Investment Banking - Factoring

Factoring:Definition

Facotor is a financial intermediary,which recieved bills recievable from the companies or traders at discounted price.Factor give cash in the return of bills recievable after charging his commission.Factor advance most of the cash and remaining is paid after reciept of funds from invoice party.

 Factoring is basically a financial mand management support to the client .It is a method of converting non productive and inactive assets(debts) into productive assets(cash) by selling book debts to the companies specialize in collection and administration.

For Example, If Factor purchase a incoice from X ltd.represent outstanding recievable from Y ltd, and factor  is discount this invoice  say rs 100000.A Factor discount it at @ 5%,then in such case factor make payment rs 95000 to the X ltd.In such case factor make payment rs 60000 in advance and remaining rs 35000 is paid after total fund rs 100000 is recieved from the Y ltd.

Functions of Factors:

1.Factor act as a local representatives for the seller of the goods.

2.Factor main function is to recieve,store and safekeeping of  commodities as agents.

3.It also helps in arranging for sales and delivery of goods to buyers.

4.It helps in collecting and remitting of  sales  proceeds.

5.Factor hepls in making advance payments to the seller against invoice of goods.

6.Factor give fill information about the buyers to the seller before entering in the factoring.

7.Factor have special skills of analysing risk or losses related to the service of bill discounting.

8.Factor maintain the account(ledger) related to the recievables.

9.It helps in collection of recievable and protecting against default in payment by debtors.

Difference between Bills Discounting and Factoring:

1.In Bills discounting individual transaction is taking place, while Factoring is taking place between whole turnover basis.This give client liberty to draw desire finance only.

2.In Bills discounting each bills has to be individually accepted by the drawee which takes place,while in case of Factoring one time notification is taken from the customers at the commencement of the facility.

3.In Bills dicounting more paperwork is involved,whil in case of Factoing no such paperwork is involved.

4.In Bills discounting grace period of payment is 3 days,while in case of Factoring period are far more generous.

5.In Bills discounting original document like invoice,Bill of lading are to be submitted,while in case of Factoring no copies of such documents are necessary.

6.In Bills discounting Stamp duty is charged on certain usance bills together with bank charge.It prove to be very expensive,while in case of Factoring no Stamp duty is charged on invoice.No charge other than usual finance and service charge.

7.In Bills discounting charge up front charge,while in case of Factoring no up front charge is involved.Only finance charge is leived on only the amount of money withdrawn.

 Difference between Cash Credit and Factoring:

1.In Cash credit margin retain is on recievables are usually 40-50%,while in case of Factoring margin retain is usually 20%.

2.In Cash credit drawing power on the basis of stock statements is computed once a month.If invoice are raise between submission of stock statements,no money can be drawn against them,while in case of Factoring prepayments against invoice are made as and when they are factored.It is like a cash sales.

3.The client has to be submitted the various statements like stock statement ect to the bank,while in case of Factoring no statements are to be given.Once the contarary factor furnish various report on both client and the customers.

4.In Cash credit no collection service performed for the customers/client,while in case of Factor have performed collection of debt.

5.In Cash credit Once the book debt exceeds it's usance period.It is removed from the eligible list,while in case of Factoring,factor allow generous grace periods.

6.In Cash credit processing fees are about 1% of the limit,while in case of Facoring maximum processing fees are about rs 30000/ for non SSI & rs15000/ for SSI.

7.In Cash credit interest link tp PLR,while in case of Factoring finance charge is linked to the cost od fund which is competitive to that of banks.

Types of Factoring:

1.Full Factoring :It is also known as without Recource factoring,providing all types of services like finance sales ledger administration,Collection,Debt protection and Customer information.

2.Recource Factoring:Under this types of Factor services client liability to Factoris not discharge until customer pay full cash pyments.It provide all types of services except debt protection.

3.Matrurity Factoring:Under this types of Factor service all types of facilities are providing except providing finance.Here payment is made to to the clients at the end of the collection period or on  the day of collection amount whicheve is earlier.It is also known as Collection factoring.

4.Undisclosed Factoring:In this types of factoring arrangement between factor and client is not aware by the customer.Here, client recieve debt collections and make payments of each invoice collection to the factor, if advance payments is recieved by the client earlier.

5.Invoice Discounting:Here the facility provided by the Factor is finance.In this facilities client is from reputed company and deal it's customer directly for collection and keep this factoring arrangement confidential.Client collect payments from the customers and handed over to the Factor.Risk involved in this types of Factoring is much higher then any other methods.

 6.Advance Factoring:Under this types of factoring,factor make advance payment to the client at predetermine rate of interest on  non due recievable/debt collections.Afterward,at the time of Factoring client give payments to the Factor if client recieve debt collections.

7.Bulk Factoring:It is a modified version of invoice discounting whearin notification of  assignment of debt is given to the customer.Client is making full payment and make collection on his own level.

8.Agency Factoring:In this types of factoring,facilities of finance and debt protection is provided by the Factor,while sales ledger administrations and collection of debts are carries out by client.



Benefits of Factoring:
1.Reduction in Administrative Overhead:The most important benefit of Factoring to the Company/Seller is to reduce administrative cost of the Business by reducing the cost of fund recovering through recovery agents,who charge extra commisions.

2.Bad debt loss reduced:Another benefit of Factoring to the seller is to reduce it's bad debts by selling it's bad debts collections to the factor.Then factor recover bad debts on his own level.

3.Better use of management time:Factoring helps seller to increase efficiences  of better use of time management by avoiding wastage of time in recovering of invoice payments or bad debt recovering.

4.Increase liquidity flow:Factoring helps seller/companies to increase liquidity flow in there business because of easy availability of fund in advance through advance factoring services.

5.Increase turnover or profitability:Factoring increase liquidity among the busineses,which further increase the capacity of more production/trading and increase sales,which helps to push up the profitability of the company.
6.All round growth/diversification:Factoring ensure easy flow of funds and liquidity,which helps companies to grow and diversify there business in other sectors also.

7.Sales ledger administration:Factoring hepls busineses/sellers to maintain and keep proper record of sales ledger,sometimes factor itself administre the sales ledger.

8.Better competitive term:The Factor service provider have expertise in it's field,which helps companies/seller to increase competitiveness in there field also by reducing work load of bad debt recievable collections.

Factor benefit to the Client's Customers(Buyers):
1.Main benefit of factoring service for the buyers is that they get adequate credit period for payments of assigned debts.
2.Factor helps buyers to facilititate credit purchases,by having facilities of  purchasing invoice recievable from the seller.
3.Due to the availability of Factor services,Customers saves on high Bank charges and expenses.
4.Under factor service facility,customer does not need documentation except acknowledgement of notification letter(customer undertaking to make payment of invoices to the factor).
5.Factor furnish the customers with periodic statement of outstanding invoice factor ed on them.


Factor benefit to the Client's Banker:
1.Factoring is not a threat to banking system,it is a financial service complementary to that of banks.
2.Factor improves liquidity to the client's,which hence increase liquidity to the client's bank.
3.Credit sales are closely monitored by the factor and proceeds are routed with the client's accounts with Banks.
4.Factoring improve the quality of advances of Banks.


Problems of Factoring:
1.Factoring in india is in a introductory stage only,the aspect of factoring is not so fimiliar to the industry and lack of awareness about the essential service especially among the medium scale industry is a big marketing problem.
2.The product have been design very well but the service seekers has not yet communicated,unless customer come to know they can not buy a product or service.
3.Another marketing  problem of Factor is getting disclaimer certificate from bank.
4.There is lack of legal framework for the factoring services.

Investment Banking - Securitization

Securitization:

Securitization means taking illiquid or a group of assets,which is transformed into a security by using financial engineering.Example of securitization is a mortgage-backed security(MBS),which is types of assets based security that is secured by collection of assets.
Basically,it is type of process in which iiliquid assets are packaged and sold them into third party investors.Investors have a right to recover debt from the borrowers,lender don't have right on this types of aseets.

Securitization in India:

This technique is of recent development in india,ICICI is leading in this area.In 1991,City Bank has introduce first securitization concept by introducing Securitising Auto loan.

