Credit Rating

CREDIT RATING:Definations

According to the CRISIL,Credit rating is Unbiased,Objectives and Indipendent opinion as to an issuer capacity to meet it's financial obligations.

According to the Moody's,Rating is designed exclusively for the purpose of grading Bonds according to there investment qualities.

According to the Standard and Poor's,corporate or municipal debt rating is a current assesment of creditworthiness of an obliger with respect to specific obligation. 

According to the Australian rating agency,A corporate credit rating provides lenders with a simple system of gradation by which the relative capacities of companies to make timely payment of the interest and principle on a particular types of debt can be noted.

Credit Rating:Meanings

Credit Ratings is a types of ranking given to the entity which want to borrow fund from the market on the basis of the good credit rating.Credit Rating done by specialized rating agencies on the behalf of Governments or Corporations for there close entities or for themself for raising foreign debts.

The entity have high credit rating means it have high creditworthiness and able to pay it's debts on times.High creditworthiness corporations get credit at low interest rates and also able to pay it's debts on due date.

Before given rating to any Corporations,rating agencies done detail audit of the corporation related to there books of accounts.

Investment grades of Credit rating agencies:

1.Highest safety-AAA(High Investment grade):Any Corporations rated AAA are judged to offer highest safety of timely payment of principle and interest.

2.High safety-AA(High Investment grade):Any Corporations or instruments rated AA are judged to offer high safety of timely payment of interest and principle.

3.Adequate safety-A(Investment grade):Any instrument of firm rated A are judged to offer adequate safety of timely payment of interest and principle.

4.High safety-BBB(Investment grade):Any firms or instrument rates BBB are judged to offer moderate safety of timely payment of interest and principle.

5.Inadequate safety-BB(Speculative grade):An instrument rated BB are judged to offer inadequate safety of timely payment of interest and principle.

6.High risk-B(Speculative grade):Any corporation rated B are judged to have grater susceptibility to default.

7.Substantial risk-C(Speculative grade):An instruments rated C are judged to have factor present that make them vulnerable to default.

8.In Default-D(Speculative grade):An Instrument rated C are in default and arrears of interest or principle payments or expected to default on maturity.

Rating Process:

1.The rating process start with the client approaches to the credit rating.
2 After client approache to the rating agency,rating agency take all necessary information required for this by meeting the management of the comapany /borrowers.
3.Thereafter,rating agency analyse the information collected from the client and generate report.Based on the generated report rating would be decided.
4.After that rating has to be communicated to the client along with the reson supporting  the rating.If client is not agree with the rating then client will appeal for reviewing the rating along with addtitional/new information wil have to be provided.
5.Finally,if the rating is accepted  by the client,it will then be declared by the credit rating agency.

6.Hence,rating is not a one time process,there would be continuous monitoring of client's performance and it's operational environment.Based on this information,rating may be affirmed,upgraded or downgraded.Any changes may be informed to the public.


Types of Ratings:
1.Shadow Rating:This rating is not shown by the rating agency or companies to the public.This rating is performed by the companies to assess hoe much debt issue is worth to the investors.Before,it releases to the public,companies do detail analyses of it's impact.So,this rating useful for the companies own benefits.
2.Formal Rating:In this rating grade is given to any instruments and shown it to the public for there uses.
3.Security Rating:There are various types of security ratings
   3.1 Debt/Bond rating:In this rating grade is given to the Bonds which indicate its credit quality. Credit rating agencies give ranking which shows Bonds issuers financial strength to repay interest and principle to the investors on maturity.
   3.2 Equity rating:In this rating grade is given to the equity/share of any company on the bases of the companies financial strength.Higher grade shown the higher price appreciation of the value of the share.
   3.3 Individual/Borrower rating:In this rating,the creditworthiness of individual /borrower is judge and    provide grade accordingly.This rating shows the borrowers ability to repay the principle and interest on time.
   3.4 Sovereign rating:In this rating a credit rating of a particular country has done.Rating agency evaluate the economic and political condition of particular country and give rank accordingly.This rating give insight to the investors about the risk involvement in investment of a particular country.Obtainig good sovereign rating helps developing countries to attract good investments.


