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Financial Services: An Introduction

Meaning and Concept

Financial services are services that ensure the smooth flow of financial activities in the economy

It including
banking, insurance, stock broking and investment services business and professional services.

Cater the need of financial institutions, financial markets and financial instruments Financial services include the services offered by both
Asset Management companies and Liability Management companies

Meaning and Concept

Financial Services help to raise the required funds but also ensure their efficient deployment

To ensure an efficient management of funds, services such as

bill discounting, factoring of debtors, parking of short term funds in money market, e-commerce and securitization of debts credit rating, lease financing, factoring, venture capital, mutual funds, merchant banking, stock lending, depository services, housing finance

This sector provides services such as

Characteristics of Financial services

Customer-Specific: Focused, need of the customer, due regard to cost, liquidity and maturity consideration Intangibility: Quality and innovativeness of their services to build up their credibility Concomitant: Production of new and innovative financial services and supplying of these services are to be performed simultaneously Tendency to Perish: Proper synchronization of demand and supply People based services: People incentive and hence its subjected to variability of performance or quality of service Market Dynamics: Constantly redefined and refined taking into consideration of various dynamics in financial services

Types of financial services

Financial services industry classify the financial services under three broad categories
Fee Based services Fund Based services Insurance Services

Fee Based Services

Financial institutions operate in specialized fields to earn a substantial income by way of fees, dividend commission, discount and brokerage on operations. Issue Management Corporate Advisory Services Credit Rating Mutual FundsAssets Securitization-

Fund Based Services

The firm raises funds through equity, debt, and deposits and invests these funds in securities or lends to those who are in need of capital
Leasing and Hire Purchase Hosing Finance Credit Cards Venture Capital Factoring Forfaiting Bill Discounting

Growth of financial services in India

1. Discussed under the various stages Merchant Banking Era (1960 onwards) fin.services like MB, Insurance, Leasing services began to grow. Investment Companies Era: (1970 onwards) includes establishment of variety of investment institutions and banks. Like, UTI, MF, LIC, Nationalization of major commercial banks. Modern Services Era: (1980 onwards) launch of a variety of financial products and services like OTCEI, MF, Factoring, VC, and credit rating. Depository Era: (1990 onwards) depositories were set up, promoting paperless trading through dematerialization of securities. Book Building, NSE and computerization of BSE. Legislative Era: (1995 onwards) FERA replaced by FEMA, Amendments in Co. Act 1956,





Growth of financial services in India

1. Amendments in Inc. Tax Act, etc to facilitate safe and orderly trading and settlement of transactions and separate law to regulate the internet trading of securities was framed. FIIs Era: (1998 onwards) economic reforms envisaged the free play of Foreign Institutional Investors in Indian capital market towards the growth & development. GDR plays a vital role in portfolio investments in India.


Regulatory framework
1. Institutional regulations: also known as structural regulations which call for a clear demarcation of activities of Financial institutions. It is to promote healthy competition among players. Apex agencies like SEBI to regulate the MB, Stock Broking Co. and RBI another structural entity prescribing the activities of commercial banking.


Prudential regulations: related to internal management of financial institutions and other financial services org, regarding capital adequacy, liquidity and solvency etc. Aims at preventing the entry of firms without adequate resources. (ex. Minimum net worth requirement for various financial service firms is fixed by the SEBI and RBI`s regulations relating to the NBFC`s)

Regulatory framework
3. 4. Investors regulations: the role of SEBI is highlighted with periodic guidelines on investor protection. Legislative Regulations: brought out by Govt. for all round development of financial services industry.
Banking Regulation Act, Securities Contract Regulation Act


Self-regulations: this is addition to the above regulations that are self imposed regulations such as,
Foreign Exchange Dealers association, and Merchant Bankers association in addition to SEBI regulation that governs their members. AMFI

Regulatory Framework
MOF- department of economic affairs Departments:
Economic Affairs Expenditure Revenue Financial Services Disinvestment



Merchant Banking

Merchant Banking-An Overview

Companies raise capital by issuing securities in the market. Merchant bankers act as intermediaries between the issuers of capital and the ultimate investors who purchase these securities.

Merchant Banking-An Overview

Merchant banking is the financial intermediation that matches
the entities that need capital and those that have capital. It is a function that facilitates the flow of capital in the market.

