A Course Material on BA 7022- MERCHANT BANKING AND FINANCIAL SERVICES By 1 SCE DEPARTMENT OF MANAGEMENT STUDIES Mr.P.TAMILSELVAN ASSISTANT PROFESSOR DEPARTMENT OF MANAGEMENT SCIENCE SASURIE COLLEGE OF ENGINEERING VIJAYAMANGALAM – 638 056 2 SCE DEPARTMENT OF MANAGEMENT STUDIES QUALITY CERTIFICATE This is to certify that the e-course material Subject Code : BA7022 Subject : MERCHANT BANKING AND FINANCIAL SERVICES Class : II MBA Being prepared by me and it meets the knowledge requirement of the university curriculum. Signature of the Author Name : P.TAMILSELVAN Designation: Assistant Professor This is to certify that the course material being prepared by Mr. P. TAMILSELVAN is of adequate quality. He has referred more than five books amount them minimum one is from abroad author. Signature of HD Name : S.ARUNKUMAR 3 SCE DEPARTMENT OF MANAGEMENT STUDIES SEAL CONTENTS CHAPTER TOPICS PAGE NO MERCHANT BANKING 1.1 An Overview of Indian Financial System financial system 1.1.2. Objectives 1.1.3 Components of Financial System 1.1.4 Limitations of the financial system in India 1.1.5 Functions of merchant Banking 1.2 Merchant Banking In India 1.2.1 Recent Developments in Merchant Banking and Challenges Ahead 1.3 Merchant Banking And Legal Regulatory Frame Work 1.3.1 Companies Act 1.3.2 Provisions under Companies Act 1.3.3 SCRA (Security contract regulation Act) 10- 57 1.4 Recognized Stock Exchanges I 1.5 Security Exchange Board Of India (SEBI) 1.5.1 General Obligations 1.5.2 Appeal to the Securities Appellate Tribunal 1.5.3 SEBI Regulations on merchant bankers 1.5.4 Code Of Conduct For Merchant Bankers 1.6 SEBI Guidelines 1.6.1 Operational Guidelines 1.7 Stock Exchanges 1.7.1Objectives of Stock Exchanges 1.7.2 Functions of Stock Exchanges 4 SCE DEPARTMENT OF MANAGEMENT STUDIES 1.8. Organization of Stock Exchanges 1.8.1 Traditional Structure of stock Exchanges 1.8.2 Demutualization of Stock Exchanges 1.8.3 Corporatization of Stock Exchanges 1.9 ONLINE TRADING 1.9.1 BSE Bolt System, Bolt 1.10 OTCEI (Over the Counter Exchange of India) 1.10.1 Features Of OTCEI 1.10.2 Objectives of OTCEI 1.10.3 Benefits to Financial System II. ISSUE MANAGEMENT INTRODUCTION 2.1 Introduction 2.2 Merchant Bankers And Capital Issues Management 2.2.1 Merchants Of Public Issue Management 2.2.2 Merchant Bankers Functions 2.3 Pricing Of The Issue (Preferential Issue Of Shares) 2.3.1 Global Debt Instruments 2.3 PREPARATION OF PROSPECTUS 2.3.1 Prospectus For Public Offer 2.3.2 General Obligations And Responsibilities Code Of Conduct For Register To An Issue And Share Transfer Agents 2.4 Underwriters 2.4.1 General Obligations And Responsibilities Code Of Conduct For Underwriters 58- 115 II 2.5 Bankers to an Issue 2.5.1Code of Conduct for Bankers To Issue 2.6 Brokers To The Issue 2.6.1Merchant Banking And Marketing of New Issues 2.7 Offer for Sale Method 2.8 Private Placement Method 2.9 Initial Public Offer (IPO) Method 5 SCE DEPARTMENT OF MANAGEMENT STUDIES 2.10 Rights Issue Method 2.11 Bonus Issues Method 2.11.1SEBI Guidelines 2. 12 Book Building Method 2.12.1Advantages of Book Building 2.13 Stock Option Of Employees Stock Option Scheme (ESOP) 2.13.1Stock Option Norms for Software Companies 2. 14 Bought Out Deals 2.14.1 Bought Out Deals vs. Private Placements Benefits 2.15 Advertising Strategies 2.16 Foreign Institutional Investors (FIIS) 2.16.1 FII and SEBI Regulations, 1995 2.17 Investment Potential Of NRIS III. OTHER FEE BASED MANAGEMENT INTRODUCTION 3.1 Mergers 3.1.1steps in M & A 3.1.2 Take Over 3.13 Distinction between Mergers vs. Takeovers III 3.14 Major Issues of M&A in India 116-137 3.2 Portfolio And Management Services 3.2.1 Functions of Portfolio and Management 3.3 Credit Syndication 3.3.1 Credit Syndication Services 3.4 Credit Rating 3.4.1 Credit Rating Of Individuals, Companies And Countries 3.4.2 Basis of Credit Rating 3.4.3 Credit Rating Companies in India 3.4.4 Types of Credit Rating 3.5 Mutual Fund 3.5.1 Mutual Funds Set Up In India 6 SCE DEPARTMENT OF MANAGEMENT STUDIES 3.5.2 Types of Mutual Funds 3.5.3 History of Mutual Funds In India 3.6 Business Valuation 3.6.1 Net Assets Value 3.6.2 Capital Stock and Distribution FUND BASED FINANCIAL SERVICES 4.1 LEASING 4.1.1 Definition 4.1.2 Evolution of Leasing 4.1.3Legal aspects of Leasing IV 4.1.4 Contents of a Lease Agreement 138-149 4.1.5 Types of Leasing 4.2 HIRE PURCHASE 4.2.1 Hire Purchase Agreement 4.3.2 Difference between Hire Purchase and Leasing 4.3 HIRE PURCHASE LEASING 5. OTHER FUND BASED FINANCIAL SERVICES 5.1 CONSUMER CREDIT 5.1.1Characteristics of Consumer Credit 5.1.2 Nature of Consumer Classes In India 5.1.3 Consuming Class in India 5.1.4 Importance of Consumer Credit In India 5.2.CREDIT CARDS 5.2.1 Introduction V 5.2.2 Origin of Credit Cards In India 150-189 5.2.3 Types of