INVESTMENT MANAGEMENT

MODULE 1:
      

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MEANIND AND TYPES OF INVESTMENT FACTORS INFLUENCING INVESTMENT SECURITY MARKETS: PRIMARY AND SECONDARY STOCK EXCHANGES: FUNCTIONS LISTING OF SECURITIES SEBI,CAPITAL MARKET REFORMS ONLINE TRADING,DEMETERIALISATION,DEPOSITORY SERVICES MERCHANT BANKING,MUTUAL FUNDS CREDIT RATING AND CREDIT RATING AGENCIES IN INDIA

MEANING OF INVESTMENT
The term INVESTMENT Refers to funds invested in various securities, consisting of govt. and semi govt. Securities, loans, debentures of local authorities, such as municipal corporations ; debentures and shares of companies. Thus investment represent a legal claims of various securities such as bonds, shares, debentures and are assets of special nature. Invest. Means the use of money to earn more money by way of interest,dividend or capital appreciation and can be used to meet the financial requirements of the investors. In financial sense, it is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period of time.

DEFENITIONS

F.AMLING- “INVESTMENT May be defined as the
purchase by an individual or institutional investor of a financial or real asset that produces a return proportional to the risk assumed over some future investment period.”

FISHER AND JORDAN-” Commitment of funds
made in the expectation of some positive rate of return. If the investment is properly undertaken, the return will commensurate with the risk the investor assumes.“

TYPES OF INVESTMENT
ECONOMIC INVESTMENT:
 It

refers to the net additions to the capital stock of the society which consists of goods and services that are used in the production of other goods and services. to capital stock means an increase in buildings, plants, equipments and inventories over the amount of goods and services that existed.

 Addition

COMMITMENT INVESTMENT

It refers to the money commitment to satisfy personal desires, since no rate of return is involved in such investment nor capital growth is expected. Ex. A commitment of money to a new car is an investment from an individual point of view.

FINANCIAL INVESTMENT

It involves the investment of funds in various assets, such as stock,bonds,real estate etc. Investment is the employment of funds with the aim of achieving additional income or growth in value. It involves the commitment of resources which have been saved or put away from current consumption in the hope some benefits will accrue in future. Thus it is a long term commitment of funds and waiting for a reward in future

FLOW OF INVESTMENT INTO INDIA

FACTORS INFLUENCING INVESTMENT
 Increase

in investing population  Availability of tax incentives  Tendency of people for investment  Availability of investment opportunities  Increase in investment related information  Ability of investments to provide income and capital gains.

1.INCREASE IN INVESTING POPULATION

Increase in working population and larger family incomes had resulted in higher savings. Also there are large number of listed companies in the world. Investment in shares and debentures has become a major source of income at present days. At present the investors in india is more than 1.25 crores compared to 65 lakhs in 1992(lpg). Still compared to developed markets india has to grow more.

2.AVAILABILITY OF TAX INCENTIVES
 Investment

in securities cannot be made without considering various provisions of tax laws. Investor may find that most of his profits have eroded by the payment of taxes. tax planning would help us in savings.

A

 There

are many exceptions and deductions available to the investors under income tax act, wealth tax act. by way of interest, premium, issued by the central govt. Is exempted from income tax

 Income

3.TENDENCY OF PEOPLE FOR INVESTMENT
 Emerging

economic environment and competitive market along with the consumer sovereignty had increased the tendency of the people to invest. savings constitute around 82% of Indians gross domestic savings financial liberalization).

 Household

4.INVESTMENT OPPURTUNITIES
 There

are various schemes available to the investors which are offered by both government and private institutions which would provide us different satisfaction levels, depending up on the needs, schemes, returns and risk of the investment involved.

5. INCREASE IN INVESTMENT RELATED INFORMATION

       

INVESTMENT RELATED INFORMATION IS EASILY AVAILABLE NOW, SO THAT THE INVESTORS CAN WISELY DECIDE THE RIGHT TYPE OF INVESTMENT WHICH SUITS THEM THE BEST SOURCES OF INFORMATION TO THE INTELLIGENT INVESTORS IS: FINANCIAL PERIODICALS SATELLITE CHANNELS GLOBAL AFFAIRS NATIONAL ECONOMIC AFFAIRS ASSOCIATIONS FINANCIAL NEWS PAPERS COMPANY DATA AND PUBLICATIONS

6.ABILITY OF INVESTMENT
Ability

of the investments to provide income and capital gains had increased the investment habits, which is a very important factor of investment.

Security markets
 An

exchange where security trading is conducted by professional stockbrokers  The term securities markets enclose a number of markets in which securities can be bought and sold. These securities markets can be classified into four types of markets: • Primary market • Secondary market • Money market • Capital market

Financial Market (S.M) Primary Mkt Inst Primary market Firms raise capital equity Public Private placement Capital market

Money market Commercial Credit banks unions Short term instrumentsdebt

g rtin ppo Su nts age Insurance cos

Stock excha nge

Second ary market

Investors trade securities issued in primary market

SECURITY
A

security is a fungible (exchangeable), negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as banknotes, bonds and debentures, and equity securities, e.g. common stocks.

