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Collective Investment

Vehicles

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Mu t ua l F u ndsThe small investors who generally lack expertise to invest on their ow

the securities market have reinforced the saying Don have trust in mohave your money in trust

M utual funds are a kind of collective investment vehicle, which ptheir marginal resources and invest in securities and distribute the retamong the cooperative principles.

Investors will be benefited in terms of reduced risk and higher retarising from professional expertise of fund managers employed byM Fs.

This approach was conceived in the USA in 1930s.In the developed financial market,M Fs have almost overtaken bank

deposits and total assets of insurance funds.

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chopra.rajiv@icai.org

Flow Ch ar t of Mu t ua l F u nd

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First Phase 1964 - 87a) Unit Trust of India (UTI) was established on 1963 by Act of Parliament. At the end of 1988 U

had Rs.6,700 crores of assets under management.Second Phase-1987-1993 (Entry of Public Sector Funds)

a) M arked the entry of N on UTI Public sector mutual funds set up by public sector banks, LIC anGIC.

b) SBIM

utual Fund was the firstN

on UTIM

utual Fund established in June 1987. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.Third Phase-1993-2003(Entry of Private Sector Funds)

a) In 1993, the firstM utual Fund Regulations came into force, under which all mutual funexcept UTI were to be registered and governed.

b) The Erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first prisector mutual fund registered in July 1993. As at the end of January 2003, there weremutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase - Since February 2003a) The UTI Act 1963 was repeal the year 2003, February.b) UTI M utual Fund Ltd, sponsored by SBI, PN B, BO B and LIC.c) UTI was registered with SEBI and functions under the SEBIM utual Fund Regulations

B r ief Histo ry of Mu t ua l F u nds

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O rga niz a tion a l St ru ct ur e of a Mu t ua l F u nd

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Constit u tion & Ma n ag ement of

Mu t ua l F u ndsFund SponsorA sponsor is a person who acting alone or in combination with another corporate body, establishe

M F. Ex: SBIM F is sponsored by SBI, LICM F is sponsored by LICA sponsor has to file an application form to the SEBI with a registration fee of Rs. 25,000Sponsor must furnish all the information and give clarification as may be required by the board

Sponsor should has a sound financial track record & general reputation for not less than 5 years.The sponsor has contributed at least 40 % of theN et worth of AM C.

TrusteesA person who holds the property of the mutual fund in trust for the benefit of the unit-holders and

includes a trustee company and the directors of the trustee companyM F can either be managed by the Board of Trustees or a body of individuals or body corporateTrustee are appointed with the approval of SEBI.Two thirds of trustees are independent persons and are not associated with sponsors in any manner.

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Contin u edAssetM anagement Company (AM C)

AM C was appointed by the sponsor or trustees & approved by SEBI Acts for the investmanager of the trust.AM C should have at least a net worth of Rs. 10 crore.AM C functions under the supervision of its Board of Directors, Trustees and the SEBI.

In the name of the Trust, AM C floats and manages different investment schemes as per SEBI Regulations and the InvestmentM anagement agreement signed with the Trustees.AM C is required to obtain prior in-principle approval from the recognised stock exchwhere units are proposed to be listed.

Custodian

A custodian is appointed for safe keeping the securities like gold or gold related instrumor real estate mutual fund instruments and participating in the clearing system throapproved depository.Custodian also records information on stock splits and other corporate actions.

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Type of Mutual Fund

Schemes

St ruc ture Inves tmen tOb jec tive

S pecial S che mes

Open Ended Funds

Close Ended Funds

Interval Funds

Grow th Funds

Inco me Funds

Balanced Funds

Money Marke tFunds

Indus try S pecificS che mes

Index S che mes

S ec toral S che mes

T yp es of Mu t ua l F u nds

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T yp es of Mu t ua l F u nd SchemesBy Structurea) O pen-Ended anytime enter or exitb) Close-Ended Schemes listed on exchange, redemption after period of scheme is ovc) Interval Funds - Combination of Both