Ministry of Finance: Any person who is engaged in the business

of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management

ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association

Evolution of Investment Banking in India

In 1967, ANZ Grindlays Bank set up a separate Merchant Banking Division to handle new capital issues. Followed by Citi Bank, which started rendering Merchant Banking services. The foreign banks monopolized merchant banking services in the country. The Banking Commission, in its report in 1972, took note of this with concern and recommended setting up of merchant banking institutions by commercial banks and financial institutions.

Evolution of Investment Banking in India

State Bank of India ventured into this business by starting a Merchant Banking Bureau in 1972. In 1973 ICICI became the first financial institution to offer Merchant Banking services.

JM Finance was set up by Mr. Nimesh Kampani as an exclusive Merchant Bank in 1973. The growth of the industry was very slow during this period.
By 1980, the number of Merchant Bankers rose to 33 and were set up by Commercial Banks, Financial Institutions and private sector. The industry remained more or loss stagnant in the eighties.

Evolution of Investment Banking in India

Many of the top rung Indian Merchant Banks, who had strong domestic base, started entering into joint ventures with the Foreign Investment Banks.

This arrangement resulted in synergies as their individual strengths complemented each other. Some of the successful tie-ups are :
JM Finance-Morgan Stanley DSP Financial Consultants-Merrill Lynch Kotak Mahindra-Goldman Sachs Ind Global Fin Trust-Salomon Bros Creditcapital-Lazard Bros SBI Capital Markets-Lehman Bros

Evolution of Investment Banking in India

Some of the alliances failed due to cultural differences, varied aspirations of the partners, etc. Some of the notable failures are :
IDBI-Asian Capital Partners ICICI Securities-J.P. Morgan ITC Classic-Peregrine

Services rendered
Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets

Business Portfolio of Indian Investment Banks

Non Fund Based Merchant Banking Services for: Management of Public offers of equity and debt instruments Right issues Open offers under the Takeover code Buyback offers De-listing offers Advisory and Transaction Services in Project Financing Syndicated Loans Structured Finance and Securitization Private/ Equity Venture Capital Preferential Issues Qualified Institutional Placements Business Advisory Financial Restructuring Corporate re-organisations such as mergers and demergers, hive-offs, assets sales, divestitures Acquisitions, strategic sale, buyouts and privatization Government disinvestments and privatization Assets recovery agency services Fund Based Underwriting Market Making Bought Out Deals Proprietary investments and trading in equities, bonds and derivatives

Main functions of a merchant banker

Management of debt and equity offerings- This
forms the main function of the merchant banker. He assists the companies in raising funds from the market. The main areas of work in this regard include: instrument designing, pricing the issue, registration of the offer document, underwriting support, marketing of the issue, allotment and refund, listing on stock exchanges.

Placement and distribution- The merchant banker helps in

distributing various securities like equity shares, debt instruments, mutual fund products, fixed deposits, insurance products, commercial paper to name a few. The distribution network of the merchant banker can be classified as institutional and retail in nature.

Corporate advisory services Merchant bankers offer customized solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.

Project advisory services- (done by foreign MB)
conceptualizing the project idea feasibility studies
Preparing different documents like the detailed project report.

Loan syndication- (done by foreign MB)

Tie up loans for their clients Analyze the pattern of the clients cash flows Prepares a detailed loan memorandum This takes place in a series of steps. Firstly they, based on which the terms of borrowings can be defined. Then the merchant banker, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate.

ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening of issue, closing of issue, launching & publicity campaign etc.. They help the companies in fixing up the prices for their issues (will see the details later)

Post-issue activities:

collection of application forms,

screening of applications, deciding allotment procedure, mailing of allotment letters, and refund orders


Underwriting is an insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters.

MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two. For an issue of 100 crores, upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..

PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination. Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. Merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys.(Foreign MB)

NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a single company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.