Debt Rating Regulatory requirements:
1.There is compulsory Credit rating requirement if conversion is made for Fully Convertible Debenture(FCD) after 18 months.
2.In case of Non Convertable Debenture(NCD) Credit rating is compulsory where maturity exceeds 18 months.
3.If any Company rollover NCD,fresh Credit rating shall be obtained within the period of 6 months prior to the date of redemptions and communicate to the holder before roll over.
4.Under Debt rating,rating of commercial paer and fixed deposit is also compulsory.


Debt Rating Key parameters:
1.Industry Evaluations:There are some major constrains of Industry evaluation by rating agencies like General profile of the company,Major competitors,Intensity of competition,Growth potential and trend of development both domestic and international,Demand and supply position of the product,Existing insatall and licenced capacity,capacities in pipeline,Position of import and export,Technological development,Price trends,Quality and prices of major inputs,Government policies and regulation affecting industry.

2.Unit Evaluations:There are some unit evaluation criterias used by rating agencies like Position of the unit in the industry,Market sahre,Competitive edge,Major strength and weeknesses,Product range and quality,Market segmentation and Seasonality and market,Marketing strategies,Channel and network,Future programe,Goals and targets,Product range(wide,depth,scope and prospects),Brand equity,Age,Corporate governance,Group or assocaite company performances.

3.Technical Evaluations:There are various technical prameters which rating agencies consider during analyses like Level of technology,Operation efficiencies of the plant,Vintage of the pant and level of maintenace,Need and plan for modernization,Competence and support of technical collaborators,Terms of collaborations,Royalty and buyback,In house expertise and expertise for absorption of technology,Efforts of skill development and productivity improvement,Location advantages and infrastrucutral facilities,Yield analysis,Protection against hazards and other natural calamities.

4.Financial Evaluations: This is most important evaluations for credit rating by rating agancies.This includes parameters like Accounting policies, extent of disclosures,Inventory valuations,Depriciations and other major policies,Revaluation of assets,Assets quality,Contingent and off balance sheet liabilities,Auditors report and Director report,Capitalization trends and policies,Cash flow trend and potential,Future projections,Profitability and liquidity management,Interest coverage,Debt service coverage and other aspect of debt servicing,Requirements of future debts,major fund commitments and overall liquidity,Financial flexibility,Unutilized borrowing potential,Standing in capital market,Capabilities to raise resources and to absorbed debts,Working capital policies,Management of cash,debts and inventory,Budgeting and cost control systems, Sensitivity to change interest rates,taxe rates,exchange rates, Risk management policies.

5.Statutory Evaluations:There are some statutory factors take into consideration while doing analyses for rating like Compliance status in respect of government regulations and directive affecting industry,Position of obtaining approvals and NOC,Pending dispute by and against the unit,Practice regarding payments of statutory dues,Mandatory corporate governance issues.

6.Management Evaluations:Some management evaluation during credit rating are like Shareholding pattern and controlling interest,Composition of Board of directors, Organizational profile,Adequacy and quality of setup,extent and effectiveness of delegations, Competency and integrity of management and it's capability to face crises,Policies and practices regarding recruitment,taining,career planning and developement of employees,Style of management functioning,approaches and outlook,organizational culture,employee morale,Management information and monitoring system.


Commercial Paper Rating:
Commercial Paper are the short term money market instrument issued for the maturity period not more than 270 days.It is issued by the corporations to finance account recievable,inventories and short term liabilities.

Credit rating is compulsory to Commercial papers,so the company should obtain specific credit rating from the approved agencies.Minimum credit rating of A2(by ICRA), P2(by CRISIL), D2(by Fitch).Credit rating obtained for Commercial papers should not be 2 month old.


Key Ratios for Commercial Paper Rating:
1.Pre tax interest coverage ratio
2.Pre tax interest and full rental coverage
3.Cash flow / long term debt(%)
4.Cash flow / total debt(%)
5. Pre tax return on average long term capital employed(%)
6.Operating income / Sales(%)
7.Long term debt / Total capitalization(%)
8.Total debt / Capitalization including short term debt(%)
9.Total liabilities / Tangible shareholders equity(%)



Equity Rating:Key considerations:
1.ICRA has started the Equity rating which is also known as grading.
2.There is an seperate division of ICRA,which is known as Earning Prospect and Risk Analysis(EPRA) group.It is set up to do two tasks:(1).Grading of Primary market.(2 )Assesment for Secondary market.