Credit Cards or Types of Cards 5.3 REAL ESTATE FINANCING 5.3.1 Introduction 5.3.2 Factors Determining the Real Estate Finance Assistance 5.4 BILL DISCOUNTING 5.4.1 Introduction 7 SCE DEPARTMENT OF MANAGEMENT STUDIES 5.4.2Definition of Bill Discounting 5.4.3 Following are the salient features of bill discounting financing 5.4.4 Steps In Discounting And Purchasing 5.4.5 Bill Systems 5.5 FACTORING AND FORFAITING 5.5.1 Introduction 5.5.2 Factoring And Forfeiting 5.5.3 Functions of a factor 5.5.4 Factoring mechanism 5.5.5 Features of Factoring 5.5.6 Types of Factoring 5.6 FORFAITING 5.6.1 Forfeiting Mechanism 5.6.2 Benefits to Exporter 5.6.3 Benefits to Banks 5.7 VENTURE CAPITAL 5.7.1 Introduction 5.7.2 Meaning of Venture Capital 5.7.3 Features of Venture Capital 5.7.4 Objectives of Venture Capital 5.7.5 Financing By Venture Capital Institutions 5.7.6 Stages/Process 5.7.7 Infrastructure financing Incubators 5.7.8 Venture Capital in India 5.7.9Investment Pattern In Venture Capital QUESTION BANK 190-206 UNIVERSITY QUESTIONS 207-214 8 SCE DEPARTMENT OF MANAGEMENT STUDIES SYLLABUS MERCHANT BANKING ANF FINANCIAL SERVICES UNIT- 1 Introduction – An Overview of Indian Financial System – Merchant Banking in India – Recent Developments and Challenges ahead – Institutional structure – Functions of Merchant Banking – Legal and Regulatory Frameworks- Relevant Provisions of Companies Act- SCRA- SEBI guidelines- FEMA etc. – Relation with stock Exchanges and OTCEI UNIT II - ISSUE MANAGEMENT Role of Merchant Banking in Appraisal of projects, Designing Capital Structures and Instruments – Issue Pricing - Preparation of prospectus selection of bankers, Advertising Consultants etc. – Role of Registrars –Underwriting Arrangements. Dealing with Bankers to the Issue, Underwriters, Registrars, and Brokers. –Offer for sale – Book- Building – Green Shoe Option –E –IPO Private Placement- Bought out Deals – Placement with FIs, MFs, FIIs, etc. off- Shore Issues. – Issue Marketing – Advertising Strategies-NRI Marketing- Post Issue Activities. UNIT III - OTHER FEE BASED MANAGEMENT Mergers and Acquisitions – Portfolio Management Services – Credit Syndication – Credit Rating – Mutual Funds – Business Valuation. UNIT IV - FUND BASED FINANCIAL SERVICES Leasing and Hire Purchasing – Basics of Leasing and Hire Purchasing – Financial Evaluation –Tax Implication. UNIT V - OTHER FUND BASED FINANCIAL SERVICES Consumer Credit – Credit Cards- Real Estate Financing – Bills Discounting – Recent Developments in Factoring and Forfeiting – Venture Capital. REFERENCES 1. M.Y.Khan, ‗Financial Services‗– Tata McGraw –Hill, 3 rd Edition, 2005. 2. Machiraju, ‗ Indian Financial System ‗- Vikas Publishing House, 2 nd Edition, 2002. 3. J.C.Verma, ‗ A Manual of Merchant Banking ‗, Bharath Publishing House, New Delhi, 2001. 4. K.Sriram, ‗Hand Book of Leasing, Hire Purchase & Factoring‗, ICFAI, Hyderabad, 1992. 5. Economic Dailies, Relevant Publication of AMFS. 6. Bhalla. V.K.-‗Management of Financial Services‗ – Mnmol, New Delhi 2001. 7. Bhalla V.K.and Dilbag, Singh , ‗International Financial Centers‗, New Delhi, Anmol,1997. 9 SCE DEPARTMENT OF MANAGEMENT STUDIES 8. Ennew.C.Trevor Watkins & Mike Wright, ‗Marketing of Financial Services‗, Heinemann Professional. CHAPTER I MERCHANT BANKING 1.1. An overview of Indian Financial System The word system implies a set of complex and interrelated factors organized in a particular form. These factors are mostly interdependent but not always mutually exclusive. The financial system of any country consists of several ingredients. It includes financial institutions, markets, financial instruments, services, transactions, agents, claims and liabilities in the economy. Financial system‘s a system to canalize the funds from the surplus units to the deficit Units. ‗Deficit units‘ is a case where current expenditure exceeds their current income. There are other entities whose current income exceeds current expenditure which is called as ‗Surplus Units‗. An efficient financial system not only encourages savings and investments, it also efficiently allocates resources in different investment avenues and thus accelerates the rate of economic development. The financial system of a country plays a crucial role of allocating scarce capital resources to productive uses. Its efficient functioning is of critical importance to the economy. 1.1.1 FINANCIAL SYSTEM: • It is a system for the efficient management and creation of finance. According to Robinson, financial system provides a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth. According to Van Horne, financial system is defined as the purpose of financial markets to allocate savings efficiently in an economy to ultimate users – either for investment in real assets or for consumption.