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Financial services
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Financial servicesMeans
Mobilizing and allocating savingsAlso called financial intermediation
Mobilization of investments in to
savings
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Definition
activities, benefits and satisfactionconnected with the sale of money thatoffer to users and customers financialrelated value.
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Merchant banking Merchant banker Rule 2(e)of SEBI defines..
any person who is engaged in the businessof issue management either by makingarrangements regarding selling, buying orsubscribing, to securities as Manager,
Consultant, Advisor or rendering corporateadvisory services in relation to such issuemanagement.
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Merchant banking
includes wide range of activitiessuch as management of customers,portfolio management, underwriting,actins as a banker etc.
It is a service oriented function whichtransfers capital from those who owns itto those who can use it
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Merchant banking-functions Project planning and control
Issue management
Portfolio management -preparation of prospectus
obtaining approval from SEBI
marketing and underwriting
dealing with stock exchanges
press publicity
Counseling
Loan syndication
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Kinds of merchant banksMerchant banks
basis of operations basis of organisation
Category 1
Category 2
Category 3
Category 4
Commercial banks
Financial institutions
Foreign institutions
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Category 1
Manager
advisor
Consultant
Underwriter
Portfolio managerCategory 2
Advisor
Co-manager Underwriter
Portfolio manager
Consultant
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Category 3
UnderwriterAdvisor and
Consultant
Category 4Advisor or
Consultant
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Mutual funds
Are trusts of public members who wishto make investments in the financial
assets of the corporate sector for themutual benefit of members.
Mutual fund is governed by:-
The Co.Act
Indian Trust Act
SEBI
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Structure of mutual fundBoard of Trustees
custodianAMC
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Managing MFs in IndiaSponsorAny corporate body which initiates the
launching of a mutual fund The agency should have a sound track
record and experience in the financialservices for 5 yrs
Minimum contribution of 40 percent ofthe networth
Sponsor apppoints custodian, trustees
& AMC
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Trustees
Persons who hold the property of MF intrust for unit holders
Constituted under Indian trust Act
Under SEBI 75 %of trustees must be independent
of sponsors
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custodiansAgency that keeps custody of the
securities that are brought by the MFmanagers
Participation in clearing system onbehalf of the client
Collecting dividends
Arranging for registration of securities
Timely resolution of descrepancies
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AMC Manages the affairs of MF
Can act as the AMC of one mutual fund With SEBI permission it can act as an
underwriter also
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Classification of MFs
Mutual funds
Open ended Closed ended
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Open ended funds
Open ended funds do not have a maturity.
They can be purchased and sold on acontinuous basis at a NET ASSET VALUErelated price. Such funds provide substantial
liquidity. NAVper unit = (TMV CL)/SU
TMV =total mkt value of the investmentportfolio + written down value of fixed assets
+cost value of other current assetsCL = current liabilities
SU = no of outstanding units in that scheme
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2. Closed ended funds
Its duration are pre fixed. Once the subscription closed end
scheme is so called because its corpusis closed i.e... Corpus of the funds
reaches the predetermined level theentry of investors is closed.
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Sl o Feature Open ended Closed ended
1subsription
Open through outthe scheme
Open for a limited period
2 Corpus The fund raisedfrom public keepsvarying
Fixed
3 Exit Easy & convenient
exit at any time
No exit till closure of the
scheme
4 Liquidation Units can beliquidated anytime
Liquidated only at the end ofthe period
5 Maturity No maturity
period
Fixed MP
6 Listing No listing & not traded in stockexchange
Listed in stock exchange andtraded
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Types of MFs
Area fund
Income fund Lmoney market
Balanced fund
Growth fund
Mutual funs
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Income Fund
These type of funds are aimed atgenerating and distributing regularincome to thee members on a periodicalbasis.