 The

PRIMARY MARKET

primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

Features Of P.m  1. This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).  2. In a primary issue, the securities are issued by the company directly to investors.  3. The company receives the money and issue new security certificates to the investors.

 4.

Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.  5. The primary market performs the crucial function of facilitating capital formation in the economy.  6. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’.

Methods of issuing securities in the PM
1. Initial Public Offer 2. Rights Issue (For existing Companies) 3. Preferential Issue.

SECONDARY MARKET
 The

secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket.

 Secondary

Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

STOCK EXCHANGE Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include: Shares,stocks,bonds,debentures,G ovt. securities

Definition
 According

to Securities Contract Act 1956, the stock exchange can be defined as “An association, organisation or body of assissting, regulating and controlling business in buying , selling, and dealing in securities.”

Objectives
 To

regulate Stock market practices  To create efficient securities market.  To ensure fair dealing and protection to investors  To improve the working of stock exchange.  To control the undesirable speculative practices.

Role and Functions of a stock exchange

• • • •

To bring companies and investors together so that Investors can put risk capital into companies and companies can use the capital. Provide an orderly regulated market for securities. Facilitate continuous, ready and open market for selling and buying securities. Promote saving and investment in the economy by attracting funds from the investors. Facilitate takeovers by means of acquiring majority of shares traded on the stock market.

• • • • • • • • •

Act as clearing house of business information. Extend liquidity to securities. Facilitate marketability and transparency of securities. Allow companies to float their shares on the market. Ensure wider ownership of securities. Enable investors to evaluate the net worth of their holding. Provide capital to profitable sectors. Ensure safety and fair dealings to all. Motivate well reputed companies to retain their shares in “A” group to improve performance.

Listing of securities

A security is said to be “listed” when its name is added to the list of securities in which trading on a particular exchange is permitted. listing of securities on Indian S.E is governed by the provisions in the Companies Act 1956,SCRA,SCRR,rules,bye-laws and the regulations of the concerned S.E.

 Listing

is a common forum for dealing in securities.  Securities of the company are said to be listed when they have been included in the official list of stock exchange for the purpose of trading.

Objectives of listing To provide ready marketability, liquidity and free negotiability to stocks and shares To ensure proper supervision and control of dealings therein To protect the interests of shareholders and of general investing public

Advantages of listing
1. 2.

Management shareholders

Management perspective
 Distinct

advertising value  In broadening and diversifying shareholding  Encourages institutional investors to be interested in the shares  Comp. gains national importance & widespread recognition  Saves the cost of raising new capital

Share holders perspective
 It

provides liquidity to their holdings  It affords them to obtain best prices for the securities they want to sell off.  A mere verbal order to a stock broker will help in buying and selling security

 Transactions

are transparent, so clear prices is known  Maximum protection to the investors, with the rules and regulations held by the S.E.  Added collateral value, as banks prefer listed security against the loan.  Advantageous in case of income tax, wealth tax

Requirements of listing
 Minimum

issued capital of a company shall be Rs. 3 cr.  The minimum public offer of equity capital shall be Rs. 1.8 cr.  Prospectus shall be scrutinized by the stock exchange and SEBI.  Applications should be for minimum trading lots of securities.  Memorandum and Articles of Association must contain prescribed provisions.  Allotment should be fair and unconditional and on equitable basis.

 Listing

of securities on more than one stock exchange is obligatory for any company if the paid-up capital of the company is above Rs. 5 crores.  There should be atleast 3 years locking period for promoters  Minimum share holders of atleast 10 for every one lakh of sale of fresh issue of capital.  Minimum share holders of 20 for every Rs. 1 lakh of sale of existing capital.  Incase of over subscription allotment has to be finalised in consultation with the regional stock exchange.

 {……….Minimum

Share holders.  Standard Denomination  Prospectus  Allotment of shares  Allotment of further issues of capital  Rights issue by a listed company  Listing of Fresh Capital  Listing Fees  Listing Applications  Listing Agreement………..} in brief………

Public offer, min. no.of.

Benefits of listing
• • • •

Visibility Market support Investors confidence Increased demand for products and services Overall increase in profitability

Disadvantages of listing

Once the shares are listed the companies subjected for various regulatory measures of stock exchange and SEBI. Listed companies must submit and disclose vital information to the stock exchanges. The company has to send notices of Annual General Meetings, Annual Reports etc, to a large number of shareholders, resulting in unnecessary expenditure. The companies have to spend heavily in the process of placing the securities with the public.

S.E.B.I
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. This is a positive outcome of the Securities Scam of 1990-91.

Objectives of SEBI
 to

protect the interests of investors in securities;  to promote the development of Securities Market;  to regulate the securities market

FUNCTIONS OF SEBI
     

To register and regulate the working of stock brokers To register and regulate the working of bankers to an issue To control and regulate securities market To exercise the powers under securities contracts act. To regulate the working of mutual funds To control unfair trade practices relating to securities market

FUNCTIONS OF SEBI continued….
 To

conduct research for unfair trade practices.  To control investment business.  To regulate issue of securities.  To regulate take overs.  To prohibit insiders trading in securities.

