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lndlan flnanclal lndusLry has gone Lremondous

changes afLer 1991 due Lo LC
lndlan flnanclal servlces lndusLry was
domlnaLed by commerclal banks and flnanclal
lnsLlLuLlons caplLal markeL played a
secondary role
LC has compleLely Lransformed Lhe lndlan
flnanclal servlces lndusLry

rlor Lo LC Lhe lndlan flnanclal servlce secLor was characLerlzed by

Lhe followlng facLors
Lxcesslve conLrols by regulaLor ln Lhe form of regulaLlons of lnLeresL
raLes money raLes eLc
rlclng of Lhe securlLles by conLroller of caplLal lssues
nonavallablllLy of lnnovaLlve flnanclal lnsLrumenLs
Absence of lndependenL credlL raLlng and research agencles
8lgld SLrlcL regulaLlon of Lhe forex markeL wlLh Loo many
resLrlcLlons on forelgn lnvesLmenL and forelgn equlLy holdlng ln
lndlan companles
Lack of lnformaLlon abouL lnLernaLlonal developmenLs ln Lhe flnanclal
Absence of a developed CovernmenL securlLles markeL and Lhe
exlsLence of sLagnanL caplLal markeL wlLhouL any reformaLlon
nonavallablllLy of debL lnsLrumenLs on a large scale
Meaning, Scope & Innovations
Financial services means ' mobilizing and allocation oI savings``.
It is a process oI converting savings into investment.
Financial services include FINANCIAL INTERMEDIARIES such
as Merchant Bankers, Venture capitalists, Commercial banks,
Insurance Companies etc.
The Iinancial services are classiIied into two categories:
i) Capital market intermediaries & term lending institutions which
provide long-term Iunds.
ii) Money market intermediaries include commercial banks,
cooperative banks which supply Iunds Ior short term requirements.
Financial services Iacilitate Iinancial transactions oI both
individuals and corporate customers.
Financial service providers are:
Commercial Banks
Non-Banking Finance companies (NBFCS) and
Investment banks
Features of Financial Services
Customer-Oriented due to consumerism
Intangibility- can not be standardised or
produced in the same form & require integrity,
reputation, good corporate image and timely
delivery of services.
Simultaneous Performance-Production and
delivery should be at the same time.
Dominance of Human Element
Perishability- can not be stored, measured
SigniIicance oI Iinancial services
Economic Growth: financial services mobiles
savings & channel them for productive purpose
Promotion of Savings
Capital Formation
Provision of Liquidity
Financial Intermediation
Contribution to GNP
Creation of Employment Opportunities
Financial services are classiIied into two categories:
Traditional activities
Modern activities
%raditional Activities include capital and money market activities which
are classiIied in to:
Fund based activities, and
Non-Iund based activities.
Fund Based Activities are:
&nderwriting oI debentures, bonds oI new issues (primary market activities)
Dealing in secondary market activities include:
Participating in money market instruments like CP, CD, T bills, discounting
oI bills, equipment leasing, hire purchase, venture capital, seed capital,
Dealing in Ioreign exchange market .
odern activities are non-fund Based Activities or Iee
based activities & include:
Managing the capital issues, i.e. pre-issue and post-issue
management as per SEBI guidelines.
Making arrangements Ior the placement oI capital and debt
instruments with investment institutions.
Arrangement oI Iunds Irom Iinancial institutions Ior the
clients' project cost or his working capital requirements.
Assisting in the process oI getting all Government and other
Rendering project advisory services.
Preparation oI the project report
Raising oI Iunds Ior starting the project with necessary
Government approval.
odern Activities
Planning Ior mergers and acquisitions and assisting Ior their
smooth carry out.
Guiding corporate customers in capital restructuring.
Acting as Trustees to the debenture-holders.
Recommending suitable changes in the management
structure and management style Ior achieving better results.
Structuring the Iinancial collaboration/joint ventures by
identiIying suitable joint venture partner and preparing joint
venture agreement.
Rehabilitating and reconstructing sick companies through
appropriate scheme oI reconstruction and Iacilitating the
implementation oI the scheme.
odern Activities
edging oI risks due to exchange rate risk, interest rate risk, economic risk and
political risk by using derivative instruments.
Managing the portIolio oI large Public Sector Corporations.
&ndertaking risk management services like insurance services, buy-back
options etc.
Advising the clients Ior selecting the best source oI Iunds on the basis oI Iunds
required, their cost, lending period etc.
Guiding the clients in the minimisation oI the cost oI debt and in the
determination oI the optimum debt-equity mix.
&ndertaking services relating to the capital market such as:
(a) Clearing services,
(b) Registration and transIers,
(c) SaIe-custody oI securities,
(d) Collection oI income on securities.
Promoting credit rating agencies Ior the purpose oI rating companies which
want to go public by the issue oI debt instruments.
Low profitability
Keen competition
Economic liberalization
Improved communication technology
Global impact
Investor awareness:
Role oI Financial Services and Promotion oI Industries
Industrial Promotion through erchant Banking
Working Capital Finance %hrough Factoring Services
Equipment Finance through Leasing
Financial Resources through utual Funds
Long-term Risk Capital through Venture Capital
Risk anagement through Derivatives
Debenture Issue through Credit Rating
Development Finance through Development Banking
Industrial Development through Specialised Services
(i) Merchant Banking
(ii) Loan Syndication
(iii) Leasing
(iv) Mutual Funds
(v) Factoring
(vi) ForIeiting
(vii) Venture Capital
(viii) Custodial Services
(ix) Corporate Advisory Services
(x) Securitization
(xi) Reverse Mortgage
(xii) Derivative Security
(xiii) New Products in Forex Market
(a) Forward Contracts
(b) Options
(c) Futures
(d) Swaps
(xiv) Letter oI Credit (LOC
(i) erchant Banking:
A MB is a Iinancial intermediary who helps to transIer capital Irom those
who possess it to those who need it.
It includes a wide range oI activities such as:
Management oI customers securities,
PortIolio management,
Project counseling and appraisal,
&nderwriting oI shares and debentures,
Loan syndication,
Acting as banker Ior the reIund orders,
andling interest and dividend warrants etc.
As such a merchant banker renders a host oI services to corporate and
thus promotes industrial development in the country.
(ii) Loan Syndication:
It is also referred as 'consortium Iinancing` and is the extended Iorm oI
merchant banking as a lead-manager.
Corporate require huge amount oI Iunds Ior inIrastructure projects.
As per RBI guidelines one bank can not take exposures in single
company or group oI company.
Corporate choose a lead banker or lead manager to arrange Iunds on a
best oI terms.
As such Loan Syndication is a loan arranged by a bank called lead
manager Ior a large corporate customer on common terms and
The other banks participate in the loan by contributing an amount
according to their own lending policies.
It enables the members oI the syndicate to share the credit risk associated
with a particular loan among themselves.
(iii) Leasing:
A lease is an agreement under which a company or a Iirm, acquires a right to
make use oI a capital asset like machinery, on payment oI a prescribed Iee
called rental charges.
There are two parties in leasing, a Lessor and a Lessee.
The lessee cannot acquire any ownership to the asset, but he can use it and
have Iull control over it.
e is expected to pay Ior all maintenance charges and repairing and
operating costs.
In countries like the &.S.A., the &.K. and Japan equipment leasing is very
popular and nearly 25 oI plant and equipment is being Iinanced by leasing
In India also, many Iinancial companies have started equipment leasing
business. Commercial banks have also been permitted to carry on this
business by Iorming subsidiary companies.
(iv) utual Funds:
A mutual Iund reIers to a Iund raised by a Iinancial service company by
pooling the savings oI the public.
It is invested in a diversiIied portIolio with a view to spreading and
minimizing risk.
The Iund provides investment avenue Ior small investors who cannot
participate in the equities oI big companies.
It ensures low risks, steady returns, high liquidity and better capital
appreciation in the long run.
(v) Factoring:
Factoring reIers to the process oI managing the sales ledger oI a client by
a Iinancial service company known as a Iactor.
In other words, it is an arrangement under which a Iinancial intermediary
assumes the credit risk in the collection oI book debts Ior its clients.
The entire responsibility oI collecting the book debts passes on to the
is services can be compared to a agent who undertakes to collect debts.
Factor also provides credit inIormation, collects debts, monitors the sales
ledger and provides Iinance against debts.
Thus, he provides a number oI services apart Irom Iinancing.
(vi) Forfeiting: ForIeiting is a technique by which a IorIaitor (Iinancing
agency) discounts an export bill and pay ready cash to the exporter who
can concentrate on the export Iront without bothering about collection oI
export bills. The IorIeiter does so without any recourse to the exporter
and the exporter is protected against the risk oI non-payment oI debts by
(vi) Forfeiting:
ForIeiting is a technique by which a IorIaitor (Iinancing
agency) discounts an export bill and pay ready cash to the
exporter who can concentrate on the export Iront without
bothering about collection oI export bills.
The IorIeiter does so without any recourse to the exporter
and the exporter is protected against the risk oI non-
payment oI debts by the importers.
(vii) Venture Capital: A venture capital is another method oI
Iinancing in the Iorm oI equity participation. A venture capitalist
Iinances a project based on the potentialities oI a new innovative
project. It is in contrast to the conventional security based Iinancing.
Much thrust is given to new ideas or technological innovations.
Finance is being provided not only Ior 'start-up capital' but also Ior
'development capital' by the Iinancial intermediary.
(viii) Custodial Services: It is yet another line oI activity which has
gained importance, oI late. &nder this, a Iinancial intermediary mainly
provides services to clients, particularly to Ioreign investors, Ior a
prescribed Iee. Custodial services provide agency services like saIe
keeping oI shares and debentures, collection oI interest and dividend
and reporting oI matters on corporate developments and corporate
securities to Ioreign investors.
(ix) Corporate Advisory Services: Financial intermediaries particularly banks have
set up corporate advisory service branches to render services exclusively to their
corporate customers. For instance, some banks have extended computer terminals to
their corporate customers so that they can transact some oI their important banking
transactions by sitting in their own oIIice. As new avenues oI Iinance like Euro
loans, GDRs etc. are available to corporate customers, this service is oI immense
help to the customers.
(x) Securitization: Securitization is a technique whereby a Iinancial company
converts its ill-liquid, non-negotiable and high value Iinancial assets into securities
oI small value which are made tradable and transIerable. A Iinancial institution
might have a lot oI its assets blocked up in assets like real estate, machinery etc.
which are long term in nature and which are non-negotiable. In such cases,
securitization would help the Iinancial institution to raise cash against such assets by
means oI issuing securities oI small values to the public. Like any other security,
they can be traded in the market. It is best suited to housing Iinance companies
whose loans are always long term in nature and their money is locked up Ior a
considerable long period in real estates. Securitization is the only answer to convert
these ill-liquid assets into liquid assets.
(xi) Reverse ortgage: In 2007-08, the National ousing Bank and
commercial banks have introduced an innovative product viz., reverse
mortgage to enable the senior citizens to Ietch value out oI their
property without selling it.
In a normal mortgage, a home buyer borrows money to Iinance his
In a Reverse Mortgage (RM) the owner oI a house property surrenders
the title oI his property to a lender and raises money.
In a normal mortgage the borrower gets 60-70 oI the money upIront.
But, in a RM generally the lender does not pay the entire amount. On
the other hand, he pays out a regular sum each month Ior the agreed
The owner, normally a senior citizen, can use the property and stay
with his spouse Ior the rest oI their lives.
(xi) Reverse ortgage:
Thus, the owner can ensure a regular cash Ilow in times oI need and enjoy the
beneIit oI using the property.
AIter the death oI the owner, the spouse can continue to use the property.
In case, both die during the period oI the RM scheme the lender will sell the
property, take his share and distribute the rest among the heirs.
It is called reverse mortgage because the payment steam is reversed. Instead oI
making monthly payments to a lender, as in the case oI a regular mortgage, a lender
makes regular payments to a senior citizen.
A RM Iacilitates to convert an immovable asset into an income generating one.
There are other options available to a senior citizen to pay back the entire loan
The legal heirs have also an option to pay back the loan and take possession oI the
The concept oI RM is very popular in &S/&K. But it is quite new to India.
Parents in India still want their property to pass on to their children aIter they are no
longer there, mainly due to social and emotional considerations.
(xii) Derivative Security:
A derivative security is a security whose value depends upon the values oI other
basic variables backing the security.
In most cases, these variables are nothing but the prices oI traded securities.
A derivative security is basically used as a risk management tool and it is resorted to
cover the risks due to price Iluctuations by the investments manager.
Just like a Iorward contract which is a derivative oI a spot contract, a derivative
security is derived Irom other trading securities backing it.
Naturally the value oI a derivative security depends upon the values oI the backing
Derivative helps to break the risks into various components such as credit risk,
interest rates risk, exchange rates risk and so on.
It enables the various risk components to be identiIied precisely and priced them and
even traded them iI necessary.
Financial intermediaries can go Ior derivatives since they will have greater
importance in the near Iuture. In India some Iorms oI derivatives are in operation.
Example: Forwards in Iorex market.
(xiii) New Products in Forex arket: New products have also emerged in the Iorex markets
oI developed countries.
Some oI these products are yet to make Iull entry in Indian markets. Among them, the
Iollowing are the important ones:
(a) Forward Contracts: A Iorward transaction is one where the delivery oI a Ioreign
currency takes place at a speciIied Iuture date Ior a speciIied price.
It may have a Iixed maturity Ior, e.g. 31 st May or a Ilexible maturity Ior, e.g.1st to 31st May.
There is an obligation to honour this contract at any cost, Iailing which, there will be some
penalty. Forward contracts are permitted only Ior genuine business transactions.
It can be extended to other transactions like interest payments.
(b) Options: As the very name implies, it is a contract wherein the buyer oI the option has a
right to buy or sell a Iixed amount oI currency against another currency at a Iixed rate on a
Iuture date according to his option.
There is no obligation to buy or sell, but it is completely leIt to his option.
Options may be oI two types namely call options and put options.
&nder call options, the customer has an option to buy and it is the option to sell under put
Options trading would lead to speculation and hence there are much restrictions in India.
(xiii) New Products in Forex arket:
Futures: It is a contract wherein there is an agreement to buy or sell a
stated quantity oI Ioreign currency at a Iuture date at a price agreed to
between the parties on the stated exchange. &nlike options, there is an
obligation to buy or sell Ioreign exchange on a Iuture date at a
speciIied rate. It can be dealt only in a stock exchange.
(d) Swaps: A swap reIers to a transaction wherein a Iinancial
intermediary buys and sells a speciIied Ioreign currency Ior diIIerent
maturity dates-say, Ior instance, purchase oI spot and sale oI Iorward
or vice versa with diIIerent maturities. Thus, swaps would result in
simultaneous buying and selling oI the same Ioreign currency oI the
same value Ior diIIerent maturities to eliminate exposure risk. It can
also be used as a tool to enter arbitrage operations, iI any, between two
countries. It can also be used in the interest rate market also. It is
explained in detail under the chapter derivatives.
(iv} Letter oI CredIt (LOC):
9 is an innova9ivc funding mccIanism 9or 9Ic imor9 of goods and
scrviccs on dcfcrrcd aymcn9 9crms.
LOC is an arrangcmcn9 of a financing ins9i9u9ion/lanl of onc
coun9ry wi9I ano9Icr ins9i9u9ion/lanl/agcn9 9o suor9 9Ic cor9
of goods and scrviccs so as 9o cnallc 9Ic imor9crs 9o imor9 no
dcfcrrcd aymcn9 9crms.
TIis may lc laclcd ly a guaran9cc furnisIcd ly 9Ic
ins9i9u9ion/lanl in 9Ic imor9ing coun9ry.
TIc LOC Icls 9Ic cor9crs 9o gc9 aymcn9 immcdia9cly as soon as
9Ic goods arc sIicd, sincc, 9Ic funds would lc aid ou9 of 9Ic ool
accoun9 wi9I 9Ic financing agcncy and i9 would lc dcli9cd 9o 9Ic
accoun9 of 9Ic lorrowcr agcncy/imor9cr wIosc con9rac9 for availing
9Ic facili9y is alrcady arovcd ly 9Ic financing agcncy on 9Ic
rccommcnda9ion of 9Ic ovcrscas ins9i9u9ion. 9 ac9s as conduc9 of
financing wIicI is for a ccr9ain criod and on ccr9ain 9crms for 9Ic
rcquircd goods 9o lc imor9cd. TIc grca9cs9 advan9agc is 9Ia9 i9
savcs a lo9 of 9imc and moncy on mu9ual vcrifica9ion of lonafidcs,
sourcc of financc c9c. 9 scrvcs as a sourcc of forc.
CommercIaI Paper: commcrcial acr is a sIor99crm ncgo9iallc
moncy marlc9 ins9rumcn9. 9 Ias 9Ic cIarac9cr of an unsccurcd
romissory no9c wi9I a ficd ma9uri9y of 3 9o 6 mon9Is. Danling and
nonlanling comanics can issuc 9Iis for raising 9Icir sIor9 9crm
dcl9. 9 also carrics an a99rac9ivc ra9c of in9crcs9. Commcrcial acrs
arc sold a9 a discoun9 from 9Icir facc valuc and rcdccmcd a9 9Icir
facc valuc. Sincc i9s dcnomina9ion is vcry IigI, i9 is sui9allc only 9o
ins9i9u9ional invcs9ors and comanics.
%reasury BIII: 9rcasury lill is also a moncy marlc9 ins9rumcn9
issucd ly 9Ic Ccn9ral Covcrnmcn9. 9 is also issucd a9 a discoun9
and rcdccmcd a9 ar. Fcccn9ly, 9Ic Covcrnmcn9 Ias comc ou9 wi9I
sIor9 9crm 9rcasury lills of 182days lills and 364 days lills.
CertIIIcates oI DeposIt: TIc scIcdulcd commcrcial lanls Iavc
lccn crmi99cd 9o issuc ccr9ifica9c of dcosi9 wi9Iou9 any rcgula9ion
on in9crcs9 ra9cs. TIis is also a moncy marlc9 ins9rumcn9 and unlilc
a ficd dcosi9 rccci9, i9 is a ncgo9iallc ins9rumcn9 and Icncc i9
offcrs maimum liquidi9y. s sucI, i9 Ias a sccondary marlc9 9oo.
Sincc 9Ic dcnomina9ion is vcry IigI, i9 is sui9allc 9o mainly
ins9i9u9ional invcs9ors and comanics.
