Transcript
CHAPTER 1
The Objective of the Study is as follows:
•
To understand the need and the role played by Merchant banks.
•
To understand the functioning of Merchant Banks.
Limitatios of the !"oject:
As the scope of Merchant Banking is extremely vast, I have covered a
few important points such as oncept of Merchant Banking, !eed, Importance
and "ole of Merchant Banking, #ualities of a good Merchant Banker, $ome of
the $ervices provided by Merchant Banks, %rganisational setup of Merchant
Bankers in India
1
CHAPTER #
Resea"ch $ethodolo%y
Collectio of &ata
&or the purpose of my study I have collected the relevant data keeping in mind
the aim of my research. I have collected the data from different sources namely
primary and secondary sources.
P"ima"y &ata
The primary data related to the study was collected from'
Books
(ebsites
2
Secoda"y &ata
Besides primary data, I have also collected the secondary data. And the
secondary data was collected from my pro)ect guide and some senior students.
3
CHAPTER '
Coce!t of me"chat ba(i%
The dictionary meaning of merchant bank refers to an organi*ation that
underwrites corporate securities and advises such clients on issues like
corporate mergers, etc. involved in the ownership of commercial ventures. This
organi*ation may be a bank, corporate body, firm or proprietary concern.
The $ecurities and +xchange Board of India has defined merchant banks as
any person who is engaged in the business of issue management either by
making arrangements regarding selling, buying or subscribing to securities as
manager, consultant, advisor or rendering corporate advisory service in relation
to such issue management-.
In Indian context this definition suits well. Merchant banking in India started with
the management of public issues and loan syndication and has been slowly and
gradually covering activities like pro)ect counselling, portfolio management,
4
investment counselling and mergers and amalgamation of the corporate firms.
 Although, merchant banking organi*ations present a long list of services they
contemplate to render to their clients but the main services so far being
rendered by them are those as authori*ed by the $+BI.
5
CHAPTER )
Histo"y of $e"chat *a(i%
O"i%i of me"chat ba(i%
The origin of merchant banking can be traced back to the /
th
century
when the development of international trade and finance took place. The early
merchant bankers were traders of commodities. These bankers also acted as
bankers to the kings of +uropean $tates and financed continental wars and
coastal trades. The earlier merchant bankers used to lend their name to the
lesser known traders by accepting bills through which they guaranteed that the
holder of the bill would receive full value on the date of payment. 0ence the
name merchant was used because of its roots in merchant trade.
The %"owth of me"chat ba(i% i +dia
&ormal merchant activity in India was originated in 121 with the
merchant banking division setup by the 3rindlays Bank, the largest foreign bank
in the country. The main service offered at that time to the corporate enterprises
by the merchant banks included the management of public issues and some
aspects of financial consultancy. &ollowing 3rindlays Bank, itibank set up its
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merchant banking division in 145.The division took up the task of assisting
new entrepreneurs and existing units in the evaluation of new pro)ects and
raising funds through borrowing and e6uity issues. Management consultancy
services were also offered. Merchant bankers are permitted to carry on
activities of primary dealers in government securities. onse6uent to the
recommendations of Banking ommission in 147, that Indian banks should
offer merchant banking services as part of the multiple services they could
provide their clients, $tate Bank of India started the Merchant Banking 8ivision
in 147. In the initial years the $BI9s ob)ective was to render corporate advice
and assistance to small and medium entrepreneurs.
The commercial banks that followed $tate Bank of India were entral
Bank of India, Bank of India and $yndicate Bank in 144.Bank of Baroda,
$tandard hartered Bank and Mercantile Bank in 14: and ;nited Bank of
India, ;nited ommercial Bank,
1:2? and
I8BI >11?.
7
CHAPTER ,
+m!o"tace- .eed ad Role of $e"chat *a(e"s
Important reason for the growth of merchant banking has been
developmental activity throughout the country, exerting excess demand on the
sources of funds for ever expanding industry and trade thus, leaving a widening
gap unbridged between the supply and demand of inventible funds. All Indian
financial institutions and experienced resources constraint to meet the ever
increasing demands for funds from the corporate sector enterprises. In the
circumstances corporate sector had the only alternative to avail of the capital
market services for meeting their long@term financial re6uirements through
capital issues of e6uity and debentures. (ith the growing demand for funds
there was pressure on capital market that enthused the commercial banks,
share brokers and financial consultant firms to enter into the field of merchant
banking and share the growing capital markets. (ith the result, all the
commercial banks in nationali*ed and public sector as well as in private sector
including the foreign banks in India have opened their merchant banking
windows and are competing in this field. There has been a mushroom growth of
financial consultancy firms and broker firms doing advisory functions as well as
managing public issues in syndication with other merchant bankers.
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!otwithstanding the above facts, the need of merchant banking
institutions is felt in the wake of huge public savings lying still untapped.