3. The grading is grouped into 6 categories ,ER1 to ER6-In decending order of earning prospects viz,Excellent,Very good,Good,Moderate,Week and Poor.


Equit Rating: Complete Rating Symbols:
1.ER1A:Excellent Rating Prospects(Low risk)
2.ER1B:Excellent Rating Prospects(Moderate risk)
3.ER1C:Excellent Earning Prospects(High risk)
4.ER2A:Very Good Earning Prospects(Low risk)
5.ER2B:Very Good Earning Prospects(Moderate risk)
6.ER2C:Very Good Earning Prospects(High risk)
7.ER3A:Good Earning Prospects(Low risk)
8.ER3B:Good Earning Prospects(Moderate risk)
9.ER3C:Good Earning Prospects(High risk)
10.ER4A:Moderate Earning Prospects(Low risk)
11.ER4B:Moderate Earning Prospects(Moderate risk)
12.ER4C:Moderate Earning Prospects(High risk)
13.ER5A:Week Earning Prospects(Low risk)
14.ER5B:Week Earning Prospects(Moderate risk)
15.ER5C:Week Earning Prospects(High risk)
16.ER6A:Poor Earning Prospects(Low risk)
17.ER6B:Poor Earning Prospects(Moderate risk)
18.ER6C:Poor Earning Prospects(High risk)


 Individual Credit Rating:
 During the era of Globalization and Liberalization the Auto loans,Home Loans,Personal loans ect are easily available in india,So there is the requirements of  individual credit rating is arises.Individual credit rating evaluate the risk involved to a financial transactions with respect to the individual at a given point of time.      
Therefore,Equifax inc. of USA and Onida finance ltd(india) set up ONICRA to meet this types of rating requirements.


Individual Credit rating Process:
1.An Individual should not approache directly to the ONICRA,but finance company insists to it's customers to obatain an individual credit rating to reduce its risk exposure.
2.An ONICRA has tie ups with various financial firms like Home loans companies on fee bases which depend upon the quantity of work.
3.After getting work ONICRA start its work of assessing creditworthiness of the customers of its clients.

There are 3 vital parameters are studied for Individual:
1.Potential:
   1.1 Personal Strength-In individual credit rating personal strength is very important parameter based on the followings
       1.1.1 Qualification:Credit rating agency has to identify the individual educationalqualifications,higher the qualifications higher would be the rating.
       1.1.2 Occupation:Agency also has to identified and verify the individual occupation and were he/she is working.
  1.2 Stability-Stability in the occupation and job is also one of the important parameters for credit rating agencies,It is judge on the followings:
       1.2.1 Job Tenure:Agencies has to identify and  verify the tenure of the job,higher the tenure higher would be the credit rating.
        1.2.2 Duration of stay in presence place of resedence:it is also one of the important parameters to show the stability of the individual.

2.Capability:A personal capabilities are inportant factors in individual ratings,which are followings

   2.1 Income:It is one of the important parameters for raing agencies to identify the creditworthiness of the individual.
   2.2 Future Job prospects:Credit rating has to identify the individual future job prospects to judge the capabilities of paying debts in future.

3.Strength-The are some strength of individual has to identify like:

   3.1 Financial Assets:It is one of the imortant parameters of the rating of individual to shows the financial strength of the individual.
   3.2 Discipline:There should be the decipline of payment of past debt is also identify by the individual.
   3.3 Willingness to pay:Rating agencies also identify the willingness to pay the debt by the individual in present .


There are 3 vital Transaction parameters:
1.Risk:There are some risk involved in individual transactions parameters are follows
        1.1 Security:Rating agency identify if there is any assets possess to the individual.
      1.2 Ownership of the assets:If there is any assets shown by the individual then the ownership has to identify.
       1.3 Control over the end use of funds:Rating agency has to identify the controller of the end use of funds provided by its client in the form of debt.
        1.4 Collaterals:There should be the proper searching/ identification of collateral kept by the individual.
        1.5 Exposure:There should be the proper analyses of how much exposure alloted to the individual.