SEBI in new millennium
 Mr.

M.M Damodaran calls for better risk management systems  New Delhi,SEBI and the Government have decided to make investors education the top priority in 2008,” the SEBI chief said.  SEBI issues advisory on “Art Funds” SEBI has advised investors with regard to their investments in “Art Funds” that “Art Funds” are “Collective Investment Schemes” as defined under the SEBI Act. Source: SEBI Date: 2008-02-14

Washington, Jan. 8, 2008 - The Securities and Exchange Commission and the Securities and Exchange Board of India (SEBI) announced terms for increased cooperation and collaboration of Capacity Building Events in India Structure of agenda- 3 objectives:  Identify and discuss regulatory issues of common concern  Continue and expand upon the existing program of capacity-building and technical cooperation between the SEC and the SEBI  Improve cooperation and the exchange of information in cross-border securities enforcement matters

Following topics have been identified for discussion for the over the coming year:  Oversight of dually regulated entities  Regulatory and compliance issues relating to outsourcing  Accounting and auditing standards  Corporate governance standards and internal controls  Areas for continued capacity-building and technical cooperation  Cross-border cooperation and information sharing in securities enforcement matters

CAPITAL MARKET

The capital market is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, such as the U.S. Securities and Exchange Commission, oversee the capital markets in their designated countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded

CAPITAL MARKET REFORMS
 Dematerialization  Depositories  options

and single stock futures were introduced in 2000-2001  The VaR (Value at Risk ) based margining system was introduced in mid 2001 and the risk management systems have withstood huge volatility experienced in May 2003 and May 2004

 Value

at Risk

 screen

based trading of government securities in January 2003.  Straight Through Processing (STP), which will completely automate the process of order flow and clearing and settlement on the stock exchanges.  RBI has introduced the Real Time Gross Settlement system (RTGS) in 2004 on experimental basis. RTGS will allow real delivery v/s. payment which is the international norm recognized by BIS.

 To

improve the governance mechanism of stock exchanges by mandating demutualization and corporatisation of stock exchanges and to protect the interest of investors in securities market.  Rules for Corporate governance, mergers and acquisitions, take overs were laid.  Foreign institutional investors have been permitted to invest in Indian market.  Over the counter exchange of India  Permission of PSU’s to sell bonds to NRI’s.
[Pg no:197 I. M (V.GANGADAR,G.RAMESH BABU)]

WHAT IS ONLINE TRADING?

On-line trading is every activity of securities trading directly integrated. It is making trades through internet.

It starts from:
Order Matching

Order Submission

Order Validation

Online transaction Settlement

ONLINE TRADING

When servicing traditional brokerage clients, orders were manually entered into the system by a broker after the broker received instructions from the client.

In contrast, online investors place orders directly into the brokerage firm's trading system, via the Internet, and fulfill the need for order entry by a broker.
 

The implementation of direct order placement by online investors has revolutionized the securities industry with the facilitation of online trading.

Does Online Trading affect Market Liquidity?

THE IMPACT

In broader terms, online trading does in fact have an impact on market liquidity for the very simple reason that it encourages new entrants in the market and leads to higher participation Furthermore, Investors shift from traditional trading to online to enjoy the benefits it provides. The following features Online Trading is characterized by are a good illustration on how it affects market liquidity.

THE IMPACT

 Accessibility  Confidentiality  Transparency

No Single Access Point No one knows about your trade Live quotes makes you act faster

THE IMPACT
 Flexibility  Cost

Frequent order modification Lower per cost trade makes trade you more Faster Execution No need for calculations

Efficiency Trading

 Day

 Accuracy

Simply Put…

According to Bill Barret: “Online Trading is probably the only business in the world where u can …

Point, Click & Make Money”

Online trading- Requirements (company’s view)
Create cost-effective commerce sites and applications, with targeted online advertising and marketing, and personalized promotions Conduct business online with secure and scaleable order processing and integration with existing systems.

Transact Engage Transact Analyze

Understand customer and partner purchases and usage to improve online business

Advantages of Online Trading
 Extended

hours of trading  Several forms of online research (public and exclusive)  Cheaper trades  Complete control of your investing decisions

Online Trading in India
 Online

trading in India is the internet based investment activity that involves no direct involvement of the broker.  There are many leading online trading portals in India along with the online trading platforms of the biggest stock houses like the National stock exchange and the Bombay stock exchange.  The total portion of online share trading India has been found to have grown from just 3 per cent of the total turnover in 2003-04 to 16 per cent in 2006-07.

Facilities of the online trading India:

The investor has to register with an online trading portal and get into an agreement with the firm to trade in different securities following the terms and conditions listed down on the agreement. The order processing is done in correct timings as the servers of the online trading portal are connected to the stock exchanges and designated banks all round the clock. They can also get updates on the trading and check the current status of their orders either through e-mail or through the interface. Brokerages also provides research content on their websites, such that the clients can take their own decisions on stocks before investing.

Products and services of the online trading India:
        

The major financial products and services of the online trading India are Equities, Mutual Funds, Life Insurance, General Insurance, Loans, Share Trading, Commodities Trading, Portfolio Management and Financial Planning.