From 1992-98,large number of transactions,which is 35% is related to Hire Purchase recievables of Truks.Main hindrances of growth of  securitization in india are leagal,accounting and tax related matters.Also,absence of active secondary debt market is also it's limitation.

Most of the Credit rating agencies like CRISIL,ICRA,Standard & Poor's(S&P) ect.are doing there job to popularise this concept of Securitization.

Upto the period of 1998,Housing loans were not securitised,afterwards this sector is also came under the securitization concept.In the year 2002 Securitization act 2002 and Securitization & reconstruction of financial assets & enforcement of security interest act 2002 has made.By this period Housing Finance companies and cooperative banks also covered under Securitization act 2002.In this process of securitization,individual investors are not been permitted to participate.

Needs for Securitization:

1.Asset-Liability Management(ALM):Main needs of Securitization is to manage the mismatch of assets and liabilities of financial institutions(specially to Banks and NBFC's) because if there is a mismatch in ALM then there is financial and liquidity crises arises in financial institutions.Sometimes they don't have funds to give cash to the big withdrawals because of liquidity shortage.

2.To Control NPA's: Securitization also helps financial institutions to control NPA's because large numbers of NPA's affect creditworthiness of financial institution.Also NPA's somethime lead Financial institution to default.Many NPA's are used as to securitized and create new asset or remove these NPA's,which improve balance sheets of the financial instituions. 

Factors responsible for NPA's:

(A) Internal Factors :

1.Project appraisal deficiency:Many a times Financial institutions giving credit or loans to the firms,which do not evaluate project during the structure level of project appraisals.Also sometime financial institutes finance the projects which are unviable.

2.Project management deficiency:Sometimes firms do not have good management team to manage the operation of the running project,which hence lead to going project in losses.This has lead to default the loan instalments payment of financial instituions and hence incrases the NPA's.

3.Ineffictive credit monitoring:Many a times Financial instituions not have good credit monitoring policies,which lead to not tracking defaulters correctly and hence lead to occure problem of NPA's.

4.Follow up Mechanism:Sometimes financial instituions not have good follow up mechanism to take follow up of customers,which make customers lassy for paying loan installments.

(B) External Factors:

1.Economic slowdown:If there is a Economic slowdown at domestic and global level,then there is a problem of increasing NPA's beacuse of lots of loan defaulters arises.

2.Non availability of Raw materials:If any company of firm not get raw material for there production then it reduce the sales and hence profit,which leads to default of loan payments of firms.

3.Power shortage:If any company running on the basis of  power then if power is not available,which stop it's productions and hence fall in profit,which lead to incease in NPA's of finance institutions.

4.Operation Hinderances:If there is any operation hindrence of firms due to factors like labour strike then it lead to stop production and hence fall in profit,which lead to growing NPA's.

5.Natural Calamities:Any types of natural calamities like flood and drought lead to rise in NPA's specially in Agricultural loans.

6.Market Saturation:If Financial instituions given loans to any business sector which is going at satutated level then it lead to loans defaults from that sector firms and hence leads to NPA's.

7.Product Obsolescence:If any product of any firm is obsolete and not going to sold in the market then it lead to increase NPA's of the Financial institutes which given loans to that sector.This is happen in Electronic and Electrical sector.

8.Slow Judiciary system:In india judiciary system is slow.if any Financial institutions file a case against defaulters then it takes lots of years to come judgement.By that time loans is going under NPA's .

Steps in Securitization:

1.Organization:First step of Securitization is to identify the organisation or firm,whose assets are beign securitise.

2.Pooling of assets:After that identify the assets which are non performing and then pooled them into for the further process of securitization.

3.Spliting up in marketable lots:Then the pooled assets are beign split into a different marketable lots for selling into different investors.

4.Enhancing Creditability:Therefore,afterward enhance creditability of the product formed into different lots by providing enough information to the investors related to the mortgagged assets backed by this types of products.

5.Sales to Investors:Afterward,final securitized product formed is sold to the investors.

6.Final Settlement: Hence,finally the securitized products is formed by the debts are  recovered by the investors who bought this types of products.

Pre-Requisites for Securitizations:

1.In the the process of Securitization,the assets which are securitisied should be highly in quality.Means loans have been provided to the borrowers,after satisfying the credit worthiness of the borrowers by the lenders.

2.The default rate are not existence or it is very low.It means borrowers repay the principle amount and interest on time or on date of pre-schedule structure.

3.The database related to the information about the borrowers should be available related to the performance of loans  assets,so that it can helps in evaluating the various aspect related to the borrowers.

4.There should be the requirement of secondary debt market for the trading of securitized debt instruments.

5.There should be well supportive and legal normas required for the protection of different parties involve in securitization process.

6.Beside above, there should be sound capital and money market are been operation.Also, there should be stable interest rate structure are been used.Further,standardised document are been used.

Benefits to Originator fom Securitization:

1.Reduced Cost of Capital:During the time of liquidity crunch,originators(like banks) take fund from other Banks or Financial institutions at higher interest rate.So if Banks raised fund through Securitizations then it would reduce the cost of capital.

2.Exemption from Capital adequacy requirements:The originator who raised funds throughSecuritization are exemption to maintain Capital adequacy requirements.

3.Assets Liability Management(ALM):Securitization hepls originators(like Banks,NBFC's) to manage there assets liability requirement.The got fund through securitization and fullfill there liquidity requirements.

4.Increase liquidity:Securitisation helps to increase liquidity to the Banks,NBFC's ect. for there future lending purposes.

5.Achieving Expertise:Securitization helps Originators(Banks) to achieve special expertise related to the process of securitization like maintaining investors relations,assets valuations ect.

6.Up fronting profits:Sometime originators of securitizations give his service related to the securitization to the third party (other Banks) on charging upfront commissions.

Securitisable Assets:

1.Housing loans:This loan is the widely used in the securitization purposes because of big loan amount.

2.Mortgage loans:The assets kept as a mortgaged is also used under securitization purpses and sell it to other investors.

3.Auto loans:These loans are also very large in number and lots of NPA's are coming under this loan,so this is also used for securitization in order to incrase liquidity by the issuer.

4.Credit card recievables:This is also another types of securitized assets,used for selling to the investors for reducing  credit card defaulters.

5.Trade recievable:Sometimes,trade bills are not paid on time,so these bill are used under securitization in order to increase cash flow to the traders.

6.Consumer loans:These loans are very risky for the lenders,so it can used it under securitization for minimizing defaulters.

7.Education loans:This is a safer types of but still it is used under securitization in order to increase liquidity to the lenders.

8.Leases:In some rare cases this assets are used under securitization.In a case when lessee unable to pay lease to lessor then lease is come under securitize assets.

9.Hire purchase agreements:This is another types of securitized assets used under securitizations.

10.Students fees:In very rare cases student fees are come under securitization.if parents are unable to pay fees then this case is come into picture.

11.ElectricityBills:This is also another types of securitized assets,but in india it use in very rare cases(only to corporates electricity bills) because of electricity department is under government.

12.Central & State taxes:It is also use in very low in india.

13.Road Taxes &Toll Taxes: Sometimes,this assets are used under securitizations in india.

SECURITISATION STRUCTURES:
1.Pass Through Structure(PTS):It is a most common structure of Securitization,where ownership is transferred to SPV/Trust.The ownership certificate is known as PTC's,which are sold directly to investors.Each PTC represent a claim of entire portfolio and investors have direct ownership of entire assets pooled in portfolio.After assets are tranfered they are not appears on originator's balance sheet.Originator or other service institution collect interest and principle amount and pass it to the investors after charging there commission.
2.Assets Backed Security(ABS):The Originator sell assets directly to it's own Subsidary created for this purpose and it's ownership is retained by the Corporate group of the originator.Assets sold is appear in the Consolidated balance sheet of the Subsidary.Then Subsidary sell assets to the investors and collect revenue fron the assets and transfered to the trustee for the disbursment to the investors.
3.Pay Through Structures(PTS):Here, all cash flow recieves by originator are reinvested by the SPV in securities which bear fixed return on interest.Return recieved by the SPV from such investment are distribute to the investors.In this structure assets appear in the balance sheet of the Originator.
4.Stripped Derivatives Structures(SDS):In this structure cash flow from the SPV are broken into two parts,Principle only(PO) and Interest only(IO) amounts.Payments to Principle only(PO) investors from principle amount and payment to Interest only(IO) investors from interest amount.