Merchant banks can play highly significant role in mobili*ing funds of savers to
investible channels assuring promising return on investments and thus can help
in meeting the widening demand for investible funds for economic activity. (ith
the growth of merchant banking profession corporate enterprises in both public
and private sectors would be able to raise re6uired amount of funds annually
from the capital market to meet the growing re6uirements for funds for
establishing new enterprises, undertaking expansion or moderni*ation or
diversification of the existing enterprises. This reinforces the need for a vigorous
role to be played by merchant banks.
Merchant banks have been procuring impressive support from capital
market for the corporate sector for financing their pro)ects. This is evidenced
from the increasing amount raised form the capital market by the corporate
enterprises year after year.
Merchant bankers, with their skills, updated information and knowledge,
provide service to the corporate units and advise them on such re6uirements to
be complied with for raising funds from the capital market under different
enactments vi*. ompanies Act, Income@tax Act, &oreign +xchange "egulation
Act, $ecurities ontracts >"egulation? Act and various other corporate laws and
regulations.
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Merchant bankers advise the investors of the incentives available in the
form of tax reliefs, other statutory relaxations, and good return on investment
and capital appreciation in such investment to motivate them to invest their
savings in securities of the corporate sector. Thus, the merchant bankers help
the industry and trade to raise funds and the investors to invest their saved
money in sound and healthy concerns with confidence, safety and expectation
for higher yields.
Role of $e"chat *a(e"
The role of merchant banker is dynamic in the wake of diverse nature of
merchant banking services. Merchant banker9s dynamism lies in promptly
attending to the corporate problems and suggests ways and means to solve it.
The nature of merchant banking services is development oriented and
promotional to help the industry and trade to grow and survive.
0e is always awake to renew his skills, develop expertise in new areas
so as to e6uip himself with the knowledge and techni6ues to deal with
emerging new problems of corporate business world.
0e has to keep pace with the changing environment where government
rules, regulations and politics affecting business conditions fre6uently
change where science and technology create new innovations in
production processes of industries.
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Merchant banker has to think and devise new instruments of financing
industrial pro)ects.
0e has to assume wider responsibilities of saving industrial units from
going sick and guiding industries to be setup in industrially backward
areas to eliminate regional imbalances in industrial development of the
country.
0e has to guide the wider section of the community possessing surplus
money to invest in corporate securities and other productive investment
channels.
0e has to help the industry in different forms to ensure that it runs risk
free and devoid of uncertainty by assisting the promoters with his
knowledge and skills to resolve the problems being faced by them.
0e has to watch the interest and win over the confidence of the
government, its agencies, along with the entrepreneurs, the investors
and the whole community.
0e must bridge the communication gap between different sections and
resolve the problem being faced in different areas concerned with the
business world.
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In the days ahead, merchant bankers have very significant role to play
tuning their activities to the re6uirements of the growth pattern of the corporate
sector, the industry and the economy as a whole which is, in itself, a challenging
task and to meet these challenges merchant bankers will have to be more
vigorous and strategic in playing their role. They will have also to adopt new
ways and means in discharging their role.
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CHAPTER /
$e"chat *a(i%: Objectives
Merchant Banker plays a vital role in the economic and financial
development of the country. As a result of economic and financial liberali*ation
new companies are formed and number of issues floated to raise resources
from the investor community. onsidering the significance of the issue the
3overnment of India instituted $+BI in 115 to regulate and control various
market intermediaries. $+BI issued various rules and regulations for each and
every segment of the capital market. To regulate Merchant bankers, with the
twin ob)ective vi*., investor protection and development of the capital market,
$+BI issued rules and regulations for Merchant Bankers. $ubse6uent
amendments also have been made to these regulations to further strengthen
this segment of the securities industry. These regulations >Merchant Banking?
specified that every company desires to float an issue to the public should
engage Merchant Banker >"egistered under these regulations with $+BI? as
ead Manager. In this context Merchant Banker gained the importance in the
Indian $ecurities Industry. In the wake of economic reforms and financial
liberali*ation the need for financial resources has significantly increased. As an
intermediary@Merchant Banker plays a crucial role in exploring the ways and
means for the funds. Besides, issue management, Merchant Banker also
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performs several other important functions like underwriting of securities,
0;&?
d?orporate +nterprises
e?o@operative $ociety
3enerally it is preferred that the Merchant Banking outfit be a registered
company. Merchant Banks are generally setup as subsidiary companies of
banks >$+BI? has
divided merchant bankers into four categories based on its capital
re6uirements, which are as follows' @
CATEORTH
ategory I
To carry on the activity of issue management
and to act as adviser, consultant, manager,
underwriter, portfolio manager.
"s.crore
ategory IITo act as adviser, consultant, co@manager,
underwriter, portfolio manager.