Merchant bankers help their clients in : Long term foreign currency loan

Joint venture abroad

Financing exports and imports Foreign collaboration arrangement

Merchant Bankers Regulations -Securities and Exchange Board of India Company Act 1956 Listing guidelines of Stock Exchanges Securities Contracts (Regulation) Act, 1956 Formation of divisions Subsidiaries companies





Pure investment banks that do not have presence in the lending or banking business are governed primarily by the capital market regulator (SEBI). Universal banks and NBFC investment banks are regulated primarily by the RBI in their core, business of banking or lending and insofar as the investment banking segment is concerned, they are also regulated by SEBI At the constitutional level, all investment banking companies incorporated under the Companies Act 1956are governed by the provisions of that Act. Universal Banks are regulated by the Reserve Bank of India under the RBI Act and the Banking Regulation Act which put restrictions on capital market exposures to be taken by banks.


Investment banking companies that are constituted as non-banking financial companies are regulated operationally by the RBI under Chapter IIIB (sections45H to 45QB) of the RBI Act. Under these sections RBI is empowered to issue directions in the area of resource mobilization, accounts and administrative controls. The following directions have been issued by the RBI so far:
Non-Banking Financial Companies Acceptance of Deposits (Reserve Bank) Directions, 1998. NBFCs Prudential Norms (Reserve Bank) Directions, 1998


Merchant banking business consisting of management of public offers is a licensed and regulated activity under the Securities and Exchange Board of India (Merchant Bankers) Rules 1992and Securities and Exchange Board of India (Merchant Bankers) Regulations 1992. Underwriting business is regulated under the SEBI (Underwriters) Rules, 1993 and the SEBI (Underwriters) Regulations 1993. The activity of secondary market operations including stock broking are regulated under the relevant by-laws of the stock exchange and the SEBI (Stock Brokers and Sub Brokers) Rules 1992and the SEBI (Stock Brokers and Sub Brokers)Regulations 1992. For curbing unethical trading practices, SEBI has promulgated the SEBI(Prohibition of Insider Trading)Regulations, 1992and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 1995.


The business of asset management as mutual funds is regulated under the SEBI (Mutual Funds) Regulations 1996. The business of portfolio management is regulated under the SEBI (Portfolio Managers) Rules, 1993 and the SEBI (Portfolio Managers) Regulations, 1993.

The business of venture capital and private equity by such funds that are incorporated in India is regulated by the SEBI (Venture Capital Funds) Regulations, 1996 and by those that are incorporated outside India is-regulated under the SEBI (Foreign Venture Capital Funds) Regulations 2000. The business of institutional investing by foreign investment banks and other investors in Indian secondary markets is governed by the SEBI(Foreign Institutional Investors)Regulations 1995.

to carry on any activity of the issue management,
preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers final allotment refund of the subscription; and

to act as
adviser, consultant, manager, underwriter, portfolio manager.

Category II
that is, to act as
adviser, consultant, co-manager, underwriter, portfolio manager;

Category III
that is to act as
underwriter, adviser, consultant to an issue;

Category IV
that is to act only as
adviser or consultant to an issue.

Registration with SEBI

Around 250 Merchant Bankers Abolished all categories and maintained Category-I Separate registration for
underwriters and portfolio manager

Segregation between
fee based and Fund based activities

Registration with SEBI

Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms:
The applicant should be a body corporate The applicant should not carry on any business other than those connected with the securities market The applicant should have necessary infrastructure like office space, equipment, manpower etc. The applicant must have at least two employees with prior experience in merchant banking Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker The applicant should not have been involved in any securities scam or proved guilt for any offence The applicant should have a minimum net worth of Rs.5 crores

Terms of Authorization
Authorization is valid for an initial period of 3 years Authorization fee, annual fee and renewal fee All issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead manager MB expected to exercise due diligence independently Involvement of MB in post-issue management Adhere a code of conduct prescribed by SEBI MB may be cancelled or suspended for suitable duration MB regulations integrate issue management with underwriting

General Obligations and Responsibilities

Maintenance of books of accounts, records and documents Copy of the balance sheet, auditors report and statement of financial position Responsibilities of lead Manager Underwriting obligation Submission of due diligence certificate Insider Trading Acquisition of shares

BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming, Klienwort Benson etc


SEBI stipulates high capital adequacy norms for authorisation which prevents young, specialised professionals into merchant banking business Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is another problem Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking services

Product Differentiation
In Investment Banking Industry, product expertise on both the issuing and investing side needs to be developed or acquired. Generally, product differentiation is not very high, because the ultimate deal structure is designed as per the advise of the client. The area where an Investment Banker can make the difference, is in the execution of the deal. Though new financial innovations also help a firm to differentiate from others, but they are easily initiated in this industry. For example, Videocon Leasing and Industrial Finance Ltd., introduced the concept of Bought-Out Deal for the first time for raising capital for Patheja Forgings Ltd., and later on many Investment Bankers followed it by raising money for their clients through this route.