3ter-ba3 PartIcIpatIo3s (BPs): TIc scIcmc of in9crlanl
ar9icia9ion is confincd 9o scIcdulcd lanls only for a criod
ranging lc9wccn 91 days and 180 days. TIis may lc 'wi9I risl'
ar9icia9ion or 'wi9Iou9 risl' ar9icia9ion. Howcvcr, only a fcw
lanls Iavc so far issucd DPs carrying an in9crcs9 ra9c ranging
lc9wccn 14 and 17 cr ccn9 cr annum. TIis is also a moncy marlc9
2ero 3terest Co3;ertIbIe Debe3tureJBo3ds: s 9Ic vcry namc
suggcs9s, 9Icsc ins9rumcn9s carry no in9crcs9 9ill 9Ic 9imc of
convcrsion. TIcsc ins9rumcn9s arc convcr9cd in9o cqui9y sIarcs af9cr
a criod of 9imc.
Deep DIscou3t Bo3ds: TIcrc will lc no in9crcs9 aymcn9s in 9Ic
casc of dcc discoun9 londs also. Hcncc, 9Icy arc sold a9 a largc
discoun9 9o 9Icir nominal valuc. For camlc, 9Ic ndus9rial
Dcvclomcn9 Danl of ndia issucd in Fclruary 1996 dcc discoun9
londs. EacI lond Iaving a facc valuc of Fs. 200,000 was issucd a9 a
dcc discoun9cd ricc of Fs. 5300 wi9I a ma9uri9y criod of 25 ycars.
Of coursc, rovisions arc 9Icrc for carly wi9Idrawal or rcdcm9ion in
wIicI casc 9Ic dccmcd facc valuc of 9Ic lond would lc rcduccd
roor9iona9cly. TIis lond could lc gif9cd 9o any crson.
Index-Linked Guilt Bonds: These are instruments having a Iixed
maturity. Their maturity value is linked to the index prevailing as on the
date oI maturity. ence, they are inIlation-Iree instruments.
Option Bonds: These bonds may be cumulative or non-cumulative as
per the option oI the holder oI the bonds. In the case oI cumulative
bonds, interest is accumulated and is payable only on maturity. But, in
the case oI non-cumulative bond, the interest is paid periodically. This
option has to be exercised by the prospective investor at the time oI
Secured Premium Notes: These are instruments which carry no interest
Ior three years. In other words, their interest will be paid only aIter 3
years, and hence, companies with high capital intensive investments can
resort to this type oI Iinancing.
edium %erm Debentures: Generally, debentures are repayable only
aIter long period. But, these debentures have a medium term maturity.
Since they ,70secured and negotiable, they are highly liquid. These types
oI debt instruments are very popular in Germany.
Variable Rate Debentures: Variable rate debentures are debt instruments. They
carry a compound rate oI interest, but this rate oI interest is not a Iixed one. It varies
Irom time to time in accordance with some pre-determined Iormula as we adopt in
the case oI Dearness Allowance calculations.
Non-Convertible Debentures with Equity Warrants: Generally debentures are
redeemed on the date oI maturity. But, these debentures are redeemed in Iull at a
premium in installments as in the case oI anticipated insurance policies. The
installments may be paid at the end oI 5th, 6th, 7th and 8th year Irom the date oI
Equity with 100 Safety Net: Some companies make 100 saIety net oIIer to
the public. It means that they give a guarantee to the issue price. Suppose, the issue
price is Rs. 40/- per share (nominal value oI Rs. 10/- per share), the company is
ready to get it back at Rs. 40/- at any time, irrespective oI the market price. That is,
even iI the market price comes down to Rs. 30/- there is 100 saIety net and hence
the company will get it back at Rs. 40/-.
Cumulative Convertible Preference Shares: These instruments along with capital
and accumulated dividend must be compulsorily converted into equity shares in a
period oI 3 to 5 years Irom the date oI their issue, according to the discretion oI the
issuing company. The main object oI introducing it is to oIIer the investor an assured
minimum return together with the prospect oI equity appreciation. This instrument is
not popular in India.
Convertible Bonds: A convertible bond is one which can be converted into equity
shares at a per-determined timing either Iully or partially. There are compulsory
convertible bonds which provide Ior conversion within 18 months oI their issue.
There are optionally convertible bonds which provide Ior conversion within 36
months. There are also bonds which provide Ior conversion aIter 36 months and
they carry 'call' and 'put' Ieatures. ,250In June 1989, the Tata Iron and Steel
Company issued 30 lakhs partly convertible debentures oI Rs. 1200 each Ior cash at
par with the Iollowing terms:
Conversion oI Rs. 600 par value into one equity share oI RS.100 at a premium oI
Rs. 500 on Feb. 1, 1990,
Interest rate oI 12 per annum, and .
Redemption oI the non-convertible portion at the end oI 8 years.
Debentures with 'Call' and 'Put' Feature: Sometimes debentures may be issued
with 'Call' and 'Put' Ieature. In the case oI debentures with 'Call Ieature', the issuing
company has the option to redeem the debentures at a certain price beIore the
maturity date. In the case oI debentures with 'Put Ieatures', the company gives the
holder the right to seek redemption at speciIied times at predetermined prices.
Easy Exit Bond: As the name indicates, this bond
enables the small investors to encash the bond at
any time aIter 18 months oI its issue and thereby
paving a way Ior an easy exit. It has a maturity
period oI 10 years with a call option any time aIter
5 years. Recently the IDBI has issued this type oI
bond with a Iace value oI Rs.5000 per bond.
Interest is payable halI yearly at the rate oI at least
2.5 p.a. over the State Bank oI India's 3 year
Fixed deposit rate at any time or 1.5 p.a. above
the interest rate on 10 year Government Bonds.
Bo3d: TIis 9yc of lond cnallcs an invcs9or 9o gc9 an assurcd
mon9Ily incomc for a ficd criod af9cr 9Ic ciry of 9Ic 'wai9 criod'
cIoscn ly Iim. No aymcn9 will lc madc during 9Ic 'wai9 criod.'
TIc longcr 9Ic wai9 criod, 9Ic IigIcr will lc 9Ic mon9Ily incomc.
Dcsidcs 9Icsc, 9Ic invcs9or will also gc9 a lum sum amoun9 on
ma9uri9y. For camlc, 9Ic DD Ias issucd Fc9ircmcn9 Dond '96
assuring a ficd mon9Ily incomc for 10 ycars af9cr 9Ic ciry of 9Ic
wai9 criod. TIis lond can lc gif9cd 9o any crson.
ReguIar 3come Bo3d: TIis lond offcrs an a99rac9ivc ra9c of in9crcs9
ayallc Ialf ycarly wi9I 9Ic facili9y of carly rcdcm9ion. TIc invcs9or
is assurcd of rcgular and ficd incomc. For camlc, 9Ic lOD Ias
issucd Fcgular ncomc Dond '96 carrying 16% in9crcs9 .a. 9 is
rcdccmallc a9 9Ic cnd of cvcry ycar from 9Ic ciry of 3 ycars from
9Ic da9c of allo9mcn9.
3Irastructure Bo3d: 9 is a lind of dcl9 ins9rumcn9 issucd wi9I a
vicw 9o giving 9a sIcl9cr 9o invcs9ors. TIc rcsourccs raiscd 9IrougI
9Iis lond will lc uscd for romo9ing invcs9mcn9 in 9Ic ficld of ccr9ain
infras9ruc9urc indus9rics. Ta conccssions arc availallc undcr
Scc.88, Scc. 54 E and Scc. 54 ED of 9Ic ncomc Ta c9. HUDCO
Ias issucd for 9Ic firs9 9imc sucI londs. 9s facc valuc is Fs. 1000
cacI carrying an in9crcs9 ra9c of 15% cr annum ayallc scmi
annually. TIis lond will also lc lis9cd in imor9an9 s9ocl ccIangcs.
Carrot a3d StIc Bo3ds: Carro9 londs Iavc a low convcrsion
rcmium 9o cncouragc carly convcrsion, and s9icls allow 9Ic issucr
9o call 9Ic lond a9 a sccificd rcmium if 9Ic common s9ocl is
9rading a9 a sccificd crccn9agc alovc 9Ic s9rilc ricc.
Co3;ertIbIe Bo3ds wItb a PremIum put: TIcsc arc londs issucd a9
facc valuc wi9I a u9, wIicI mcans 9Ia9 9Ic londIoldcr can rcdccm
9Ic londs for morc 9Ian 9Icir ucc valuc.
Debt wItb EquIty Warra3t: Somc9imcs londs arc issucd wi9I
warran9s for 9Ic urcIasc of sIarcs. TIcsc warran9s arc scara9cly
DuaI Curre3cy Bo3ds: Donds 9Ia9 arc dcnomina9cd and ay in9crcs9
in onc currcncy and arc rcdccmallc in ano9Icr currcncy comc
undcr 9Iis ca9cgory. TIcy facili9a9c in9crcs9 ra9c arli9ragc lc9wccn
9wo marlc9s.
ECU Bo3ds (Europea3 Curre3cy U3It Bo3ds): TIcsc londs arc
dcnomina9cd in a laslc9 of currcncics of 9Ic 10 coun9rics 9Ia9
cons9i9u9c 9Ic Eurocan communi9y. TIcy ay rincial and in9crcs9
in ECWs or in any of 9Ic 10 currcncics a9 9Ic o9ion of 9Ic Ioldcr.
Ya3ee Bo3ds: f londs arc raiscd in U.S.., 9Icy arc callcd Yanlcc
londs and if 9Icy arc raiscd in Jaan, 9Icy arc callcd Samurai
FIIp-FIop Notes: 9 is a lind of dcl9
ins9rumcn9 wIicI crmi9s invcs9ors 9o swi9cI
lc9wccn 9wo 9ycs of sccuri9ics c.g., 9o
swi9cI ovcr from a long9crm lond 9o a sIor9
9crm ficdra9c no9c.
FIoatI3g Rate Notes (FRNs): TIcsc arc dcl9
ins9rumcn9s wIicI facili9a9c criodic in9crcs9
ra9c adjus9mcn9s.
LoyaIty Coupo3s: TIcsc arc cn9i9lcmcn9s 9o
9Ic Ioldcr of dcl9 for 9wo 9o 9Ircc ycars 9o
ccIangc in9o cqui9y sIarcs a9 discoun9
riccs. To gc9 9Iis facili9y, 9Ic original
sulscrilcr mus9 Iold 9Ic dcl9 ins9rumcn9s
for 9Ic said criod.
GIobaI DeposItory ReceIpt (GDR): glolal
dcosi9ory rccci9 is a dollar dcnomina9cd
ins9rumcn9 9radcd on a s9ocl ccIangc in
Euroc or 9Ic U.S.. or lo9I. 9 rcrcscn9s a
ccr9ain numlcr of undcrlying cqui9y sIarcs.
TIougI 9Ic CDF is quo9cd and 9radcd in dollar
9crms, 9Ic undcrlying cqui9y sIarcs arc
dcnomina9cd in ruccs. TIc sIarcs arc issucd ly
9Ic comany 9o an in9crmcdiary callcd dcosi9ory
in wIosc namc 9Ic sIarcs arc rcgis9crcd. 9 is 9Ic
dcosi9ory wIicI sulscqucn9ly issucs 9Ic CDFs.
On 9Ic lasis of 9Ic na9urc of sIarcs, 9Ic na9urc of indus9ry 9o wIicI
9Icy lclong and 9Ic na9urc of 9rading, cqui9y sIarcs can lc callcd ly
diffcrcn9 namcs. TIc oular classifica9ion is as follows.
BIue CbIp Sbares
SIarcs of wcll lnown and cs9allisIcd comanics arc callcd Dluc
CIi SIarcs.
TIcy mus9 sIow consis9cn9 grow9I ovcr 9Ic ycars. TIcsc sIarcs Iavc
lrigI9 fu9urc roscc9s and 9Icy arc ccc9cd 9o con9rilu9c
sus9aincd grow9I in 9Ic fu9urc also.
DeIe3sI;e Sbares
TIcsc sIarcs 9cnd 9o fall lcss in a lcar marlc9 wIcn comarcd wi9I
o9Icr sIarcs and 9Icy rovidc a safc rc9urn for 9Ic invcs9ors moncy.
n o9Icr words, 9Icsc sIarcs arc morc s9allc 9Ian o9Icr sIarcs.
Na9urally, Dluc CIis fall undcr 9Iis ca9cgory also.
Growtb Sbares
Crow9I sIarcs rcrcscn9 9Ic sIarcs of fas9 growing comanics. TIcy
sIow incrcasing and IigIcr 9Ian avcragc carnings cr sIarc 9Ian
9Ic indus9ry. TIcy arc good for long 9crm invcs9mcn9, al9IougI 9Ic
currcn9 yicld of sucI sIarcs can lc insignifican9 lccausc of 9Icir
IigIcr PE ra9ios.
CycIIcaI Vs No3-CycIIcaI Sbares
Cyclical sIarcs arc 9Iosc wIicI risc and fall in ricc wi9I 9Ic s9a9c of 9Ic
na9ional cconomy of 9Ic indus9rics 9o wIicI 9Icy lclong lilc cons9ruc9ion,
au9omolilcs, ccmcn9, cnginccring c9c. TIcy may also lc affcc9cd ly
in9crna9ional cconomy of indus9rics sucI as sIiing, avia9ion and 9ourism.
TIcy also includc sIarcs wIicI arc affcc9cd ly na9ural Icnomcna lilc
fcr9ilizcrs, 9ca, c9c.
f 9Ic sIarcs arc no9 affcc9cd ly sucI cyclical cIangcs ci9Icr duc 9o 9Ic s9a9c
of 9Ic na9ional cconomy or 9Ic in9crna9ional cconomy, 9Icy arc callcd non
cyclical sIarcs.
SIarcs of drug comanics, insurancc comanics and lasic food s9uffs of
many consumcr roduc9s comanics comc undcr 9Iis ca9cgory.
%ur3 Arou3d Sbares
Turns around sIarcs arc 9Iosc wIicI ci9Icr risc or fall all in a suddcn duc
9o 9urn around si9ua9ions rcvailing in comanics. TIcy offcr oor9uni9ics
9o invcs9ors 9o icl u 9Ic sIarcs wIcn 9Icir ricc is low.
ActI;e Sbares
c9ivc sIarcs arc 9Iosc in wIicI 9Icrc arc frcqucn9 and day9oday dcalings.
TIcy mus9 lc lougI9 and sold a9 lcas9 9Ircc 9imcs a wccl. nvcs9ors can luy
or scll 9Icsc sIarcs qui9c casily in 9Ic marlc9.
AIpba Sbares
lIa sIarcs arc 9Iosc wIicI arc mos9 frcqucn9ly 9radcd in 9Ic
marlc9. TIcy arc also callcd sccificd sIarcs or clcarcd sccuri9ics.
TIcy arc includcd undcr Crou sIarcs wIilc lis9ing on a s9ocl
Sweat Sbares
Swca9 sIarcs rcfcr 9o 9Iosc sIarcs wIicI arc issucd 9o cmloyccs or
worlcrs wIo con9rilu9c for 9Ic dcvclomcn9 of a comany ly
roviding ncccssary lnowIow using 9Icir in9cllcc9ual rocr9y. TIcrc
mus9 lc valuc addi9ion 9o 9Ic comany lccausc of 9Icir ac9ivc
involvcmcn9 in 9Ic comany and 9Icy con9rilu9c 9Icir migI9 for 9Ic
rogrcss of 9Ic comany. Swca9 sIarcs arc indccd a rcward for Iard,
ac9ivc and dcdica9cd worl for 9Ic dcvclomcn9 of a comany.
TIc cmcrgcncc of various financial roduc9s and ins9rumcn9s Ias
9ransformcd 9Ic financial scrviccs scc9or from lcing a conscrva9ivc
indus9ry 9o a vcry dynamic onc.
TIcsc innova9ions Iavc cnlargcd 9Ic mcnu of assc9s availallc 9o 9Ic
invcs9ors and lorrowcrs so as 9o mcc9 9Icir varicd rcquircmcn9s. TIc
in9roduc9ion of ncw lorrowing ins9rumcn9s Ias facili9a9cd cai9al
forma9ion wIicI is vcry vi9al for 9Ic cconomic dcvclomcn9 of any
coun9ry. lovc all, 9Ic dcvclomcn9 of ncw financial ins9rumcn9s will
in 9urn imrovc 9Ic caaci9y of financial in9crmcdiarics 9o managc
To cnallc 9Ic financial scrvicc indus9ry 9o lay a dynamic rolc
and 9o facc 9Ic glolal comc9i9ion in an cffcc9ivc way, 9Ic
Covcrnmcn9 of ndia Ias rcccn9ly 9alcn 9Ic following s9cs.
Priva9iza9ion of ullic scc9or undcr9aling.
SIif9ing of ricing issucs from 9Ic Con9rollcr of Cai9al ssucs
9o frcc ricing.
Full convcr9ilili9y of ndian Fucc on currcn9 accoun9.
Pcrmi99ing riva9c scc9or 9o ar9icia9c in lanling and mu9ual
Dcrcgula9ion of in9crcs9 ra9cs.
llowing corora9c scc9or 9o raisc dcl9/cqui9y in in9crna9ional
Signing of 9Ic CTT agrccmcn9 and 9Ic affirma9ion of 9Ic WTO
Financial Scrviccs Scc9or agrccmcn9.
9 is 9imc for 9Ic financial scrvicc agcncics 9o cloi9 9Ic
oor9uni9ics 9Ia9 lic aIcad in 9unc wi9I 9Ic dcvcloing acc
of 9Ic cconomy. 9 rcquircs 9Icm 9o ado9 ncw ins9rumcn9s
and innova9ivc mcans of financing 9o mcc9 9Ic growing
financial rcquircmcn9s of 9Ic various scgmcn9s of 9Ic
(I) Lac oI quaIIIIed perso33eI
(II) Lac oI I3;estor aware3ess
(III) Lac oI tra3spare3cy
(I;) Lac oI specIaIIsatIo3
(;) Lac oI rece3t data
(;I) Lac oI eIIIcIe3t rIs
ma3ageme3t system
i) Conservatism to dynamism:
India is in a process oI rapid transIormation, aIter the liberalization oI
Iinancial sector. The main objective oI the Iinancial sector reIorms is to:
promote an eIIicient, competitive and diversiIied Iinancial system in the
Indian Iinancial services sector is very dynamic and it is adopting itselI
to the changing needs.
ii) Emergence of Primary Equity arket:
Primary market in India is now very active. India is now witnessing the
emergence oI many private sector Iinancial services. Capital market is
one oI the major places to raise Iinance. The aggregate Iunds raised in the
Indian capital market have doubled over a decade.
iii) Concept of Credit Rating:
Credit rating helps the investors in Iinding a proIitable and saIe debt
capital. It gives its unbiased opinion but not recommendations.