2.Modes of payments:There are some methods payments analyses of individual by credit rating agencies are follows

        2.1 Direct deduction from salary
        2.2 Post dated cheques
        2.3 Automated debiting of bank account
        2.4 Payments on due date
        2.5 Payments on demand

Investment Banking - Loan Syndication & Forefaiting

LOAN SYNDICATIONS: Meaning

Loan Syndication is a pocess of pooling of money from the different lenders and lent it to the large borrowers who need large capital.

Baisically,In loan syndication  may borrowers grant loan to any big borrower who need large capital where any single borrower is unable to provide this large capital.

Loan Syndication is mostly use in large scale transactions mostly in any types of merger and acquisition,Buyout ect,where there is requirements of huge capital to close the deal.

Roles within Syndication Process:

1.Arranger/ Lead Manager:The roles of arrangers is to arrange the funds for the borrowers.They are also responsible for placing the syndicated loans with other banks and ensuring that syndication is fully subscribed.They charge the arrangement fee for there services.

2.Underwriting Banks:These Banks commit to supply funds to the Borrowers,if necessarly for it's own resources if the full loans are not arranged or subscribed.Underwriter may be the arranging bank or another bank who take resposibility for providing this facility.There is also the risk involved to the underwriter if loans is not fully subscribed.

3.Participating Banks:Thes are the Banks which participate in the syndication process by lending a portion of the total amount required.These banks charge the interest on the loans given,also charging participating fees.

These Banks involve the risk of not recovering debts if borrowers get default.

4.Facility Manager/Agent:The main role of facility manager is arrange the administrative facilities over the term of loans.The facilities are in the forms of disbursement,repayments,compliances ect.Facility manager may be the arranging and underwriting banks.

 Benefits to the Leads Bankers:

1.Leads bankers have good links to arrange the fund,so they can earn fees in retun of giving there services without investing capital.

2.By giving there services leand bankers should enhance the it's reputation.

3.By providing services helps Banks to enhance there relationship with clients.

Benefits to the Paticipating banks:

1.Loan syndications helps participating banks to access to the lending opportunities at low marketing costs.

2.Once they participate in current loan syndications then there are the chances for them to participate the future syndications.

3.Participating banks have low risk as compare to the bank which dominate the high leverage over them.

 Benefits to Borrowers:

1.Loan syndication system helps borrowers to deals with single banks for raising high value loans.

2.Loan syndication process is simple and quikers than other ways of raising capitals.

Stages of Loan Syndications:

1.Pre Manadate Phases:In this phase prospective borrowers are approach to the single banks or the are invite competitive bids from numbers of banks.In this phase lead bankers identify numbers of borrowers,Designed and appropriate loan structure,Developed a persuasive credit proposal and Obtain internal approvals.

2.Placing the Loans:In this phase the leads managers are start selling the loans in marketplace.In this phase the lead banks prepare the informal memorandum,prepare a term sheet,prepare legal documentations,Approache selected banks and invite participations.

3.Post closer phase:In this phases the agent now handles the day to day running of the loan facilities.

Pricing in Loan Syndication:
1.Banks which provide Loan syndication facilities charge fees for front end activities.These may be  Arrengements and Underwriters fees.
2.Banks providing bulk loan would charge interest on them.This would be margin over base rate.
3.Banks also charge commitment fees for availability of funds.
4.Banks providing loan syndication facilities charge agency fees for managing administrative activities during the term of loans.

Documentations involved in Loan Syndication:
1.The providing Loan Syndication facilities should appoint specialized lawyers working closely with  all banks/party involved in syndication process.
2.Roles of each party is pre determined in documents,related to there duties and regulations.

FORFAITING:
It is a export finance mechanism for converting export credit sales into cash.
In this concept exporter sells it's recievables to the forfaiter at discounted rate,in return exporter get cash.All the risk associate related to the collecting of recievable are bear by forfaiter.