Product Differentiation
JM Financial has designed and executed several innovative deals. In 1979, JM designed Fully Convertible Debentures (FCDs) for TISCO.

It was also instrumental in introducing

Zero coupon FCDs in Mahindra & Mahindras issue, Deep Discount Bonds for IDBI and Triple Option Convertible Bonds in 1993 for Reliance Petroleum. It is however difficult to differentiate between services rendered by various Investment Banking outfits in India.

Bargaining power of buyers..companies

In India, success of issue may also be determined by the reputation of its lead manager. Bargaining power of buyers is very high because they are free to approach any Investment Banker who is ready to offer him quality services.

Bargaining Power of Suppliers

Persons who support the Investment Banker in successful execution of the issue like
registrars, printers, advertisers, underwriters, bankers, legal advisors, etc., can be considered as suppliers because without their co-operation and support the public issue cannot see light.

People rendering these services are in large number in the market, hence bargaining power of suppliers can be considered to be very less.

Merchant Banking-An Overview

Banking commission Report-1972
a) b) c) d) e) Necessity Distinct from commercial Banks Investment Management and Advisory services Medium and small savers Manage



It includes preparation of project reports,deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions.
LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

Capital Markets

Primary Issues

Equity Sharessome concepts related to markets

IPO FPO Book Building Cut of price Dutch auction French auction

Listing price Listing gain Grey market ASBA account Application Supported by Blocked Amount Private placement
SEBI: The capital market regulator

An issuer may make IPO in following 3 options Option 1 Profitability Route An issuer company may make an IPO only if : Net tangible assets of at least Rs 3 crores in each of 3 preceding years, of which not more than 50% is held in monetary assets except were the issuer company has made firm commitments to utilise such excess monetary assets in its project Issuer company has a track record of distributable profits terms of section 205 of the Companies Act, 1956 for at least 3 years out of immediately preceding 5 years

Net worth of at least Rs 1 crore in each of preceding 3 years Size of the public issue sum of (proposed issue + all previous issues) made in the same financial year =< 5 times its pre-issue net worth as per the audited balance sheet of the preceding financial year

If its name is changed within last 1 year, 50% or more of the revenue for preceding 1 year has been earned from the activity indicated by new name

Option 2 Qualified Institutional Buyer (QIB) Route

An issuer company not satisfying any of the conditions mentioned under option 1 may make an IPO if Issue is made through book building process and the issuer undertakes to allot 50% or more of its issue to QIB and to refund full subscription monies if it fails to make allotment to the QIB;

The minimum post-issue face value capital of the issuer is Rs. 10 crores
OR Issuer shall be compulsory undertake marketmaking for at least 2 years from the date of listing of specified securities subject to specified conditions.

Option 3 Appraisal Route An issuer not satisfying any of the conditions mentioned under option 1 may make an IPO if Minimum 15% of cost of project is appraised & participated by scheduled commercial banks or public financial institutions

The minimum post-issue face value capital of the issuer is Rs. 10 crores OR Issuer shall be compulsory undertake marketmaking for at least 2 years from the date of listing of specified securities subject to specified conditions.

A company can make a public issue only if Issuer company / its promoters / promoter group / directors / persons in control of Issuer Company are not debarred from accessing the capital market. After entering into an agreement with depository for dematerialisation of specified securities already issued or proposed to be issued All existing partly paid up equity shares of the issuer company shall be either been fully paid or forfeited An issuer shall make an allotment only if prospective allottees are more than 1000 Issuer shall obtain grading for IPO from at least one credit rating agency on or before date of registering prospectus or red herring prospectus with Registrar of Companies A company should not have convertible securities or any other right which would entitle any person to receive equity shares after IPO


Size of the public issue sum of (proposed issue + all previous issues) made in the same financial year =< 5 times its pre-issue net worth as per the audited balance sheet of the preceding financial year If its name is changed within last 1 year, 50% or more of the revenue for preceding 1 year has been earned from the activity indicated by new name

Green Shoe option means an option of allotting equity shares in excess of equity shares offered in the public issue as a post listing price stabilizing mechanism Issuer Company use green shoe option Mechanism during IPO to ensure that the shares price on the stock exchanges does not fall below the issue price after issue of shares.