Pricing is linked to rating.
Mercba3t Ba3I3g
Diffcrcn9 dcfini9ions in diffcrcn9 coun9rics
according 9o crcc9ion.
n ins9i9u9ion wIicI covcrs a widc rangc of
ac9ivi9ics sucI as managcmcn9 of cus9omcr
scrviccs, or9folio managcmcn9, crcdi9
syndica9ion, accc9ancc crcdi9, counsclling,
insurancc c9c.
No9ifica9ion of MOF dcfincs MD as any
crson wIo is cngagcd in 9Ic lusincss of
issuc managcmcn9 ci9Icr ly maling
arrangcmcn9s rcgarding sclling, luying or
sulscriling 9o 9Ic sccuri9ics as managcr,
consul9an9, adviscr or rcndcring corora9c
advisory scrvicc in rcla9ion 9o sucI issuc
Origina9cd in London wIcn mcrcIan9s cngagcd 9Icmsclvcs in
financing forcign 9radc 9IrougI accc9ancc of lill.
La9cr on MD c9cndcd 9Icir ac9ivi9ics 9o diffcrcn9 9ycs of
Crow9I of MD is olscrvcd af9cr WW duc 9o cosurc in Euro
Dcforc 1956 mos9 of 9Ic riva9c firms andsIarc lroling firms
func9ioncd as mcrcIan9 lanlcrs.
TIc nccd for MD was fcl9 in ndia duc 9o raid grow9I in 9Ic
numlcr and sizc of 9Ic issucs in 9Ic rimary marlc9.
TIc MD scrviccs wcrc s9ar9cd ly Na9ional Crindlays Danl in
1967 and 9Ic Ci9y Danl in 1970.
TIc Danling Commission in i9s rcor9 in 1972 rccommcndcd
9Ic sc99ing u of MD ins9i9u9ions ly commcrcial lanls and
financial ins9i9u9ions as SPV.
TIis marlcd 9Ic lcginning of sccialiscd mcrcIan9 lanling in
To lcgin wi9I, mcrcIan9 lanling scrviccs
wcrc offcrcd along wi9I o9Icr 9radi9ional
lanling scrviccs.
n 9Ic midcigI9ics, 9Ic DF1949 was
amcndcd crmi99ing commcrcial lanls 9o
offcr a widc rangc of financial scrviccs
9IrougI 9Ic sulsidiary.
TIc S9a9c Danl of ndia was 9Ic firs9 ndian
Danl 9o sc9u McrcIan9 Danling Division in
La9cr CC sc9 u i9s McrcIan9 Danling
Division followcd ly Danl of ndia, Danl of
Daroda, Canara Danl, Punjal Na9ional Danl
and UCO Danl.
TIc mcrcIan9 lanling gaincd romincncc
during 198384 duc 9o ncw issuc loom.
CommercIaI Ba3s Mercba3t Ba3s
Dcal in dcl9 and dcl9 rcla9cd financc
lilc crcdi9 roosals, crcdi9 araisal
and loan sanc9ions.
Dcal in 'cqui9y and cqui9y rcla9cd
financc'. & raisc funds 9IrougI moncy
marlc9 and cai9al marlc9.
Civc assc9 oricn9cd, sccuri9y lascd
financc. TIcy arc risl avcrsc.
Func9ions of MD arc managcmcn9
oricn9cd. TIcy arc willing 9o 9alc risls.
Commcrcial lanlcrs arc mcrcly
MD do rojcc9 counsclling, corora9c
counsclling in arcas of cai9al
rcs9ruc9uring, amalgama9ions,
mcrgcrs, 9alcovcr c9c., discoun9ing
and rcdiscoun9ing of sIor99crm acr
in moncy marlc9s, managing,
undcrwri9ing and suor9ing ullic
issucs in ncw issuc marlc9 and ac9ing
as lrolcrs and adviscrs on or9folio
managcmcn9 in s9ocl ccIangc.
MD ac9ivi9ics Iavc imac9 on grow9I,
s9alili9y and liquidi9y of moncy
Sincc F could no9 mcc9 9Ic dcmand for long
9crm funds rcquircd ly 9Ic indus9ry and
TIc corora9c scc9or cn9crriscs, 9Icrcforc,
mcc9 9Icir rcquircmcn9s 9IrougI issuc of
sIarcs and dclcn9urcs in 9Ic cai9al marlc9.
To raisc moncy from cai9al marlc9, mul9ilc
scrviccs of MDs arc rcquircd.
TIc MD also advisc 9Ic invcs9ors rcgarding
inccn9ivcs availallc in 9Ic form of 9a rclicfs
and o9Icr s9a9u9ory olliga9ions.
Following arc 9Ic main scrviccs of 9Ic
mcrcIan9 lanlcrs.
(i} Corora9c Counsclling
Corora9c counscling covcrs rojcc9
counscling, cai9al rcs9ruc9uring, rojcc9
managcmcn9, ullic issuc managcmcn9,
loan syndica9ion, worling cai9al, ficd
dcosi9, lcasc financing, accc9ancc crcdi9
TIc scoc is limi9cd 9o giving suggcs9ions
and oinions 9o 9Ic clicn9 and Icl 9aling
ac9ions 9o solvc 9Icir rollcms for lc99cr
crformancc, main9ain s9cady grow9I and
crca9c lc99cr imagc among invcs9ors.
(II) Project Cou3seII3g
Projcc9 counscling includcs.
Prcara9ion of rojcc9 rcor9s,
Dcciding uon 9Ic financing a99crn
Filling u of alica9ion forms wi9I rclcvan9 informa9ion for
ol9aining funds from financial ins9i9u9ions.
raising rojcc9 rcor9 wi9I 9Ic financial ins9i9u9ions or
Projcc9 rcor9s arc rcquircd 9o.
Ol9ain govcrnmcn9 aroval,
To ol9ain financial assis9ancc from ins9i9u9ions and
Planning for 9Ic ullic issuc.
TIc financing mi is 9o lc dccidcd lccing in vicw 9Ic rulcs,
rcgula9ions and norms rcscrilcd ly 9Ic govcrnmcn9 or
followcd ly financial ins9i9u9ions.
TIc rojcc9s arc araiscd on 9Ic lasis of.
Loca9ion of 9Ic rojcc9,
TccInical, commcrcial and financial vialili9y of 9Ic rojcc9.
Projcc9 counscling also includcs
(III) Loa3 Sy3dIcatIo3
9 is assis9ancc rcndcrcd ly mcrcIan9 lanls 9o gc9 mainly
9crm loans for rojcc9s wIicI may lc ol9aincd from a singlc
DF or a syndica9c or consor9ium.
McrcIan9 Danlcrs Icl corora9c clicn9s 9o raisc syndica9cd
loans from commcrcial lanls and F.
TIc dccision as 9o wIicI financial ins9i9u9ion sIould lc
aroacIcd dccnds on indus9ry, loca9ion of 9Ic uni9 and sizc
of rojcc9 cos9.
TIc MD firs9 malc an araisc rojcc9 vialili9y & dcsign
cai9al s9ruc9urc, dc9crminc 9Ic romo9cr's con9rilu9ion and
arrivc a9 a figurc of aroima9c amoun9 of 9crm loan 9o lc
f9cr adIcrcncc 9o all 9Ic guidclincs MD aroacI financial
f 9Ic financial ins9i9u9ion agrccs 9o considcr 9Ic roosal, 9Ic
alica9ion is fillcd in and sulmi99cd along wi9I o9Icr
TIc McrcIan9 Danlcrs involvcmcn9 cnallcs 9Ic comany 9o
ccrcisc duc diligcncc undcr various rcgula9ions.
(I;) ssue Ma3ageme3t
involvcs marlc9ing of corora9c sccuri9ics ly
offcring 9Icm 9o ullic. McrcIan9 lanls ac9 as
in9crmcdiary wIosc main jol is 9o 9ransfcr cai9al
from 9Iosc wIo own i9 9o 9Iosc wIo nccd i9.
TIc issuc func9ion is dividcnd in9o rcissuc
managcmcn9 and os9 issuc managcmcn9.
n lo9I 9Ic s9agcs, lcgal rcquircmcn9s Iavc 9o lc
comlicd wi9I and scvcral ac9ivi9ics conncc9cd wi9I
9Ic issuc Iavc 9o lc coordina9cd.
TIc rcissuc managcmcn9 is dividcd in9o.
(i} ssuc 9IrougI roscc9us, offcr for salc and
riva9c laccmcn9.
(ii} Marlc9ing and undcrwri9ing.
(iii} Pricing of ssucs.
(I) PubIIc ssue tbrougb Prospectus
(a} TIc mos9 common mc9Iod of ullic issuc is 9IrougI roscc9us.
(l} Somc9imcs comany may o9 9Ic rou9c of riva9c laccmcn9.
For a ullic issuc, MD Ias 9o coordina9c wi9I diffcrcn9 govcrnmcn9 and
ullic lodics, rofcssionals and riva9c agcncics.
nforma9ion rcquircd undcr 9Ic Comanics c9 and SED arc furnisIcd in
9Ic roscc9us and gc9 i9 vc99cd ly rcu9cd solici9or.
TIc conscn9 of ccr9s, lcgal adviscr, a99orncy, solici9or, lanlcrs, lanlcrs 9o
9Ic issuc, lrolcrs and undcrwri9crs arc 9o lc ol9aincd & 9o lc filcd along
wi9I roscc9us 9o 9Ic Fcgis9rar of Comanics.
Proscc9us is 9o lc scn9 9o SED for vc99ing & 9Icn 9o lc filcd wi9I 9Ic FOC.
Princial lrolcrs & sullrolcrs assis9 MD 9o dcvisc s9ra9cgy for succcss of
9Ic ullic issuc, lcc liaison lc9wccn mcrcIan9 lanlcr and s9ocl
ccIangcs and canvass suor9 for 9Ic issuc among s9ocl lrolcrs.
Somc9imcs lrolcrs undcr9alc mailing of roscc9us, alica9ion forms and
o9Icr ullici9y ma9crial a9 9Ic ins9an9 of 9Ic mcrcIan9 lanlcr.
Danlcrs 9o 9Ic issuc accc9 alica9ions along wi9I sulscri9ions 9cndcrcd
a9 9Icir dcsigna9cd lrancIcs and forward 9Icm 9o 9Ic Fcgis9rar.
TIc lrolcrs 9o 9Ic issuc, rincial agcn9 and lanlcrs 9o issuc arc aoin9cd
ly McrcIan9 Danlcrs.
(II) MaretI3g
f9cr disa9cI of roscc9us 9o SED 9Ic MDs finalisc.
Da9c of ocning and closing of issuc,
Fcgis9ra9ion of roscc9us,
LauncIing ullici9y camaign and
Fiing da9c of loard mcc9ing 9o arovc and sign roscc9us and
ass 9Ic ncccssary rcsolu9ions.
Prcara9ion of all ullici9y ma9crial and lrocIurcs, roscc9us,
announccmcn9, advcr9iscmcn9 in 9Ic rcss, radio, TV, invcs9ors
confcrcncc c9c.,
CIccling accuracy of s9a9cmcn9s madc and cnsurc 9Ia9
alica9ion form and roscc9us conform 9o 9Ic s9andard
rcscrilcd ly 9Ic s9ocl ccIangc.
McrcIan9 Danlcr Ias 9o cnsurc 9Ia9 9Ic ma9crial is dclivcrcd 9o
9Ic s9ocl ccIangc a9 lcas9 21 days lcforc 9Ic issuc ocns and 9o
lrolcrs 9o 9Ic issuc, lrancIcs of lrolcrs 9o 9Ic issuc and
undcrwri9crs on 9imc.
n casc of undcr sulscri9ion 9Ic issucs arc 9alcn u ly 9Ic
undcrwri9crs. SED Ias madc undcrwri9ing manda9ory for issucs
9o 9Ic ullic. Undcrwri9ing arrangcmcn9 sIould lc mcn9ioncd in
9Ic roscc9us.
TIc rc issuc managcmcn9 arc a 9imc lound rogrammc wIicI
Ias 9o lc rom9ly a99cndcd 9o.
(III) PrIcI3g oI ssues
TIc SED guidclincs 1992 Iavc ocncd 9Ic cai9al
marlc9 9o frcc ricing of issucs.
Pricing of issucs is donc ly comanics 9Icmsclvcs
in consul9a9ion wi9I 9Ic mcrcIan9 lanlcrs.
Pricing of issuc is ar9 of rc issuc managcmcn9.
n cis9ing lis9cd comany and a ncw comany sc9
u ly an cis9ing comany wi9I fivc ycar 9racl
rccord and cis9ing riva9c closcly Icld comany
and cis9ing unlis9cd comany going in for ullic
issucs for 9Ic firs9 9imc wi9I 9wo and Ialf ycars
9racl rccord of cons9an9 rofi9alili9y can frccly
ricc 9Ic issuc.
TIc rcmium Ias 9o lc dccidcd af9cr 9aling in9o
accoun9 nc9 assc9 valuc, rofi9 carning caaci9y
and marlc9 ricc. Jus9ifica9ion of ricc Ias 9o lc
s9a9cd and includcd in 9Ic roscc9us.
(I;) Post ssue Ma3ageme3t
Consis9s of collcc9ion of alica9ion forms and s9a9cmcn9 of amoun9 rcccivcd
from lanlcrs, scrccning alica9ions, dcciding allo9mcn9 roccdurc, mailing
of allo9mcn9 lc99crs, sIarc ccr9ifica9cs and rcfund ordcrs.
Fcgis9rars 9o 9Ic issuc lay a major rolc in os9 issuc managcmcn9. TIcy
rcccivc 9Ic alica9ions, vcrify 9Icm and sulmi9 9Ic lasis of allo9mcn9 9o 9Ic
s9ocl ccIangc.
f9cr 9Ic lasis of allo9mcn9 is arovcd ly 9Ic s9ocl ccIangc and allo99cd
ly 9Ic
Doard, 9Ic audi9or/comany sccrc9ary Ias 9o ccr9ify 9Ia9 9Ic allo9mcn9 Ias
lccn madc ly 9Ic comany as cr 9Ic lasis of allo9mcn9 arovcd ly 9Ic
ccIangc. Fcgis9rars Iavc 9o cnsurc 9Ia9 9Ic alica9ions arc roccsscd and
allo9mcn9/rcfund ordcrs arc scn9 wi9Iin 70 days of 9Ic closc of 9Ic issuc.
TIc 9imc limi9 of 70 days Ias rovcd difficul9 9o adIcrc and alican9s Iavc
9o wai9 for any9imc lc9wccn 90 9o 180 days.
McrcIan9 lanlcrs assis9 9Ic comany ly cocoordina9ing 9Ic alovc
(;) U3derwrItI3g oI PubIIc ssue
Undcrwri9ing is a guaran9cc givcn ly 9Ic undcrwri9cr 9Ia9 n 9Ic cvcn9 of
undcr sulscri9ion 9Ic amoun9 undcrwri99cn would lc sulscrilcd ly firm. 9
is an insurancc 9o 9Ic comany wIicI rooscs 9o malc ullic offcr agains9
risl of undcr sulscri9ion.
TIc issucs aclcd ly wcll lnown undcrwri9crs gcncrally rcccivc a IigI
rcmium from 9Ic ullic. TIis cnallcs 9Ic issuing comany 9o scll
sccuri9ics quiclly.
(;II) PortIoIIo Ma3ageme3t
Por9folio rcfcrs 9o invcs9mcn9 in diffcrcn9 linds of sccuri9ics
sucI as sIarcs, dclcn9urcs or londs ly main9aining rocr
mi of sccuri9ics 9Ia9 givc maimum rc9urn wi9I minimum
MD rovidc or9folio managcmcn9 scrvicc 9o 9Icir clicn9s.
nvcs9ors lacl rofcssionalism & canno9 s9udy and cIoosc 9Ic
aroria9c sccuri9ics.
MD rovidc ccr9isc & analysc rcgular marlc9 and cconomic
survcys 9o lnow.
(i} Monc9ary and fiscal olicics of 9Ic govcrnmcn9.
(ii} Financial s9a9cmcn9s of various corora9c scc9ors
(iii} Movcmcn9 in 9Ic sIarc marlc9.
(iv} CIanging a99crn of 9Ic indus9ry.
(v} 9Ic comc9i9ion faccd ly 9Ic indus9ry wi9I similar 9yc of
TIc MDs Icl 9Ic invcs9ors in cIoosing 9Ic sIarcs.
TIc or9folio managcrs classify 9Ic invcs9ors on 9Ic lasis of
risl lcaring caaci9y and lan succcssful invcs9mcn9
s9ra9cgics for invcs9ors.
TIc NF invcs9mcn9 lays a vi9al rolc in 9Ic
cconomic dcvclomcn9 of a coun9ry.
Covcrnmcn9 offcrsnumlcr of facili9ics and
inccn9ivcs 9o NF.
MDs Icl 9Ic NF in sclcc9ing rigI9 9yc of
sccuri9ics and offcr ccr9isc & guidancc
in fulfilling govcrnmcn9 rcgula9ions &
9Icrcly molilisc morc rcsourccs for 9Ic
corora9c scc9or.
(;III) Ad;Isory Ser;Ice ReIatI3g to Mergers a3d %aeo;ers
MD offcr 9Icir ccr9isc in mcrgcrs, acquisi9ions, 9alcovcrs and
rcvcrsc mcrgcrs.
MD ac9 as 9Ic middlcmcn in sc99ing ncgo9ia9ion lc9wccn 9Ic offcrcc
and offcror.
TIcy safcguard 9Ic in9crcs9 of 9Ic sIarcIoldcrs in lo9I 9Ic
Oncc 9Ic mcrgcr ar9ncr is rooscd, 9Ic mcrcIan9 lanlcr
araiscs mcrgcr/9alcovcr roosal wi9I rcscc9 9o financial vialili9y
and 9ccInical fcasilili9y.
Hc ncgo9ia9cs urcIasc considcra9ion and modc of aymcn9.
Hc gc9s aroval from 9Ic govcrnmcn9/FD, draf9s scIcmc of
amalgama9ion and ol9ains aroval from financial ins9i9u9ions.
(1) OII Sbore FI3a3ce
TIc mcrcIan9 lanlcrs Icl 9Icir clicn9s in 9Ic following arcas
involving forcign currcncy.
(i} Long9crm forcign currcncy loans
(ii} Join9 vcn9urc alroad
(iii} Financing cor9s and imor9s and
(iv} Forcign collalora9ion arrangcmcn9s.
TIc lanlcrs rcndcr o9Icr financial scrviccs sucI as araisal,
ncgo9ia9ions and comliancc wi9I roccdural and lcgal ascc9s.