National stock exchange and Bombay stock exchange:

In spite of many private stock houses at present involved in online trading in India, the NSE and BSE are among the largest exchanges. They handle huge daily trading volumes, supporting large amounts of data traffic, and possessing a countrywide network. The automated online systems used for trading by the national stock exchange and the Bombay stock exchange are the NIBIS or NSE's Internet Based Information System and NEAT for the national stock exchange and the BSE OnLine Trading system or BOLT for the Bombay stock exchange.

Trading Portals in India ::A1 Technology Online Trading ::Best online trading ::Bonanza Online Trading ::Express Computer Online Trading ::STC Online Trading ::Geojit Securities Online ::ICICI Online Trading ::India bulls Online ::Kotak Securities Online Trading ::JV Financial Online ::Mansukh Securities Online Trading ::Quote.com Online Trading ::SHCL Online Trading ::BullishIndian.com Online Trading ::Technical Analysis Trading ::Union Bank of India Online Trading

DEMETERIALISATION
 Dematerialisation

(“Demat” in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to your demat account which you open with a Depository Participant (DP).

Who is a Depository Participant? Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is your representative (agent) in the depository system providing the link between the Company and you through the Depository.

Your Depository Participant will maintain your securities account balances and intimate to you the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians(A financial institution that has

the legal responsibility for a customer's securities. This implies management as well as safekeeping. Also known as "custody". There are additional fees associated with this special attention), stockbrokers etc. can become participants in the depository. A DP is one with whom
you need to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of your bank with whom you can have an account.

DEMETERIALISATION CONT…..
 Dematerialisation

is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in electronic form at the request of the investor.

Dematerialisation Process :
Once the account is opened, your existing shares can be dematerialised and converted into Electronic Form. Dematerialisation is a process by which you can deposit (i.e.demat) shares of any company listed on NSDL which are registered in your name and convert your physical holdings into electronic form. For this purpose, you have to:

a. Fill a Dematerialisation Request Form available with your participant. b. Submit your share certificates along with the above form. (Please write ‘Surrendered for Dematerialisation’ on the face of each certificate before you submit it for dematerialisation). c. Your account will be credited within 15 days. d. If you wish to convert your electronic shares back to physical shares at a laterstage, you may do so by applying for rematerialistion.

Dematerialisation of shares is optional and an investor can still hold shares in physical form. However, he / she has to demat the shares if he / she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he / she will get delivery of the shares in demat form.

What are the benefits of having a demat account?

No stamp duty for transfer of securities in the electronic form. In case of transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of shares being transferred. All risks associated with physical certificates such as delays, loss, in transit, theft, bad deliveries, etc. eliminated. The concept of an “odd lot" ( is an order for

anything less than 100 shares (which is called a "round lot") in respect of dematerialized
shares stands abolished, i.e. in the demat mode, market lot becomes one share.

Dematerialised securities are most preferred by banks and other financiers for providing credit facility against securities. After the settlement, pay in and pay out are on the same day for trading which means you get your securities as well as cash immediately. Shares bought or sold are transferred in your name on the very next day of pay out. In case of physical shares, transfer of ownership takes 30 days or sometimes even more.

 No

courier / postal charges for sending share certificates / transfer deeds.  Facility for freezing / locking of investor accounts, which enables you to make your account non-operational, for instance if you are abroad.  Facility to pledge and hypothecate (give as a guarantee ) your securities available.  As the Depository System becomes popular, brokers will be increasingly reluctant to deal with physical shares.  Investors prefer to buy shares which are already in dematerialised form.

DEPOSITORY SERVICES
What is a depository ?  A depository can be compared to a bank. A depository holds securities of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.  A depository interfaces with its investors through its agents called Depository Participants(DPs).  If an investor wants to utilise the services offered by a depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilise the bank’s services.

Who are the depositories ?
 Depositories

are those who are licensed by the Securities and Exchange Board of India(SEBI) to undertake depository functions i.e. holding and handling of securities in electronic form.  The National Securities Depository Ltd. (NSDL) promoted by UTI, IDBI and NSE is the first depository of India.  The Stock Exchange, Mumbai has promoted Central Depository Services (India) Ltd. (CDS) which has drawn plans to set up the second depository in the country.

Need for Depository System :
 The

trading in physical segment is full of inefficiencies due to handling of large volumes of certificates and also involves various other problems like delays in transfer, delay in settlement, loss in transit, forgery certificates, stolen certificates, mutilation of certificates, postal losses, court cases, litigation etc.  To overcome these deficiencies, a new system of trading, viz. Depository system was introduced, which facilitates investor to hold securities in electronic form and to trade in these securities.

Services offered by NSDL(1996) :
The following services are offered by NSDL to the investors, through its agents viz Depository Participants. 1. Holding the investors securities in electronic form. 2. Dematerialisation and Rematerialisation of securities. 3. Settlement of trades in electronic form. 4. Electronic credit of public offerings and non-cash corporate actions such as rights, bonus etc.