A contract has been entered in relation to green shoe option with the existing shareholders (i.e with promoters) before the public issue of shares. The guidelines require the promoter to lend his shares (not exceeding 15% of issue size) which is to be used for price stabilisation to be carried out by a stabilising agent (normally merchant banker or book runner) on behalf of the Company. The stabilization period can be for a period of maximum period of 30 days from the date of allotment of shares to bring stability in post listing pricing of shares. The company then goes on to make allotment, including over allotment, to the extent it has exercised the greenshoe option.

Say, for instance, that a company is planning to issue only 100,000 shares, but in order to utilize the greenshoe option; it actually issues 115,000 shares, in which case the overallotment would be 15,000 shares. Please note that the company does not issue any new shares for the over-allotment.
The 15,000 shares used for the over-allotment are actually borrowed from the promoters with whom the stabilizing agent enters into a separate agreement. For the subscribers of a public issue, it makes no difference whether the company is allotting shares out of the freshly issued 100,000 shares or from the 15,000 shares borrowed from the promoters. Once allotted, a share is just a share for an investor.

For the company, however, the situation is totally different. The money received from the over-allotment is required to be kept in a separate bank account (i.e. escrow account)
The stabilizing agent start its process only after trading in the share starts at the stock exchanges. In case the shares are trading at a price lower than the offer price, the stabilizing agent starts buying the shares by using the money lying in the separate bank account. In this manner, by buying the shares when others are selling, the stabilizing agent tries to put the brakes on falling prices. The shares so bought from the market are handed over to the promoters from whom they were borrowed. In case the newly listed shares start trading at a price higher than the offer price, the stabilizing agent does not buy any shares.

It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. The sale of securities can be either through book building or through normal public issue.

Initial Public Offer

Book Building Process

Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price.

The offer price is determined after the bid closing date.

Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. In case of Book Building, the demand can be known everyday as the book is being built. But in case of the public issue the demand is known at the close of the issue.

Difference between Offer of Shares through Book Building and Offer of Shares through Normal Public Issue

Cut-Off Price
In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price.
Floor Price in case of Book Building Minimum Price at which bids can be made

French auction multiple price auction-System under which the bidders are allotted shares at the price they have bid. E.g.NTPC Dutch auction uniform price auction- System under which the cut-off price at which the shares are allotted to everybody participating in the bidding process is the one at which the issue gets fully subscribed. The lowest bid which ensures 100 per cent success of the issue becomes the norm.

French auction/ Dutch auction

Listing Gain
IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains.

Application Supported by Blocked Amount ASBA

An application containing an authorization to block the application money in the bank account, for subscribing to an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed. Investor submits the ASBA form available at the designated branches of the banks acting as Self certified Syndicate Bank (SCSB).

Reliance Power.
The IPO was open from January 15 to January 18, 2008. It had 22.8 crore shares on offer, with 30% reserved for retail investors. Rp 6.84 crore shares were available for retail investors. The price band was Rs. 405 to Rs. 450. There was a discount of Rs. 20 for retail investors. There was an option that retail investors could pay only Rs. 115 at the time of application, and pay the remaining at the time of allotment. The allotment of shares happened on January 31, 2008.

Reliance Power.
Lets assume, to be very conservative, that ALL retail investors paid only Rs. 115 per share at the time of application. Also, lets assume that all retail investors applied only on January 18th, the last day of the IPO. The retail portion of the IPO was oversubscribed by 15 times. Thus, application was received for 102.6 crore shares.
At Rs. 115 per share, this means that Rs. 11,799 (115*102.6)crores was collected just from retail investors. (Now, this is the most conservative estimate. There are lots of media reports suggesting that the collection from retail investors was 2 -3 times this amount.