By InvestmentO bjectivea) Equity (Growth) only in Stocks Long Term (3 years or more)b) Debt (Income) only in Fixed Income Securities (3-10 months)c) Liquid/M oneyM arket (including gilt) Short-termM oneyM arket (Govt.)d) Balanced/Hybrid Stocks + Fixed Income Securities (1-3 years)

O ther Schemesa) Tax Saving Schemesb) Special Schemes like ULIP

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S p eci a l Schemes-EXA MPL E

Funds based on Size of the Companies Invested inLarge Cap Funds: Funds that invest in companies whose totalmarket cap is above Rs40bn

Mid Cap Funds: Funds that invest in companies whose markecap is between Rs20-40bn

Small Cap Funds: Funds that invest in companies whose markcap is below Rs20bn

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Close Ended Schemes Vs O p en

Ended SchemesClosed Ended Schemes O pen Ended Schemes

O pen for a fixed Period O pen throughout the period

Two price values available namelyN AV and the market trading price

O nly one price namelyN AV

Listed in Specific Stock Exchange forbuying and selling

N o listing on exchange transactionsdone directly with the fund

M ostly Liquid Highly Liquid

M ay be Re-purchased after 2 to 3years

Re-purchased at any time

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Contin u edLi quid Fu nd s: M oney M arket or Li quid Fu nd s provid e easy li quidi ty and preserves capi tal, bu t generates mod erate i ncome. As theyi nvest exclu si velyi nsafer short-termi nstru ments su ch as, treasu ry bi lls, certi f i cates of d eposi t,commerci al paper,i nter-bank call money and government secu ri ti es.Physi cal Assets: Hi stori cally, the regu latory frameworki n Indi a did not permi tmu tu al f u nd s to i nvest i n physi cal assets. A si gni f i cant change was mad e i n Janu ary 2006, when SEBI permi tted gold exchange trad ed f u nd schemes thatwou ld i nvesti n gold and gold related i nstru ments.M u tu al Fu nd s have also beenpermi tted to i nvesti n Real Estate si nceM ay 2008SectorFu nd s: Sector f u nd s i nvest i n shares only of a speci f i c sector su ch asPharmaceu ti cals, software, energy and Banki ng etc.Fu nd s of Fu nd s:Fu nd s of Fu nd s i s a scheme wherei n the assets arei nvested i n theexi sti ng schemes of mu tu al f u nd s.

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Assets u nde r Ma n ag ement a t

the end of Mar ch 2009

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R e a sons to Invest in Mu t ua l F u nds

ProfessionalM anagementa) Investors avail the services of experienced & skilled professionals who are dedicated t

investment research & analyze the performance and prospects of companies & selects suinvestments

Diversification

a) Invest in a number of companies across a broad cross-section of industries and sectors, risk can be reducedConvenient Administration

a) Investing inM F reduces paperwork & helps investors to avoid many problems such as delivery, delayed payments & unnecessary follow up with brokers & companies

b) M utual funds save investors time and make investing easy and convenient.

Return Potentiala) O ver a period of time,M F has potential to provide a higher return because they invest indiversified basket of selected securities

Low Transaction costsa) M F are relatively less expensive way to invest compared to directly investing in the c

markets because the benefits of scale in brokerage, custodial and other fees translate into

costs for investors

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Contin u edLiquidity

a) In open ended schemes, investors can get their money back promptly at net asset related prices from theM F within 4 working days.

b) But in closed ended, investors can sell their units on a stock exchange at the prevmarket price or directly purchase at net asset value (N AV) related prices, where some

closed ended and interval schemes offers periodically or at the date of maturity.Transparencya) Investors get regular information about their investment with other disclosuresb) Fund managers can take investment decision based upon the disclosures and choose

strategically decisions.Investor protection

a) A mutual fund in India is registered with SEBI, which also monitors the operatiothe fund to protect your interests.Tax benefits

a) O ver the years, tax policies on mutual funds have been favourable to investorscontinue to be so.