Benefits of Assets backed Security(ABS) over Conventional instruments:

1.ABS are claimes against Pool of assets:In ABS,if claim is made it would be against a pool of assets rather than claim against issuer.Here Trustee can proceeds against underlying Borrowers.Also,investors do not have claim against any corporate entity.

2.Difference due to Rating:ABS are rated by one and more Rating agencies on other hans convestional instruments are without rated.Also in ABS there are a good quality assets and legal intergrity are present .

3.ABS are highly rated:Due to credit enhancement in the form of cash collateral,lettar of credit,over collateralization ect ABS are highly rated by Rating agency.

4.Bankrupcy Remote:In event of liqidation of Originator,official liquidator  would not have any claim on pool of assets Securitised.Wherease in case of Traditional instruments it is not so.

5.Timely Payment and better monitoring:In ABS, the payment of principle and interest amount is done on time,Also there are better monitoring of assets in ABS.

6.Amortization period:In ABS,there is monthly amotization so that investors get monthly repayment of principle rather than half yearly basis in case of Conventional Instruments.

Investment Banking - Financial services & Merchant Banking

Financial Services:

Financial Service industry include the firms that engaged in activies such as investing,lending,insurance,securities trading and securities issuance.In Financial market the financial asstes being created and transfered with the denomination of sum money.The benifits recieved may be in the form of dividend or interests.

 In india Financial market contribute to 60% to GDP in 2010-11,which is grown from 36% of GDP in 1980-80.Also,Contribution of Financial service sector in employment is grown from 54% in 1971 to 63% in 2010.This shown huge growth of Financial service sector in the country.

Reasons for the Growth of Service Sector:

1.There is the explosive growth of Service sector started in twentieth century specially after second world war.

 2.Globalization,Liberalization,Privatisation and industrial revolution across the globe have given the rise of quality and sophistication of Services.

3.As the literacy rate has improves specially women literacy rate , more and more women are educated and came in the job market specially to the service sector.

4.As the Capital market start developing,career opportunities start growing in service sector,which push large group of population in service sector.

5. As the country is shift to the deveploped statge from developing,more and more people start adopting career in Servise sectors.


 Financial Systems:
It is a Institutional frameworke that exist in the country to enable financial transaction.It allow transfer of money between investors and borrowers.Financial systems work or operates of global,regional and corporation levels.There are some rugulators who regulate financial systems,some are like RBI,IRDA,SEBI ect.
 Three main parts of financial systems:
1.Financial assets:These are the assets which are transfer between one party( eg. lenders) to another party(eg.borrowers).These may be Loan,Deposits,Bonds,Equities ect).
There are assets for savers like mutual funds,deposits,equities ect.Also assets for borrowers like loans,overdrafts ect.Government raise funds by issuing Bonds,Treasury bills ect.
2.Financial institutions:Thses are the institutions which run financial assets like Banks,Mutual funds,Insurance companies ect.Main airms of financial institutions is to mobilising savings from the depositors and then distribute effectively this savings.
3.Financial markets:These are are markets where transaction of  financial products or assets are taking place.These markets are like money market,capital market,forex market ect.


Financial Services Classifications:
(A) Fund based financial services
1.Commercial banking:It is a types of Financial services which accept deposits and making business loans.Also,provides basics investment products.
2.Leasing:It is a contract between two parties,lessee and lessor.Lessee is user of assets and Lessor is the owner of assets.Lessee agree to pay a predetermeine rate of using assets to the Lessor.
3.Hire Purchase financing:It is types of financing in which a purchaser of goods are liable to pay a amount in installments over a period of time.
4.Mutual funds:It is a types of financial services,which pools saving from the investors and invest in a predetermine objectives.
5.Factoring:It is a types of financial transaction in which a business sells it's account recievable(invoices) to the third party( which is called factor) at discount.
6 Forefeiting:It is a types of financing in which banks give exporters cash in advance so as to guatantees payment to them.
7.Securitization:It ia process in which issuer create financial instruments by combining other financial assets and then marketing as a different packaged instruments to the investors.
8.Bank Financing:It is process in which banks finance any asstes by providing loans to the purchaser of the assets.
9.Stock Investment:In this process investor invest money in any company's stock or share for price appreciation in future period of time.
10.Venture Capital:It this process capital is invested in any new business idea.Venture capitalist provise capital to the enterprenure who have innovative business idea.
11.Credit Cards:It is a type of financial services in which advance credit is provided  to the credit card holders according to his credit worthiness.
12.Insurance Products:Insurance products are also a part of Financial services,they insure the risk of any person or damage to any assets by charging small premium amount regularly.


(B) Non Fund based Financial Services:
1.Merchant Banking (include public issue management,underwriting ect):These are a types of Financial Institutions,which provides capital by subscribing shares of the firms or helps in selling the shares of the firms.Merchant Banks also provides consultancy services to the firms by providing correct advices related to the financial matters to the firms.
2.Portfolio  management:It is a process of evaluating the investment objectives and risk profile of the investors and then allocate invested assets accordingly in order to maximise return at minimum risk.Portfolio management services are provide by the skilled finance professional,who have a expertise in researching investment assets.
3.Stock and Security broking:This is a types of financial services,where selling and buying of stocks and securities taking places on the behalf of  customers by charging small amount(brokrage).
4.Merger and Takeover consultancy:These are an types of financial service providers,helps in merging and takeover of firms by using there expertise of analyzing the firms complete financial and operations reports.
5.Leasing and Hire purchase broking:These are an financial service providers,which helps firms or individuals in leasing there assets.
6.Foreign Exchange Broking:This is atypes of financial service,which helps in buying and selling of currency with another currency.For this service carry a charge for providing a service which is called brokrage.
7.Financial Consulting:This ia types of financial service in which financial professional give consultancy to any firm,which need to restructure it's financial statments.
8.Credit Rating:It is a rating giving by the credit rating agencies to the firms on the bases of the firm's efficiency of doing business.
9.Depositories:Thses are a types of service providers,which keeps the shares,mutual funds ect safely with them.They secure the investment of the investors at safer place.
10.Tax Planning advising:These are a another types of financial service providers,who provide service related to the Tax planning.They advice in minimizing Tax liabilities in a legal way.


MERCHANT BANKING:
In 13th Cerntury Merchant Bankers were Traders of Commodities and act of as a bankers to the  European Kings.They finance the continental wars and coastel trades.They lent there names to lesser known traders by accepting bills through which they guaranteed that the holder of the bill would recieve full payment .
In today's time Merchant banker's provide financial consultancy to the firms and also hepls firms to raise capital by selling equitites.

Roles of Merchant Bankers:
1.Merchant Bankers helps companies on advicing on the capital strucutre  and instruments of issue.
2.It hepls firms in assessing and appraisal there project reports.
3.Merchant Bankers helps in appointment of Bankers,Underwriters,Brokers,Registrars,Printers and advertisement agents.
4.Merchant Bankers helps firms going publicly by deciding accurate pricing of the Initial Public Offer(IPO).
5.Merchant Bankers decide the patterns of the advertisement of the IPO's.
6.Merchant Bankers decide the collection branches where applications of IPO's are received or collected.
7.Merchant Bankers decide the opening and closing of the subscription list.
8.Merchant Bankers obtain daily reports of the applications and amount collected at branches.
9.Merchant Bankers obtain consents of the Stock exchange and get basis of allotment approved.

Factors Selecting Merchant Mankers:
1.Ethics and Integrity:Merchant Bankers should be ehtical and not use any illigal activities in services it provide.
2.Raputations:Merchant Bankers should have good reputation in Financial market,it should have good credit rating.
3.Trained and Committed manpower:The firms which provide Merchant Banking facilities should appoint trained and committed main power.
4.Concern and interest of clients:A firm want merchant bannking facilities should be appoint Merchant bankers related to the interest of the client of the firm.
5. Liaison and Networking:Firms are selcting Merchant bankers who have good networking in financial market,so that he/se can perform his duty in an efficient manner.
6.Relationship and Contacts:A merchant banker should have good relationship and contact with his previous  other clients and persons who provide underwriting facilities.
7.Infrastructure:Merchant Banker should have developed infrastrucutre like have underwriter facilities,have team of good  Analyst and Financial professionals.
8.Past performance:A Merchant banker should have past track record of merchant banking facilities and issue management,which is a most important factors in selecting merchant bankers.
9.Track record of the company:Merchant Banking company should have good track record of providing services of issue management.
10.Track record of the promoters:A promoters of Merchant banking firm should have godd track record of running a firm legally and ethically.Promoters should not involve in any unfair practices.
11.Professional management:Merchant bankers should have good profesionals for running a firm.so that they can manage the new issue efficiently and effectivly.
12.Financial strength of the promoters and the company:A promoters of Merchant banking firms should have good fiancial capability and strength.