Growth fundThey concentrate mainly on long term
gains. They do not offer regular income
but offer capital appreciation in the longrun
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Area funds/ sectoral fund
invested in various sectors
Gold, silver, real estate,oil & gasindustry
Balanced fund
It is a combination of both income andgrowth fund
Gilt funds
These funds seek to generate funds
Invested in state & central governmentsecurities
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Fund of fund schemes
Funds of one mutual funds are invested in
the units of other mutual fundsLeveraged fund scheme
Funds created out of investment not only
with the amount mobilised from small saversbut the fund managers who borrow moneyfrom capital market
Index funds
Linked to specific index of share pricesTax saving schemes
Certain MF offer rebate on investment made inequity shares
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CREDIT RATINGA specific evaluation about credit
quality of the issuer of securities and is
done for a particular instrument.According to Moodys , ratings are
designed exclusively for the purpose of
grading bonds according to theirinvestment qualities.
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Functions of Credit Ratings Superior information
Low cost information
Basis for a proper risk-return trade off
Healthy discipline on corporateborrowers
Formulation of public policy guidelineson institutional investment
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Benefits Low cost information
Quick investment decision
Independent investment decision
Investors protection
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Types of credit rating
equity
unsolicited
Sovereign
bond
Credit rating
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Bond rating
Rating of bonds or debt instrumentissued by a company, govt. or localbody
Equity rating
Rating of equity shares
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Sovereign rating
Rating a country a to its creditworthiness, political risk etc.
Unsolicited rating
When rating is mad by a credit ratingagency voluntarily and not as per therequest of the company, it is known asunsolicited rating.
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Benefits of CR To investors
1. Superior information at low cost
2. It enables the investors to take quickinvestment decision
3. Stimulates the investors to invest theirsavings in corporate debt instrument
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To corporate borrowers it facilitate company with good rating to raise
funds at a cheaper rate it can be used as a tool for marketing securities
it encourages financial discipline amongcompanies to improve their performance to get
better rating.
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RATING METHODOLOGY
Business analysis
Financial analysis
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CR process1. Submit proposal
2. Written agreement
3. Appoint a team4. Team analysis
5. Presenting the findings
6. Evaluation
7. Present to client
8. Accept or reject
9. If accept,go for notification
10. Periodic review
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CR agenciesCredit rating information services ofIndia limited (CRISIL)
This is the first credit rating agency inIndia and was floated on january1;1988.it was promoted jointly by ICICI
and UTI with an equity capital of Rs.4crores.
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CR agenciesInvestment Information and CreditRating Agency of India Ltd
It has been promoted by IndustrialFinance Corporation of India In 1991.
it is a public limited company with an
authorized capital of Rs.5 lakhs
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CR agenciesThe Credit Analysis and Research
Ltd.
It is promoted by Industrialdevelopment bank of India.
Its main object is credit rating security
analysis and information service
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Venture capital
A financing institution which joins anentrepreneur as a co-promoter in a
project and shares the risks and rewardof the entrepreneur
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Venture capital is usually in the form of
an equity participation. It may also takethe form of convertible debt or longterm loan.
Investment is made only in high risk buthigh growth potential projects.
Venture capital is available only for
commercialization of new ideas andtechnologies
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There is continuous involvement in thebusiness after making an investment bythe investor.
Once the venture has reached the fullpotential the venture capitalistdisinvests his holdings either to the
promotors or in the market ,with anobjective of capital appreciation.
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Disinvest MechanismThe disinvestment options available in
developed countries are:
1. Promoters buy back.
2. Public issue.
3. Sale to other venture capital funds.
4. Management buy outs
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In India, the most popular investmentroute is promoters buy back. this helps
the ownership and control of thepromoter in tact.
Public issue would be difficult &
expensive since first generationentrepreneurs are unknown in thecapital market.
Management buy outs and sale to otherventure capital funds are notconsidered appropriate in India.