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Investin g Checklist Draw up your asset allocation.a) Financial goals & Time frame (Are you investing for retirement?

childs education? Is it for current income?)b) Risk Taking Capacity

Identify funds that fall into your Buy List.O btain and read the offer document.M atch your objectives.a) In terms of equity share and bond weightings, downside

protection, tax benefits offered, dividend payout policy, sector foc

Check out past performance.a) Performance of various funds with similar objectives for at leasyears (managed well and provides consistent returns)

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Checklist Contin u edThink hard about investing in sector fundsa) For relatively aggressive investorsb) Close touch with developments in sector, review portfo

regularlyLook for `load' costsa) M anagement fees, annual expenses of the fund and sales loads

Does the fund change fund managers often?Look for size and credentials

a) Asset size less than Rs. 25 CroresDiversify, but not too muchInvest regularlya) M F- an integral part of your savings and wealth-building plan.

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B uy in g Mu t ua l F u ndsContacting the AssetM anagement Company directlya) Web Siteb) Request for agent

Agents/Brokers

a) Locate one on AM

FI siteFinancial plannersa) Bajaj Capital, Franklin Templetion etc.

Insurance agentsBanksa) N et-Bankingb) Phone-Bankingc) ATM s

O nline Trading Accounta) ICICI Direct, Karvy etc.

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K ee p in g T ra ck

Filling up an application form and writing out acheque - End of the StoryNO!

Periodically evaluate performance of your fundsa) Fact sheets andN ewslettersb) Websitesc) N ewspapersd) Professional advisor

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W ar nin g Si g n a ls

Fund'sM anagement changesPerformance slips compared to similar funds.

Fund's expense ratios climbBeta, a technical measure of risk, also climbs.Independent rating services reduce their ratings of

fund.It merges into another fund.Change in management style or a change in t

objective of the fund.

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R ig hts a s a Mu t ua l F u nd Unit Holde r

Receive statement of accounts within 6 weeks from the date yrequest is received by theM utual FundReceive information about the various Investment PolicO bjectives, Financial position & General affairs of the schemeReceive dividend within 30 days of their declaration, recredemption proceeds within 10 days from the date of the varedemptionVote in accordance with the Regulations to:

a) Change the AssetM anagement Companyb) Wind up the schemes.

To receive communication from the Trustee about change in fundamental attributes of any scheme.

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Vent ur e C ap it a l Venture Capital is the capital that is invested in equity or debt securities of yunseasoned companies promoted by technocrats who attempt the break path.VC is a source of finance for new or relatively new, high risk, high ppotential products belongs to untried segments or technologies.Venture capitalist is knowledgeable and sophisticated investors who come forto face higher risks with the calculated hope of making much higher gains the new projects succeed.VC works on the theory, that greater the risk, the greater will be the profit.Success of a VC depends on the care with which the projects are evaluatedselected for investmentsVenture Capitalist take faster decisions in appraising projects and releasing fthan Banks & FIs.

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T yp es of Vent ur e C ap it a lists

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products or services

Add value to the company through active participation.

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Ch ara cte r istics of VC

Long Time Horizon

Lack of Liquidity

High Risk

Equity Participation

Participation inM anagement

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Adv a nt ag es of VC VC injects long term equity finance which provides a solid capital base for fgrowth.VC is a business partner share both risks and rewards. Venture capitalistsrewarded by business success and the capital gain.The venture capitalist is able to provide practical advice & assistance tocompany based on past experience with other companies which were in sisituations.Venture capitalist also has a network of contacts in many areas that can add vto the company.Venture capitalist may be capable of providing additional rounds of fundshould it be required to finance growth.Venture capitalists are experienced in the process of preparing a company finitial public offering (IPO ) of its shares onto the stock exchanges or oversestock exchange such asN ASDAQ.

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St ag es of Fin a ncin gSeedM oney:

Low level financing needed to prove a new idea.Start-up:

Early stage firms that need funding for expenses associated with marketingproduct development.

First-Round:Early sales and manufacturing funds.Second-Round:

Working capital for early stage companies that are selling product, but not yeturning a profit .