Prime Objectives of Merchant Bankers:
1.Main objective of Merchant Bankers is to provide long term funds to the projects or companies though Initila Public Offers(IPO) or right issues.'
2.Also,Merchant Bankers helps companies in Project counselling ,Loan syndications,Project appraisals and arrangement of Working capitals.
3.Merchant Bankers helps companies in deciding Capital structure.
4.Merchant Bankers providing Portfolio Management services by managing investment portfoilio's of big clients.
5.Merchant Bankers provide Underwiting services by helping companies in subscribing there Public offers.
6.Merchant Bankers helps companies in advicing the matters related to the corporates.Also,helps in managin the new issue of the firms.


SEBI Regulations for Merchant Bankers(1992):Code of conducts for Merchant Bankers
1.SEBI instruct Merchant Bankers for Observing high standads of integrity and fairness in all his dealings.
2.Merchant Bankers should render high standard of services,exercise due diligence,proper care,exercise independence judgement & disclose conflict of interest while providing unbiase services.
3.SEBI do not permitt merchant bankers to make any harmful statements or became privy to any act,practice or unfare competitions,likely to harm any other merchant banker.
4.Merchant banker should provide best possible services to the clients according to the clients needs and environment.
5.Merchant Bankers should ensure theat all professional dealings are effected in prompt ,efficient and cost effective manner.
6.Merchant Bankers deals in securities of the client company without making disclosure to the board as required under the regulation and also to the Board of directors of the client company.
7.Merchant Bnakers should provide investors with truth and adequate informations without making any misguiding or exaggerated claims and are aware of attendant risk before any investment decision are made.
8.Merchant Bankers should ensure copies of prospectus,memorandum and related literature are made available to the investors.
9.Merchant Bnakers should ensure fair allotment of securities and refund of application money without delay.
10.Merchant Bankers should dealt investors complaints adequately.

Qualities of Good Merchant Bankers:
1.Leadership:Merchant bankers should have good leadership qualities to manage his team efficiently and effectively.
2.Aggresive action:Merchant Bankers should have aggresive attitute in order to take decision fast and complete work fast and effecent.
3.Co-Operative and friendliness:Merchant Bankers should be Co-Operative in order to maintain good business relations with clients and his team.
4.Contacts:Merchant Bankers should have contact in finance market,so that he/se should arrange all facilities required for providing merchant banking and issue management like have contacts with underwriters.
5.Attitude towards  problem solving:Merchant bankers should have attitude towards solving problems arises in providing services.
6.Keen to learn new skills,informations and knowledge:Merchant Bankers should have qualities to learn new skills and have good informations & knowledge related to the financial markets.

Mutual Funds(Part 2)

  STRUCTURE FRAMEWORK OF MUTUAL FUNDS

 1.Sponsor:It is a type of finance company,which establish Mutual fund and registred with SEBI.It also,appoint Trustees,the AMC(Asset mangement Company) and Custodian with the prior approval of SEBI and according with SEBI Regulations.

Sponsor shoild have 5year track record in Business related to Financial Market.Also,sponsor's company should have at least  3 year profit making from 5 years.It should contribute 40% of the net worth in AMC in which it is sponsering.Sponsor could be a Banks( SBI,PNB,ICICI ect) or Financial institutions or a Corporates(like Reliance.TATA ect).

2.Trustee:It is also a private ltd company(like Reliance cap Trustee co.ltd).It  protect investors money by playing a role of Gardian.Investors of these fund are the members of this Trustees.

3.Assets Management Company(AMC):It is a pvt ltd Company(like Reliance cap asset mgt company) formed by sopnsor.It's main role is to manage the fund pooled from the investors,it also play a key role of Marketing and Distribution of funds.AMC's have tie up with Banks for the direct credit facilities and other settelment systems.Also,have tie up with custodian(like Karvy) for keeping securities in D-MAT form.

Rights of Trustees:

1.Trustee appoint AMC(Asset Management Company) with the consultation with Sponsor and according to the SEBI Regulations.

2.All Mutual fund schemes launched or floated by the AMC have to be approved by Trustees.

3.Trustees must seek remedial actions fro AMC and in case disiss the AMC.

Obligation of the Trustees:

1.Trustees must ensure due deligence on part of AMC in the appointment od constitution and business associates.

2.Trustees must frunished a harlf yearly report on the activities of AMC  to the SEBI.

3.Trustees must compliance with SEBI Regulations.

4.According to the SEBI Regulations Trustees should organized meeting one  in every two month.

Regulatory Requirement for the AMC's:

1.Only SEBI registered AMC can appoint investor manager of Mutual funds.

2.AMC must have minimum Net Woth of  Rs10 crore at all time .

3.An AMC or Trustees can not be an Trustees or AMC of another Mutual fund.

4.AMC can not enggage in any other business other than Asset management.

5.At least half of the member of AMC ,have to an independent.

Appointment of AMC:

1.The Sponsor or Trustees,if authorized by trust deed appoint the AMC.

2.The AMC are the pvt ltd corporation ,in which the sponsors and their associates or JV partners are shareholders.

3.The AMC has to be a SEBI registered entity with a minimum Net Worth od Rs 10 crore.

The trustees sign an Investment management agreement with the AMC,which spells out the function of the AMC.

Roles of Registrar and Transfer Agents :

1.They are responsible for issuing and redeeming unit of Mutual fund.

2.There role is to process investors applications.

3.The keep details of all investors.

4.They send important informations to the investors.

5.They process Dividend payout.

6.They incorporate changes in investor information.

7.They helps in keeping investors information upto date.

Regulating agencies of Mutual funds:

1.Mutual funds are regulated by SEBI through Mutual fund regulations act 1996.SEBI regulate all funds except offshore funds(ie those scheme offered in foreign counties).

2.Bank sponsored mutual fund were jointly regulated by RBI and SEBI.

3.Liquide fund which invest money in money market instruments are not governed by SEBI alone.

4.If Bank sponsored Mutual fund offers guatrantees,it requires RBI permission.

5.SEBI also regulate Registrar,Custodian,Stock market ect.

Association of Mutual Fund India(AMFI)

AMFI is a Mutual fund industry association,incorporated in 1995.It can just issue guideline to members to enhance and maintain standard in all area.It helps in protecting and promoting the interest of mutual funds and there Unit holders.

Objectives of Mutual Funds:

 1.To promote the interest of Mutual fund and Unit holders.

2.To set ethics,Commercial and proffesional standard in the Industry.

3.To increase public awareness of Mutual fund industry.

4.To developea cadre of well trained distributors.

 

SEBI's Advertising Code for Mutual fund:

1.The dividend declared or paid shall be mentioned in Rs/unit along with the face value of each unit and prevailing NAV at the time of declaration of the dividend.

2.Only Compounded annualised yield can be advertised  if scheme has been existance for more than one year.

3.All performance calculations shall be based only on NAV and payout to the unit holders.

4.Annualised yield should be shown for 1,3,5 years and since launch of the scheme.For the fund with less than 1 year performance can be termed as total returns.

5.Appropriate benchmark and identical time period must be used while comparing.Once choosen the benchmark should be used consistently overtime.

6.Where any ranking is used such ranking be appropriatly mentionaed.

AMFI code of Ethics:

1.Mutual funds have to manage fund for the interest of the unit holders.Investors interest is the periority for the Mutual funds.

2.AMFI expect high standards of services from the fund.

3.Adequate disclosure of fund ought to made to the Unit holders and Trustees.

4.Funds are urge to adopt the use of professional selling practices.