Steps involved in joining depository system :
There are 3 steps in which an investor can covert his physical certificate into electronic form. 1. Open an account with one of the participants of NSDL (A participant is a market intermediary through whom NSDL interacts with the investors). 2. Sign an Agreement with the participant. 3. Submit Dematerialisation Request form along with share certificate to the Issuer.

How do you open a depository account ?
Choose a participant from amongst the participants offering depository services and registered with NSDL. Thereafter : a. Fill up an Account Opening Form available with the participant. b. Sign ‘Participant-Client Agreement’. c. Receive your account number which should be quoted in all your correspondence. d. Your participant will provide you a statement of holdings and statement of transactions (like a bank pass book) every fortnight giving details of your holdings and transactions in your account.

The benefits of participation in a depository are :

No bad deliveries;  Immediate transfer of shares and registration of securities, increasing liquidity of  Stocks with investors;  No stamp duty on transfer of shares;  Considerable reduction in the handling of large volumes of paper;  Elimination of risk associated with physical certificates such as loss, theft, mutilation and forgery;  Reduction in transaction cost;  Pay-in and pay-out of securities and funds on

Faster settlement cycle;  Faster disbursement of corporate benefits like rights and bonus;  Reduction in rate of interest on loans granted against pledge of dematerialised securities by banks;  Lower margin on securities pledged with banks;  Reduction in brokerage by several brokers for trading in dematerialised securities;  Periodic status reports to investors on their holdings and transactions, leading to Better controls

Merchant Banking
These were invented in the Middle Ages by Italian grain merchants.  a merchant bank is a traditional term for an Investment Bank.

Defined as, “ an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counseling and insurance etc., The merchant banks are also known as “ accepting and Issuing houses” in UK and as “Investment Banks” in US.

The notification of the Ministry of Finance defines a merchant banker as  “ 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”.

CHARACTERESTICS……………….

-Merchant banks are private financial institution.

-Their primary sources of income are PIPE (Private Investment In Public Entities ) financings and international trade. -Their secondary income sources are consulting, Mergers & Acquisitions help and financial market speculation. -Because they do not invest against collateral, they take far greater risks than traditional banks. -Because they are private, do not take money from the public and are international in scope, they are not regulated. -Anyone considering dealing with any merchant bank should investigate the bank and its managers before seeking their help. -The reason that businesses should develop a working relationship with a merchant bank is that they have more money than venture capitalists. Their advice tends to be more pragmatic than venture capitalists.

Scope of merchant banking activities…
Merchant banking helps:  In channelising the financial surplus of the general public into productive investment avenues  To coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers etc.  To ensure the compliance with rules and regulations governing the securities market

Functions of a merchant banker…(pg 168 IM- V. Gangadhar)
 Management

of debt and equity offerings- This forms the main function of the merchant banker.  He assists the companies in raising funds from the market.  The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges

 Placement

and distribution-

The merchant banker helps in distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature. The institutional network consists of mutual funds, foreign institutional investors, private equity funds, pension funds, financial institutions etc. The size of such a network represents the wholesale reach of the merchant banker. The retail network depends on networking with investors.

 Corporate

advisory services-

Merchant bankers offer customised solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debtequity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.

Project advisory servicesMerchant bankers help their clients in various stages of the project undertaken by the clients. They assist them in conceptualising the project idea in the initial stage. Once the idea is formed, they conduct feasibility studies to examine the viability of the proposed project. They also assist the client in preparing different documents like the detailed project report.

 Loan

syndication-

Merchant bankers arrange to tie up loans for their clients as term loans. This takes place in a series of steps. -Firstly they analyse the pattern of the client’s cash flows, based on which the terms of borrowings can be defined. -Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate. -The banks then negotiate the terms of lending on the basis of which the final allocation is done.

Providing venture capital Merchant bankers help companies in obtaining venture capital financing for financing their new and innovative strategies.

Registration of merchant bankers…
     

 

Registration with SEBI is mandatory to carry out the business of merchant banking in India.THE NORMS: The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc. The applicant must have at least two employees with prior experience in merchant banking Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker The applicant should not have been involved in any securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs.5 crores

Services of Merchant Banks
1. Corporate Counselling  It covers the entire field of merchant banking activities. Like project counselling, capital restructuring, project management,public issue management, loan sydication, working capital , fixed deposit, lease financing, acceptance credit etc.  The scope of corporate counselling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. It is provided to a corporate unit with a view to ensure better performance, maintain steady growth and create better image amoung investors.

2. Project counselling  Preparation of project reports, deciding up on the financing pattern to finance the cost of the project and appraising project report with the financial institutions or banks. 3. Loan syndication 4. Issue Management  Involves marketing of corporate securities,like equity shares, preference shares and debentures or bonds by offering them to public.

 Issue

function may be broadly divided into pre-issue management and post-issue management.  Preissue management includes: Issue through prospectus marketing and underwriting, pricing of issues.  Post issue management includes: collection of application forms and statement of amount received from bankers, screening applications, deciding allotment procedure, mailing of allotment letters, share certificates.

5. Underwriting

of public Issue Underwriting is a guarantee given by the underwriter that in the event of under subscription the amount underwritten would be subscribed by him. It is an insurance to the company which proposes to make public offer against risk of under subscription.