Mercba3t Ba3ers as Iead ma3agers
s cr SED guidclincs i9 is manda9ory 9Ia9 all ullic issucs sIould lc managcd ly
mcrcIan9 lanlcrs in 9Ic caaci9y of lcad managcrs.
Only in 9Ic casc of rigI9 issucs no9 ccccding Fs. 50 lalIs sucI an olliga9ion is no9
TIc numlcr of lcad managcrs 9o lc aoin9cd ly a comany dccnds uon 9Ic sizc of
9Ic issuc as sIown lclow.
$7 No $1ze o] 1e 1ssue Mo1mum Numbe7 o] Leod Monoge7s
Less than Rs. 50 crores

Rs. 50 crores to Rs. 100 crores

Rs. 100 crores to Rs. 200 crores

Rs. 200 crores to Rs. 400 crores

Above Rs. 400 crores 5 or more as prescribed by SEBI

DutIes a3d Respo3sIbIIItIes oI Lead Ma3agers
To ccrcisc rcasonallc carc and diligcncc in issuc managcmcn9 ly aying a99cn9ion 9o 9Ic
To cn9cr in9o an agrccmcn9 wi9I 9Ic issuing comanics dcciding rigI9s,& olliga9ions, lialili9ics,
mu9ual rigI9s, func9ions, disclosurcs, rcfund, allo9mcn9 c9c.
coy of 9Iis agrccmcn9 sIould lc sulmi99cd 9o 9Ic SED a9 lcas9 onc mon9I lcforc 9Ic ocning of
9Ic issuc for sulscri9ion.
Onc mcrcIan9 lanlcr canno9 Iavc associa9ion wi9I ano9Icr mcrcIan9 lanlcr wIo docs no9 Iold a
ccr9ifica9c of rcgis9ra9ion wi9I 9Ic SED.
Similarly a lcad managcr can no9 undcr9alc 9Ic worl of issuc managcmcn9 if 9Ic issuing comany
is i9s associa9c.
n casc 9Icrc is morc 9Ian onc lcad managcr 9o an issuc, 9Ic rcsonsilili9ics of cacI of i9cm
sIould lc clcarly dcfincd in 9Ic agrccmcn9.
lcad managcr is undcr an olliga9ion 9o accc9 a minimum undcrwri9ing olliga9ion of 5 cr ccn9
of 9Ic 9o9al undcrwri9ing commission or Fs. 25 lalIs wIicIcvcr is lcss.
f Ic is no9 allc 9o comly wi9I 9Ic alovc rovision i9 is Iis du9y 9o malc managcmcn9s wi9I
ano9Icr McrcIan9 lanlcr associa9cd wi9I 9Ia9 issuc 9o undcrwri9c 9Ic said amoun9. Of coursc i9
mus9 lc duly in9ima9cd 9o 9Ic SED.
lcad managcr Ias 9o ccrcisc duc carc and diligcncc in 9Ic vcrifica9ion of roscc9us or lc99cr of
Hc Ias 9o sulmi9 duc diligcncc ccr9ifica9c ra9ing 9Ia9 9Ic roscc9us or lc99cr of offcr is in
conformi9y wi9I 9Ic documcn9s rclcvan9 9o 9Ic issuc 9Ic disclosurcs arc 9ruc, fair and adcqua9c
and all lcgal rcquircmcn9s conncc9cd wi9I 9Ic issuc Iavc lccn duly comlicd wi9I.
Evcry lcad managcr Ias 9o sulmi9 all 9Ic ar9icular of an issuc, draf9 roscc9us or lc99cr of offcr
c9c. 9o 9Ic SED a9 lcas9 9wo wccls lcforc 9Ic da9c of filing wi9I 9Ic Fcgis9rar of Comanics or
rcgional s9ocl ccIangcs or lo9I.
n casc of any suggcs9ions or modifica9ions givcn ly 9Ic SED, Ic Ias 9o cnsurc 9Ia9 9Icy arc
rocrly incorora9cd in 9Ic aroria9c arcas.
n 9Ic casc of dcvclomcn9, 9Ic lcad managcr Ias 9o cnsurc 9Ic collcc9ion of 9Ic sccificd amoun9
from 9Ic undcrwri9crs.
Evcry lcad managcr is rcsonsillc for cnsuring 9imcly rcfund of cccss alica9ion moncy rcccivcd
from 9Ic alican9s.
9 is Iis du9y 9o mail 9Ic sIarc/dclcn9urc ccr9ifica9c immcdia9cly on allo9mcn9 or inform i9 9o 9Ic
dcosi9ory ar9ician9.
lili9y 9o analysc various ascc9s sucI as
9ccInical, financial and cconomic ascc9s
conccrning 9Ic forma9ion of an indus9rial rojcc9.
Knowlcdgc alou9 9Ic various ascc9s of cai9al
marlc9s, 9rcnds in s9ocl ccIangc, sycIology of
invcs9ing ullic, cIangc in 9Ic cconomic and
9ccInological cnvironmcn9 in 9Ic coun9ry.
lili9y 9o luild u 9Ic lanlclicn9 rcla9ionsIi
and livc u 9o 9Ic clicn9s ccc9a9ions wi9I 9o9al
involvcmcn9 in 9Ic rojcc9 assigncd 9o 9Icm.
nnova9ivc aroacI in dcvcloing cai9al marlc9
ins9rumcn9s 9o sa9isfy 9Ic cvcr cIanging nccds of
invcs9ing ullic.
n9cgri9y and main9cnancc of IigI rofcssional
s9andards arc 9Ic csscn9ial rcquisi9cs for 9Ic
succcss of mcrcIan9 lanlcrs rcscn9 sccnario.
Tradi9ionally firms acquirc roduc9ivc assc9s and usc 9Icm as
TIc sourccs of financc for rocuring assc9s may lc in9crnal or
TIc 9rcnd in 9Ic in9crnally gcncra9cd rcsourccs of ndian comanics
is dcclining duc 9o low rofi9alili9y.
TIc Fs facc liquidi9y cruncI 9o mcc9 9Ic incrcasing nccds of
Dusincss cnvironmcn9 is lccoming morc and morc comlc.
To succccd in 9Ic si9ua9ion, 9Ic firms aim a9 grow9I wi9I s9alili9y.
To accomlisI 9Iis oljcc9ivc, firm arc rcquircd 9o go for massivc
cansion, divcrsifica9ion and modcrniza9ion.
Esscn9ially sucI rojcc9s involvc a Iugc amoun9 of invcs9mcn9.
HigI ra9c of infla9ion, scvcrc cos9 cscala9ion, Icavy 9aa9ion and
mcagcr in9crnal rcsourccs forccd many comanics 9o lool for
al9crna9ivc mcans of financing 9Ic rojcc9s.
Lcasing Ias cmcrgcd as a ncw sourcc of financing cai9al assc9s.
Lcasing is an arrangcmcn9 lc9wccn 9wo ar9ics, 9Ic lcasing comany
or lcssor and 9Ic uscr or lcsscc, wIcrcly 9Ic lcssor arrangcs 9o luy
cai9al cquimcn9 for 9Ic usc of 9Ic lcsscc for an agrccd criod of
9imc in rc9urn for 9Ic aymcn9 of rcn9. TIc rcn9als arc rcdc9crmincd
and ayallc a9 ficd in9crvals of 9imc according 9o 9Ic mu9ual
convcnicncc of lo9I 9Ic ar9ics. Howcvcr, 9Ic lcssor rcmains 9Ic
owncr of 9Ic cquimcn9 ovcr 9Ic rimary criod.
Dy rcsor9ing 9o lcasing, 9Ic lcsscc comany is allc 9o cloi9 9Ic
cconomic valuc of 9Ic cquimcn9 ly using i9 as if Ic owncd i9
wi9Iou9 Iaving 9o ay for i9s cai9al cos9. Lcasc rcn9als can lc
convcnicn9ly aid ovcr 9Ic lcasc criod ou9 of rofi9s carncd from 9Ic
usc of 9Ic cquimcn9 and 9Ic re3t Is ce3t perce3t tax deductIbIe.
TIus in a con9rac9 of lcasc 9Icrc arc 9wo ar9ics involvcd (i} lcssor
and 9Ic lcsscc.
TIc lcssor can lc a comany, a coocra9ivc socic9y, a ar9ncrsIi
firm or an individual in manufac9uring or allicd ac9ivi9ics. TIc lcsscc
can lc cvcn a doc9or or any o9Icr sccialis9s wIo usc cos9ly
cquimcn9 for 9Ic rac9icc of Iis rofcssion.
(1} TIc lcsscc Ias 9o dccidc 9Ic assc9 rcquircd and sclcc9 9Ic sulicr.
Hc Ias 9o dccidc alou9 9Ic dcsign sccifica9ions, 9Ic ricc,
warran9ics, 9crms of dclivcry, scrvicing c9c.
(2} TIc lcsscc 9Icn cn9crs in9o a lcasc agrccmcn9 wi9I 9Ic lcssor. TIc
lcasc agrccmcn9 con9ains 9Ic 9crms and condi9ions of 9Ic lcasc sucI
(a} TIc lasic lcasc criod during wIicI 9Ic lcasc is irrccovcrallc.
(l} TIc 9iming and amoun9 of criodical rcn9al aymcn9s during 9Ic
lcasc criod.
(c} Dc9ails of any o9ion 9o rcncw 9Ic lcasc or 9o urcIasc 9Ic assc9 a9
9Ic cnd of 9Ic criod.
(d} Dc9ails rcgarding aymcn9 of cos9 of main9cnancc and rcairs, 9acs,
insurancc and o9Icr ccnscs.
(3} f9cr 9Ic lcasc agrccmcn9 is signcd 9Ic lcssor con9ac9s 9Ic
manufac9urcr and rcqucs9s Iim 9o suly 9Ic assc9 9o 9Ic lcsscc.
TIc lcssor malcs aymcn9 9o 9Ic manufac9urcr af9cr 9Ic assc9 Ias
lccn dclivcrcd and accc9cd ly 9Ic lcsscc.
TIc lcasc agrccmcn9 can lc classificd lroadly
in9o four ca9cgorics.
1. FI3a3cIaI Lease
dvan9agcs of Lcasc
Pcrmi9 l9crna9ivc Usc of Funds
Fas9cr and CIcacr Crcdi9
Facili9a9cs ddi9ional Dorrowings
Pro9cc9ion agains9 olsolcsccncc
No Fcs9ric9ivc Covcnan9s
Hundrcd Pcrccn9 Financing
Doon 9o Small Firm
Disadvan9agcs of Lcasing
Lcasc is no9 sui9allc modc of rojcc9 financc. TIis is lccausc rcn9als arc
rcayallc soon af9cr cn9cring in9o lcasc agrccmcn9 wIilc in ncw rojcc9s
casI gcncra9ion may s9ar9 only af9cr a long gcs9a9ion criod.
Ccr9ain 9a lcncfi9s/inccn9ivcs sucI as sulsidy may no9 lc availallc on
lcascd cquimcn9.
TIc valuc of rcal assc9s sucI as land and luilding may incrcasc during lcasc
criod. n sucI a casc 9Ic lcsscc loscs 9Ic advan9agc of a o9cn9ial cai9al
TIc cos9 of financing is gcncrally IigIcr 9Ian 9Ia9 of dcl9 financing.
manufac9urcr wIo wan9s 9o discon9inuc a ar9icular linc of lusincss will
no9 in a osi9ion 9o 9crmina9c 9Ic con9rac9 ccc9 ly aying Icavy cnal9ics.
f i9 is a owncd assc9 9Ic manufac9urcr can scll 9Ic cquimcn9 a9 Iis will.
f 9Ic lcsscc is no9 allc 9o ay rcn9als rcgularly, 9Ic lcssor would suffcr a
loss ar9icularly wIcn 9Ic assc9 is a soIis9ica9cd onc and lcss liquid.
n casc of lcasc agrccmcn9, i9 is lcssor wIo Ias urcIascd 9Ic assc9 from 9Ic
sulicr and no9 9Ic lcsscc. Hcncc, 9Ic lcsscc ly Iimsclf is no9 cn9i9lcd 9o
any ro9cc9ion in casc 9Ic sulicr commi9s lrcacI of warran9ics in rcscc9
of 9Ic lcascd assc9s.
n 9Ic alscncc of cclusivc laws dcaling wi9I 9Ic lcasc 9ransac9ion, scvcral
rollcms cro u lc9wccn lcssor and lcsscc rcsul9ing in unncccssary
comlica9ions and avoidallc 9cnsion
HIre Purcbase
HP is a mc9Iod of sclling goods, goods arc lc9 ou9 on Iirc ly a financc
comany (crcdi9or} 9o 9Ic Iircr. TIc luycr is rcquircd 9o ay an agrccd
amoun9 in criodical ins9allmcn9s during a givcn criod. TIc owncrsIi of
9Ic rocr9y rcmains wi9I crcdi9or and asscs on 9o Iircr on 9Ic aymcn9 of
las9 ins9allmcn9.
TIc luycr 9alcs osscssion of goods immcdia9cly and agrccs 9o ay 9Ic 9o9al
Iirc urcIasc ricc in ins9allmcn9s.
EacI ins9allmcn9 is 9rca9cd as Iirc cIargcs.
TIc owncrsIi of 9Ic goods asscs from luycr 9o scllcr on 9Ic aymcn9 of
9Ic ins9allmcn9.
n casc 9Ic luycr malcs any dcfaul9 in 9Ic aymcn9 of any ins9allmcn9 9Ic
scllcr Ias rigI9 9o rc osscs 9Ic goods from 9Ic luycr and forfci9 9Ic amoun9
alrcady rcccivcd 9rca9ing i9 as Iirc cIargc.
TIc Iircr Ias 9Ic rigI9 9o 9crmina9c 9Ic agrccmcn9 any 9imc lcforc 9Ic
rocr9y asscs, Ic Ias 9Ic o9ion 9o rc9urn 9Ic goods in wIicI casc Ic
nccd no9 ay ins9allmcn9s falling duc 9Icrcaf9cr.
Howcvcr, Ic can no9 rccovcr 9Ic sums alrcady aid as sucI sums lcgally
rcrcscn9 Iirc cIargc on 9Ic goods in qucs9ion.
TIc Iirc PurcIasc c9, 1972 dcfincs HP agrccmcn9 as an agrccmcn9 undcr
wIicI goods arc lc9 on Iirc Iircr Ias an o9ion 9o urcIasc 9Icm according
9o 9Ic 9crms of agrccmcn9 undcr wIicI.
Paymcn9 is 9o lc madc in ins9allmcn9s ovcr a sccificd criod.
TIc osscssion is dclivcrcd 9o 9Ic Iircr a9 9Ic 9imc of cn9cring in9o a
TIc rocr9y asscs 9o 9Ic Iircr on aymcn9 of 9Ic las9 ins9allmcn9.
EacI ins9allmcn9 is 9rca9cd as Iirc cIargc & if dcfaul9 is madc in aymcn9 of
ins9allmcn9, 9Ic scllcr is cn9i9lcd 9o 9alc away 9Ic goods.
TIc Iircr/urcIascr is frcc 9o rc9urn 9Ic goods wi9Iou9 lcing rcquircd 9o
ay any fur9Icr ins9allmcn9s falling duc af9cr 9Ic rc9urn.
HIre Purcbase Agreeme3t
s 9Ic agrccmcn9 in wri9ing and signcd ly lo9I ar9ics incorora9ing
(i} TIc dcscri9ion of goods in a manncr sufficicn9 9o idcn9ify 9Icm.
(ii} TIc Iirc urcIasc ricc of 9Ic goods.
(iii} TIc da9c of commcnccmcn9 of 9Ic agrccmcn9.
(iv} TIc numlcr of ins9allmcn9s in wIicI Iirc urcIasc ricc is 9o lc aid,
9Ic amoun9, and duc da9c.
HigIcr urcIasc 9ransac9ion is diffcrcn9 from crcdi9 salc. n casc of salc
owncrsIi and osscssion is 9ransfcrrcd 9o 9Ic urcIascr simul9ancously, in
Iirc urcIasc, 9Ic owncrsIi rcmains wi9I 9Ic scllcr un9il las9 ins9allmcn9 is
Par9iculars Lcasing Hirc PurcIasc
OwncrsIi TIc owncrsIi rcmains wi9I 9Ic
lcssor 9IrougIou9 and 9Ic lcsscc
(Iircr} Ias no o9ion 9o urcIasc
9Ic goods.
TIc owncrsIi rcmains wi9I 9Ic luycr
& 9Ic 9i9lc is asscd on 9o Iircr oncc
Ic ays las9 ins9allmcn9.
Mc9Iod of
Lcasing is a mc9Iod of financing
lusincss assc9s .
Hirc urcIasc is a mc9Iod of
financing lo9I lusincss assc9s and
consumcr ar9iclcs.
Dcrccia9ion dcrccia9ion and invcs9mcn9
allowancc can no9 lc claimcd ly
9Ic lcsscc.
dcrcca9ion and invcs9mcn9 allowancc
can lc claimcd ly 9Ic Iircr.
Ta Dcncfi9s TIc cn9irc lcasc rcn9al is 9a
dcduc9illc ccnsc
Only 9Ic in9crcs9 comoncn9 of 9Ic
Iirc urcIasc ins9allmcn9 is 9a
TIc lcsscc, no9 lcing 9Ic owncr of
9Ic assc9, docs no9 cnjoy 9Ic
salvagc valuc of 9Ic assc9.
TIc Iircr, in urcIasc, lcing 9Ic
owncr of 9Ic assc9, cnjoys salvagc
valuc of 9Ic assc9.
Dcosi9 Lcsscc is no9 rcquircd 9o
malc any dcosi9
20% dcosi9 is rcquircd in Iirc
Wi9I lcasc, wc rcn9 wi9I Iirc urcIasc wc luy 9Ic
Par9iculars Lcasing Hirc PurcIasc
Exte3t oI
9 is 100% financing. No
immcdia9c down aymcn9
or margin moncy ly 9Ic
lcsscc is rcquircd.
Margin of 2025 % of 9Ic cos9
of 9Ic assc9 is 9o lc aid ly
9Ic Iircr.
n casc of financc lcasc
only, 9Ic main9cnancc of
lcascd assc9 is 9Ic
rcsonsilili9y of 9Ic lcsscc.
TIc cos9 of main9cnancc of 9Ic
Iircd assc9 is 9o lc lornc ly
9Ic Iircr Iimsclf.
ReportI3g TIc lcascd assc9s arc
sIown ly way of foo9 no9c
only .
TIc assc9 on Iirc urcIasc is
sIown in 9Ic lalancc sIcc9 of
9Ic Iircr.