"s.E5 lakhs
ategory IIITo act as underwriter, adviser or consultant to an
issue.
"s. 75 lakhs
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ategory IFTo act only as adviser or consultant to an issue!il
Merchant Bankers are classified into G categories as shown in the above
table having regard to their nature and range of activities and their
responsibilities to $+BI, investors and issuers of securities. The minimum net
worth and initial authori*ation fee depends on the category. The first category
consists of merchant bankers who carry on any activity of issue management,
determining financial structure, tie@up of financiers, advisor or consultant to an
issue, portfolio manager and underwriter. The second category consists of
those authori*ed to act in the capacity of co@managerDadvisor, consultant, and
underwriter to an issue or portfolio manager. The third category consists of
those authori*ed to act as underwriter, advisor or consultant to an issue. The
fourth category consists of merchant bankers who act as advisor or consultant
to an issue.
To carry on the activity as underwriter or portfolio manager a separate
certificate of registration needs to be obtained from $+BI.
c)
A!!licatio to cofo"m to the "e9ui"emets
The application should conform to all the re6uirements under the $+BI
guidelines, otherwise it may be re)ected.
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d)
;u"ishi% of ifo"matio- cla"ificatio ad !e"soal
"e!"esetatio
The Board may re6uire the applicant to furnish further information or
clarification regarding matters relevant to the activity of a merchant banker for
the purpose of disposal of the application. The applicant or its principal officer
may appear before the Board for personal representation.
e)
Coside"atio of a!!licatio
The Board shall take into account for considering the grant of a certificate, all
matters, which are relevant to the activities relating to merchant banker and in
particular the applicant complies with the following re6uirements, namely' @
the applicant shall be a body corporate other than a non@ banking
financial company
the merchant banker who has been granted registration by the "eserve
Bank of India to act as a Merchant Bankers? "egulation. The issuer
company is also re6uired to enter into a formal agreement with the lead
merchant banker as per the re6uirement of the regulation.
2'3 .umbe" of co8maa%e"s to the issue 7
The number of lead merchant
bankers should not exceed in case of any of the following issues'
Sie of the !ublic issue
2Rs6 i c"o"es3
.umbe" of Lead $e"chat *a(e"s
ess than "s.E5 croresTwo
"s.E5 crores but less than "s55
crores
Three
"s.55 crores but less than&our
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"s.755 crores
"s.755 crores but less than
"s.G55 crores
&ive
"s.G55 crores and above&ive or more as may be agreed by
the $+BI
2++3 Ste!s to be ta(e by lead maa%e" to the !ublic issue fo" ew
com!aies- "i%hts issue o" dilutio sha"es fo" eisti% com!aies 7
%nce
the company has appointed lead manager to the public issue, its executives
work in close coordination with the lead merchant banker. In case, there is more
than one lead manager, the role to be played by each of the lead managers is
discussed and the work relating to issue management could be allocated
amongst them keeping in view their respective expertise and resourcefulness in
the specific area. $uch merchant banker will be responsible and accountable
for all matters related to the specified and accepted roles. ead merchant
bankerDs hasDhave to plan the public issue activities through a schedule listing
the activities to be performed and the time@frame within which each activity has
to be performed and completed. A specimen activity schedule which is generally
prepared by lead managers to the issue is given as check@list. The ma)or
activities to be performed by the merchant bankers are as follows'
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16Stoc( echa%e a!!"oval6
#6Coside"atios "e%a"di% the ade9uacy of ca!ital- balaced ca!ital
st"uctu"e- debt8e9uity "atio ad !"efe"ece e9uity "atio6
'6Ta(i% actio as !e" SE*+ %uidelies 7
"e6uirements for capital
issues under the $+BI guidelines are listed below'
a3
&resh issue of capital to public' e6uity shares and preference
shares.
b3
"ights issueDpublic issue by existing listed companies.
c3
Bonus issue.
d3
8ebenture issue.
e3
s?. In the case of !"I subscribers verification is made with
reference to entral 3overnment stipulations under &+"A. Applications
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made under power of attorney are accompanied with respective power of
attorney document which has to be verified. !o applicant, it is ensured is
a fictitious person. 0aving ascertained and verified all these above facts,
applications are serially numbered for 6uick identification and future
reference. By using computer systems the processing is done fast.
116SE*+Ds %uidelies 7
To monitor the post@issue process, obligations have
been placed upon lead merchant bankers to strictly supervise and follow@
up the post@issue activities and periodically report to $+BI the progress
in the matters of allotment and refunds as noted below' @
i6
4 days reporting from closure of issue J ead managers to confirm
to $+BI that the issue is subscribed to the extent of 15H within 4
days from the date of the closure of the issue.
ii6
GE days reporting from closure of issue J This is compliance report
to be sent to $+BI. In this report lead manager shall also include if
the company was permitted by stock exchange to utili*e the funds
on receipt of 15H subscription.
iii6
"eport on the basis of allotment.
iv6
15 days final report J $+BI vide its letter to all merchant bankers on
Kuly 2, 11/ has amended the ompendium of irculars wherein it
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has prescribed a complete reporting system for subscribed public
issues, unsubscribed public issues, subscribed right issues and
undersubscribed right issues in the prescribed performance.