6. Portfolio Management Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return with minimum risk.ie investment in different kinds of securities such as shares, debentures or bonds issued by different companies and securities issued by the government. There are 23 stock exchanges, 28 nationalised banks with network of about 50,000 branches, but only 1/8 th of savings is mobilized from rural areas, so by establishing portfolio management centres at various more investments can be augmented from villages.

7. Advisory Service related to mergers and acquisitions. Negotiates purchase consideration, mode of payment, also getting approval from govt. RBI, getting approval from financial institutions. 8. Offshore finance Arranging long term foreign currency loans, joint venture abroad, financing exports and imports, foreign collaboration arrangements. 9. Non Resident investment. Services to NRI in terms of identification of investment opportunities, selection of securities, investment management.

Merchant Banking in India
 The

SBI was the first Indian bank to set up Merchant Banking division in 1972. later ICICI setup its Merchant Banking division followed by bank of India, Bank of Baroda, Canara Bank, Punjab National bank and UCO (United Commercial )bank.

Mutual Fund
They are associations or trusts of public members who wish to make investments in the financial instruments or assets of the business sector or corporate sector for the mutual benefit of its members.
http://www.mortgage22.com/Mutual-Funds-types.html

Mutual Fund Operation Flow Chart

Advantages of Mutual Funds
          

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

Types of Schemes/Funds

 

By Structure  Open Ended Schemes  Close Ended Schemes  Interval Schemes By Investment Objectives  Growth Schemes  Income Schemes  Balance Schemes  Money Market Schemes Other Schemes  Tax Saving Schemes Special Schemes  Index Schemes  Sector Specific Schemes

Open-end fund
Being open-ended means that: at the end of every day, the fund issues new shares to investors and buys back shares from investors wishing to leave the fund.

closed-end fund
A closed-end fund is a collective investment scheme with a limited number of shares. characteristics that distinguish a closed-end fund from an ordinary open-end mutual fund are that:  it is closed to new capital after it begins operating.  its shares (typically) trade on stock exchanges rather than being redeemed directly by the fund.  its shares can therefore be traded during the market day at any time. An open-end fund can usually be traded only at the closing price at the end of the market day.  a CEF usually has a premium or discount. An openend fund sells at its NAV (except for sales charges).

Money market funds Though a money market mutual fund invests in safe instruments and has rarely defaulted, it gives you no guarantee that you will not lose all or part of your original investment. Money market funds first try to keep your principal intact and then try to get you interest. They manage to keep the principal intact because they invest in highly liquid investments called money market instruments. This includes lending money to banks for only a day (called call money), treasury bills and certificates of deposits.

High yield bond funds
These funds pay higher returns than other bond funds, but invest all or part of their funds in riskier bonds like those that may not have the highest safety rating from credit rating agencies. The risk that a bond or bonds in the fund's portfolio could default is greater.

High safety bond funds Some bond

funds will only invest their funds in the highest rated corporate bonds or risk free government securities. Gilt funds *Gilt funds invest in Government of India and state government securities and bonds that are guaranteed by the central and state governments. *These mutual funds are the safest type of debt funds available since they invest in bonds backed by the full faith of the government. *returns may be lower.

Balanced funds
*a mixture of stocks and bonds *do better than equity funds in times of economic downturn since shares are usually poor performers during such times. *They do better than bond funds in times of economic upturns since the stock investments in these funds help them post better. *Balanced funds are ideal for diversifying Your investments without spending time on the process.

Equity funds
Equity funds invest in stocks but usually follow different investment strategies.  Equity funds may look for value in stocks or invest in the most actively traded stocks.  the price of its units will fluctuate with the price of the stocks it owns.  Equity funds from the same mutual fund family could be different in where and in what proportion they invest their money.  you need to see its holdings to determine if the holdings are truly blue chip. Equity funds could be of the following types: *Index Fund *Sector Specific Funds *Blue chip funds *Growth Funds

Equity Funds Type
Index funds are equity funds that invest in exactly the
same stocks (and in the same proportion) that make up the market indices like the BSE Senses or the NSE Nifty Index.

The advantage of an index fund
For those of you who follow the markets but have no time to pick and choose, just buy into an index fund. Then just look at how the BSE Senses or the NSE Nifty is doing and you will know how your index fund is doing. Index funds have two distinct advantages. *The fund manager can programme a computer to just follow the index and pick stocks without putting in hours of his time in research and stock picking. So the cost to the mutual fund for managing an index fund is low. The other advantage is that you cannot do worse than the BSE Senses or the NSE Nifty. Simply because the index fund is replicating the movements of the index.

Sector specific funds
Sector specific funds invest in particular industry sectors like information technology, pharmaceuticals or consumer goods. Keep away from sector funds because they provide no diversification and in most cases they tend to be more volatile than most other mutual funds. That's because most stocks in the same industry sector usually suffer from the same problems or gain for the same reasons. But if you are really optimistic about a particular sector, it may not hurt to put up to 5 10 per cent of your investible funds in a sector specific fund.