Third-Round:Also calledM ezzanine financing, this is expansion money for a newly profit

companyFourth-Round:

Also called bridge financing, it is intended to finance the "going public" proc

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R isk in E a ch St ag eFinancial Stage Period (Funds

locked in years)Risk

Perception Activity to be financed

SeedM oney 7-10 ExtremeSupporting a concept or idea orR&D for product development

Start Up 5-9Very High

Initializing operations or

developing prototypesFirst Stage 3-7 High

Start Commercials Production &M arketing

Second Stage 3-5 Sufficiently highExpandM arket and Growing

Working Capital need

Third Stage 1-3 M ediumM arket Expansion, Acquisition &Product Development for Profit

making Company

Fourth Stage1-3 Low Facilitating public issue

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M ethods of Vent ur e Fin a ncin g

The financing pattern of the deal is the most importantelement. Following are the various methods of venturefinancing:EquityConditional loanIncome note

Participating debenturesQuasi equity

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D EVE LP O M EN T O F VEN T U R E CA P I T A L IN

IN D IA

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The concept of venture capital was formally introduced India in 1987 by IDBI.

The government levied a 5 per cent cess on all know-himport payments to create the venture fund.ICICI started VC activity in the same year.

Later on ICICI floated a separate VC company.

B a ck gr o u nd of VC

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VC F u nds in Indi aVCFs in India can be categorized into following five groups:

Those promoted by the Central Government controlled developmfinance institutions. For example:a) ICICI Venture Funds Ltd.

b) IFCI Venture Capital Funds Ltd (IVCF)c) SIDBI Venture Capital Ltd (SVCL)Those promoted by State Government controlled development finainstitutions. For example:a) Punjab Infotech Venture Fundb) Gujarat Venture Finance Ltd (GVFL)c) Kerala Venture Capital Fund Pvt Ltd.

Those promoted by public banks. For example:a) Canbank Venture Capital Fundb) SBI CapitalM arket Ltd

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Those promoted by private sector companies. For example:a)IL&FS Trust Company Ltdb)Infinity Venture India Fund

Those established as an overseas venture capital fund.Forexample:

a)Walden International Investment Groupb)HSBC Private Equityc)M anagementM auritius Ltd

Contin u ed.

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How does the VC wo r k? Venture capital firms typically source the majority of thfunding from large investment institutions.

Investment institutions expect very high RO I

VCs invest in companies with high potential where they are ato exit through either an IPO or a merger/acquisition.

Their primary RO I comes from capital gains although they alsreceive some return through dividend.

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Vent ur e C ap it a l Ind u st ry W ise

Se g ment a tion6.94

7.73

11.5

4.32

27.95

4.82

11.43

12.92

3.36

9.03

Percentage

IT & ITES

Energy

Manufacturing

Media & Ent .

BF SI

Shipping & logistics

Eng . & Const .

Telecom

Health care

Others

P ercen tage calcula ted on the total VC inves tmen t- 14,234 US B (fig. of 2009)

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T o p Cities Att ra ctin g VC Investments

CITIES SECTO RSM UM BAI Software services, BPO , M edia,

Computer graphics, Animations,Finance & Banking

BAN GALO RE All IP led companies, IT & ITES,Bio-technologyDELHI Software services, ITES , Telecom

CHENN AI IT , Telecom

HYDERABAD IT & ITES, PharmaceuticalsPUN E Bio-technology, IT , BPO

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C r itic a l f a cto r s fo r the

S u ccess of VC Regulation, tax & Legal environment should play an enabling role in international vfunds, which evolved in an atmosphere of structural flexibility, fiscal neutralO perational adaptability.Resource raising, investment, management and exit should be as simple and flexneeded and driven by global trends.VC should become an institutionalized industry that protects investors, investing foperating in an environment suitable for raising the large amounts of risk capital neefor spurring innovation through start-up firms in a wide range of high growth areas.In view of increasing global integration & mobility of capital it is important that InVC funds as well as VC enterprises are able to have global exposure & investopportunitiesInfrastructure in the form of R&D need to be promoted using government support private management as has successfully been done by countries such as the US, IsraTaiwan. This is necessary for faster conversion of R&D and technological innovatiocommercial products.

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Im pa ct of Union B u d g et 2010

The increase in weighted deduction of in house R&will boost up investment in health care.

46% of the total investment is going to infrastructudevelopment which is a positive sign for investors.