1#6@de"8subsc"i!tio ad ude"w"ite"s liability 7
;nder@subscription of
the issue causes difficulties for the company and underwriters. "egistrars
advise the company to call upon the underwriters to fulfill their
commitments. ;nderwriter9s liability is decided by deducting the total
number of shares underwritten to the extent of deficiency, he has to be
liable. In case any particular underwriter has procured ade6uate number
of shares, he incurs no liability
>atch o defaulti% ude"w"ite"s 7
In
order to keep a close watch over such underwriters who have failed to
meet their underwriting devolvement and to consider penal action
against such underwriters and debar them from underwriting public
issues in future, the merchant bankers are re6uired to provide
information to $+BI in the below given format beginning from Kuly, 11/'
!ame of the merchant banker
!ame of the issuer company
Issue si*e
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1'6*"id%e loa f"om istitutioal ude"w"ite"s a%aist !ublic issue of
sha"es 7
&inancial institutions provide bridge loan to the company to the
extent of E5H of their underwriting commitments which has demand
character, to be ad)usted on allotment. To avail of the amount of bridge
loan the company has got to notify in the prospectus its intentions.
1)6&evolvemet ad commitmet of ude"w"ite"s 7
Institutional
underwriters including banks should be immediately contracted by the
company through its Mangers to put in the application to the extent of
devolvement. The underwriter Banks should be approached in writing
with the following documents enclosed.
Auditors ertificate showing that the promoters and their
associates have contributed their share of contribution in the
e6uity capital of the company in terms of the prospectus.
Auditors9 ertificate explaining that the obligation of underwriters
in respect of contingent underwriting have been duly fulfilled by
the underwriters.
$tatement of underwriters obligations showing therein the extent
of devolvement upon institutionsDbanks, which has also got to be
verified by the auditors.
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@de"w"iti%
$eai%
The word =underwriting9 was coined by British Merchants who used to write their
names at the end of marine insurance document wherein each agreed to
assure )oint risk.
The dictionary meaning of underwriting is =to agree to sell bonds, etc. to the
public, or to furnish the necessary money for such securities and to buy those
which cannot be sold9.
;nderwriting is an important primary market activity performed by stock
brokers, merchant bankers and underwriters approved by $+BI for this
purpose. It is related to marketing and merchant banking for an issue. The
industry positions are measured by the amount of underwriting one does.
;nderwriters are distributors for the financial products@ assuring a sale and if
the sale does not actually take place, they agree to pick up the residual. It is an
assurance against the possible failure of the issue and the underwriters have to
step in if the issue remains under subscribed to the extent of the amount
underwritten. If the market does not take the share, it is an indication of
overpricing of scrip. As such, the underwriter exposes himself to risk on account
of fall in market price and blockening his funds.
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;nderwriting offer is similar to insurance business, where the insurer is exposed
to risk to the extent of amount insured, but the only game is the insurance
commission. In underwriting, the compensation is underwriting commission. The
underwriting decision is evaluation of risk and probable loss which can also be
reduced by sub@underwriting.
In India underwriting commission is regulated by statute at a maximum of 7.EH.
$imilarly, the entry into this business is also regulated by $+BI thereby only
$+BI registered agencies can act as underwriters. These are'@
.ategory ,7 C / Merchant bankers.
7.;nderwriters.
/.$tockbrokers.
@de"w"iti% ad SE*+ %uidelies
According to $+BI guidelines on investor protection and disclosure dated
D52D117, underwriting was mandatory for the full issue amount for each issue
of capital to the public. This has since been relaxed in view of high costs
involved and now the underwriting is optional.
The lead managers are re6uired to satisfy themselves that the financial of the
underwriters are ade6uate for them to undertake their underwriting
commitments such opinion has to be included in the prospectus also.
52
@de"w"iti% a%"eemet
To avoid disputes between the underwriters and Issuer ompany, $+BI has
formulated a model underwriting agreement which seeks to standardi*e the
legal relationship between the two parties. It provides clear guidelines for
resolving the issues of disputes. It stipulates several norms for interest of both
the parties including the time limit within which the issue should open from the
date of agreement i.e. three months.
The practice in our country is that lead managers obtain blank and undated
consents from the underwriters which the underwriters do in order to get the
business and there have been cases where the issues really came even after
one year of sending consents.
