns your papers and
shares with objections, contact your broker immediately.
10) Ensure that shares bought are transferred in your name before
the company’s book closure date. This is necessary to make
sure that you receive benefits like dividend, interest and bonus shares.
All companies have a book closure date on which the list of shareholders
in the company is finalised.
[Link] if broker does not deliver the shares bought in your
name. Proceed to contact another broker with the bill/
contact given to you by the earlier broker and the latter will purchase
the shares on your behalf. In such an event, the first broker will
have to pay the difference in price.
12. Do not sell/deal in shares where even one of the holders has
book closure, as there are not valid in the market.

[Link]
not sell/deal in shares where even one of the holders has
passed away. In cases where the holder has died, a
succession certificate is necessary. In cases where one of the joint holders
passed away, the surviving holder should send the shares along
 with the death certificate to the company. Only after the name
of the deceased has been deleted from the shares, can they be
transferred.

PORTFOLIO MANAGEMENT SERVICES

A list of all those services and facilities that are provided by a

portfolio manager to its clients, relating to the management and
administration of portfolio of securities or the funds of clients, is referred
to as ‘portfolio management services’. The term ‘portfolio’ means
the to as ‘portfolio management services’. The term ‘portfolio’ means the
total 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 or undertakes on behalf of the clients the
management or administration of a portfolio 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 to portfolio management,
exercises any degree of discretion as to the investments or management
of the portfolio of securities or the funds of the clients, as the case may
be.
FUNCTIONS
The objective of portfolio management is to develop a portfolio
that has maximu m return at whatever level of risk the investor
deems appropriate.
 Risk Diversification
An essential function of portfolio management is spread risk akin
to investment of assets. Diversification could take place across different
securities and across different industries. Diversification achieved
in different industries is an effective way of diversifying the risk in an
investment. Simple diversification reduces risk within categories of
stocks that all have the same quality rating.

The portfolio managers could as well adopt the ‘Markotiwz

model’ whereby portfolio risk are sought to be reduced through
combining assets, which are less than perfectly positively correlated.

Efficient Portfolio:
A portfolio manager aims at building ‘dominant investment’ called
‘efficient portfolio’. An efficient portfolio consists of combination
of assets that maximizes return and maximizes the risk level of expected
return. The objective of portfolio management is to analyze
different individual assets and delineate efficient portfolios. A group of
portfolio of efficient portfolios is called ‘efficient set of portfolios’. The
efficient set of portfolio comprises efficient frontier.

Asset allocation
An important function of portfolio management is asset allocation.
It deals with attaining proportion of investments from categories.
Portfolio managers basically aim at stock-bond mix. For this purpose
equally weighted categories of assets are used.
 Beta Estimation
Rebalancing of portfolio involves the process of periodically
adjusting the portfolios to maintain the original conditions of portfolio.
The adjustments may be made either by way of ‘constant proportion
portfolio’ or by way of ‘constant beta portfolio’. In constant
proportion portfolio, adjustments are made in such a way as to maintain
the relative weighting in portfolio components according to the change in
prices. Under the constant beta portfolio, adjustments are made to
accommodate the values of component betas in the portfolio.
STRATEGIES
A Portfolio manager may adopt any of the following strategies
as part of an efficient management:

Buy and Hold Strategy

Under the ‘buy and hold’ strategy, the portfolio manager builds a
portfolio of stock, which is not disturbed at all for a long period of
time. This practice is common in case of perpetual securities such as
common stock.

Indexing
Another strategy employed by portfolio managers is ‘ indexing’.
Indexing involves an attempt to replicate the investment
characteristics of a popular measure of the bond market. Securities that
are held in best- known 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 a portfolio manager aims at distributing the funds throughout the
yield curve.

Barbell Portfolio
Under this portfolio strategy, less investment of funds is made in
middle maturities.

REGISTERATION OF PORTFOLIO
MANAGERS
Following are steps involved in the registration of portfolio
Managers:

Application for Grant of Certificate

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

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 the Board. Before rejecting any such application, the applicant shall
be given an opportunity to remove within the time specified such
objectives as may be indicated by the Board.

Furnishing of Further Information, ETC

The board may require the applicant to furnish further information
or clarification regarding matters relevant to his activity of a portfolio
manager for the purpose of disposal of application. The applicant or
its principal officer shall, if so required, appear before the Board for
personal 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 deems
relevant to activities relating to the activities to portfolio
management.

The Board considers the following in this 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
effectively discharge the activities of a portfolio manager.

3. Whether the principal officer of the applicant has the

professional qualifications in finance, law, accountancy or business
management from an institution recognized by the Government.

4. Whether the applicant has in its employment a minimum of

two
Persons who, between them, have at least five years of experience
as portfolio manager or stock broker or investment manager or in
the 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 has
been rejected by the Board.

6. Whether any disciplinary action has been taken by the Board

against a person directly or indirectly connected with the applicant
has been under the Act or the Rules or the Regulations made
thunder.

7. Whether the applicant fulfills the Capital adequacy

requirements as specified in regulation 7
 8. Whether the applicant, its director, principal officer or the
employee as specified in clause (d) is involved in any litigation
connected with securities markets which has an adverse bearing on
the 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
convicted for any offence involving moral turpitude or has been
found guilty of any economic offence.

10. Whether the applicant is a fit and proper person

[Link] 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 fifty lakhs rupees. For the purpose of this regulation, “net
worth” means the “aggregate value of paid up equity capital value of
paid up equity capital plus free reserves reduced by the aggregate value
of accumulated losses and deferred expenditure not written off, including
miscellaneous expenses not written off.”

Procedure for Registration

The Broad on being satisfied that the applicant and on receipts of
the payment of fees as specified in Schedule II, then grants a certificate
in ‘Form B.’