Blue chip funds These funds invest in stocks of very well respected companies. The purpose is to build a stock portfolio of conservative stocks so that it does not do worse than the stock market indices. Such funds return less than funds that invest in growth oriented companies.

 Growth

funds A number of mutual fund families use this word to describe their equity funds. But growth funds are funds that invest in companies which are growing at a rate faster than the rest of the economy and industry.  The goal is to capitalize on the increase in stock prices. The risk is that many growth companies are not very big and may not be able to absorb bad news as easily as blue chip companies. Shares bought by such funds are usually more volatile than blue chip stocks.

Commodity funds
Commodity funds are new to India and offer you an opportunity to invest in the outlook for commodities like gold. But funds of these types have not done well globally and are best avoided.

Even though regulations allow Indian mutual funds to invest in foreign securities, nothing much has happened as yet primarily because a number of mutual funds don't have the expertise and there is not much interest among investors to buy mutual funds that invest in international stocks or bonds. * But mutual funds that invest in foreign stocks and bonds provide an excellent opportunity to diversify your portfolio. They also reduce the country risk or the risk that all Indian investments could be affected by changes in Indian economy, politics, etc.

International stock and bond funds

 Mutual •

funds with tax benefits You can reduce your taxable income by 20 per cent of your investment up to a maximum of Rs 2,000 by investing in mutual funds schemes that are authorized to offer such a benefit. The condition is that you cannot withdraw your funds from the scheme for a certain number of years.

Exchange-traded funds

A relatively recent innovation, the exchange traded fund (ETF), is often formulated as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. An ETF usually tracks a stock index. Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value; this is how the institutional investor makes its profit. Because the institutional investors handle the majority of trades, ETFs are more efficient than traditional mutual funds (which are continuously issuing new securities and redeeming old ones, keeping detailed records of such issuance and redemption transactions, and, to effect such transactions, continually buying and selling securities and maintaining liquidity position) and therefore tend to have lower expenses. ETFs are traded throughout the day on a stock exchange, just like closed-end funds.

Funds of funds

Mutual funds which invest in other underlying mutual funds. A fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation services. Recently, FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).

Net Asset Value
 Net

asset value is the market price of each unit of a particular scheme/share.  Net asset value (NAV) represents a fund's per share market value. This is the price at which investors buy ("bid price") fund shares from a fund company and sell them ("redemption price") to a fund company. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities.

CREDIT RATING- Definition

Credit Rating is an opinion on the relative degree of safety regarding debt obligations being met on time.

CRISIL: “ credit rating is an unbiased and independent opinion as to issuers capacity to meet its financial obligations. It does not constitute a recommendation to buy/sell or hold a particular security”. ICRA: “ ratings are opinions on the relative capability of timely servicing of corporate debt and obligations. These are not recommendations to buy or sell…… neither the accuracy nor the completeness of the information is guaranteed”

From Definition

   

CR is an assessment of the capacity of an issuer of debt security, by an independent agency, to pay interest and repay the principal as per the terms of issue of debt. (both qualitative and quantitative data is collected and assessed with the team of experts ) The ratings would be expressed in code format so that even lay investors could understand. Credit rating in India is done for a specific debt security and not for a company as a whole. Debt rating is not a one time evaluation of credit risk, it is an ongoing appraisal. Credit rating does not create a fiduciary relationship between the rating agency and the users of rating as no legal basis for that.

Origin

 Originated

in USA(1909), when Moody’s investors Agencies started rating railroad.  Since then importance has grown in the global market.  In India Credit Rating Information Services of India Limited was setup in 1987.  Then Investment Information and Credit Rating Agency of India was promoted in 1991  Credit Analysis Research Limited was introduced in 1993.

CRISIL

 

CRISIL was floated on jan 1 1988. it was started jointly by ICICI and UTI with an equity capital of Rs. 4 cr. CRISIL is India's leading rating agency, and is the fourth largest in the world. With over a 70% share of the Indian Ratings market, CRISIL Ratings is the agency of choice for issuers and investors. CRISIL Ratings is a full service rating agency that offers a comprehensive range of rating services. CRISIL has rated over 6,797 debt instruments worth Rs.13.53 trillion (over USD343 billion)* issued by over 4,600 debt issuers, including manufacturing companies, banks, financial institutions (FIs), state governments and municipal corporations.

 

CRISIL rates long-term instruments such as debentures/bonds and preference shares, structured obligations (including asset-backed securities) and fixed deposits; it also rates short-term instruments such as commercial paper programmes and short-term deposits. As part of bank loan ratings, CRISIL also rates credit facilities extended to borrowers by banks. In addition, CRISIL undertakes credit assessments of state governments: in the past, it has rated state governments including those of Maharashtra, Gujarat, Karnataka and Andhra Pradesh.

CRISIL Debenture Rating Symbols
        

AAA - : Highest Safety AA - : High Safety A - : Adequate Safety BBB - : Moderate Safety BB - : Sub -moderate Safety B - : Inadequate Safety C - : Substantial Risk D - : Default In case of preference shares pf is prefixed to rating symbols.