The underwriters shall be entitled to appoint sub@underwriters but the main
underwriter will be primarily responsible. The underwriters are also asked to
produce a statement of devolvement of issues and a statement of declaration of
net worth alongwith hartered Accountant9s ertificate at the time of sending
consents. All underwriters who are members of recogni*ed stock exchanges
have also to obtain permission to act as underwriter from their $tock +xchange.
;nderwriting agreement is a legally enforceable contract between a company or
an issuer and the underwriter. There is no legal difference between underwriting
and contingent underwriting as all underwritings are dependent on a
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contingency. $ometimes, a company enters into a standby arrangement
whereby there is an agreement between the company and an undertaker who
agrees to apply for shares, if not subscribed by public. This is also an
underwriting agreement.
Evaluatio by ude"w"ite":
$ince the underwriter9s contingent stake is involved in any issue, it is desirable
for any underwriter to evaluate the pro)ect or issue before consenting to act as
an underwriter. 0e should stress upon following points while deciding whether
to underwrite and how much to underwrite.
16
ompany9s standing and past track record
#6
Management of the company, competence of promoters and
professional approach.
'6
%b)ects of the proposed issue.
)6
hat the com!ay loo(s fo" i ude"w"ite"s:
The companies or their lead managers appoint underwriters on the basis of
their standing in the market and past experience as to procurement and
honouring of commitments.
The ma)or points that are looked into are'@
16
&inancial strength of the underwriters.
#6
+xperience in primary market.
'6
I&I?
ii.Industrial 8evelopment Bank of India >I8BI?
iii.Industrial redit and Investment orporation of India td. >III?
iv.Industrial "econstruction Bank of India >I"BI?
v.$hipping redit and Investment ompany of India td. >$II td.?
#6 State Level ;iacial *odies:
i.$tate &inancial orporations >$&s?
ii.$tate Industrial 8evelopment orporations >$I8s?
iii.$tate Industrial and Investment orporations >$IIs?
'6 All +dia Level +vestmet +stitutios:
i.ife Insurance orporation of India >I?
ii.;nit Trust of India >;TI?
iii.3eneral Insurance orporation of India >3I? and its subsidiary
companies.
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)6 Comme"cial *a(s:88
ommercial banks )oin consortium financing with all
India financial institutions to provide medium term loan to industrial pro)ects,
otherwise they cater to the needs for working capital re6uirements.
,6 $utual ;uds
/6 =etu"e Ca!ital ;uds
60
P"oject Couselli%
7 of 1/G?
#6
0e shall not derive any direct or indirect benefit out of the clients
funds or securities
'6
0e shall not pledge or give on loan securities held on behalf of clients9
to a third person without obtaining a written permission from his
client
)6
0e shall ensure proper and timely handling of complaints from his
clients and take appropriate action immediately
,6
0e shall abide by the code of conduct.
*asic !"ici!les of !o"tfolio maa%emet
There are two basic principles, given below, for effective portfolio management'
16
+ffective investment planning, and
#6
onstant review of investment.
16 Effective ivestmet !lai%
73
Merchant bankers rendering the service as portfolio managers plan for the
investment in securities by considering the following factors'
i.&iscal, financial and monetary policies of the entral 3overnment or
"eserve Bank of India.
ii.Industrial and economic policy of the 3overnment and their impact on
industry prospects in terms of prospective technological change,
competition in the market, capacity utili*ation in the industry, demand
prospects, etc.
#6 Costat "eview of ivestmet
Merchant bankersD portfolio managers should constantly review their
investments in securities and continue selling and purchasing to change
investments in more profitable avenues. &or this purpose it is necessary to
carry on the following analysis'@
i.Assessment of 6uality of management of the companies in which
investment has already been made or is planned to be made
ii.&inancial analysis and trend analysis of companies balance sheetsDprofit
and loss accounts to choose more sound companies with optimum
capital structure and better performance and off@load investment made in
companies with slackening performance
74
iii.Analysis of securities market trend is done on a continuous basis.
75
$e"%e"s ad Ac9uisitios
Business combinations are known by different names vi*. mergers,
consolidation
s, takeover, amalgamations, and ac6uisitions. Meanings of these
terms should be understood as some of these terms carry different meanings in
different situations. &or example, the meaning of the word combination- it
refers to mergers and consolidation as a common term used interchangeably
but carrying legally distinct interpretation.
$eai% of te"ms:
$e"%e" 7
Mergers is defined as a combination of two or more companies into a
single company where one survives and the others lose their corporate
existence. The survivor ac6uires the assets as well as the liabilities of the
merged company or companies. 3enerally, the company which survives is the
buyer which retains its identity and the seller company is extinguished. Merger
is also defined as amalgamation. Merger is the fusion of two or more existing
companies. All assets, liabilities and stock of one company stand transferred to
Transferee ompany in consideration of payment in the form of e6uity shares of
Transferee ompany or debentures or cash or mix of the two or three modes.
Amal%amatio 7
%rdinarily amalgamation means merger. Both the terms are
used interchangeably.