5.Management of funds collected has to be in accordance with stated investment objectives.

6.Funds should avoid conflict of interest in dealing by directors,officers and employees.

7.Funds have to be refrain from unethical market practices.

SIP vs VAP:

1.SIP(Systematic investment Plan):SIP is a process of investing a fixed sum periodically in a diciplined manner for long term.It give benifit of Rupee cost averaging.

2.VAP(Voluntary Investment Plan):It is a revised version of SIP.It allow investors flexibility with respect to the amount and frequency of investment.

INVESTMENT PLANS:

Broadly there are two types of plan:

1.Growth Option:In this types of plan dividend reciev by any scheme should be reinvested.It's main objective is to give huge return to the scheme holders(investors).

2.Dividend Option:In this types of schemes,dividend recieved is not reinvested but distribute to the scheme holder.

Other Plans:

1.SIP:It is known as Systematic investment plan.In this scheme,a fixed amount is invested periodically at regular interval.

2.SWP:It is known as Systematic Withdrawal Plan.In this scheme,investor get back his principle amount in the form of income regularly.

3.STP:It is known as Systematic transfer Plan.It's main aim is to transfer the periodic amount from one scheme into another within the same fund family.

 FUND PERFORMANCE MEASUREMENT:

1.Change in NAV = (NAV at the end - NAV at the begining)*100/NAV at the begining

2.Portfolio Turnover rate:It measure the amount of buying and selling  of security done by the fund.It is calculated by dividing difference of asset purchase and sold by the fund's net assets.

A 100% Portfolio turnover implies that manager replace his entire portfolio during the period in question.200% shown that portfolio change in 6 in a month.

A liquid funds have highest portfolio turnover.

3.Expense Ratio:It is a Ratio of Total expense to average net asset of the fund.Fund with small corpus size will have a higher expense ratio affecting investor return.It measure the fund efficiency and cost effectiveness.

Evaluating the Risk of a Mutual Funds by following tools:

1.Standard Deviation:It meaure the Fluctuation of fund return around a mean level.It give the idea of how volatile the earning are.It measure total risk.It's disadvantage is that it is based on past returns.

2.Beta Coefficient:Beta compare the funds return with market index and measure the sensitivity of fund's return to change in market index.A beta of 1 means fund moves with market and beta of -1 means fund is less volatile than market.It also based on past return.

3.R-Squared:It shows how much is fund's fluctuate with the overall market movement from 0-100%.An index fund will have R-Squared nearly 100%.

4.Alpha:It shown the risk adjusted performance.It compare the fund actual result with what would have been expected from fund's beta and market index performance.

5.Sharpe ratio:It also shown risk adjusted performance.It is calculated by dividing difference between fund's return and Risk free rate of return by Standard deviation.

6.Treynor ratio:It is calculated by dividing differnce between fund's return and Risk free rate of return by Beta.

INITIAL ISSUE EXPENSES:

Expenses which is incurred during the launching of the schemes are known as initial issue expenses.The SEBI impose ceilingof 6% in this case.If any fund is launch without any initial issue expenses than such funds are known as no load funds,but they charge 1% of investment management fees.

Initial issue expenses are the followings:

1.The cost of registration and fund formation.

2.Legal and advisory expenses.

3.Cost of launching of schemes.

4.Advertisement and Promotion expenses.

5.Distribution Cost.

6.Commisions to Selling expenses.

EXPENSES INCURRED BY MUTUAL FUNDS:

1.Investment management fees to AMC

2.Custodian fees

3.Trustee fees

4.Registrar and transfer agent fees

5.Marketing and Distribution expenses

6.Operating expense

7.Audit fees

8.Legal expenses

9.Cost of mandatory Advertisement and Communication to the investors.

                                                              

Mutual Funds(Part 1)

Mutual Funds:Introductions

Mutual Fund is a type of fund which pools money from the different investors and invested according to the certain investment objectives.Mutual funds invest money in the different investment instruments like stocks,mony market instruments,bonds ect.The ownership of the fund in Mutual funds is joint or mutual and  belong to the different investors who's money has invested.

Characteristics of Mutual Funds:

1.The owenership of Fund is in the hand of investors who pools there funds ,so it is joint or mutual.

2.Funds is beign manage by the professional investment managers and other service providers on the behalf of investors.

3.Funds pools by Mutual fund company is beign invested in portfolio of marketable investment like stocks,money market instruments ect.

4.The share of investors in Mutual fund is denominated by 'Units' whose value is called as Net assets Value(NAV) which is change every day according to the market movements.

5.The investment portfolio of different funds is beign made according to the different objectives of the funds,each funds have it's own objectives according to the customer demand.

6. In india Mutual fund is known as TRUST of different investors who are it's members.

7.Mutual Funds in india is known as financial intermediaries,which play a important role of financial inclusion in india.

Advantages of  Mutual Fund:

1.Portfolio Diversification:Diversification means mixing of different investment in portfolio in order to manage risk.Fund manager invest fund polled from the investors into different sector's stocks.For example fund manager invest some fund in auto sector and remaining in FMCG sector because is auto sector went down the loss occured is managed by the some growth of FMCG sector.

2.Professional Management:Other benifit to invest in Mutual Fund is to get your investment manage by Proffesional Fund managers who  have an expertise in  Fundamental and Technical analysis.Fund manager research each and every stock before taking investment decision.Investors can also choose fund manager before investing in mutual funds.Every Funds have it's own fund managers,which depend upon it's expertise in the sector  he/she is working.

3.Reduction in Risk:Investing in stock market through Mutual fund is less risky as compare to invest directly because mutual fund is manged by proffesional fund managers.Also because of Portfolio diversification reduce risk in Mutual funds.

4.Liquidity:Investment through Mutual fund is more liquid ,any investor can enter and exit quikly.There is no lock in period in Mutual funds.

5.Convenience and Flexibility:Investing in Mutual fund is flexible,any investor can easly switch into another secheme if he/se want.Also invetment is also very convenience in Mutual fund. By using online terminals any investors can easly invest in any scheme by one click.

6.Safety:Investing in Mutual fund is safe as compare to invest in any traditional investment avenues like lending in unorganized market.SEBI(Security Exchange Bord Of India) regulate Mutual Fund industry through proper guidelines made for Mutual funds.No Mutual Fund companies do illegal activities or divert fund pooled from investors into another activities apart from funds objectives.
7.Rupee cost averaging: Investing in Mutual fund regularly through SIP(Systematic Investment Plan) investor get rupee cost averaging.For example, if investor invest every month 1000 rupee every month through SIP he get an opportunity to buy more units when NAV decreases in any perticular month.This type of investment reduce the risk level for the investors.


Disadvantages of Mutual Funds:

1.Similar Objectives:Many Schemes in Mutual Funds have similar obectives,which create difficulty for the investors to select schemes.
2. Fluctuating Returns:Mutual funds schemes consists of different types of stocks which are traded in stock market.So the returns of Mutual funds schemes fluctuate as the market fluctuate,which is not give guarantees returns like  Bonds,FD,Debentures ect.
3.Over diversification: Although diversification is a key in Mutual fund industry but many a times investor over diversify there portfolio by investing in many similar schemes,which does not reducte much risk but create unnecesry burden on portfolio.
4.Cost:Mutual fund carry cost of running schemes and fees for to the Fund Managers for managing funds,Also there is Entry load and exit load in Mutual funds which is ranging from 1-3%.
5.Misleading Advertisements:Many a times Mutual fund mislead investors by showing manipulated growth figures in there Advertisements,which sometimes suffers with a heavy loses to the investors wealth.

EVALUATION OF MUTUAL FUND IN INDIA

1.Phase1:Growth of UTI(1964-87)
UTI was establish by the Act of Parliament in 1963 as a sole player in the Industry.First product lunch by UTI was a Unit scheme 1964.It also create popular  product such as ULIP in 1971,MIP's,Children plans in 1986,Offshore funds ect.
Also,UTI lunch it's first Diversified equity scheme calles 'Mastershare' in 1987.In 1986,UTI lunch it's first offshore fund called 'India Fund'.