Fixed deposit Rating symbols
 Investment

Grades  FAAA : Highest safety  FAA: High Safety  FA: Adequate Safety  Speculative Grades  FB: Inadequate Safety  FC: High Risk  FD: Default

Credit Rating for short term Instruments
P-1 :

Very Strong

P-2 : Strong P-3 : Adequate P-4 : Minimal P-5 : Default

IICRA
 Investment

Information and Credit Rating Agency was set up by Industrial Finance Corporation of India on jan 16th , 1991.  It is a public limited company with an authorised share capital of Rs. 101 cr. The initial paidup capital of Rs. 3.50 cr is subscribed by IFC,UTI,LIC,GIC,SBI and 17 other banks.

Major shareholders
           

Moody's Investment Company India Private Limited -State Bank of India -Life Insurance Corporation of India -Punjab National Bank -General Insurance Corporation of India -Central Bank of India -Allahabad Bank -Indian Bank -Canara Bank -UCO Bank -Andhra Bank -Oriental Bank of Commerce

CARE

Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. It was promoted in 1993.  CARE Ratings methodologies are in line with the best international practices.  CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc.  CARE has seven offices in India located at - Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bangalore and Ahmedabad.  

Rating Experience: (As at December 2007)
 Total

Assignments Completed3,850  Total Instruments Rated3,537  Total Volume of Debt Rated Rs. 8,071 Bn  Total Issuers Rated1,190

Debt Instruments rated
 Commercial

Paper  Fixed Deposits  Bonds and Debentures  Redeemable Preference Shares  Loans  Certificate of Deposits  Structured Obligations

Why CARE Ratings?
Regulatory Recognition CARE Ratings are recognized by Government of India and regulatory agencies in India. CARE is registered with the Securities and Exchange Board of India. CARE Ratings are also recognized by RBI, NABARD, NHB and NSIC. RBI has also recognized CARE Ratings as an eligible external credit rating agency for the purpose of Basel II implementation in India

 Independent

CARE is an independent rating agency promoted by major banks and financial institutions in India. The three largest shareholders of CARE are IDBI Bank, Canara Bank and State Bank of India.  CARE is a board managed company with eminent professionals on the board. The entire Board comprises of Independent Directors.

 

Professional CARE Ratings endeavor has been to provide investors and risk managers with independent, authentic and insightful credit opinions based on detailed in-depth research, which encompasses detailed analysis of risks that affect credit quality of an issuer. CARE's analyst strength consists of large number of well qualified and multi-faceted professionals from diverse backgrounds such as; financial analysts, economists, sector specialists, chartered accountants, chartered financial analysts and financial risk managers. CARE is a founder member of the Association of Credit Rating Agencies in Asia (ACRAA) and is actively in dialogue with Asian and International rating agencies. This provides access to international know-how on ratings. CARE has a well established rating process and detailed rating methodologies covering various sectors. CARE also follows a well defined Code of Conduct for its Directors, Rating Committee Members and Analysts for professional conduct and for avoidance of conflict of interests.

Experienced CARE has over a decade of experience in rating various types of instruments. CARE assigned its first rating in November 1993 and upto March 31, 2007, CARE had completed 3488 rating assignments for an aggregate value of about Rs 6975 billion. With a large number of qualified and experienced multi-faceted analyst and presence in all major metros of India, CARE has a unique understanding of the local business, cultural and value systems and factors which affect the Indian economy.

Wide Sectoral Coverage CARE is a full service rating company offering a wide range of rating and grading services which includes rating debt instruments/enterprise ratings of Corporate, Banks, Financial Institutions (FIs), Public Sector Undertakings (PSUs), State Government bodies, Municipal Corporations, Nonbanking Finance Companies (NBFCs), SMEs, Micro finance institutions, Structured finance Securitization transactions. In addition, CARE Ratings undertakes Corporate Governance ratings, Mutual Fund Credit quality ratings, IPO grading, Claims Paying Ability rating of Insurance Companies, Grading of Construction Entities and Issuer ratings.

Market Acceptance CARE has a significant rating coverage of the Indian Banks and Financial Institutions, who are also amongst the major investors in the Indian bond markets. This, acknowledges the confidence of Indian Institutional Investors in CARE Ratings. CARE ratings are also used by a wide range of investors including Mutual Funds, Insurance companies, Provident funds, Corporate and Retail investors.

Rating Process The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee.

 Rating

process

Duff and Phelps Rating India Private Ltd(DCR)
     

International credit rating agency Joint venture with the J.M Financial and Alliance group and now set up DCR in India. Special obj: credit rating to debt instruments On special request it may undertake rating of companies and countries. Popular symbol:D1, D2, D3. RBI has stipulated a minimum credit rating of D2 for the purpose of issuing commercial papers by instructions.

ONICRA (Onida Individual Credit Rating Ltd)
 

Sponsored by Onida Finance Ltd Taken up individual borrowers for rating, not as such, but risk associated with such transactions before entering in to the credit transactions with that individual at a certain period. This is to know the quantum of default risk associated with such transactions. Credit transactions relating to credit cards, housing finance, rental/h.p agreements, personal loans Gaining popularity among financial institutions.

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