Ve3ture CapItaI
TIc concc9 of vcn9urc cai9al is lascd on HFHF concc9.
9 is lusincss arca of indus9rial financing ly various financial
ins9i9u9ions sc9u in ndia 9o romo9c indus9rics.
Somc financial ins9i9u9ions givc sccd cai9al or Fisl cai9al Fund 9o
Icl ncw cn9rcrcncurs.
Howcvcr, mos9 of 9Ic F follow 9Ic cri9cria sucI as safc9y, sccuri9y,
liquidi9y and rofi9alili9y and no9 o9cn9iali9y.
TIc cai9al marlc9 & i9s in9crmcdiary do no9 rovidc vcn9urc cai9al.
ndia is oiscd for a 9ccInological rcvolu9ion wi9I 9Ic cmcrgcncc of
ncw lrccd of cn9rcrcncurs wi9I rcquircd rofcssional 9cmcramcn9
and 9ccInical lnowIow.
To malc 9Ic innova9ivc 9ccInology of 9Ic cn9rcrcncurs a succcssful
lusincss vcn9urc, suor9 in all rcscc9s and morc ar9icularly in
9Ic form of financial assis9ancc is all 9Ic morc csscn9ial.
TIis Ias ncccssi9a9cd 9Ic sc99ing u of vcn9urc cai9al financing
'Vcn9urc Cai9al' rcfcrs 9o, invcs9mcn9 in ncw and 9ricd cn9crriscs
9Ia9 arc lacling a s9allc rccord of grow9I.
Vcn9urc cai9al rcfcrs 9o 9Ic commi9mcn9 of cai9al as sIarcIolding,
for 9Ic formula9ion and sc99ing u of small firms sccializing in ncw
idcas or ncw 9ccInologics.
9 is no9 mcrcly an injcc9ion of funds in9o a ncw firm; i9 is a
simul9ancous inu9 of slill nccdcd 9o sc9 u 9Ic firm, dcsign i9s
marlc9ing s9ra9cgy and organizc and managc i9.
9 is an associa9ion wi9I succcssivc s9agcs of firm's dcvclomcn9 wi9I
dis9inc9ivc 9ycs of financing aroria9c 9o cacI s9agc of
VC is long9crm risl cai9al 9o financc IigI 9ccInology rojcc9s
wIicI involvc risl lu9 a9 9Ic samc 9imc Ias s9rong o9cn9ial for
vcn9urc cai9al comany is dcfincd as a financing ins9i9u9ion
wIicI joins an cn9rcrcncur as a coromo9cr in a rojcc9 and
sIarcs 9Ic risls and rcwards of 9Ic cn9crrisc.
Features oI Ve3ture CapItaI
Normally, i9 is in 9Ic form of an cqui9y ar9icia9ion. 9 may lc in 9Ic
form of convcr9illc dcl9 or long 9crm loan.
nvcs9mcn9 is madc only in IigI risl lu9 IigI grow9I o9cn9ial
VC is availallc only for commcrcializa9ion of ncw idcas or ncw
9ccInologics and no9 for cn9crriscs wIicI arc cngagcd in 9rading,
looling, financial scrviccs, agcncy, liaison worl or rcscarcI and
VC joins 9Ic cn9rcrcncur as a coromo9cr in rojcc9s and sIarc 9Ic
risls and rcwards of 9Ic cn9crrisc.
TIcrc is con9inuous involvcmcn9 in lusincss af9cr maling an
invcs9mcn9 ly 9Ic invcs9or.
Oncc 9Ic rojcc9 is succcssful 9Ic VC disinvcs9s Iis Ioldings ci9Icr
9o 9Ic romo9crs or in 9Ic marlc9. TIc lasic oljcc9ivc of invcs9mcn9
is no9 rofi9 lu9 cai9al arccia9ion a9 9Ic 9imc of disinvcs9mcn9.
VC is no9 jus9 injcc9ion of moncy lu9 also an inu9 nccdcd 9o sc9u
9Ic firm, dcsign i9s marlc9ing s9ra9cgy and organizc and managc i9.
nvcs9mcn9 is usually madc in small and mcdium scalc cn9crriscs.
ActI;ItIes oI VC Fu3ds
Providc sccd cai9al for indus9rics and suor9 a concc9 or idca.
Providc addi9ional cai9al 9o ncw lusincss a9 various s9agcs of
Dridgc financc/rojcc9 financing.
Equi9y financing 9o managcmcn9 grous for 9aling ovcr o9Icr
Cai9al 9o ncw cn9rcrcncurs is forcign ocra9ions.
Cai9al 9o ma9urc cn9crriscs for cansion, divcrsifica9ion and
FcscarcI and dcvclomcn9 financing for roduc9 dcvclomcn9.
S9ar9u cai9al for ini9ial roduc9ion and marlc9ing.
Dcvclomcn9 financing for facili9a9ing ullic issucs.
cquisi9ion or luyou9 financing for acquiring ano9Icr firm.
Turnaround financing for 9urning around a sicl uni9.
Ad;a3tages to 3;estI3g PubIIc
TIc invcs9ing ullic will lc allc 9o rcducc risl significan9ly agains9
unscruulous managcmcn9, if 9Ic ullic invcs9 in vcn9urc fund wIo
in 9urn will invcs9 in cqui9y of ncw lusincss. Wi9I 9Icir ccr9isc in
9Ic ficld and con9inuous involvcmcn9 in 9Ic lusincss 9Icy would lc
allc 9o s9o malrac9iccs ly managcmcn9.
Ad;a3tages to Promoters
TIc cn9rcrcncur for 9Ic succcss of ullic issuc is rcquircd 9o
convincc undcrwri9crs, lrolcrs and invcs9ors lu9 9o ol9ain vcn9urc
cai9al assis9ancc, Ic will lc rcquircd 9o scll Iis idca 9o jus9ify 9Ic
officials of 9Ic vcn9urc fund. Vcn9urc Cai9al rovidcs a solid cai9al
lasc for fu9urc grow9I ly injcc9ing long9crm cqui9y financing.
BusI3ess Part3er: TIc vcn9urc cai9alis9s ac9 as lusincss ar9ncrs
wIo sIarc 9Ic rcwards as wcll as 9Ic risls.
Me3torI3g: Vcn9urc Cai9alis9s rovidc s9ra9cgic, ocra9ional 9ac9ical
and financial advicc lascd on as9 ccricncc wi9I o9Icr comanics
in similar si9ua9ions.
AIIIa3ces: TIc vcn9urc cai9alis9s Icl in rccrui9mcn9 of lcy
crsonncl, imroving rcla9ionsIi wi9I in9crna9ional marlc9s, co
invcs9mcn9 wi9I o9Icr VC firms and in dccision maling.
Fcduccs 9imc for imlcmcn9a9ion of ncw innova9ivc idcas.
9 is frcc from lurcaucracy/rcd 9aism,
VC facili9a9cs wi9Iou9 margin.
Oncc 9Ic firm s9ar9s carning rofi9s, i9 will lc vcry casy for 9Icm 9o
raisc rcsourccs from rimary cai9al marlc9 in 9Ic form of cqui9y
and dcl9s.
VC Icls 9o cIannclisc invcs9mcn9 in ncw IigI9ccI lusincss or 9Ic
cis9ing sicl lusincss.
TIc cconomy wi9I wcll dcvclocd vcn9urc cai9al nc9worl induccs
9Ic cn9ry of largc numlcr of 9ccInocra9s in indus9ry, Icls in
s9alilizing indus9rics and in crca9ing a ncw sc9 of 9raincd
9ccInocra9s 9o luild and managc mcdium and largc indus9rics,
rcsul9ing in fas9cr indus9rial dcvclomcn9.
vcn9urc cai9al firm scrvcs as an in9crmcdiary lc9wccn invcs9ors
looling for IigI rc9urns for 9Icir moncy and cn9rcrcncurs in scarcI
of nccdcd cai9al for 9Icir s9ar9 us.
9 also avcs 9Ic way for riva9c scc9or 9o sIarc 9Ic rcsonsilili9y
wi9I ullic scc9or.
TIc following arc 9Ic guidclincs issucd ly 9Ic Covcrnmcn9 of ndia.
TIc ullic scc9or financial ins9i9u9ions, S9a9c Danl of ndia,
scIcdulcd lanls, forcign lanls and 9Icir sulsidiarics arc cligillc for
sc99ing 9Ic vcn9urc cai9al funds wi9I a minimum sizc of Fs.10 Crorc
and a dcl9 cqui9y ra9io of 1 . 1.5
f 9Icy dcsirc 9o raisc funds from 9Ic ullic, romo9crs con9rilu9ion
sIould lc minimum of 40% of cai9al.
Forcign cqui9y u 9o 25 cr ccn9 suljcc9 9o ccr9ain condi9ions is
NF invcs9mcn9 u 9o 74% on a rca9riallc lasis and 25% 9o 40% on
a non rca9riallc lasis crmi99cd.
TIc vcn9urc cai9al comanics and vcn9urc cai9al funds can lc sc9
u as join9 vcn9urc lc9wccn s9iula9cd agcncics and non
ins9i9u9ional romo9crs lu9 9Ic cqui9y Iolding of sucI romo9crs
sIould no9 ccccd 20 crccn9 and sIould no9 lc largcs9 singlc
Vcn9urc cai9al assis9ancc sIould go 9o cn9crriscs wi9I a 9o9al
invcs9mcn9 of no9 morc 9Ian Fs.10 Crorc.
TIc vcn9urc cai9al comany (VCC} Vcn9urc Cai9al Fund (VCF} sIould lc managcd
ly rofcssionals and sIould lc indccndcn9 of 9Ic arcn9 organisa9ion.
TIc VCC/VCF will no9 lc allowcd 9o undcr9alc ac9ivi9ics sucI as 9rading, lrooling,
moncy marlc9 ocra9ions, lills discoun9ing, in9cr corora9c lcnding.
VC arc allowcd 9o invcs9mcn9 in lcasing 9o 9Ic c9cn9 of 15% of 9Ic 9o9al funds
Lis9ing of VCCs/VCF can lc according 9o 9Ic rcscrilcd norms and undcrwri9ing of
issucs a9 9Ic romo9cr's discrc9ion.
crson Iolding a osi9ion or full 9imc cIairman/rcsidcn9, CEO, MD or ED in a
comany will no9 lc allowcd 9o Iold 9Ic samc osi9ion simul9ancously in 9Ic VCF.
TIc Vcn9urc Cai9al assis9ancc sIould lc c9cndcd 9o.
(a} TIc cn9crrisc Iaving invcs9mcn9 u9o Fs. 10 crorcs in 9Ic rojcc9.
(l} TIc 9ccInology involvcd sIould lc ncw and i9 sIould incorora9c significan9
imrovcmcn9 ovcr 9Ic cis9ing 9ccInologics in ndia.
(c} TIc romo9crs sIould lc ncw, rofcssionally or 9ccInically qualificd wi9I inadcqua9c
(d} TIc cn9crrisc sIould lc cs9allisIcd in 9Ic comany form cmloying rofcssionally
qualificd crson for main9cnancc of accoun9s.
(c} SIarc ricing a9 9Ic 9imc of disinvcs9mcn9 ly a ullic issuc or gcncral salc offcr ly
9Ic comany or fund may lc donc suljcc9 9o 9Iis lcing calcula9cd an oljcc9ivc
cri9cria and 9Ic lasis discloscd adcqua9cly 9o 9Ic ullic.
Mu9ual Funds
Dcfini9ion. SED Fcgula9ions, 1993 dcfincs a Mu9ual fund as u und
cstuIsIcd n tIc on o u tust I u sonso, to usc noncs I tIc
tustccs tIougI tIc suc o unts to tIc uIc, undc onc o noc
scIcncs, o nucstng n sccutcs n accoduncc utI tIcsc
ccording 9o Wcs9on J. Frcd and DrigIam, MF arc cooutons
uIcI uccct csouccs on suucs und tIcn usc tIcsc to Iu stocIs,
ong tcn Ionds, sIot tcn dcIt nstuncnts ssucd I Iusncss o
goucnncnt unts; tIcsc cooutons oo unds und tIus cducc sI
I ducscuton
Mu9ual fund scIcmcs can lroadly lc classificd in9o many 9ycs as givcn
On 9Ic Dasis of Eccu9ion and Ocra9ion.
(A) CIose-e3ded Fu3ds
(B) Ope3 e3ded Fu3ds
CIose-e3ded Fu3ds:
Undcr 9Iis scIcmc, 9Ic corus of 9Ic fund and i9s dura9ion arc rcficd. n
o9Icr words, 9Ic corus of 9Ic fund and 9Ic numlcr of uni9s arc
Oncc 9Ic sulscri9ion rcacIcs 9Ic rcdc9crmincd lcvcl, 9Ic cn9ry of invcs9ors
is closcd.
f9cr 9Ic ciry of 9Ic ficd criod, 9Ic cn9irc corus is disinvcs9cd and 9Ic
rocccds arc dis9rilu9cd 9o 9Ic various uni9 Ioldcrs in roor9ion 9o 9Icir
Iolding. TIus, 9Ic fund ccascs 9o lc a fund, af9cr 9Ic final dis9rilu9ion.
Features oI CIose-E3ded Fu3ds:
(1} TIc main oljcc9ivc is cai9al arccia9ion.
(2} From 9Ic invcs9ors' oin9 of vicw, i9 may a99rac9 morc 9a sincc 9Ic
cn9irc cai9al arccia9ion is rcalizcd in9o a9 onc s9agc i9sclf.
(3} TIc criod and/or 9Ic 9argc9 amoun9 of 9Ic fund is dcfini9c and ficd
(4} Ccncrally, 9Ic riccs of closcdcndscIcmc uni9s arc quo9cd a9 a
(5} Oncc 9Ic criod is ovcr and/or 9Ic 9argc9 is rcacIcd, 9Ic invcs9ors.
canno9 urcIasc any morc uni9s.
(6} f 9Ic marlc9 condi9ion is no9 favourallc, i9 may also affcc9 9Ic
invcs9or sincc Ic may no9 gc9 9Ic full invcs9cd amoun9.
(7} 9 9Ic 9imc of rcdcm9ion, 9Ic cn9irc invcs9mcn9 is liquida9cd and
9Ic rocccds arc dis9rilu9cd among 9Ic uni9 Ioldcrs.
(8} TIcsc uni9s arc ullicly 9radcd 9IrougI s9ocl ccIangc and
gcncrally, 9Icrc is no rcurcIasc facili9y ly 9Ic fund.
(9} TIc wIolc fund is availallc for 9Ic cn9irc dura9ion of 9Ic scIcmc
and 9Icrc will no9 lc any rcdcm9ion dcmands lcforc i9s ma9uri9y.
Hcncc, 9Ic fund managcr can managc 9Ic invcs9mcn9s cfficicn9ly and
rofi9ally wi9Iou9 9Ic ncccssi9y of main9aining any liquidi9y.
(B) Ope3-e3ded Fu3ds:
TIc sizc of 9Ic fund and 9Ic criod of 9Ic fund is
no9 rcdc9crmincd. TIc invcs9ors arc frcc 9o luy
and scll any numlcr of uni9s a9 any oin9 of
9imc. For ins9ancc, 9Ic Uni9 ScIcmc (1964} of 9Ic
Uni9 Trus9 of ndia is an ocncndcd onc, lo9I in
9crms of criod and 9argc9 amoun9. nylody can
luy 9Iis uni9 a9 any 9imc and scll i9 also a9 any
9imc a9 Iis discrc9ion.
Features oI Ope3-E3ded Fu3d:
1. Oljcc9ivc of 9Iis fund is incomc gcncra9ion. TIc
invcs9ors gc9 dividcnd, rigI9s or lonuscs as rcwards for
9Icir invcs9mcn9.
2. TIc fund managcr Ias 9o managc liquidi9y lccausc Ic
Ias 9o mcc9 9Ic rcdcm9ion dcmands a9 any 9imc madc
during 9Ic lifc of 9Ic scIcmc.
3. Frcc cn9ry and ci9 for invcs9ors in an ocncndcd fund.
4. TIc uni9s arc no9 lis9cd on 9Ic s9ocl ccIangc, 9Icir
riccs arc linlcd 9o 9Ic NV of 9Ic uni9s wIicI varics
from 9imc 9o 9imc.
5. Uni9s arc no9 ullicly 9radcd lu9, 9Ic fund is rcady 9o
rcurcIasc 9Icm and rcscll 9Icm a9 any 9imc.
6. TIc invcs9or is offcrcd ins9an9 liquidi9y in 9Ic scnsc 9Ia9
9Ic uni9s can lc sold on any worling day 9o 9Ic fund.
7. Pricc of 9Ic uni9 is vcry closc 9o 9Icir NV. TIc fund
fics a diffcrcn9 ricc for 9Icir urcIascs and salcs.
Features oI Ope3-E3ded Fu3d:
1. Oljcc9ivc of 9Iis fund is incomc gcncra9ion. TIc invcs9ors gc9
dividcnd, rigI9s or lonuscs as rcwards for 9Icir invcs9mcn9.
2. TIc fund managcr Ias 9o managc liquidi9y lccausc Ic Ias 9o mcc9
9Ic rcdcm9ion dcmands a9 any 9imc madc during 9Ic lifc of 9Ic
3. Frcc cn9ry and ci9 for invcs9ors in an ocncndcd fund.
4. TIc uni9s arc no9 lis9cd on 9Ic s9ocl ccIangc, 9Icir riccs arc
linlcd 9o 9Ic NV of 9Ic uni9s wIicI varics from 9imc 9o 9imc.
5. Uni9s arc no9 ullicly 9radcd lu9, 9Ic fund is rcady 9o rcurcIasc
9Icm and rcscll 9Icm a9 any 9imc.
6. TIc invcs9or is offcrcd ins9an9 liquidi9y in 9Ic scnsc 9Ia9 9Ic uni9s
can lc sold on any worling day 9o 9Ic fund. n fac9, 9Ic fund
ocra9or jus9 lilc a lanl accoun9 wIcrcin onc can gc9 casI across
9Ic coun9cr for any numlcr of uni9s sold.
7. Ccncrally, 9Ic lis9cd riccs arc vcry closc 9o 9Icir Nc9 ssc9 Valuc.
TIc fund fics a diffcrcn9 ricc for 9Icir urcIascs and salcs.
MutuaI Fu3ds O3 tbe BasIs oI 3come
(} 3come Fu3ds aims a9 gcncra9ing and dis9rilu9ing rcgular
incomc 9o 9Ic mcmlcrs on a criodical lasis. 9 conccn9ra9cs
morc on 9Ic dis9rilu9ion of rcgular incomc and i9 also sccs
9Ia9 9Ic avcragc rc9urn is IigIcr 9Ian 9Ia9 of 9Ic incomc from
lanl dcosi9s.