Benefits of forfaiting to Exporters:
1.Forefaiting helps exporters to get liquidity by converting recievable into cash by selling recievables to the forfaiters.
2.In forefaiting there is no risk associates like interest rate risk,foreign exchange risk,political risk,commercial risk ect.
3.It is simple and flexible in nature as it can be alter according to the needs of the exporters.
4.It can be finance upto 100% export value.
5.It can save exporters export credit insurance amount.


Forfaiting Risk Eliminations:
1.Commercial risk:The risk of non payments by non sovereign or private sector buyers or borrowers in his own currency arising from insolvency.
2.Political risk:There is the risk of borrowers country Government actions,which prevent or delay the repayment of export credit.This risk should be eliminate.
3.Transfer risk:There is the risk of an inability to convert local currency into the currency in which debt is denominated.
4.Exchange risk:The should be the risk of fluctuation of exchange rate.so this risk should be eliminate.


Criteria for Forefaiting:
1.Normal durationof recievable for using forefating is between 1 to 5 years.
2.Export contracts are been executed in all major convertible currencies like Pounds,Dollar,Yen ect.
3.Minimum eligible amount for using Forefaiting is Rs 250000 US dollars.

Different between forefaiting and export factoring:
1.In forefaiting,forefaiter finance 100% of bills recievable whereas,In factoring foactor finance only 75 - 85% of the bills recievable.
2.In forefaiting is used in account recievable of capital goods products or any other high value product where payment is recieved in longer duration of time,whereas in factoring is used in trade of general products were payment is recieve immiditely on delevery of goods.

Investment Banking - Venture Capital

VENTURE CAPITAL: Concepts

It is a types of capital,provided by the investors to the new start ups having innovative business idea's.It also provide capital to the small companies having strong growth prospects.It is a very important source of funding for the starts ups and new entrepreneurs who are unable to excess funding from the capital market.

There are various options available in Venture Capital like Seed funding,Angel investing ,Crowd funding ect. From out of these various options  any small firm raise capital who not have any operating history of running a firm.New firms are unable to get bank loans because of the risk involved in these firms,so Venture capitalist invest in these firms in order to get higher returns if new concept got success,also venture capitalist have benefit of taking control of decision making in the operation of the firm.

Also,Private equity firms are also a types of Venture Capitalist,which are a job creator in the economy by hiring Fund managers and Investment Bankers have role of researching a potential investors investing in Venture capital fund and a starts ups having  future business growth.

Venture Capital is transfer it's equity to the promoters or sell in the open market when company/firm listed in  stock market.Also,during the time of Initial public offer(IPO) venture capitalist sell it's equity through IPO.

Venture Capital is an investments in the forms of Equity,Quasi equity and a Times debt,which have conditions of paying interest and priciple when the venture start generating sales.

Key Elements of Venture Capital:

1.The main element of Venture capital is to invest in Unquoted companies which is not listed is stock market.So unable to raise funds for there future business expansions.

2.Venture capital is Invest for medium to longterms in the companies with high growth potential.So as to generate huge returns when company grow and expands.

3.Venture Capital comprises numbers of shareholders,influence by the Venture capitalist for the huge potential of generating returns.

4.Other main element of Venture Capital is to invest in high risk projects,which also have high potential of generating high returns.

5.The high risk factor in the venture capital backed firms,forces them to make changes in there operations and sometimes business model.

6.Venture capital also have objectives is to sell there shareholding either to the promoters or to the open market through IPO's.

7.In various countries there is a variation of Venture capital and Private equity.There Venture capital means funding starts ups and Private equity means funding to the existing high potential and growth firms through Private Equity funds.

8.Venture capitalist closely follow the Technology and Market Development in the area of expertise like Computer software,Hardware,Energy,Biotechnology ect.

9.Venture Capitalist closely screen the Entreprenure and Business concepts prior to making an investment.To diversify risk,they create venture funds that is a portfolio of investment in young companies.

10.Venture capitalist are not a passive Equity investors .They structure a financing deal with great attention to creating the right incentives and compensation for the start ups firm's owners.They are also instrumental in raising additional financing during future stages of firm's lifecycle.