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F u t ur e Pr os p ects of VC in

Indi aVC can help in the rehabilitation of sick units.VC can assist small ancillary units to upgrade th

technologiesVCFs can play a significant role in developicountries in the service sector including tourispublishing, health care etc.VC can provide financial assistance to people comout of universities, technical institutes, etc thpromoting entrepreneurial spirits.

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C r edit R a tin gCredit rating is an evaluation of the credit worthiness of an individual or business coor an instrument of a business based on relevant factors indicating ability & willingnpay obligation as well as net worth.Credit rating establish a link between risk and return trade off.Investors or any other interested person uses the rating to assess the risk levecompares the offered rate of return with his expected rate of return.

Credit rating is extremely important as it not only plays a role in investor protectioalso benefits industry as a whole in terms of direct mobilization of savings findividuals.Rating also provides a marketing tool to the company & investment bankers in plcompanys debt obligations with investors base & their level of risk.Rating also encourage discipline amongst corporate borrowings to improve their finstructure and operating risks to obtain better rating.Companies those get a lower rating are forewarned, either they desire to take stetheir financial risks or improve their standing in the market.

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G lob a l R a tin g Ag enc y a nO

ve r viewIn 1841, the firstM ercantile Credit Agency was established inN ew York.M ercantile Credit Agency first rating guide was published in 1859Robert Dun.Similar type of agency was set up by John Bradstreet which publishrating guide in 1857.At last , these two agency merged together to form Dun & Bradstre1933, which was acquired byM oodys Investors Service in 1962. ThesM oodys founded byM oody in 1900.Finally, the other renowned rating agency namely S&P was created in by merging the Standard Statistics Company and Poors PublishCompany which had their origin earlier.

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R a tin g Ag enc y in Indi aCredit Rating & Information Service India Limited (CRISIL)1987

In 1991, Investment Information and Credit Rating Agency of IndLimited (ICRA).

Credit Analyses & Research Limited (CARE) 1994

Finally in 1997, the Duff & Phelps India Private Limited.

Some of the individual credit rating agency is also available

In 1993, O nida Individual Credit Rating Agency of India Limite(ON ICRA).

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Uses of C r edit R a tin gI nvestors

Communicate investors the relative ranking and their probability for a given fixed ininvestments, in comparison with other instruments.In the absence of professional credit rating, the investors has to largely depend on the familnames of the promoters, collaborators of a company issuing debt instrumentsCredit rating by skilled, competent and credible professionals eliminates the role of recognitioreplaces with well researched and properly analyzed options.Provides low cost supplement to investors.Large investors use information provided by rating agencies such as upgrades and downwaralter their portfolio mix by operating in secondary marketApart from this, investors also use industry reports, corporate reports, seminars and open a

provided by credit rating agencies.Intermediaries

Useful for merchant bankers for planning, pricing, underwriting and placement of issues.Intermediaries like brokers & dealers in securities use rating for monitoring risk exposures.

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Contin u edI ssuer s

M arket place immense faith on credit rating agencies, hence the issuers also deupon their information.Enables the issuers of highly rated instruments to access the market even duadverse market conditionsCredit rating provides a basis for determining the additional return and the mmovements in the scripts.

RegulatorsRegulatory authorities in different countries such as US, Australia & Japan have

specified their restrict entry to the new market participants &N

RIsRating is made compulsory also for the fixed deposit schemes of N BFCs registeredunder the Companies Act.O ne of the issuance of Commercial Paper in India must have been rated , becausliquidity and mobilize resources.

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F a cto r s fo r S u ccess fo r a R a tin g S y stem

Credible and independent structure and procedures.O bjectives & neutrality of opinions.