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Scope of Venture Capital.Venture capital may take various forms at
different stages of a project. There are4 successive stages of development ofa project:
1. Development of a project idea.2. Implementation of the idea.
3. Commercial production and marketing.
4. Large scale investment to exploit theeconomies of scale and achievestability.
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Scope of venture capitalEstablis
hment
Additional
finance
Start up finance
Seed finance
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Seed finance
In the first stage of development ofthe project ideas, venture capitalistsprovide seed capital for translating anidea in to business propositions.
Start up finance
It is provided at the time when thecompany set up to manufacture a
product or service
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Additional finance
At this stage the company is
commercializing its products on a largescale. Venture capitalist providesadequate funds to develop marketinginfrastructure.
Establishment finance
This is given for the expansion anddiversification of the company.
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Methods of venture financing Equity participation
Venture capital firm participate in equitythrough direct purchase of share buttheir stake does not exceed 49%.
Conventional loan
Under this method, till the assisted unitsbecome commercially operational therate of interest charged shall be a lower
one.
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Conditional loan
Under this method, an interest free loanis provided during the implementationperiod, but it has to pay royalty onsales
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Income notes It is a combination of conventional
and conditional loans.
Both interest and royalty are payableat much lower rates than in case ofconditional loans
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Advantages to Promoters
The entrepreneur for the success ofpublic issue is required to convinceunderwriters, brokers and thousands ofinvestors, but to acquire venture capital
assistance, he just need to sell his idea. Public issue of equity shares has to be
preceeded by a lot of efforts which a
new entrepreneur finds difficult. This ismade easy by the venture fundassistance.
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General A developed venture capital institution set-up
reduces the time lag between a technological
innovation and its commercial exploitation. Venture capital acts as a cushion to support
business borrowings, as bankers andinvestors will not lend money with inadequatemargin of equity capital.
A venture capital firm serves as anintermediary between investors looking forhigh returns for their money andentrepreneurs in search of needed capital for
their start ups.
Origin
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Origin
Venture capital as a new phenomenonoriginated in USA and developedspectacularly world wide. In USA alonethere are 800 venture capital firms.
UKoccupies the second position afterUS in terms of investment in venturecapital.
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Initiative in India.Venture capital is a growing business of
recent origin in the area of industrial
financing in India.
It was started in India by the Tata Ironand Steels and Empress Mills.
The Tatas successfully promoted hi-techenterprises such as CEAT tyres,National Rayon. etc.
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FACTORING
Is an arrangement between a firm anda financial institution under which thelatter takes over the credit , collectionand recovery functions of the former.
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mechanism Negotiation b/w seller and buyer Seller tells to make the payment to the factor
on due date Agreement b/w seller and factor Seller sells without raising BOE Seller delivers invoice to factor Factor makes payment to seller Factor collects debts Makes payment of margin, after deducting
commission
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With recourse factoring
The factor has recourse to the clientfirm in the event of irrecoverable debts
Factor assumes no credit associated
with the receivables
If customer defaults , bad debt loss willbe met by the firm
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With out recourse factoring
No right with the factor to haverecourse to the client
Factor bears loss arising out ofirrecoverable receivables
Charges higher commission called delcredere commission as a compensationfor loss
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Advance & maturity factoring
Factor makes an advance payment inthe range of 70 to 80 %of thereceivables factored
Factor collects interest on the advancepayment from the client
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Collection/ maturing factoring No advance payment
Factor pays on guaranteed paymentdate or date of collection
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typesFull service Old line factoring
Factor has no recourse to the seller inthe event of failure of buyers to makeprompt payments
Occurs due to insolvency/ bankruptcy ofthe buyer
Combination of nonrecourse andadvance factoring
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Bank participation factoringVariation of advance factoring
Factor arranges advance to the clientthrough banker
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Factoring deed
The agreement containing terms andconditions of factoring. including:
Assignment of debt in favour of thefactor
Selling limits for the clientsdetails aboutfactoring fees
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leasing Is a contract where by the owner of an
asset (lessor) grants to another party
(lessee) an exclusive right to use theasset for an agreed period of time, inreturn for the payment of rent.