VENTURE CAPITAL INVESTMENT PROCESS: 
1.Development of Fund Concept:-
1.1 Secure Commitment from Investors:Before the development of Venture Capital fund,Venture capitalist  try to secure the commitment from the investors to get investment for the fund.
1.2 Generate Deal Flow:After got commitment from the investors,Venture Capitalist generate deal flow comprises the numbers of investors,fund managers,investment managers ect.

2.Closing of Fund(first capital call):-For 2-3 years

2.1 Screen Business Plan:The venture capitalist screen the Business plan,so that to identify the viability of the business in which the are going to invest.
2.2 Evaluate and Conduct due diligence:In this step Venture capitalist evaluate and investigate the detail historical facts and figures of the firm in which the are planning to invest funds.Financial analyst of the Venture capital firm evaluate and analyse the past year Balance sheets and others financial statement of the proposed acuquire firm and give his/her verdict related to the actual position of the firm.
2.3 Negotiate Deals and Staging: After analysing financial statement,Venture Capitalist negotiate with the promoters of the firm related to the valuations and book value of the firm.
2.4 Additional capital call:After negotiate with the venture capitalist for the deals,if there is any requirement of fund before the Venture capital deal related to the paying heavy debt,additional capital is infuse by the promoters for fullfilling VC deal requirement.
 2.5 Invest fund:After deal has been finalised,Venture capitalist invest funds in Firm for the future business expansions.

3.Value Creation and Monitoring :-For another 4-5 years

3.1 Board service:Value creation and monitoring is a board service for the Venture capitalist.It is a main work after investment had done.Success and failiure of investment  is depend on the proper value creation and monitoring.
3.2 Assist with external relationships:Venture capitalist assits the invested firm for the successful running it's operations and maintain good work relations in order to inrease operation efficiency of the firm.
3.3 Performance evaluation and review:Venture capitalist evaluate and review the performance of the promoters and there staff,so as to identify the operation efficiency of the firm.
3.4 Help arrange additional financing:If there is the need of additional financing to the fim then Venture capitalist arrange finance for it,so as to helps expansion and diversification of the firm.
3.5 Recruitment management:Venture Capital helps in recruite talented manpower for the invested firm and also helps to manage them in a efficient manner.

4. Harvesting Investment:- For 2-3 years
4.1 Initial Public Offer(IPO):In this step,Venture capitalist dilute it's stake through IPO's.Here company launch IPO and allow retail investors to acquire shares of the company.Afterwards,IPO listed on stock exchanges for further trading in secondary market.
4.2 Acquisition:Sometimes firms promoters acquire entire stakes of the Venture capitalist in order to keep full control of the firm with them.
4.3 Liquidation:In thi steps,promoters of the VC backed companies also liquidate there stakes in the market during the time of IPO or afterwards through right issue/Follow up public issue.
4.4 Leverage Buyout:This is a process in which firm/company acquire the another company by using borrowed money.In such case assets of the acquired company and acquring company used as collateral for loans.

5.Distributing Proceeds:-
5.1 Cash:In this steps in there is a surplus cash with the company,it reinvested back to the company for future business expansions.
5.2 Public shares:Also,if company take the buy back then there is the opportunity to the retail investors to sell there shares back to the company if the wish to do so.


Key Success Factors of Venture Capital:
1.First and important  factor of Venture Capital is the knowledge about the Financial market and the industries in which they are invest funds.Also, they should have risk management skills and contact with the investors and have external expertise.
2.There should be high profit achieve by the venture capital company which shows good financial performances of the venture capital company.Also,there should be the good track record of the Venture capital companies in order to attract funds which needs for large deals.However,larger deal associate the higher risk of losses.many venture capital comany try to minimise the risk by hiring professional managers for eficient portfolio management.