2.Phase2:Entry of Public Sector Fund(1987-1993)
In 1987,Public sector banks and Funancial Institutions got permission to set up Mutual Funds.SBI mutual fund was the first non UTI Mutual fund set up in 1987.This was followed by Can Bank Mutual fund,LIC Mutual fund,Indian Bank Mutual fund,GIC Mutual fund and PNB Mutual fund.In 1992,SEBI got regulatory power to regulate Mutual fund industry.By the year 1993,Mutual fund industry opened for private players.

3.Phase3:Emergence of Private funds(1993-1996)
In this era lots of private sector mutual funds were emerge,giving a choice to investors to choose from the wide variety of funds.Also,in 1993 first Mutual Fund Regulator is came into picture under SEBI which regulate entire industry except UTI.The first private Mutual fund was Kothari Pioneer(now merged with FranklinTempleton) which is registered in july 1994.

4.Phase4:Growth and SEBI Regulation(1996-1999)
 In this Phase new SEBI Regulation came into picture,which helps in increasing the market size of Mutual fund industry.During this period Banks Mutual funds were recast as per SEBI Guidelines.Also,UTI came voluntarly under SEBI Regulation.In 1999,Dividend made tax free.
During this phase SEBI and AMFI launch investor awareness programe.Mutual fund assets during Mid 2002 cross aprox.100000 crore.

5.Phase5:Emergence of Large and Uniform industry(1999-2004)
During this phase Mutual fund industry in india became large and uniform,with the repletion of UTI act in 2003.Mutual fund industry grow rapidly during this phase,which helps private Mutual fund to grow there corpus.AUM(Assets Under Management) by the end of 2005 cross aprox.150000 crore.Tax break is offered durin this phase helps industry to crate arbitrage opportunity.During this period Bond funds and liquid funds became popular and registred high growth.

6.Phase6:Consolidation and Growth(From2004 onwards)
During this phase,merger and acquisition takes places like Allince Mutual fund acquired by Birla sunlife Mutual fund.Also,consolidation of different similar schemes within the Funds thake place.


Mutual Fund Classifications:

1.Open-Ended Fund:It is a types of Fund , which is bought and sell by investor any time at NAV(Net asset Value) related price.It is very conviniant vehical of investment for the investors who buy fund and sell it back to the AMC any time.This fund is open through out the year to subscribe the schemes by the investors.
 Investors can recieve the account statement of there holdings.The number of outstanding unit and unit capital goes up and down every day.Also,corpus of this scheme change every day.

2.Close-Ended fund: It is a type of Fund,which is bought by the investors first time through IPO(Initial Public Offer)after that it is closed for futher sales is closed.After few day this type of schemes is listed on stock exchange for further buying and selling between investor to investors.Price at which unit sold and redeem depend on market price,which is linked to NAV.
Number of unit of close ended fund remail unchange.Also,unit capital is fixed because of one time sale.

 3.Load fund:It is a type of fund which carry load,which is one time initial issue expences including brokers,agents,Distributor commision,advertisement and marketing expenses.Fund which charge front end(entry load) or back end load(exit load) are called Load funds.

4. No Load fund: Fund which does not charge front end load and back end load is calles no load fund.

5.Tax exempt fund:Thses are a funds which invest in the tax exempted security like infrastructure bonds.After 1991,dividend recieve by the mutual fund is tax free in the hand of investors.But all fund other than Open ended fund is liable to pay Dividend distribution tax.

6.No tax exempted funds:These are the funds which pay taxes on dividend recieve like the Close ended schemes pay dividend distirbution tax.After 2005,repurchase transaction of equity oriented schemes subjected to pay Security transaction tax.


TYPES OF FUNDS:On the Basis of Investment Objectives

1.Equity Funds:There is diffrent type sof equity funds
1.1 Equity Funds- These funds invest money into equity related investment instruments like shares of public ltd.companies.Main objectives of these funds is capital appreciation by investing in equities.It carry high risk and recommended to invest for the period of 5 years.it carry no entry load but carry exit load of 0.5% till 6 month.
       1.1.1 Large cap Funds:These are the funds invest into the large cap stocks.
       1.1.2 Mid cap Funds:These funds invest into the mid cap stocks.
       1.1.3 Small cap Funds:These funds invest into the small cap stocks.
1.2 Index Funds:These funds invest money into the equities of any index like SENSEX,Nifty ect.It invest in each and every stock of any particular index.
1.3 Sectors Funds:These funds invest in stocks of any particular sector like FMCG,Real estate,Banking ect.

1.4 Selct Sector Funds:These funds invest money into the multiple sectors like any funds invest in Banking,Pharma,Auto ect.

1.5 Dividend yield funds:These funds invest into the companies who distribute high dividend like Reliance industries.

1.6 International Equity funds:These funds invest in stock of the companies,which are listed in foreign countries like Nestle,Pepsi,Coca Cola ect.

1.7 Growth Funds:These funds invest in high growth companies.

1.8 Value Funds:These are the funds which invest into the stocks whose market values are fallen below thre intinsic value or book value.


2.Debt Funds:
2.1 Fixed Income Funds:These funds provide fixed income and capital appreciation by inbesting in government securities ,Corporate debentures,Call money market,Bank deposits ect.These funds carry credit risk and interest rate risk.
2.2 GILT Funds:These are the funds invest money only in Govenment securities.The risk averse investors are investing in these funds,where he/she don't wont to take risk.

3.Money market Funds:These funds invest money in  money market instruments like T- Bills,Commercial papers ect for very short duration of times.It's objectives is to provide investors  with high level of incomes from short term investments.These funds are very liquide,investors can liquidate funds within 24 hours.

4.Balance funds:These funds is a mixture od Equity and Debt component.Also,known as hybride funds.Objective of these funds is long term capital appreciation by investing in equities,it maintain an optimum balance between debt and equity component and generate periodic return by managing debt component.


 

Indian Money Market

Indian Money Market:Introduction

Money market is a market where borrowing and lending of money takes place for short period of time between few hours to a year.It is a biggest debt  market  in the world where transaction of large value takes place for shorter period of time.

In money market large player are taking part in borrowing and lending like Government,RBI,Banks,Mutual Funds,PSU's(Public Sector Undertaking),Provident Fund,NBFC's(Non Banking Finance Company).

There are various instruments in Money market like Call Money market,Treasury Bills,Certificate of Deposit,Repo,Forward rate agreement,Interest rate swap.

Role of Money Market:

1. Money market fulfill the short term financial need of the economy through Banks participant.

2.It also hepls RBI for making effictive monetary policy by watching liquidity position of the economy.

3.Money Market provide short term fund to the Government for meeting any funds requirement for any disaster.

Structure of Indian Money Market:
1.Call Money Market:It is a market in which Banks,Corporations,Financial institution borrow and lend money at iner-bank rate for a short duration of time,may be for few hours and not lonfer then a week.This helps banks to meet there reserve requirements.
       Features of Call money market:

       1.1 It helps in trading of surplus money between banks.

        1.2 It's Duration is between one day to 15 days.
        1.3 If money lend/borrowed is for one day then it is called Call money otherwise called  Notice     money .
        1.4 It hepls RBI to maintain cash liquidity.
        1.5 It hepls HNI's to save there interest cost on cash credit.
        1.6 It's high demand in march because of corporate tax payment.
        1.7 It's demand changes with the change in CRR.

2.Treasury Bill market:These is a market in which treasury bill has been traded.Treasury bill is a instrument of short term  borrowing by the Government of india,issued as a promessory note under discount.It is classified on the basis of maturity period of 91 days TB's,182 days TB's,364 days TB's.Teasury bills are secured types of debt instruments backed by Central Government.

        Features of Treasury Bill :

         2.1 It is like the Overdraft(OD) for the Private sector.

         2.2 It is high liquid instrument,easy converted into cash.

         2.3 It is eligible for the  SLR criteria for the bank to maintain it.

       2.4 It has a ways to means advance (WMA) system to cover day to day mismatch of                Government revenue and Expenditure.

         2.5 It issued by RBI on the behalf of Govenment.

         2.6 RBI still the major holder of T Bills.

       
3. Commercial Bill market:It is a market where Commercial bill is traded.Commercial bill is a short term debt instrument issued by any public or private corporation.It is issued to finance short term liabilities,account recievable,inventories ect.Maturity of comercial bill not longer than 270 days.It carry fixed interest rate and issued at discounted rate.