76
Cosolidatio 7
onsolidation is known as the fusion of two existing
companies into a new company in which both the existing companies
extinguish. Thus, consolidation is mixing up of the two companies to make them
into a new one in which both the existing companies lose their identity and
cease to exist. The mix@up assets of the two companies are known by a new
name and the shareholders of two companies become shareholders of the new
company. !one of the consolidating firms legally survive. There is no
designation of buyer and seller. All consolidating companies are dissolved. In
other words, all the assets, liabilities and stocks of payment in terms of e6uity
shares or bonds or cash or combination of the two or all modes of payments in
proper mix
Holdi% Com!ay 7
Mergers and consolidations are distinct business
combinations which differ from a holding company. The relationship of the two
companies when combine their resources are differently known as parent
company which holds the e6uity stock of the other company known as
subsidiary and controls its affairs. The main criteria of becoming holding
company is the control in the composition in the Board of 8irectors in another
company and such control should emerge from holding of e6uity shares and
thereby more than E5H of the total voting power of such company.
77
Ac9uisitio 7
In the context of business combinations, an ac6uisition is the
purchase by one company of a controlling interest in the share capital of
another existing company. An ac6uisition may be affected by'
a3
Agreement with the persons holding ma)or interest in the company
management like members of the board or ma)or shareholders
commanding ma)ority of voting power.
b3
for cash? of the shares or assets of one company by the
other.
b3
Ac6uisition >in exchange for shares or other securities in the ac6uiring
company? of shares or assets of one company by another.
c3
Ac6uisition of undertaking or shares of both companies by a new
company in exchange for shares or other securities.
d3
Ac6uisition of minority held shares of a subsidiary by parent company.
2+=3 ;ollow the chec( list fo" com!leti% !"elimia"y ivesti%atio fo"
me"%e"
16
Memorandum and articles of association of the company.
#6
Management agreement and documents relating to succession, etc.
'6
$hareholding pattern, agreement between shareholders.
)6
8irectors loan to the company.
,6
Information for preliminary investigation.
a3
Audited accounts for E years and current year.
83
b3
ash flow and ratio analysis for E years with pro)ections for E years.
c3
"ecent valuation report on land, building, plant and machinery,
leases, stocks, etc.
d3
&inancial analysis for last E years covering turnover and profit
margins product@wise, market@wise with pro)ections for E years with
comments of management about continuation of present policy or
addition of alternatives.
e3
Budgeted accounts and management accounts for past E years
covering current year with comments of management.
f3
8epartmental analysis for past E years commenting on staff,
workload, output, suggested changes.
%3
!AF?, is calculated daily based on the total value of the
fund divided by the number of shares currently issued and outstanding.
Advata%es of mutual fuds 7
Advantages of mutual funds over direct
investment are noted below'
?
Reduce "is( 7
Mutual fund provides small investors access to reduced
investment risk resulting from diversification, economies of scale in
transaction cost and professional finance management.
7?
&ive"sified ivestmet 7
$mall investors participate in larger basket of
securities and share the benefits of efficiently managed portfolio by the
experts and are freed of keeping any records of share certificates, etc. of
various companies, tax rules, etc.
86
/?
*othe"atio8f"ee ivestmet 7
Investors get freedom from emotional
stress involved in buying or selling securities. Mutual funds relieve them
from such stress as it is managed by professional experts who act
scientifically with right timings in buying and selling for their clients.
G?
Revolvi% ty!e of ivestmet 7
Automatic re@investment of dividends
and capital gains provides relief to the members of mutual funds.
E?
Selectio ad timi%s of ivestmet 7
expertise in stock selection and
timing is made available to investors so that invested funds generate
higher returns to them.
2?
>ide ivestmet o!!o"tuities 7
Availment of wider investment
opportunities that create an increased level of li6uidity for the funds
holders become possible because of package of more li6uid securities in
the portfolio of mutual funds. These securities could be converted into
cash without any loss of time.
$utual fud "etu"s 7
0olders of mutual funds get return in the following
forms'
?
&ivideds 7
The dividend income to mutual fund company from
investments in shares, both e6uity and preference are passed on to
87
holders. These dividends are sub)ect to tax deduction as per Income@tax
laws.
7?
Ca!ital %ais 7
Mutual fund holders or owners also get benefits of
capital gains which are reali*ed and distributed to them in cash or kind.
These are sub)ect to tax in the same way as gains or losses of directly
held securities.
/?
+c"ease o" dec"ease i et assets value 7
The increase or decrease
in net assets value are the results of unreali*ed gains and losses on
portfolio holdings. They are not taxed until reali*ed.