Method of Financing through Venture Capital:
1.Equity:Venture Capitalist finanace start ups through selling equity of start ups to the investors of venture capital fund.
2.Preference(Redeemable/non Redeemable):Venture Capitalist also finance through preference shares,which carry fixed divident.They may have choice of  redeemable or non redeemable.
3.Debt(Convertable /Non Convertable):Venture capitalist also finance by giving debt or acquire debenture of the starts ups/firms,which have a choice of  convertable or non convertable.
4.Conventional loans:Venture capital finance the starups by providing conventional loans,which are a types of mortgaged loans not insured by any government schemes.
5.Conditional loans:
6.Income note loans:In this types of loans if any startups take this then it has to pay interest on loans amount plus sales of the firm.


Players in Venture capital:
1.Angels and Angel clubs:They are usually wealty individual who invest directly into the companies.Beside the money investment angel provide there personal knowledge,experiances and contact to support there investees.
2.Venture Capital funds:
    2.1Small Venture capital funds:They are small venture capital companies that mostly provide seeds and startups capital.They so called boutique firms are specialized in certain industries or market segment.
    2.2 Medium Venture capital funds:They finance after seeds stages and operate in all business segment.
    2.3Large Venture capital funds:It operate in all business sector and provide all types of capital for the companies after seed stages.They often operate internationally and finance deal upto 500 million dollar.
3.Corporate Venture funds:These funds are set up and owned by technology companies.There aims is to widen the parent companies technology based win win secuation for both,the investor and investee.In general corporate fund invest in growing or maturing companies,often when the investee wishes to make additional investment in technology or product development .
4.Financial Service Venture fund:These are the funds set up by financial institutions.Thus they have access to resources from penson funds and from their parent companies.


Major group of Stakeholders:
1.Management/Shareholders:They are interested in stable and positive future development of their Venture capital companies.Therefor they will carefully  monitor all drivers and developments.We can  assume that that management and shareholders are willing and able to take immediate action and to develop new and creative strategies eg,Aliance,Merger,new product.
2.Investors:Investors are interested in higher returns beside that group of investors can have other preference as well like suport for certain industries or technologies.Due to the globalizations and development of capital markets investors have a wider choices of investments.In additions,it provides better acess to information and better tools for analysing informations.That's we expect investors to become more critical and more interested in where there money is invested.
3.Employees/Investees/External managers:These group interest focus in Venture Capital industry as an Employer and Business partner.As long as preference are fullfilled,this group have much interest in in detail stratergies .With an expected positive development of VC industry we expect it to remain an attractive partner for employees and external professionals.The VC firm can/could provide more experianced management,contact within the industry,access to markets,to knowledge and to people.The better the VC can provides these values the better he can attract investees.



Five External factors and Drivers that impact the Venture capital industry:
1.Competitive Rivalry:There is a competitive rivalry within the industry,there are various market segments.A Venture capital company invest in early seed stage does not directly compete with an other one,investing in MBO's and MBI's.So between the segments the competition is moderate.It is more within the segment,between like and like of cource all together compete for money from investors and for experianced people.At present industry still is in growth phase we assess the competition between the players in general as moderate.Highly liquid capital markets and a growing number of startups provide sufficient Business opportunity for the whole industry.
2.Threat of New enterance:In this industry there is high profit which attract new entrants.Despite money needed but it is not difficult.If you have industry contacts and good network,you can set up new Venture capital company.In today's time of liquid financial market it is not the problems to obtain funds.Thus specially people working in the industry for several years have pre requisites to setup new companies.Beside that other larger financial and non fiancial firms can take some money and setup a new VC firm as a means of diversifications or some other reason.
3.Power of Suppliers:Powere of supplier of money is not very high beacause of high liquidity in today's financial markets.It is very important for the Venture capital companies to demonstrate good track record of high profits in order to attract funds.The investment preferance is given to the investors where they put there money.Also,equally importance to venture capital firms to compete for  attracting good talent.

4.Power of Buyers:Buyers are the investee companies.They are selected by the Venture capital companies according to there preference in order to minimise potential loses.Depending upon the proportion  of supply and demand of Venture capital we assess the supply as moderate to high.

5.Threat of substitute:There are hardly any substitute for the Venture capital industry product,consisting equity combined with management help,contacts and guidance.


conclusions:We see that there is moderate competition in Venture capital industy because of growing industry.It is rapedly changed to mature and  growth slow down.




 

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.