        Features of Commercial Bill:

        3.1 It is not backed by any form of collateral,so the company with high debt rating can easy find buyer without offering discount.

       3.2 Main benifit of commercial billis that it that it does not resitered with SEBI as long as they mature before 270 days.

     

        Types of Commercial Bills:

        1.Bill of Exchange: These are the non- interest bearing instrument issued by individual or corporation in order to bind one part to pay sum of money to another party at predetermine furture date.

        2.Demand Bill:These are the bills payable on the basis of demand of any corporations.

        3.Time or Usance Bill :These are the allowable period of time between date of bill anf it's payment.It is permitted by customes.

        4.Documentary Bill:These are the Bill of Exchange,presented in international trading for payments with the required documents like clean bill of lading,certificate of insurance,certificate of origin ect.

        5.Inland Bill:It is document required for any transporter to transport goods on land  via truks or trains.In inland bill specified detail of good transported such as quantity,type and destination.

        6.Foreign Bill:It is a bill drawn in one county and made payment in another country.This is mostly use in foreign trade.

     

Commercial Papers(CP's) & Certificate of DepositsCD's):

1.Commercial Papers(CP's): CP's are the maoney market instruments issued by the private or public ltd companies to meet there short term debts obligations.Companies issue CP's on face value,promiss to pay the amount on maturity which is short term from 30 days to 270 days.

Commercial Paper(CP's) Guidelines:

1.1 Company issued CP's should not have the Tangible networth less then 4crores.

1.2 Companies working capital limit should not be less then 4 crores.

1.3 Companies can issued CP's upto the extent of 75% of WCL(working capital limit).

1.4  Minimum denomination should be 5 lakhs and Minimum size should be 25 lakhs to single investors.

1.5 Credit rating of the company issued CP's should not be older then 2 month.

1.6 Companies issuing CP's are not required to take prior approvals from RBI.

 

 2.Certificate of Deposit(CD's):These are the saving certificate which carry a fixed interest rate,fixed maturity and issued in any denomination.These certificate of deposit are promissory note issued by Banks or Financial institutions.Populary it is known as Negotiable Certificate of Deposits(NCD's).There maturity is between two weeks to 5 years,but most commonly nine days.CD's can be issued to Corporate clients to Mutual Funds.Almost every person NBFC's to state Govt. can buy.

Concepts of Repo and Reverse Repo:

Repo rate:It is rate of interest at which Central Bank of any country(in india RBI) lend money to any Commercial Bank in case of any shortfall of fund.
UTI,NBFC's,LIC ect are not allow to participate in Repo rates.

 Reverse Repo rate: It is a rate of interest at which Central Bank(RBI) can Borrow money from Commercial Banks within the country.it is a monetary policy instrument which can be use to control the money supply withn the country.

      

International Financing

Globalization:It is a process of doing business internationally.If any local company going abroad and doing business there, then the business which the company is doing is called the globalized business.Now a day's many business housed are going abroad in order to do business beacause of the facilities of liberalized policies are beign making by the lots of countries.

Impacts of Globalization:

1.High Inflation: As the world beacame Globalized ,purchasing power of the citizens of different countries increases,which lead to high prices of different commodities.

2.Declining Unit labour cost: Due to the Globalization,more and more advance technologies beign adopting by different countries and hence this decreases the per unit labour cost.

3.Increasing global imbalance: When the Globalization process started,large corporated set up there units in developed countries or in the countries where demand is huge,So the small countries begin neglected and hence the problems of global imbalance is increasing.

4.Competitive global labour market:Due to the globalization,prices of different commodities are beign similar in entire world which make the labour cost similar in whole world and hence the labour is available at competitve rate.

5.Knowledge Economy:Due to the Globalization,education is beign promoted at large scale on entire world.So large numbers of private players beign entered in education sector and literacy rate beign increases,which provide enough professional to work in corporate sector aroung the globe.

6.Improvement in quality:As the Globalization process started,many governments of different countries beign made the policies related to the quality of different products.Hence,it put pressures on companies to improve the products quality.

7.Improvement in efficiency in investment and borrowings:As the companies go Global,they need more efficient  and professional finance managers in order to manage the companies investments and borrowing.Hence companies decisions related to the investments and borrowing improved.

8.Enhance financial decipline:As the more advanced financial software are available in the era of Globalization,chances of financial frauds and been decreased.

Structure of Global financial markets:
1.International Equity markets:These are the types of equity markets run on international level,they are enggaged in buying and selling of shares on different global stock markets like NASDAQ,NSE,DOW ZONES ect.On international equity markets any investors can invest on any stock markets around the world from any part of the world by online share trading platform.
2.Fixed income Security market:These is a kind of debt market in which borrowers/issuers,are making payments of fixed interest every years and promised to make payments of principle amount on maturity.
3.Global Derivative market:These are the types of markets dealing in futures and options of different shares and commodities.This market is also run on international level by online stock trading platform.
4.Foreign Exchange market:These are also the types of markets run on global level,this market helps in dealing(buying and selling) of different country's currency.For example in this market any trader can trade in dollar by ruppe or wis-a-versa.


Barriers to International Investments:

1.Information Barriers:Many investors do not have much information about the company situated in other country in which they are planning to invest.
2.Political and Capital controls:Political control is main problem in international investment,every country have different political situation related to the investment.
3.Foreign Exchange rules:Every country have it's own foreign exchange rule related to the transactions in foreign currencies with it's own currencies which affect the foreign investment.
4.Taxation:There are various tax barriers after having capital gain on international investments.Every country have it's own tax policy,which would affect international investments.
5.Higher costs:Some countries have higher cost of investment due to the higher rate of interest because if interest rate is high investor start investing in debts intruments and hence affect international investments.

Global Depository Receipt:

Global Depository Receipt(GDR) is a certificate which contain group of shares of foreign countries.These shares are held by foreign banks(as a custodian) having branches internationally.This GDR's listed in major stock exchanges across the world and then traded in this exchanges.

If any investor want to exit from the GDR's then he should surrender the depository receipt and get back the investments.After surrendering the GDR's,overseas depository will give the instructions to domestic custodian to sell the share and release investments.

The payments of divident on GDR's are paid to the custodian and therefore the issuing company protected from the exchange risk on the payment of dividend.

American Depository Receipt(ADR's):

 

American Depository Receipt is a negotiable certificate issued by US banks consists of Specific number of shares of foreign companies.These GDR's are traded in US stock market.

ADR's follow the US rulers and regulation in order to protect the US investord.

International Bonds:

These are a debts instruments issued by the domestic or foreign country at a foreign currency denomination for a fixed maturity of time.The rulers and regulation, which internationl bonds are following are from the the country which it issued.

Classification of International bonds:

1.Domestic Bond:This is a Bond issued  in domestic currency within the country.Also,it follow the domestic rulers and regulation in issuing the bonds.

2.Foreign Bond:This is a bond issued by any foreign country in any other domestic country in that domestic country's currency.This bond are issued by foreign firms any other country in order to raise capital.

3.Euro Bond:These are a Bonds issued and sold outside the country of the currency denomination.Generally,it is first issued in europe thats why it's name is euro bonds.

NBFC's(Non Banking Finance Companies)

NBFC's are an types of finance company,which do not hold banking licence but do all the activities which banks are doing.These finance companies cover under banking regulations.They accept deposits from  public by some deposits schemes and lend to the borrowers.

Charactristics of NBFC's:

 1.NBFC's are registered under Companies act 1956 as the other pvt ltd Company registered.
2.NBFC's engaged in business of loans and advances,aqcuisition of stocks/bonds/debentures issued by Govt and local authority.Also ,these companies are enggaged in Leasing,Hirepurchases,Insurences business and Chit fund busines ect.
 3.Non banking finance companies do accept demand deposits,so that no one send money to another city through DD.
4.NBFC's not have payment and settlement systems, so therefore can not provide cheques facilities to it's customers.
5.Deposits made by the investors into the NBFC's are not covered under deposits insurance scheme.
6.NBFC's not allowed to accept deposits directly from the public,rather they have to arrange funds by issuing debt instruments,borrowing fron the banks and financial institutions.