Sale ad !u"chase of mutual fuds sha"es:
Mutual fund shares may be easily purchased or sold directly through the
management company9s sales officesDagents or through stock brokers. A
loading fee is usually charged >in the case of open fund mutual funds? for the
initial purchase. The fee is added to the !AF of shares in order to arrive at the
purchase price. $uch a loading fee reduces the 6uantity of funds invested. The
fee range may differ as per prevalent practices in different countries and usually
range of GH to 1H of the total purchase. $uch mutual funds are called =load
mutual funds9 where no load fee is charged, are called non@load mutual funds-.
!on@load mutual funds will have higher management fee to off set the absence
of the load fee. A small fee is charged on redemption for non@load mutual fund
88
shares when redemption occurs within 2 months of the purchase date. The fee
is .EH and is meant to discourage trading of the shares on stock exchanges.
lose@end mutual fund shares are sold through underwriters, like e6uity shares
offerings, load mutual fund shares are bought and sold through dealers at their
bid and ask price. The bid price represents the current pro rata market value of
the assets backing each share. The ask price reflects the bid price plus a
commission. The commission which may be as high as :.EH goes to the dealer
or underwriter who sells the shares to cover expenses. %n the other hand, non@
load mutual funds buy and sell their shares at the same price without charging
any additional sum towards fee or load charges.
89
;acto"i%
&actoring , a sort of suppliers9 credit , is understood by the services an
a
gent renders to its principal by managing the latter9s9 scales ledger ,
reali*ing the book debts or bills receivables against a pre@determined
commission known as =commercial charge9. &or example, the manufacturer
or trader sells the goods directly or through agent and advises the details
of the sale to the factory to reali*e the credits. Thus, the factors
responsibility is contractual with the privity of contract with the seller.
8epending upon the terms of the contract, the factor may assume risk for
non@payment by the customer also. The need for factor services is felt in
view of expanding sales by the manufacturer suppliers so as to manage
the sales reali*ation of books debts. Thus, it reduces dependence upon bank
credit for working capital re6uirements.
The above service of factoring is different what merchant bankers used to
render in the early part of nineteenth century. Then, the mercantile agent had
full control of his principal goods i.e. he used to sell and invoice the goods in his
own name either on term cash or credit depending upon the nature of
transaction.
$echaisms of facto"i%
90
redit sales generate the factoring business in ordinary course of business
dealings. "eali*ation of credit sales is the main function of factoring services.
%nce sale transaction is completed the factor steps in and takes course to
reali*e the sales. Thus, factor works between the seller and the buyer and
sometimes with sellers banks together. The following figure presents a
schematic view of factoring mechanism explaining therein the interaction
between the different parties and flow of information between them'
213 The buye":
a3
Buyer negotiates terms of purchasing plant and machinery or other
material with the seller.
b3
Buyer receives delivery of goods with invoice and instructions by the
seller to make payment to the factor on due dates.
c3
Buyer makes payment to factor in time or gets extension of time or in the
case of default is sub)ect to legal process at the hands of factor.
2#3 The selle":
a3
Memorandum of understanding with the buyer in the form of letter
exchanged between them or agreement entered into between them.
b3
$ells goods to the buyer as per memorandum of understanding.
91
c3
8elivers copies of invoice, delivery challan, memorandum ofÂ
understanding, instructions to make payment to factor given to buyer.
d3
$eller receives :5H or more payment in advance from factor on selling
the receivables from the buyer to him.
e3
$eller receives balance payment from factor after deduction of factor9s
service charges, etc.
2'3 The facto":
a3
The factor enters into agreement with seller for rendering factor services
to it.
b3
%n receipt of copies of sale documents as referred to above makes
payment to the seller of the :5H of the price of the debt.
c3
The factor receives payment from the buyer on due dates and remits the
money to seller after usual deductions.
d3
The factor also ensures that the following conditions should be met to
give full effect to the factoring arrangements'
92
i6
The invoice, bills or other documents drawn by seller should contain a
clause that these payments arising out of the transaction as referred to
or mentioned therein might be factored.
ii6
The seller should confirm in writing to factor that all the payments
arising out of these bills are free from any encumberances, charge,
lien, pledge, hypothecation or mortgage or right of set@off or counter@
claim from another etc.
iii6
The seller should execute a deed of assignment in favour of factor to
enable the latter to recover the payment at the time or after default.
iv6
The seller should confirm by a letter of confirmation that all conditions
to sell J buy contract between the buyer and him have been complied
with and the transaction is complete.
v6
The seller should procure a letter of waiver from the bank in favour of
the factor in case the bank has a charge over the assets sold out to
buyer and the sale proceeds are to be deposited in the account of the
bank.
Ty!es of facto"i%:
93
The factor could be of three broad types i.e. >? domestic factoring, >7? export
factoring, >/? cross border factoring.
213 &omestic facto"i% 7
8omestic factoring could be again sub@divided into
three main principle types vi*.'