Analytical research, integrity & consistency.Professionalism and industry related expertise.Confidentiality.Timeliness of rating review and announcement of changes.Ability to reach wide range of investors by means of Press repPrint or electronic media and investor oriented research service

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Im p o r t a nt Iss u es in C r edit R a tin g

I nve stme nt & Spe culati ve Grade sa ) Se curitie s rated bel ow t he rati ng are called non-i nve stme nt grade or

spe culati ve grade s or ju nk bond sb) Rati ng Age ncy d o not re comme nd or i ndi cate t he rati ng le vel s of

i nstrume nt s up t o whi ch one should or should not i nve st .Sur veilla nce a ) Rati ng pu bli shed by credit rati ng a ge ncy i s su bje cted t o a conti nu ou s

sur veilla nce duri ng t he li f e of t he i nstrume nt sb) Fre que ncy of sur veilla nce ma y ra nge bet wee n quarterl y or yearl y.

c) Formal & Exte nsi ve writte n re vie w i s ta ke n at lea st once i n a n year but where some s pe ci f i c concer n re vie w i s ta ke n up immediatel y.d ) Rati ng will be ju sti f ied , depe ndi ng up on t he li kel y impa ct of t he cha ngi ng

sce nari o a nd t heir concer n or i ndu str y per forma nce .

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Contin u ed.C

redit Wat cha ) M a jor de viati on f r om the e xpe cted tre nd s of the busi ne ss occur s a nd create s a n overa lli mpa ct , i n such ca se rati ng wi ll be put under credit wat ch t o knowa bout the e xa ct i mpa ct a nd de ci si on ta ke n wi ll cha nge .

b) C redit wat ch li sti ng ma y a lso spe ci fy positi ve a nd ne gati ve out looks.c) Under credit wat ch d oe s not mea n that there wi ll be a rati ng cha nge .Soverei gnC ei li nga ) Inter nati ona l rati nga ge ncy whi le rati ng out side the countr y, the y i mpose a cei li nge qua l t o

the soverei gnrati nga ssi gned by the home countr y.b) Rati ng of a ny i nstr ume nt bya home countr y, would be a bove the soverei gn.c) C once pt of rati ng bya home countr y wi ll not a ppli ca ble , be ca use of compli cated busi ne ss

operati ons.O wner shi p a s a rati ng considerati ona ) Str ong Age ncy ma y e nha nce the rati ng by se parati ng pare nt & subsidiar y concer nb) Rati nga ge ncy kee ps the i nfor mati on conf ide ntia l & complete s with 2 t o 4 wee ks

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FACTORING

When a banker discounts a bill, he buys it outright for a sum less thanits face value, the difference comprising discount based on the unexpiredterms of the bill. Middleman acting as go between for sellers ofcommodities without a common interest.

Factoring is of recent origin in Indian Context.Kalyana Sundaram Committee recommended introduction of factoring in 1989.

Banking Regulation Act, 1949, was amended in 1991 for Banks setting upfactoring services.

SBI/Canara Bank have set up their Factoring Subsidiaries:-SBI Factors Ltd., (April, 1991)CanBank Factors Ltd., (August, 1991).

RBI has permitted Banks to undertake factoring services through subsidiaries.

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WHAT IS FACTORING ?Factoring is the Sale of Book Debts by a firm (Client) to a financial institution

(Factor) on the understanding that the Factor will pay for the Book Debts as andwhen they are collected or on a guaranteed payment date. Normally, the Factormakes a part payment (usually upto 80%) immediately after the debts are purchasedthereby providing immediate liquidity to the Client.

PROCESS OF FACTORING

CLIENT CUSTOMER

FACTOR

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ContinuedSo, a Factor is,

a) A Financial Intermediaryb) That buys invoices of a manufacturer or a trader, at a discount,

and

c) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)b) Buyer or Debtor (Customer)c) Financial Intermediary (Factor)

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SERVICES OFFERED BY AFACTOR

1. Follow-up and collection of Receivables from Clients.2. Purchase of Receivables with or without recourse.3. Help in getting information and credit line on customers (credit

protection)4. Sorting out disputes, if any, due to his relationship with Buyer &

Seller.

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PROCESS INVOLVED INFACTORING

Client concludes a credit sale with a customer.

Client sells the customers account to the Factor and notifies the customer.

Factor makes part payment (advance) against account purchased, after adjusting

for commission and interest on the advance.

Factor maintains the customers account and follows up for payment.

Customer remits the amount due to the Factor.

Factor makes the final payment to the Client when the account is collected or onthe guaranteed payment date.