Roles of NBFC's:

1.NBFC's helps in development of sectors like Transportation and Infrastructure by providing easy credit to these sectors.
2.Main role of NBFC's are to generate employment to the young graduates,so as to minimize the one of the biggest  problem of unemployment in india.
3.NBFC's also play a role of wealth creation to it's investors who invest there hard earn money in there diffirent investment schemes.
4.These finance companies also helps in economic development of the countries by providing easy credit to the different corporations and publics related to the development of the country.
5.As the banks reaches are not available to the rular areas,NBFC's replace the banking needs in rular areas by proving the easy credit and hepls accumulates rular  savings in the form of issuing debt instruments.
6.NBFC's have trust in semi urban and rular ares,aslo the they have trust on first time user of NBFC's facilities beacuse of easy recovery of debts.
7.NBFC's basically finance to the economically weaker section of the society who not get debt from other sources.They provide loans at high intrest rate as compare to Banks.
 


Classifications of NBFC's:

1.Assets Financing Companies: These are the companies,providing loans against the assets only and not doing business of lending to other than assets financing.
2.Loan Companies:These types of NBFC's  only providing loans to the corporates or publics.
3.Investment Companies:These types of companies engage in a business of helping  investors of doing investments.


Categorization of NBFC's:

1.Equipment leasing companies: These are the companies which helps in finance the equipments like machineries, vehicals ect.Thses companies actually give equipments on lease by keeping ownership of financed equipments.
2.Hire Purchase Companies: These are the types of companies which hepls in purchasing an equipments by financing them and make payment of installments by purchasers.
3.Mutual Benifit finance company: These are the companies which work on the mutual benifit of a particular group of people.
4.Miscellaneous Non Banking Companies: These are a types of NBFC which are doing all types of businesses  of collecting,managing,conducting as promoters of any corporation.
5.Housing Finance Companies:These are a types of NBFC's which are helps in purchasing houses by the home buyers by allowing them the easy financing.These companies giving loans for longer period of time usally 20 to 30 years.

Credit Management of NBFC's:
1.NBFC should use the appropriate operating procedure.It should follow proper guidelines related to the running of NBFC's.
2.There is a strict regulation to the NBFC's that it would  nott provide credit to it's directors or promoters.
3.Also,NBFC's not provide credit to the directors,where its directors have any interest.
4.If in loan agreement did not specify the period of  loans, then tha loan should be recovered within one year from the date of issuing guidelines by RBI.

Management Information System:

(A) Internal Reporting Systems:

   1.NBFC's should maintain periodical statements,which shown the accurate position of the company.
    2.NBFC's should maintain the statements of different branches related to the advances,non performing assets,assets classifications and ALM.

(B) External reporting systems:NBFC's are required to submitt the following returns to Department of non banking supervision at the regional offices of RBI:
  1.NBFC's should present the Audited financial statements including the director report presented in annual general meeting.
 2.NBFC's should present the annual returns on deposits.
 3.They should submitt the detail changes in address,telephone numbers,name of directors,principal officers,specimen signature of official authorized to sign on behalf of company.
 4.NBFC's having assits size of 100 crores and public deposit of 20 crore should submitt the following ALM harlf yearly:
      4.1 Statement of strucutre liquidity
      4.2 Statement of dynamic liquidity
      4.3 Statement of interest rate sensititvity


 5.NBFC's should maintain the harlf yearly statement of capital fund,risk assets or exposures and risk assets ratio ect.
6.They should maintain the monthly return on exposure to capital market.
7.They should maintain the statement showing the names,designation and professional qualifications of principal officers.Also nae,resident adress,qualification of directors and specimen signature of authorized to sign on behalf of the company.


Financial Leverage between Banks and NBFC's:
1.Banks and NBFC's are competing in some area's like leasing and Hire purchase,Corporate loans,Investment in non convertable debenture,IPO funding,Margin funding,Small ticket loans,Venture capital ect.
2.NBFC's do not offer facilities like saving and current deposits,cash credit ,overdraft ect.
3.Banks helps in financing the operation of NBFC'sby providing credit facilities or by sucscribing NBFC's debt instruments.
4.Investment made by NBFC's are current and  long term in nature in the form of share/ debenture should not be permitted or restricted bt RBI.
5.Bills discounting ,rediscounting in a case of commercial vehical financing,two wheeler or three wheeler financing are not permitted by RBI.
6.RBI restricted to permit NBFC's to give unsecure loans and allow inter corporate deposit.
7.Also, RBI restricted to NBFC's to finance to individual for subscribing Initial Public Offer.
8.These is restriction of RBI to NBFC's to finance against capital/debt issue.

Regulatory Issues for NBFC's:These are vatious regulatory norms for the NBFC's in order to protect customer for misuse of facilities.
1.NBFC are classified into NBFC's accepting deposits(NBFC-D) and NBFC's not accepting deposits(NBFC-ND).
   1.1 NBFC-ND should have assets size of Rs 100 crore  as per last audited balance sheet and have to maintain CRAR of 10%.
   1.2 CRAR for NBFC-D should be 10% or 15% .

2. NBFC's-ND are not permitted to undertake following types of business:
   2.1 They do not lend any single borrower exceeding 15% of it's owned fund.
   2.2 They also don not lend any single group of borrower exceeding 25% of it's owned fund.
   2.3 They are not allowed to invest in share of another company exceeding 15% of it's owned fund  and    
         the share of single group of companies exceeding 25% of it's owned fund.
   2.4 Thses companies lend and invest together 25% of it's owned fund to single party and 40% of  it's           owned fund to the single group of parties.
 3.Investments in debenture willbe treated as lending and not investments by the NBFC's.

4. NBFC's should provide additional exposures for infrastructure loans/investments at certain limits.

5.If any banks are providing exposure to any NBFC should be subjected to certain ceilings.

6.If any foreign banks want to establish any NBFC as a subsidiaries in india are required to submit consolidated financial statements to RBI.

7.NBFC's are allowed to offer Portfolio management services as aproduct  irrespective of wheather they are subsidiary of banks or not.

8.Banks in india ,including foreign banks  operating in india,shall not hold more than 10% of paid up capital of NBFC's-D.

Indian Derivative Market

Overview  of Indian Derivative Market:

Dberivative market was created by BSE in india.A first Exchange traded index derivative was launch on 9th june 2000.Inaguration was done by Prof. JR Verma,member of SEBI and Chairman of the committee .

As the peroduct innovation going on BSE introduce index option on Sensex on june1,2001.After that stock option were introduce on 9th july 2001 and single Stock future were introduce on 9th july 2002.

BSE also introduce 'long dated option' on SENSEX on febraury 29, 2008 with the expiry of upto 3 yrs.

Currency Derivatives:

On 1st october ,2008 BSE launch it's currency Derivative segment in Rupee-Dollar currency future segment.

It's main aim is to  easy ecess, increase transperancy,efficient price discovery,better counterparty credit risk management,wider participation and reduce transaction cost.

Future on BOLT:
BSE re-launch it's Derivative segment by enabling trading of index and Stock Futures on it's BOLT terminal.
The main aims of this change is to provide platform for the members to trade in equity derivatives.

Why SENSEX future:
a)  SENSEX shown less volatility as compare to other indices and at the same times give return  same as return given by other indices.
b) SENSEX is use widely by describing the mood of indian stock market because of it's long history and widely acceptance.It also make attractive index based product  like index fund, Future & Option and Exchange trader fund.
c)SENSEX  is a broad based market index and reflect market trend more rationally and take into consideration only those share which are available for the trading in the market.


DERIVATIVES:
Derivatives is a kind of instruments whose values are derived from the value of underlying,which can be Commodity,precious metal,Currency,Bonds,Stock ect.Most common examples of derivatives are  Forward,Future,Option and Swaps.

1. Forward Contract:It is a type of contract between two parties, where settlement take place at some future date at price specified today.
Some features of Forward contracts are:
1.1 Each contract consists of counterparty risk.
1.2 Each contract has  unique in term of assets types,contract size,expiry date and assets quality.
1.3 Contracts has to be settle on expiry date.

2.Futures: These are a types of contract traded on exchanges to buy and sell the financial instruments or Physical commodities for future delivery at an agreed price.