2i3 &isclosed facto"i% 7
In disclosed factoring the name of the factor is
disclosed in the invoice by the supplier manufacturer of the goods asking
the buyer to make payment to the factor so named therein.
2ii3 @disclosed facto"i% 7
The name of the factor is not disclosed in the
invoice although factor maintains the sales ledger of the supplier
manufacturer. The entire reali*ation of the business transaction is done in
the name of the supplier company but controls of all moneys remain with
the factor.
2iii3 +voice discouti% 7
The factor could be a bank or the supplier of
funds which discounts the invoices of the supplier at a pre@agreed credit
limit providing finance to the supplier against the security in the form of a
charge on the book debts of the supplier on a specific cash receivables.
2#3 E!o"t facto"i% 7
In export factoring, banks play an important part. The
export company obtains finance from the bank by virtually selling the export
document to it on a reasonable basis i.e. if the claims are not honoured by the
94
importers bank the exporter shall repay the bank the amount received. The
factor bank usually advances 4EH@@E5H of the export claims of the supplier
exporter.
2'3 C"oss bo"de" facto"i% 7
+xport factoring is also known as cross border
factoring when import factor at the debtor9s place is engaged by export factor.
Import factor has knowledge of local conditions and provides help in reali*ation
as well as reduction of commercial risk. +xport factor takes over the commercial
risk from the exporter on the assurances given by import factor.
$ai te"ms ad coditios of facto"i% 7
The main terms and conditions of
factoring which are included in the agreement to be entered into between the
supplier and factor are precisely listed below'@
16
Assignment of debt in favour of factor.
#6
$elling limits and the conditions with which the factor will have no
recourse to the supplier on non@payment from the customer and in what
circumstances the factor will turn to recourse to the supplier.
'6
$elling out details of the payment to the factor for his services known as
service charge or commercial charge which is usually a percentage on
turnover.
95
)6
$elling out details of the interest to be allowed to the factor on the
accounts where credit has been allowedDto be allowed to the supplier.
The rate of interest is to vary depending upon the money market
conditions and is commonly fixed at 7 and a half to G percent per annum
above the base rate so as to give a better margin to the factor.
,6
 Agreement should set the limit of any overdraft by the supplier and the
rate of interest to be charged by the factor on such overdrafts.
/6
The agreement should specify that the amount to be paid by the factor to
the supplier should be net of the service charge.
06
The percentage of the amount of the invoice value to be received from
the factor by the supplier be specified in the agreement. ;sually, about
:5H of the invoice value of the amount is provided by the factor to the
supplier.
46
$pecific schedule be provided in the agreement setting out special terms
for the factor to handle accounts of different customers.
96
*eefits of facto"i%:
16
&actoring makes through discounting the bills, the funds available to
business enterprises which do not carry legal strings like loans or fixed
deposits as the former one is neither a loan nor a deposit.
#6
$ince factoring makes available to the firm short@term money, the firm9s
needs for funds is satisfied without recourse to borrowing. Thus, factoring
helps in avoiding increased debts.
'6
$ince the finds are easily made available by factors to the extent of :5H
of the invoices, the firm can easily meet its liabilities. This enables the
firm to reduce in balance sheet the reali*ations from debtors and also the
elimination of current liabilities to the same extent. Thus, the current
assets are flexibility managed by the firm reducing current ratio as well
as the working capital re6uirements.
)6
&actoring services assist in improving the financial position of the
enterprise and avoidance of sickness for want of reali*ation of sales.
97
CHAPTER 11
PLAFERS +. $ERCHA.T *A.G+.<
16E.A$
+!AM was founded in1:G to provide knowledge@driven financial
services at the time when Indian economy investors faced a bewildering
array of options. +!AM is the one of the largest underwriters in India.
+!AM offers promising C exciting companies the opportunity of
assessing the public market e6uity finances. +!AM9s long@term
association with capital markets C primary markets has provided it with
deep insights of the functioning of Indian financial institutions. The
merchant banking services provided by +!AM are' @
Equity debt/syndication:
"aising capital through a private
placement of a company9s securities is an effective C timely offering
to a public offering. +!AM represents the clients in the private
placement of debt and e6uity with institutional C high net worth
investors.
Corporate Restructuring: -
+!AM provides client with strategic and
practical solutions to financial challenges. Their restructuring services
includes Mergers C Ac6uisitions, Takeovers, 8ebt restructuring,
Buyers services etc.
98
+!AM also provide the seed stage services, value creation services
and I<%9s advisory services which are represented below'
#6+C+C+ SEC@R+T+ES
III $ecurities imited is a leader across the spectrum of Merchant
Banking. (e are experienced in every aspect of the business from
domestic and international capital markets advisory, to MCA advisory,
:H of Indias 38foreign exchange? market
with a G per cent market share.
As the leading custodian, itibank has over P77 billion of custody
assets under management.
CHAPTER 1#
CHALLE.