%be maI3 Ieatures oI tbe 3come Fu3ds are-
1. TIc invcs9or is assurcd of rcgular incomc a9 criodic
in9crvals, say Ialf ycarly or ycarly and so on.
2. TIc main oljcc9ivc of 9Iis 9yc of Fund is 9o dcclarc rcgular
dividcnds and no9 cai9al arccia9ion.
3. TIc a99crn of invcs9mcn9 is oricn9cd 9owards IigI and ficd
incomc yiclding sccuri9ics lilc dclcn9urcs, londs c9c.
4. TIis is lcs9 sui9cd 9o 9Ic old and rc9ircd colc wIo may no9
Iavc any rcgular incomc.
5. 9 conccrns i9sclf wi9I sIor9 run gains only.
(B) Pure Growtb Fu3ds (Growtb OrIe3ted Fu3ds):
Crow9I funds conccn9ra9c mainly on long run gains i.c. cai9al arccia9ion.
TIcy do nc9 offcr rcgular incomc and 9Icy aim a9 cai9al arccia9ion in 9Ic
long run. Hcncc, 9Icy Iavc lccn dcscrilcd as Ncs9 Eggs invcs9mcn9s.
(C) BaIa3ced Fu3ds:
TIis is o9Icrwisc callcd incomccumgrow9I fund. 9 is no9Iing lu9 a
comlina9ion of lo9I incomc and grow9I funds. 9 aims a9 dis9rilu9ing
rcgular incomc as wcll as cai9al arccia9ion.
TIis is acIicvcd ly lalancing 9Ic invcs9mcn9s lc9wccn 9Ic IigI grow9I
cqui9y sIarcs and also 9Ic ficd incomc carning sccuri9ics.
(D) SpecIaIIsed Fu3ds:
TIcy offcr sccial scIcmcs so as 9o mcc9 9Ic sccific nccds of sccific
ca9cgorics of colc lilc cnsioncrs, widows, c9c. TIcrc arc also funds for
invcs9mcn9s in sccuri9ics of sccificd arca. For ins9ancc Jaan fund, Sou9I
Korca fund, c9c.
gain, ccr9ain funds may lc confincd 9o onc ar9icular scc9or or indus9ry
lilc fcr9iliscr, au9omolilcs, c9rolcum, c9c. TIcsc funds carry Icavy risls
sincc 9Ic cn9irc invcs9mcn9 is in onc indus9ry. Du9, 9Icrc arc IigI risl
9aling invcs9ors wIo rcfcr 9Iis 9yc of fund, of coursc, in sucI cascs, 9Ic
rcwards may commcnsura9c wi9I 9Ic risl 9alcn. TIc lcs9 camlc of 9Iis
9yc is 9Ic Pc9rolcum ndus9ry Funds in 9Ic US.
(E) Mo3ey-Maret MutuaI Fu3ds (MMMFs):
TIcsc funds arc lasically ocn cndcd mu9ual funds as sucI 9Icy Iavc all
9Ic fca9urc of 9Ic ocn cndcd fund. Du9, 9Icy invcs9 in IigIly liquid call
moncy marlc9 ins9rumcn9s lilc CP, CD, Tlills, c9c. TIcy ay moncy marlc9
ra9cs of in9crcs9.
nvcs9ors gcncrally usc i9 as a Parling Placc or s9o ga arrangcmcn9s for
9Icir casI rcsourccs 9ill 9Icy final1y dccidc alou9 9Ic rocr avcnuc for 9Icir
invcs9mcn9 i.c., long 9crm financial assc9s lilc londs and s9ocls.
Sincc MMMFs arc a ncw concc9 in ndia 9Ic FD Ias laid down ccr9ain
s9ringcn9 rcgula9ions.
For ins9ancc, 9Ic cn9ry 9o MMMFs is rcs9ric9cd only 9o scIcdulcd commcrcial
lanls and 9Icir sulsidiarics.
(F) %axatIo3 Fu3ds:
9aa9ion fund is lasically a grow9Ioricn9cd fund lu9, i9 offcrs 9a rcla9cs
9o 9Ic invcs9ors. 9 is sui9allc 9o salaricd colc wIo wan9 9o cnjoy 9a
rcla9cs ar9icularly during 9Ic mon9I of Fclruary and MarcI.
n ndia a9 rcscn9 9Ic law rcla9ing 9o 9a rcla9cs is covcrcd undcr Scc. 88 of
9Ic ncomc Ta c9, 1961.
n invcs9or is cn9i9lcd 9o gc9 20% rcla9c in ncomc Ta for invcs9mcn9s madc
undcr 9Iis fund suljcc9 9o a maimum invcs9mcn9 of Fs. , cr
Otber CIassIIIcatIo3:
(G) Le;eraged Fu3ds: TIcsc funds arc also callcd lorrowcd funds sincc
9Icy arc uscd rimarily 9o incrcasc 9Ic sizc of 9Ic valuc of or9folio of
a mu9ual fund.
(H) 3dex Fu3ds:
ndc funds rcfcrs 9o 9Iosc funds wIcrc 9Ic or9folios arc dcsigncd
in sucI a way 9Ia9 9Icy rcflcc9 9Ic comosi9ion of somc lroad lascd
marlc9 indc,
() OIIsbore MutuaI Fu3ds:
OffsIorc mu9ual funds arc 9Iosc funds wIicI arc mcan9 for NF
invcs9ors. TIcy arc rcgula9cd ly 9Ic rovisions of 9Ic forcign
coun9rics wIcrc 9Iosc funds arc rcgis9crcd.
(J) Bo3d Fu3ds:
TIcsc funds Iavc or9folio consis9ing mainly of ficd incomc
sccuri9ics lilc londs. TIc main 9Irus9 of 9Icsc funds is mos9ly on
incomc ra9Icr 9Ian cai9al gains.
(L) AggressI;e Growtb unds:
Oosi9c of lond funds. TIcsc funds arc cai9al gains oricn9cd and
9Ius 9Ic 9Irus9 arca of 9Icsc funds is 'cai9al gains'. Hcncc, 9Icsc
funds arc gcncrally invcs9cd in sccula9ivc s9ocls.
mporta3ceJAd;a3tages oI MutuaI Fu3ds:
(1} Offcring widc or9folio invcs9mcn9/Divcrsifica9ion 9o 9Ic
(2} ar9 from dividcnd, in9crcs9, cai9al aricia9ion MF also
offcr 9a lcncfi9s undcr scc9ion 80L of 9Ic ncomc Ta c9.
(3} MF suor9 & dcvclo cai9al marlc9.
(4} MF CIannclisc savings in 9o invcs9mcn9s.
(5} MF Providcs lc99cr yiclds 9Ian lanl dcosi9s.
(6} MF Promo9c indus9rial & cconomic dcvclomcn9
(7} MF rovidc ccr9isc rcscarcI oricn9cd advicc 9o invcs9or a9
low cos9.
(8} TIc managcmcn9 of 9Ic fund is gcncrally assigncd 9o
rofcssionals wIo arc wcll 9raincd and Iavc adcqua9c
ccricncc in 9Ic ficld of invcs9mcn9. TIc invcs9mcn9
dccisions of 9Icsc rofcssionals arc always laclcd ly
informcd judgcmcn9 and ccricncc. TIus, invcs9ors arc
assurcd of quali9y scrviccs in 9Icir lcs9 in9crcs9.
mporta3ceJAd;a3tages oI MutuaI Fu3ds:
9. MF rovidc flcilili9y and swi9cI ovcr o9ion 9o 9Ic invcs9ors.
10. MF rcducc 9Ic marlc9ing cos9 of ncw issucs. TIc romo9crs allo9 a
major sIarc of 9Ic PO 9o 9Ic mu9ual funds and 9Ius 9Icy arc
savcd from 9Ic marlc9ing cos9 of sucI issucs,
11. c9ing as suls9i9u9c for POs. n mos9 cascs invcs9ors arc no9 allc
9o gc9 allo9mcn9 in POs of comanics lccausc 9Icy arc of9cn
ovcrsulscrilcd many 9imcs. Morcovcr, 9Icy Iavc 9o aly for a
minimum of 500 sIarcs wIicI is vcry difficul9 ar9icularly for small
invcs9ors. Du9, in mu9ual funds, allo9mcn9 is morc or lcss
12. Kccing 9Ic moncy marlc9 ac9ivc. n individual invcs9or canno9
Iavc any acccss 9o moncy marlc9 ins9rumcn9s sincc 9Ic minimum
amoun9 of invcs9mcn9 is ou9 of Iis rcacI. On 9Ic o9Icr Iand, mu9ual
funds lcc 9Ic moncy marlc9 ac9ivc ly invcs9ing moncy on 9Ic
moncy marlc9 ins9rumcn9s.
TIc ndian Mu9ual funds arc cus9omcr focuscd, wcllmanagcd and
rcgula9cd financial in9crmcdiarics. TIc rofcssionals in 9Ic indus9ry
arc of a IigI calilcr and lring grca9 dcdica9ion and drivc 9o 9Icir
Fac9oring is dcfincd as 'a con9inuing lcgal
rcla9ionsIi lc9wccn a financial ins9i9u9ion
(9Ic fac9or} and a lusincss conccrn (9Ic
clicn9}, sclling goods or roviding scrviccs 9o
9radc cus9omcrs (9Ic cus9omcrs} on ocn
accoun9 lasis wIcrcly 9Ic Fac9or
urcIascs 9Ic clicn9s lool dcl9s (accoun9s
rcccivallcs} ci9Icr wi9I or wi9Iou9 rccoursc
9o 9Ic clicn9 and in rcla9ion 9Icrc9o con9rols
9Ic crcdi9 c9cndcd 9o cus9omcrs and
adminis9crs 9Ic salcs lcdgcrs.
lL ls Lhe ouLrlghL purchase of credlL approved
accounLs recelvables wlLh Lhe facLor assumlng bad
debL losses
lacLorlng provldes sales accounLlng servlce use of
flnance and proLecLlon agalnsL bad debLs
lacLorlng ls a process of lnvolce dlscounLlng by whlch
a caplLal markeL agency purchases all Lrade debLs
and offers resources agalnsL Lhem
LvoluLlon of facLorlng
1he Lerm facLor has lLs orlgln from Lhe LaLln word
'lacere'meanlng Lo geL Lhlngs done 1he dlcLlonary
deflnes a facLor as an agenL parLlcularly a mercanLlle
agenL lacLorlng has a long fasclnaLlng hlsLory whlch
Lraces back Lhrough several cenLurles
ln Lhe early sLages facLors were lLlneranL merchanLs
who were enLrusLed wlLh merchandlse belonglng Lo
lfferenL klnds of facLorlng servlces
ebL admlnlsLraLlon
1he facLor manages Lhe sales ledger of Lhe
cllenL company 1he cllenL wlll be saved of Lhe
admlnlsLraLlve cosL of book keeplng lnvolclng
credlL conLrol and debL collecLlon 1he facLor
uses hls compuLer sysLem Lo render Lhe sales
ledger admlnlsLraLlon servlces
lfferenL klnds of facLorlng servlces
Cred|t Informat|on lacLors provlde credlL
lnLelllgence Lo Lhelr cllenL and supply perlodlc
lnformaLlon wlLh varlous cusLomerwlse analysls
Cred|t rotect|on Some facLors also lnsure agalnsL
bad debLs and provlde wlLhouL recourse flnanclng
Invo|ce D|scount|ng or I|nanc|ng lacLors advance
7 Lo 80 agalnsL Lhe lnvolce of Lhelr cllenLs 1he
cllenLs mark a copy of Lhe lnvolce Lo Lhe facLors as
and when Lhey ralse Lhe lnvolce on Lhelr cusLomers
lfferenL klnds of facLorlng servlces
8aslcally Lhere are Lhree parLles Lo Lhe
facLorlng servlces as deplcLed below
Servlces rendered by facLor
lacLor evaluaLed credlLworLhlness of Lhe cusLomer
(buyer of goods)
lacLor flxes llmlLs for Lhe cllenL (seller) whlch ls an
aggregaLlon of Lhe llmlLs flxed for each of Lhe
cusLomer (buyer)
CllenL sells goods/servlces
CllenL asslgns Lhe debL ln favour of Lhe facLor
CllenL noLlfles on Lhe lnvolce a dlrecLlon Lo Lhe
cusLomer Lo pay Lhe lnvolce value of Lhe facLor
Servlces rendered by facLor
CllenL forwards lnvolce/copy Lo facLor along wlLh
recelpLed dellvery challans
lacLor provldes credlL Lo cllenL Lo Lhe exLenL of 80
of Lhe lnvolce value and also noLlfles Lo Lhe
lacLor perlodlcally follows wlLh Lhe cusLomer
When Lhe cusLomer pays Lhe amounL of Lhe lnvolce
Lhe balance of 0 of Lhe lnvolce value ls passed Lo
Lhe cllenL recoverlng necessary lnLeresL and oLher
lf Lhe cusLomer does noL pay Lhe facLor Lakes
recourse Lo Lhe cllenL
8eneflLs of facLorlng
1he cllenL wlll be relleved of Lhe work relaLlng Lo
sales ledger admlnlsLraLlon and debL collecLlon
1he cllenL can Lherefore concenLraLe more on
plannlng producLlon and sales
1he charges pald Lo a facLor whlch wlll be
marglnally hlgh aL 1 Lo 1 Lhan Lhe bank charges
wlll be more Lhan compensaLed by reducLlons ln
admlnlsLraLlve expendlLure
1hls wlll also lmprove Lhe currenL raLlo of Lhe cllenL
and consequenLly hls credlL raLlng
8eneflLs of facLorlng
1he subsldlarles of Lhe varlous banks have
been renderlng Lhe facLorlng servlces
1he facLorlng servlce ls more comprehenslve
ln naLure Lhan Lhe book debL or recelvable
flnanclng by Lhe bankers
1he forfalLlng owes lLs orlgln Lo a lrench
Lerm 'forfalL' whlch means Lo forfelL (or
surrender) one's rlghLs on someLhlng Lo
some one else
under Lhls mode of exporL flnance Lhen
exporLer forfalLs hls rlghLs Lo Lhe fuLure
recelvables and Lhe forfalLer loses recourse
Lo Lhe exporLer ln Lhe evenL of nonpaymenL
by Lhe lmporLer
lL ls a Lrade flnance exLended by a forfalLer Lo
an exporLer/seller for an exporL/sale
LransacLlon lnvolvlng deferred paymenL Lerms
over a long perlod aL a flrm raLe of dlscounL
lorfalLlng ls generally exLended for exporL of
caplLal goods commodlLles and servlces where
Lhe lmporLer lnslsLs on supplles on credlL
1he exporLer has recourse Lo forfalLlng usually ln
cases where Lhe credlL ls exLended for long duraLlons
buL Lhere ls no prohlblLlon for exLendlng Lhe faclllLy
where Lhe credlLs are maLurlng ln perlods less Lhan
one year
CredlLs for commodlLles or consumer goods ls
generally for shorLer duraLlon wlLhln one year
lorfalLlng servlces are exLended ln such cases as well
1here are flve parLles ln a LransacLlon of
forfalLlng 1hese are
1 LxporLer
LxporLer's bank
lmporLer's bank and
1he exporLer and lmporLer negoLlaLe Lhe proposed
exporL sale conLracL 1hese are Lhe prellmlnary
8ased on Lhese dlscusslons Lhe exporLer
approaches Lhe forfalLer Lo ascerLaln Lhe Lerms for
1he forfalLer collecLs from exporLer all Lhe relevanL
deLalls of Lhe proposed LransacLlon vlz deLalls
abouL Lhe lmporLer supply and credlL Lerms
documenLaLlon eLc ln order Lo ascerLaln Lhe
counLry rlsk and credlL rlsk lnvolved ln Lhe
ependlng upon Lhe naLure and exLenL of Lhese
rlsks Lhe forfalLer quoLes Lhe dlscounL raLe
1he exporLer has now Lo Lake care LhaL Lhe
dlscounL raLe ls reasonable and would be
accepLable Lo hls buyer
Pe wlll Lhen quoLe a conLracL prlce Lo Lhe
overseas buyer by loadlng Lhe dlscounL raLe
commlLmenL fee eLc on Lhe sale prlce of Lhe
goods Lo be exporLed
lf Lhe deals go Lhrough Lhe exporLer and forfalLer
slgn a conLracL
LxporL Lakes place agalnsL documenLs
guaranLeed by Lhe lmporLer's bank
1he exporLer dlscounLs Lhe blll wlLh Lhe
forfalLer and Lhe forfalLer presenLs Lhe same
Lo Lhe lmporLer for paymenL on due daLe or
even can sell lL ln secondary markeL
ocumenLaLlon and cosL
lorfalLlng LransacLlon ls usually covered elLher by a
promlssory noLe or blll of exchange ln elLher case
lL has Lo be guaranLeed by a bank or blll of
exchange may be 'avalled' by Lhe lmporLer' bank
1he 'Aval' ls an endorsemenL made on blll of
exchange or promlssory noLe by Lhe guaranLeelng
bank by wrlLlng 'per aval' on Lhese documenLs
under proper auLhenLlcaLlon
1he forfelLlng cosL for a LransacLlon wlll be ln Lhe
form of 'commlLmenL fee' 'dlscounL fee' and
'documenLaLlon fee'
,echanlsm a case
LxporLlmporL 8ank of lndla (Lxl, 8ank) has sLarLed wlLh
a scheme Lo Lhe lndlan exporLers by worklng ouL an
lnLermedlary beLween Lhe exporLer and Lhe forfalLer
1he scheme Lakes place ln Lhe followlng sLages
1 negoLlaLlons belng beLween exporLer and lmporLer wlLh
regard Lo conLracL prlce perlod of credlL raLe of lnLeresL
LxporLer approaches Lxl, 8ank wlLh all Lhe relevanL
deLalls for an lndlcaLlve dlscounL quoLe
Lxl, 8ank approaches an overseas forfalLer obLaln Lhe
quoLe and geLs back Lo exporLer wlLh Lhe offer
,echanlsm a case
LxporLer and lmporLer flnallse Lhe Lerm of conLracL
All cosLs levled by a forfalLer are Lo be Lransferred Lo
Lhe overseas buyer As such dlscounL and oLher
charges are loaded ln Lhe baslc conLracL value
LxporLer approaches Lxl, 8ank and lL ln Lurn Lhe
forfalLer for Lhe flrm quoLe 1he exporLer conflrm Lhe
accepLance of Lhe arrangemenL
6 LxporL Lakes place shlpplng documenLs along wlLh
blll of exchange promlssory noLe have Lo be ln Lhe
prescrlbed formaL
,echanlsm a case
7lmporLer's bank dellvers shlpplng documenLs Lo
lmporLer agalnsL accepLance of blll of exchange or on
recelpL of promlssory noLe from Lhe lmporLer as Lhe
case may be and send Lhese Lo exporLer's bank wlLh
lLs guaranLee
8 LxporLer's bank geLs blll of exchange/promlssory
noLe endorsed wlLh Lhe words 'WlLhouL 8ecourse'
from Lhe exporLer and presenL Lhe documenL(s) Lo
Lxl,8ank who ln Lurn send lL Lo Lhe forfalLer
,echanlsm a case
9 lorfalLer dlscounLs Lhe documenLs aL Lhe pre
deLermlned raLe and passes on funds Lo Lxl, 8ank
for onward dlsbursemenL Lo exporLer's bank nosLro
accounL of exporLer's bank
10LxporLer's bank credlLs Lhe amounL Lo Lhe exporLer
11lorfalLer presenLs Lhe documenLs on due daLe Lo Lhe
lmporLer's bank and recelves Lhe dues
1LxporLer's bank recovers Lhe amounL from Lhe
lllL8LnCL 8L1WLLn lAC1C8lnC
An lC8lAl1lnC
1SulLable for ongolng open
accounL sales noL backed
by LC or accepLed bllls or
usually provldes flnanclng
for shorLLerm credlL perlod
of upLo 180 days
1 CrlenLed Lowards slngle
LransacLlons backed by LC
or bank guaranLee
llnanclng ls usually for
medlum Lo longLerm credlL
perlods from 180 days upLo
7 years Lhough shorLerm
credlL of 0180 days ls also
avallable for large
lllL8LnCL 8L1WLLn lAC1C8lnC
An lC8lAl1lnC
8equlres a conLlnuous
arrangemenLs beLween
facLor and cllenL whereby
all sales are rouLed Lhrough
Lhe facLor
lacLor assumes
responslblllLy for collecLlon
helps cllenL Lo reduce hls
own overheads
Seller need noL rouLe or
commlL oLher buslness Lo
Lhe forfalLer eals are
concluded LransacLlonwlse
lorfalLer's responslblllLy
exLends Lo collecLlon of
forfelLed debL only LxlsLlng
flnanclng llnes remalns
lllL8LnCL 8L1WLLn lAC1C8lnC
An lC8lAl1lnC
SeparaLe charges are
applled for
credlL proLecLlon and
provlslon of lnformaLlon
Slngle dlscounL charges ls
applled whlch depend on
guaranLeelng bank and
counLry rlsk
credlL perlod lnvolved
currency of debL
Cnly addlLlonal charges ls
commlLmenL fee lf flrm
commlLmenL ls requlred
prlor Lo draw down durlng
dellvery perlod
lllL8LnCL 8L1WLLn lAC1C8lnC
An lC8lAl1lnC
6 Servlce ls avallable for
domesLlc and exporL
7 llnanclng can be wlLh
or wlLhouL recourse
Lhe credlL proLecLlon
collecLlon and
admlnlsLraLlon servlces
may also be provlded
wlLhouL flnanclng
6 usually avallable for
exporL recelvables only
denomlnaLed ln any
freely converLlble
7 lL ls always 'wlLhouL
recourse' and
essenLlally a flnanclng
lllL8LnCL 8L1WLLn lAC1C8lnC
An lC8lAl1lnC
8 usually no resLrlcLlon on
mlnlmum slze of
LransacLlons LhaL can be
covered by facLorlng
9 lacLor can asslsL wlLh
compleLlng lmporL
formallLles ln Lhe buyer's
counLry and provlde
ongolng conLracL wlLh
8 1ransacLlons should be of a
mlnlmum value of uS
9 lorfalLlng wlll accepL only
clean documenLaLlon ln
conformlLy wlLh all
regulaLlons ln Lhe
Financial dcriva9ivcs arc con9ingcn9 con9rac9s wIosc valucs arc dcrivcd
from somc undcrlying financial ins9rumcn9s lilc currcncy, londs, s9ocl
indiccs, in9crcs9 ra9cs, commodi9ics c9c.