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MECHANISM OF LEASING
Lessee selects the equipment
lessee enters in to a lease contract withthe lessor
lessor makes the payments to the
equipment deal and lessee takes thepossession of the asset
the lessee continues to discharge his
obligation under the lease agreement
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types
leasing
Financial leasing Operational leasing
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Types of leasingFinancial lease
Here the lessee selects and specifies the equipment and thelessor purchases it and amortizes the capital cost over the leaseperiod.
Lessee uses and maintains the equipment The risk of obscelence is assumed by the lessee It can be with a purchase option
Operating lease Under this lease in addition to providing and financing the
equipment often undertaken to provide services which areoffset against the operation of the equipment.
It is a rental agreement Lessor gives maintenance expenses
Risk of obsolescence lies with the lessor
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Leverage Lease used for financing those assets which require huge capital
outlay , varying from 50 lakhs to 2 crore
Leverage lease agreement involves 3 parties-- lessee, lessor and the lender Lessor acquires the assets as per the norms of the lease
agreement but finances only 20 to 50 % Balance is given by the lender as loansale and lease back
In this type of leasing a firm which has an asset sells it toanother firm which is a leasing company,Which in turn lease itback to the former
The firm receives the sales price in cash and gets the right touse the asset during the lease period
Cross Border lease
Transaction between lessor and lessee in 2 different countries
Leasing Hire purchasing
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Leasing
Legal ownershipwith lessor
Lease rentals are taxdeductable
Cannot be claimedby the lessee
Hire purchasing
Legal ownership istransferred to hireron payment of lastinstallment
Only the interest partof installment isdeductable
Can be
ADVANTAGES
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ADVANTAGES
1. Permit alternative allocation of funds
2. Faster and cheaper credit
3. Flexibility
4. Facilitates additional borrowings
5. Protection against obsolescence
6. Hundred percent financing
7. Boon to small firms
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Advantages to Lessor
Stable business
Tax benefit
Sale of supplies
Second-hand market
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Advantages to Lessee
Efficient use of funds
Cheaper source
Flexible source
Favourable terms
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Disadvantages of Lessee
Higher cost.
Loss of moratorium period.
Risk of being deprived of the use ofasset.
No alterations or change in the asset
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Disadvantages of Lessor
High risk of obsolescence.
Competitive market.
Price level changes.
Management of cash flows.
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Value of lease = Financing provided by
the lease Value of equivalent loan
It represents the NPV
If NPV is negative it is better to buy
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FORFAITINGis a technique by which a financial agency
called forfaiter who discount and export
bill and pay ready cash to the exporterwho can concentrate on the exporttrade without bothering about the
collection of export bill
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STEPS The exporter enters in to negotiation
with a potential buyer of importing
country for delivery of goods Exporter approaches the forfaiter
Forfaiter makes enquiries
Depending upon the nature oftransaction forfaiter gives consent
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Subsequently on delivery of BOE,payment tothe full extent of face value less discount
charge is made by the forfaiter to the bankgiving the guarantee.
On maturity BOE is presented to the bank byforfaiter.
The bank ,whether receiving the payment ornot from the importer ,reimburse the the billamount to the forfaiter.
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SECURITISAT
ION
Securitisation of debt or asset refers tothe process of liquidating the liquid and
long term assets like loans andreceivables of financial institutions likebanks by issuing marketable securities
against them.
C CS O
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MECHANICSOF
SECURITISAT
ION
The Originator
A Special Purpose Vehicle or Trust
A Merchant or Investment BankerA Credit Rating Agency
A servicing Agent-Receiving and Paying
agent. The original borrowers
The Prospective investors
THE SECURITISATION
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THESECURITISATION
PRO
CESS Identification stage
Transfer stage
Issue stage
Redemption Stage
Credit rating stage
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Thankyou
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