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MECHANICS OF FACTORINGThe Client (Seller) sells goods to the buyer and prepares invoice witha notation that debt due on account of this invoice is assigned to andmust be paid to the Factor (Financial Intermediary).The Client (Seller) submits invoice copy only with Delivery Challanshowing receipt of goods by buyer, to the Factor.

The Factor, after scrutiny of these papers, allows payment (,usuallyupto 80% of invoice value). The balance is retained as RetentionMoney (Margin Money). This is also called Factor Reserve.The drawing limit is adjusted on a continuous basis after taking intoaccount the collection of Factored Debts.Once the invoice is honoured by the buyer on due date, the RetentionMoney credited to the Clients Account.Till the payment of bills, the Factor follows up the payment and sendsregular statements to the Client.

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CHARGES FOR FACTORINGSERVICES

Factor charges Commission (as a flat percentage of value of Debts purchased)(0.50% to 1.50%)

Commission is collected up-front.

For making immediate part payment, interest charged. Interest is higher thanrate of interest charged on Working Capital Finance by Banks.

If interest is charged up-front, it is called discount.

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TYPES OF FACTORING

Recourse Factoring

Non-recourse Factoring

Maturity Factoring

Cross-border Factoring

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RECOURSE FACTORING

Upto 75% to 85% of the Invoice Receivable is factored.

Interest is charged from the date of advance to the date of collection.

Factor purchases Receivables on the condition that loss arising on account ofnon-recovery will be borne by the Client.

Credit Risk is with the Client.

Factor does not participate in the credit sanction process.

In India, factoring is done with recourse.

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NON-RECOURSE FACTORING

Factor purchases Receivables on the condition that the Factor has norecourse to the Client, if the debt turns out to be non-recoverable.

Credit risk is with the Factor.

Higher commission is charged.

Factor participates in credit sanction process and approves credit limitgiven by the Client to the Customer.

In USA/UK, factoring is commonly done without recourse.

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MATURITY FACTORING

Factor does not make any advance payment to the Client.

Pays on guaranteed payment date or on collection of Receivables.

Guaranteed payment date is usually fixed taking into account previouscollection experience of the Client.

Nominal Commission is charged.

No risk to Factor.

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CROSS - BORDER FACTORINGIt is similar to domestic factoring except that there are four parties, viz.,a) Exporter,b) Export Factor,c) Import Factor, andd) Importer.

It is also called two-factor system of factoring.Exporter (Client) enters into factoring arrangement with Export Factor inhis country and assigns to him export receivables.Export Factor enters into arrangement with Import Factor and hasarrangement for credit evaluation & collection of payment for an agreedfee.Notation is made on the invoice that importer has to make payment to theImport Factor.Import Factor collects payment and remits to Export Factor who passes onthe proceeds to the Exporter after adjusting his advance, if any.Where foreign currency is involved, Factor covers exchange risk also.

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STATUTES APPLICABLE TOFACTORING

Factoring transactions in India are governed by the following Acts:-

a) Indian Contract Act

b) Sale of Goods Act

c) Transfer of Property Act

d) Banking Regulation Act.

e) Foreign Exchange Regulation Act.

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WHY FACTORING HAS NOT BECOME POPULAR IN INDIA

Banks reluctance to provide factoring services

Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer ismandatory as per RBI Guidelines).

Problems in recovery.

Factoring requires assignment of debt which attracts Stamp Duty.

Cost of transaction becomes high.

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STAGES INVOLVED IN EXPORT FACTORING

Exporter (Client) gives his name, address and credit limit required to the ExportFactor.Export Factor submits the details of Buyer to the Import Factor.Import Factor decides on the credit cover and communicates decision to ExportFactor.Export Factor enters into Factoring Agreement with Exporter.Overseas Buyer is notified of this arrangement.Exporter is then free to ship the goods to Buyers directly.

Exporter submits original documents, viz., invoice and shipping documents dulyassigned and receives advance there-against (upto 80%).Export Factor despatches all the original documents to Importer/Buyer after dulyaffixing Assignment Clause in favour of the Import Factor.Export Factor sends copy of invoice to Import Factor in the Debtors country.Import Factor follows up and receives payment on due date and remits to ExportFactor.Export Factor, on receipt of payment, releases the balance of proceeds to Exporter.