TIc valuc of dcriva9ivcs dccnds uon undcrlying assc9 wIosc fu9urc
ricc movcmcn9s arc unccr9ain.
Dcriva9ivcs arc risly if 9Icir mccIanism is no9 undcrs9ood.
Dcriva9ivcs Iavc 9Ic CIarac9cris9ic of Lcvcragc or Ccaring.
Wi9I a small ou9lay of fund (a small crccn9agc of 9Ic cn9irc con9rac9
valuc} onc can dcal in lig volumcs.
Pricing and 9rading in dcriva9ivcs arc comlc and a 9IorougI
undcrs9anding of 9Ic ricc lcIaviour and roduc9 s9ruc9urc is an
Dcriva9ivcs Iavc no indccndcn9 valuc. TIcir valuc is dcrivcd ou9 of 9Ic
undcrlying ins9rumcn9s.
Dcriva9ivcs sIif9 9Ic risl from 9Ic luycr of 9Ic dcriva9ivc 9o 9Ic scllcr
and as sucI arc risl managcmcn9 9ools.
TIcy imrovc 9Ic liquidi9y of 9Ic undcrlying ins9rumcn9s.
Mea3I3g oI DerI;atI;es:
Dcriva9ivcs involvc aymcn9 rccci9 of incomc gcncra9cd ly 9Ic
undcrlying assc9 on a no9ional rincilc.
TIcy arc a sccial 9yc of off lalancc sIcc9 ins9rumcn9s in wIicI no
rincial is cvcr aid.
TIcy arc ins9rumcn9s wIicI malc aymcn9s calcula9cd using ricc
of in9crcs9 ra9cs dcrivcd from 9Ic lalancc sIcc9 or casI ins9rumcn9s,
lu9 do no9 ac9ually cmloy 9Iosc casI ins9rumcn9s 9o fund
Kinds of Financial Dcriva9ivcs.
(1} Forwards
(2} Fu9urcs
(3} O9ions
(4} Swas.
(1) Forwards:
forward con9rac9 is an agrccmcn9 lc9wccn 9wo ar9ics
9Ia9 calls for 9Ic dclivcry of an assc9 on a sccificd fu9urc
da9c a9 a ricc 9Ia9 is ncgo9ia9cd a9 9Ic 9imc of cn9cring
in9o 9Ic con9rac9.
For c.g, on July 1 (Dcal da9c} Faju cn9crs in9o an agrccmcn9 9o
luy 100 lalcs of co99on on 1
Dcccmlcr (ma9uri9y da9c} a9 Fs
2000 cr lalc (s9rilc ricc} from Pc9cr.
9 is a casc of forward con9rac9 wIcrc Faju Ias 9o ay Fs 1 lac
on, 1
Dcccmlcr 9o Pc9cr and Pc9cr Ias 9o suly 100lalcs of
n a forward con9rac9, luycr of 9Ic sccificd assc9 a9 an agrccd
ricc a9 a ficd fu9urc da9c is said 9o lc in 9Ic long osi9ion
and on 9Ic o9Icr Iand, 9Ic scllcr wIo romiscs 9o scll a9 an
agrccd ricc a9 a fu9urc da9c is said 9o lc in sIor9 osi9ion.
TIus, long osi9ion or sIor9 osi9ion 9alc 9Ic form of luy and
scll in a forward con9rac9.
Features oI Forward Co3tracts:
(a} TIcsc con9rac9s arc riva9c agrccmcn9s and Icncc, 9Icy arc no9 a9
s9andardiscd. TIcy arc 9radcd ovcr 9Ic coun9cr and no9 in
(l} TIcrc mus9 lc a romisc 9o suly or rcccivc a sccificd assc9 a9 an
agrccd ricc a9 9Ic fu9urc da9c.
(c} TIc con9rac9ing ar9ics nccd no9 ay any down aymcn9 a9 9Ic 9imc
of agrccmcn9.
(d} TIc imor9an9 fca9urc of a forward con9rac9 is 9Ia9 no moncy or
commodi9y cIangcs Iands wIcn 9Ic con9rac9 is signcd. 9 9alcs
lacc on 9Ic da9c of ma9uri9y only.
(c} forward con9rac9 canno9 lc 9radcd in an organiscd s9ocl ccIangc
and 9Icrcforc 9Icrc is no sccondary marlc9 for i9.
(f} TIcrc is a nccd for an in9crmcdiary 9o cnallc 9Ic ar9ics 9o cn9cr
in9o a forward ra9c con9rac9s.
(g} TIis in9crmcdiary may lc any financial ins9i9u9ion lilc lanl or any
o9Icr 9Iirdar9y.
(f} TIc dclivcry of 9Ic assc9 wIicI is 9Ic suljcc9 ma99cr of 9Ic con9rac9
is csscn9ial on 9Ic da9c of ma9uri9y of 9Ic con9rac9.
(2) Futures:
9 is similar 9o a forward con9rac9 in all rcscc9s ccc9 i9 is a
s9andardiscd onc.
To 9radc in fu9urc con9rac9s, onc Ias 9o lccomc a mcmlcr of 9Ic
ccIangc ly aying 9Ic ini9ial margin and main9ain a variallc
margin accoun9 9oo wi9I 9Ic fu9urc ccIangc. TIc ma9uri9y and 9Ic
sizc of 9Ic con9rac9 arc s9andardiscd.
Features oI Futures:
(a} Fu9urcs arc IigIly s9andardiscd and lcgally cnforccallc and Icncc
9Icy arc 9radcd only in organiscd fu9urc ccIangcs. 9 is also
difficul9 9o modify 9Ic agrccmcn9 according 9o 9Ic nccds of 9Ic
con9rac9ing ar9ics.
(l} Sc99lcmcn9 is on a daily lasis of all 9Ic ou9s9anding con9rac9s.
(c} Fu9urc con9rac9s arc IigIly liquid and can lc closcd ou9 casily.
(d} Hardly 2% of 9Ic 9o9al con9rac9s arc dclivcrcd and 9alcn dclivcry of.
(c} TIc main fca9urc of fu9urcs con9rac9' is 9o Icdgc agains9 ricc
fluc9ua9ions. TIc luycrs of a fu9urcs con9rac9 Ioc 9o ro9cc9
9Icmsclvcs from fu9urc so9 ricc incrcasc and 9Ic scllcr from
fu9urc so9 ricc dccrcasc.
%ypes oI Futures:
Fu9urcs may lc lroadly dividcd in9o 9wo 9ycs.
(a} Commodi9y Fu9urcs
(l} Financial Fu9urcs.
(a) CommodIty Futures:
commodi9y fu9urc is a fu9urc con9rac9 in commodi9ics lilc
agricul9ural roduc9s, mc9als and mincrals.
n organiscd commodi9y fu9urc marlc9s, con9rac9s arc s9andardiscd
wi9I s9andard quan9i9ics. TIis s9andard varics from commodi9y 9o
commodi9y. TIcy also Iavc ficd dclivcry da9cs in cacI mon9I in 9Ic
n ndia, commodi9y fu9urcs in agricul9ural roduc9s arc oular.
Somc of 9Ic wcllcs9allisIcd commodi9y ccIangcs arc as follows.
(i} n9crna9ional Pc9rolcum EcIangc of London wIicI dcals in crudc
(ii} Commodi9y EcIangc in Ncw Yorl wIicI dcals in agricul9ural
(iii} CIicago Doard of Tradc wIicI dcals in soyalcan oil.
(iv} London Mc9al EcIangc wIicI dcals in gold.
Par9iculars Forward Fu9urcs
Na9urc of 9Ic Con9rac9 No9 s9andardizcd s9andardizcd
Eis9cncc of Sccondary
OTC EcIangc 9radcd
Sc99lcmcn9 always sc99lcd only on 9Ic
da9c of ma9uri9y.
is always sc99lcd daily,
irrcscc9ivc of 9Ic ma9uri9y
da9c, in 9Ic scnsc 9Ia9, i9 is
'marlcd 9o marlc9' on a
daily lasis.
Modus Ocrandi ar9ics cn9cr in9o a forward
agrccmcn9 wi9I 9Ic Icl of
somc financial in9crmcdiary
lilc a lanl
9 is mainly facili9a9cd
9IrougI organiscd
ccIangcs and 9Ic qucs9ion
of a 9Iird ar9y docs no9
Down Paymcn9 9Ic con9rac9ing ar9ics nccd
no9 ay any down aymcn9
a9 9Ic 9imc of agrccmcn9
9Ic con9rac9ing ar9ics Iavc
9o dcosi9 a ccr9ain
crccn9agc of 9Ic con9rac9
ricc as 'Margin moncy' wi9I
9Ic ccIangc. 9 ac9s as
colla9cral 9o suor9 9Ic
Dclivcry of 9Ic ssc9 on 9Ic da9c of ma9uri9y of
9Ic con9rac9
TIc ar9ics mcrcly ccIangc
9Ic diffcrcncc lc9wccn 9Ic
fu9urc and so9 riccs on
9Ic da9c of ma9uri9y.
Ad;a3tages oI Forward & Future Co3tracts
(I) ProtectIo3 agaI3st PrIce FIuctuatIo3s
(II) A;oIda3ce oI CarryI3g Costs
(III)Proper PIa33I3g Ior BuyI3gJSeIII3g
(I;)Proper PortIoIIo Ma3ageme3t
(;) Proper Casb Ma3ageme3t
(;I)Purcbases a3d saIes I3 buI
(;II)HIgbIy FIexIbIe
(;III)Boo3 to FI3a3cIaI 3termedIarIes
O9ion is 9ool 9o managc vola9ili9y/fluc9ua9ion risls.
n o9ion con9rac9 givcs 9Ic luycr an o9ion 9o luy or scll an
undcrlying assc9 (s9ocl, lond, currcncy, commodi9y c9c.} a9 a
rcdc9crmincd ricc on or lcforc a sccificd da9c in fu9urc. TIc ricc
so rcdc9crmincd is callcd 9Ic 's9rilc ricc' or 'ccrcisc ricc'.
n an o9ions con9rac9, 9Ic scllcr is usually rcfcrrcd 9o as a wri9cr
sincc Ic is said 9o wri9c 9Ic con9rac9.
AmerIca3 OptIo3 Vs Europea3 OptIo3
n an O9ion con9rac9, if 9Ic o9ion can lc ccrciscd a9 any 9imc
lc9wccn 9Ic wri9ing of 9Ic con9rac9 and i9s cira9ion, i9 is callcd as
an mcrican o9ion. On 9Ic o9Icr Iand, if i9 can lc ccrciscd only a9
9Ic 9imc of ma9uri9y, i9 is 9crmcd as Eurocan o9ion
%ypes oI OptIo3s
O9ions may fall undcr anyonc of 9Ic following main ca9cgorics.
(i} Call O9ion (ii} Pu9 O9ion (iii} Doullc O9ion
CaII OptIo3
call o9ion givcs 9Ic o9ion Ioldcr 9Ic rigI9 9o luy a undcr lying
assc9 a9 a rcdc9crmincd ricc callcd 'ccrcisc ricc' or s9rilc ricc
on or lcforc a sccificd da9c in fu9urc.
TIc wri9cr of a call o9ion is undcr an olliga9ion 9o scll 9Ic assc9 a9
9Ic sccificd ricc, in casc 9Ic luycr ccrciscs Iis o9ion 9o luy.
TIus, 9Ic olliga9ion 9o scll ariscs only wIcn 9Ic o9ion is ccrciscd.
Put OptIo3
u9 o9ion givcs 9Ic o9ion Ioldcr 9Ic rigI9 9o scll an undcrlying
assc9 a9 a rcdc9crmincd ricc on or lcforc a sccificd da9c in fu9urc.
TIc wri9cr of a u9 o9ion is undcr an olliga9ion 9o luy 9Ic assc9 a9
9Ic ccrcisc ricc rovidcd 9Ic o9ion Ioldcr ccrciscs Iis o9ion 9o
DoubIe OptIo3
doullc o9ion is onc wIicI givcs 9Ic o9ion Ioldcr lo9I 9Ic rigI9s ci9Icr
9o luy or 9o scll an undcrlying assc9 a9 a rcdc9crmincd ricc on or lcforc a
sccificd da9c in fu9urc.
OptIo3 PremIum
n an o9ion con9rac9, 9Ic o9ion wri9cr agrccs 9o luy or scll an undcrlying
assc9 a9 a fu9urc da9c for an agrccd ricc from/9o 9Ic o9ion luycr/scllcr a9
Iis o9ion. TIis con9rac9, mus9 lc suor9cd ly considcra9ion.
TIc considcra9ion for 9Iis con9rac9 is a callcd as 'rcmium'.
TIc rcmium is no9Iing lu9 9Ic ricc wIicI is rcquircd 9o lc aid for 9Ic
urcIasc of 'rigI9 9o luy or scll'.
TIc rcmium, onc ays is 9Ic maimum amoun9 9o wIicI Ic is coscd in
9Ic marlc9, sincc, in any casc Ic canno9 losc morc 9Ian 9Ia9 amoun9.
TIus, Iis risl is limi9cd 9o 9Ia9 c9cn9 only.
Howcvcr, Iis gain o9cn9ial is unlimi9cd.
n 9Ic casc of doullc o9ion, 9Iis rcmium moncy is also doullc.
Features oI OptIo3 Co3tract
(I) HIgbIy FIexIbIe. o9ion con9rac9s arc s9andardizcd and can lc 9radcd only
in organiscd ccIangcs. TIcsc ins9rumcn9s can lc madc according 9o 9Ic
rcquircmcn9s of 9Ic wri9cr and uscr. TIus, i9 comlincs 9Ic fca9urcs of
'fu9urcs' as wcll as 'forward' con9rac9s.
(II) Dow3 Payme3t: TIc o9ion Ioldcr Ias 9o ay 'rcmium' lcing 9Ic
considcra9ion for 9Ic con9rac9. f 9Ic o9ion Ioldcr docs no9 ccrcisc Iis
o9ion, Ic Ias 9o forcgo 9Iis rcmium.
(III) SettIeme3t: No moncy or commodi9y or sIarc is ccIangcd wIcn 9Ic
con9rac9 is wri99cn. Ccncrally 9Iis o9ion con9rac9 9crmina9cs ci9Icr a9 9Ic
9imc of ccrcising 9Ic o9ion ly 9Ic o9ion Ioldcr or ma9uri9y wIicIcvcr is
carlicr. So, sc99lcmcn9 is madc only wIcn 9Ic o9ion Ioldcr ccrciscs Iis
o9ion. f 9Ic o9ion is no9 ccrciscd 9ill ma9uri9y, 9Icn 9Ic agrccmcn9
au9oma9ically lascs and no sc99lcmcn9 is rcquircd.
(I;) No3-LI3earIty: Unlilc fu9urcs and forward, an o9ion con9rac9 docs no9
osscss 9Ic rocr9y of lincari9y. 9 mcans 9Ia9 9Ic o9ion Ioldcr's rofi9,
wIcn 9Ic valuc of 9Ic undcrlying assc9 movcs in onc dircc9ion is no9 cqual
9o Iis loss wIcn i9s valuc movcs in 9Ic oosi9c dircc9ion ly 9Ic samc
amoun9. n sIor9, rofi9s and losscs arc no9 symmc9rical undcr an o9ion
(;) No ObIIgatIo3 to Buy or SeII: n all o9ion con9rac9s, 9Ic o9ion Ioldcr Ias
a rigI9 9o luy or scll an undcrlying assc9. Hc can ccrcisc 9Iis rigI9 a9 any
9imc during 9Ic currcncy of 9Ic con9rac9. Du9, in no casc, Ic is undcr an
olliga9ion 9o luy or scll.
Swa is yc9 ano9Icr cci9ing 9rading ins9rumcn9.
9 is a comlina9ion of forwards ly 9wo coun9crar9ics.
9 is arrangcd 9o 9alc 9Ic lcncfi9s arising from 9Ic fluc9ua9ions in 9Ic
marlc9 ci9Icr currcncy marlc9 or in9crcs9 ra9c marlc9 or any o9Icr
marlc9 for 9Ia9 ma99cr.
TIc following arc 9Ic imor9an9 fca9urcs of swa.
(i} swa is no9Iing lu9 a comlina9ion of forwards.
(ii} Doullc coincidcncc of wan9s. Swa rcquircs 9wo ar9ics wi9I cqual and
oosi9c nccds mus9 comc in9o con9ac9 wi9I cacI o9Icr.
(iii} Ncccssi9y of an in9crmcdiary. Swa rcquircs 9Ic cis9cncc of 9wo
coun9crar9ics wi9I oosi9c lu9 ma9cIing nccds. TIis crca9cs a
ncccssi9y for an in9crmcdiary 9o conncc9 lo9I 9Ic ar9ics.
(iv} Sc99lcmcn9. TIougI a sccificd rincial amoun9 is mcn9ioncd in 9Ic
swa agrccmcn9, 9Icrc is no ccIangc of rincial. On 9Ic o9Icr Iand,
a s9rcam of ficd ra9c in9crcs9 is ccIangcd for a floa9ing ra9c of
in9crcs9, and 9Ius, 9Icrc arc s9rcams of casI flows ra9Icr 9Ian singlc
(v} Long9crm agrccmcn9. forwards arc for sIor9 9crm & SWPS arc long
9crm con9rac9s.
Ad;a3tages oI SWAP Co3tract
TIc following advan9agcs can lc dcrivcd ly a sys9cma9ic usc of swa.
(i} Dorrowing a9 Lowcr Cos9. Swa facili9a9cs lorrowing a9 lowcr cos9. 9
worls on 9Ic rincilc of 9Ic 9Icory of comara9ivc cos9 as rooundcd
lv Ficardo. Onc lorrowcr ccIangcs 9Ic comara9ivc advan9agc
osscsscd ly Iim wi9I 9Ic comara9ivc advan9agc osscsscd ly 9Ic
o9Icr lorrowcr. TIc nc9 rcsul9 is 9Ia9 lo9I 9Ic ar9ics arc allc 9o gc9
funds a9 cIcacr ra9cs.
(ii} cccss 9o Ncw Financial Marlc9s. Swa is uscd 9o Iavc acccss 9o ncw
financial marlc9s for funds ly cloring 9Ic comara9ivc advan9agc
osscsscd ly 9Ic o9Icr ar9y in 9Ia9 marlc9. TIus, 9Ic comara9ivc
advan9agc osscsscd ly ar9ics is fully cloi9cd 9IrougI swa. Hcncc,
funds can lc ol9aincd from 9Ic lcs9 ossillc sourcc a9 cIcacr ra9cs.
(iii} Hcdging of Fisl. Swa can also lc uscd 9o Icdgc risl. For ins9ancc,
a comany Ias issucd ficd ra9c londs. 9 s9rongly fccls 9Ia9 9Ic in9crcs9
ra9c will dcclinc in fu9urc duc 9o somc cIangcs in 9Ic cconomic sccnc.
So, 9o gc9 9Ic lcncfi9 in fu9urc from 9Ic fall in in9crcs9 ra9c, i9 Ias 9o
ccIangc 9Ic ficd ra9c olliga9ion wi9I floa9ing ra9c olliga9ion. TIa9 is 9o
say, 9Ic comany Ias 9o cn9cr in9o a swa agrccmcn9 wi9I a
coun9crar9y, wIcrcly, i9 Ias 9o rcccivc ficd ra9c in9crcs9 and ay
floa9ing ra9c in9crcs9. TIc nc9 rcsul9 is 9Ia9 9Ic comany will Iavc 9o ay
only floa9ing ra9c of in9crcs9.
Significancc of Dcriva9ivcs
Tool for risl managcmcn9. Dcriva9ivc ins9rumcn9s can lc uscd 9o
minimisc risl. Dcriva9ivcs arc uscd 9o scara9c 9Ic risls and 9ransfcr
9Icm 9o ar9ics willing 9o lcar 9Icsc risls.
Hcdging ly using dcriva9ivcs is CIcacr and morc convcnicn9.
Dy using dcriva9ivcs for Icdging, ac9ual dclivcry of 9Ic undcrlying
assc9 is no9 a9 all csscn9ial for sc99lcmcn9 uroscs.
TIc rofi9 or loss on dcriva9ivc dcal alonc is adjus9cd in 9Ic
dcriva9ivc marlc9.
Dcriva9ivcs do no9 crca9c any ncw risl, 9Icy simly maniula9c risls
and 9ransfcr 9Icm 9o 9Iosc wIo arc willing 9o lcar 9Icsc risls.
For c.g.Mr. X owns a car. f Ic docs no9 9alc an insurancc, Ic runs a
lig risl. Suosc Ic luys an insurancc, (a dcriva9ivc ins9rumcn9 on
9Ic car} Ic rcduccs Iis risl. TIus, Iaving an insurancc olicy
rcduccs 9Ic risl of owing a car.
Dcriva9ivcs also offcr IigI liquidi9y
Crcdi9 Fisl Fa9ing
Moodys'. Fa9ings arc dcsigncd cclusivcly for 9Ic urosc of
grading londs according 9o 9Icir invcs9mcn9 quali9ics.
us9ralian Fa9ings. Corora9c Crcdi9 ra9ing rovidcs
lcndcrs wi9I a simlc sys9cm of grada9ion ly wIicI 9Ic
rcla9ivc caaci9ics of comanics 9o malc 9imcly rcaymcn9 of
in9crcs9 and rincial on a ar9icular 9yc of dcl9 can lc
ccording 9o CFSL, Crcdi9 ra9ing is an unliascd and
indccndcn9 oinion as 9o issucr's caaci9y 9o mcc9 i9s
financial olliga9ions. 9 docs no9 cons9i9u9c a rccommcnda9ion
9o luy/scll or Iold a ar9icular sccuri9y.
ccording 9o CF, Fa9ings arc oinions on 9Ic rcla9ivc
caalili9y of 9imcly scrvicing of corora9c dcl9 and olliga9ions.
TIcsc arc no9 rccommcnda9ions 9o luy or scll. ... nci9Icr 9Ic
accuracy nor 9Ic comlc9cncss of 9Ic informa9ion is
(i} Crcdi9 ra9ing is an asscssmcn9 of 9Ic caaci9y of an issucr of dcl9
sccuri9y, ly an indccndcn9 agcncy, 9o ay in9crcs9 and rcay 9Ic
rincial as cr 9Ic 9crms of issuc of dcl9. ra9ing agcncy collcc9s
9Ic quali9a9ivc as wcll as quan9i9a9ivc da9a from a comany wIicI
Ias 9o lc ra9cd and asscsscs 9Ic rcla9ivc s9rcng9I and caaci9y of
comany 9o Ionour i9s olliga9ions con9aincd in 9Ic dcl9 ins9rumcn9
9IrougIou9 9Ic dura9ion of 9Ic ins9rumcn9. TIc ra9ing givcn is lascd
on an oljcc9ivc judgcmcn9 of a 9cam of ccr9s from 9Ic ra9ing
(ii} TIc ra9ings arc crcsscd in codc numlcr wIicI can lc casily
comrcIcndcd cvcn ly 9Ic lay invcs9ors. TIc ra9ings arc 9Ic quiclcs9
way of undcrs9anding a comany's financial s9anding wi9Iou9 going
in9o 9Ic comlica9cd financial rcor9s. Crcdi9 ra9ing is only a
guidancc 9o 9Ic invcs9ors and no9 a rccommcnda9ion 9o a ar9icular
dcl9 ins9rumcn9. TIc imor9an9 clcmcn9 for invcs9mcn9 dccision
maling in dcl9 sccuri9y arc (a} yicld 9o ma9uri9y (l} risl 9olcrancc 9o
invcs9or and (c} crcdi9 risl of 9Ic sccuri9y.
Clcarly 9Ic focus of crcdi9 ra9ing is on anyonc of 9Icsc 9Ircc clcmcn9s
viz., crcdi9 risl of 9Ic sccuri9y and Icncc i9 can no9 ly i9sclf lc a
lasis for invcs9mcn9 dccision maling.
9 is only a currcn9 oinion on 9Ic rcla9ivc caaci9y of firms 9o rcay
dcl9 in 9imc.
(iii} Crcdi9 ra9ing, as i9 cis9s in ndia, is donc for a sccific dcl9 sccuri9y
and no9
for a comany as a wIolc. No ra9ing agcncy 9clls 9Ia9 i9 is an
indica9or of 9Ic financial
s9a9us of 9Ic comany. ll 9Ia9 a ra9ing agcncy claims is 9Ia9 9Ic
ra9ing symlols
indica9c 9Ic caaci9y of9Ic comany 9o Ionour 9Ic 9crms of con9rac9
of a dcl9 ins9rumcn9.
(iv} dcl9 ra9ing is no9 a onc 9imc cvalua9ion of crcdi9 risl, wIicI can
lc rcgardcd as valid for 9Ic cn9irc lifc of 9Ic sccuri9y. 9 is an on
going araisal. CIangcs in dynamic world of lusincss may imly a
cIangc in 9Ic risl cIarac9cris9ios of 9Ic sccuri9y. Hcncc dcl9 ra9ing
agcncics moni9or 9Ic lusincss and financial condi9ions of 9Ic issucr
9o dc9crminc wIc9Icr modifica9ion in ra9ing is warran9cd.
v} crcdi9 ra9ing docs no9 crca9c a fiduciary rcla9ionsIi lc9wccn 9Ic
ra9ing agcncy and 9Ic uscrs of ra9ing sincc 9Icrc is no lcgal lasis for
sucI rcla9ionsIis.
1. SuperIor 3IormatIo3
Fa9ing ly an indccndcn9 and rofcssional firm offcrs a sucrior and
morc rcliallc sourcc of informa9ion on crcdi9 risl for 9Ircc in9cr
rcla9cd risls.
(a} i9 rovidcs unliascd oinion.
(l} duc 9o rofcssional rcsourccs, a ra9ing firm Ias grca9cr alili9y 9o
asscss risls.
(c} i9 Ias acccss 9o lo9 of informa9ion wIicI may no9 lc ullicly
2. Low Cost 3IormatIo3
ra9ing firm wIicI ga9Icrs, analyscs, in9crrc9s and summariscs
comlc informa9ion in a simlc and rcadily undcrs9ood forma9 for
widc ullic consum9ion rcrcscn9s a cos9 cffcc9ivc arrangcmcn9.
3. BasIs Ior a Proper RIs-Retur3 %rade OII
f dcl9 sccuri9ics arc ra9cd rofcssionally and if sucI ra9ings cnjoy
widcsrcad invcs9or accc9ancc and confidcncc, a morc ra9ional risl
rc9urn 9radc off would lc cs9allisIcd in 9Ic cai9al marlc9.
4. HeaItby DIscIpII3e o3 Corporate Borrowers
Pullic cosurc Ias Ical9Iy influcncc ovcr 9Ic managcmcn9 of
issucr lccausc of i9s dcsirc 9o Iavc a clcar imagc.
S. FormuIatIo3 oI PubIIc PoIIcy GuIdeII3es o3 3stItutIo3aI
TIc ullic olicy on 9Ic linds of sccuri9ics 9Ia9 arc cligillc for
inclusion in diffcrcn9 linds of ins9i9u9ional or9folios can lc
dcvclocd wi9I grca9 confidcncc if sccuri9ics arc ra9cd rofcssionally
ly indccndcn9 agcncics
TIc crcdi9 ra9ing concc9 origina9cd in 9Ic US. n 1860,
Hcnry Vannum oor s9ar9cd ullisIing financial s9a9is9ics of
railroad comanics. n 1909, Moody's nvcs9ors gcncics
s9ar9cd ra9ing Failroad giving morc 9Irus9 9o 9Ic concc9.
Sincc 9Icn 9Ic imor9ancc Ias grown c9cnsivcly in 9Ic glolal
marlc9. Sys9cm of ra9ings go9 ins9i9u9ionaliscd following 9Ic
Crca9 Dcrcssion. n 1933, 9Ic US con9rollcr of currcncy
cnac9cd a rulc 9Ia9 lanls could urcIasc sccuri9ics ra9cd only
DDD/Daa or alovc.
n1970, Pcnn Ccn9ral, 9Ic 9Icn largcs9 Failroad comany in
9Ic world wcn9 lanlru9 wi9I jus9 undcr $ 100 million in
ou9s9anding commcrcial acr.
TIis forccd 9Ic invcs9ors 9o asl for ra9ing for commcrcial
acr. Conscqucn9ly, 9oday, almos9 100% of 9Ic commcrcial
acr volumc and 99% of 9Ic corora9c lond volumc arc ra9cd
in 9Ic U.S..
TIc cnvironmcn9 9Ia9 rcvailcd in mcrica wIcn firs9 ra9ings wcrc
assigncd, rcvails in many dcvcloing coun9rics 9oday. TIc ndian
cai9al marlc9 Ias wi9ncsscd a 9rcmcndous grow9I in 9Ic as9 fcw
Comanics arc rclying on cai9al marlc9s for financing cis9ing
ocra9ions as wcll as for ncw rojcc9s ra9Icr 9Ian on ins9i9u9ions.
n 9Iis roccss, 9Ic avcragc sizc of dclcn9urc issucd ly comanics,
9Ic numlcr of comanics issuing dclcn9urcs and 9Ic numlcr of
invcs9ors Iavc grown suls9an9ially.
s 9Ic numlcr of comanics lorrowings dircc9ly from cai9al marlc9
incrcascs, invcs9ors find 9Ia9 9Ic comany's sizc or namc is no
longcr a sufficicn9 assurancc of 9imcly aymcn9 of in9crcs9 &
n 9Iis con9c9, 9Ic Crcdi9 Fa9ing nforma9ion Scrviccs of ndia
Limi9cd was sc9 u in 1987. Following 9Iis, nvcs9mcn9 nforma9ion
and Crcdi9 Fa9ing gcncy of ndia was romo9cd in 1991 and Crcdi9
nalysis and FcscarcI Limi9cd was floa9cd in 1993. ll 9Ic 9Ircc
crcdi9 ra9ing agcncics Iavc lccn arovcd ly 9Ic Fcscrvc Danl of
(i} Low Cos9 nforma9ion
(ii} Quicl nvcs9mcn9 Dccision
(iii} ndccndcn9 nvcs9mcn9 Dccision
(iv} nvcs9ors Pro9cc9ion
Dcncfi9s 9o Fa9cd Comanics
(i} Sourccs of ddi9ional Ccr9ifica9ion
(ii} ncrcasc 9Ic nvcs9ors Poula9ion
(iii} Forcwarns Fisls
(iv} Encouragcs Financial Discilinc
(v} McrcIan9 Danlcrs Jol Madc Easy
(vi} Forcign Collalora9ions Madc Easy
(vii} Dcncfi9s 9Ic ndus9ry as a WIolc
(viii} Low Cos9 of Dorrowing
(i} Fa9ing as a Marlc9ing Tool
Currcn9ly 9Icrc arc fivc crcdi9 ra9ing
agcncics in ndia.
1. Crcdi9 Fa9ing nforma9ion Scrvicc L9d.
2. nvcs9mcn9 nforma9ion and Crcdi9
Fa9ing gcncy of ndia (CF}.
3. Crcdi9 nalysis and FcscarcI (CFE}.
4. Duff PIcls Crcdi9 Fa9ing Pv9. L9d. (DCF
5. Onida ndividual Crcdi9 Fa9ing gcncy
L9d. (ONCF}
CredIt RatI3g 3IormatIo3 Ser;Ices LImIted
Crcdi9 Fa9ing nforma9ion Scrviccs Limi9cd (CFSL} 9Ic firs9 crcdi9
agcncy was floa9cd on January 1, 1988. 9 was s9ar9cd join9ly ly
CC and UT wi9I an cqui9y cai9al of Fs.4 crorcs. EacI of 9Icm
Iolds 18% of 9Ic cai9al. TIc o9Icr romo9crs arc sian
Dcvclomcn9 Danl (15%} 9Ic LC and Ccncral nsurancc Corora9ion
and i9s sulsidiarics and 9Ic SD (5% cacI}, 9Ic Housing Financc
Dcvclomcn9 Corora9ion(6.2%}, ninc ullic scc9or and riva9c
scc9or lanls (19.25%} and 10 forcign lanls (7.55%}.
TIc rincial oljcc9ivc of CFSL is 9o ra9c 9Ic dcl9 olliga9ions of
ndian Comanics.
9s ra9ing guidcs invcs9ors alou9 9Ic risl of 9imcly aymcn9 of
in9crcs9 and rincial on a ar9icular dcl9 ins9rumcn9.
Oljcc9ivcs of CFSL
To assis9 lo9I individual and ins9i9u9ional invcs9ors in maling
invcs9mcn9 dccisions in ficd incomc sccuri9ics.
To cnallc corora9cs 9o raisc largc amoun9s a9 fair cos9 from a widc
scc9rum of invcs9ors.
To cnallc in9crmcdiarics in lacing 9Icir dcl9 ins9rumcn9s wi9I
invcs9ors ly roviding 9Icm wi9I an cffcc9ivc marlc9ing 9ool.