Reliance Power.
Lets do the math. Issue Close Date: January 18th Allotment Date: January 31st
Number of days for which money was held by Reliance Power: 14 days (31-17) Even if the banks invested this money (in some way or the other, on behalf of Reliance Power.) at a meager 5% per annum, how much money they would make? 11799 Crores * 0.05 * (14/365) = 22.63 Crores 22.63 Crores Now, thats a LOT of money. And this, when we have been the most conservative in our calculations.

Illustrative Methodology in lPO Pricing

One of the key challenges in IPO pricing is to arrive at the future potential trading price band of the company's share in the short-term post-listing.
Going by the prevailing market conditions at the time of the issue, it would be possible to arrive at price benchmarks that would prove useful in fixing the price band for the issue. As the objective is to find out a reasonable price band, one has to decide on a conservative pricing at the lower end, and an aggressive pricing on the upper end. It is purely a quantifying effort of the company's fundamentals, it need not be reflective of the primary market sentiments. After arriving at this price-band, the upward or downward bias can be determined based on the market conditions.

Illustrative Methodology in lPO Pricing

Most issue managers look at the EPS and the P/E ratio in determining the two points of the range. The EPS values can be moderated using the weighted average of the past three normal financial years with the weight age being biased towards the immediately preceding year. This is because the latest year is presumed to be representative of the earning potential in the near future.

Illustrative Methodology in lPO Pricing

Therefore, the weighted average EPS would be (3 * rp 7.10) + (2 * rp 4.59) + (1 * rp 2.68)/6 = 5.52.

Illustrative Methodology in lPO Pricing

The next step would be to ascertain the industry average P/E for the relevant industry to which the present company belongs.
Let us consider the following illustrative figures.

Highest Lowest Average 32.5 3.50 8.60.

Price/ Earnings multiple

Considering the. average industry P/E of 8.60, and multiplying it with the weighted average EPS, one could arrive at the most conservative price or the lower end of the trading price band that the scrip of the issuer company can rule. This would work out to:

Illustrative Methodology in lPO Pricing

5.52 * 8.60 = 47.47. Looking at the EPS for similar, comparable companies in the industry, it is possible to find industry leaders whose scrips are quoted very well and others whose shares are not fancied by the market. It is possible that none of the PE figures reflect a true picture of the respective scrip.

Illustrative Methodology in lPO Pricing

While the fancied scrips may quote at exorbitant PE ratios, the laggards would have a below industry average PE. Considering these variations, the P/E of the IPO candidate at its upper end can be pegged.
If the company has made private placements or preferential issues in the past, that could also be a guiding factor as to how the investors had perceive the company's scrip.

Illustrative Methodology in lPO Pricing

If on the basis of the above analysis, it is perceived that the company's upper end P/E could be in the range of 10 to 12, the upper price limit can be found out by applying the company's highest EPS in the period in question.

Therefore, the most optimistic price would be as follows: Highest EPS = Rs 7.10 x P/E of 12 .
Thus, the upper price limit works out to Rs 85.20. The price band thus arrived at ranges from 47 to 85.

Illustrative Methodology in lPO Pricing

Using this price band and considering other factors the pricing bias can be determined. If the merchant banker prefers an upward bias, the price could be around the 75% mark of the price band. The final price for the issue is always decided in consultation with the merchant bankers, who being the experts in assessing the market conditions, can have a feel of the 'market clearing' price

Sampling Analysis of IPO Pricing in Indian Primary Market

The pricing of Deccan Aviation is at Rs 148 for a company that was yet to generate profits at the time of the issue.
Jet Airways is overpriced in relation to the industry average P/E multiple probably because of the qualitative and business justifications such as a strong brand and market share. Biocon was evenly priced considering that it had a good track record. GMR Infrastructure and Cairn Energy are primarily holding companies and all the numbers are derived from their underlying subsidiaries. Notwithstanding that, they are overpriced especially, the Cairn issue. Tech Mahindra among the above sample is the only company that seems to have the maximum upside potential for investors.

Sampling Analysis of IPO Pricing in Indian Primary Market

Issues that were high priced (Jet Airways, GMR Infra, Cairn Energy, Deccan Aviation) could not sustain the momentum post-listing either immediately or in the medium term. Two of these issues (Deccan Aviation and Cairn Energy) even faced difficulty in getting subscribed comfortably since its over-priced.

Sampling Analysis of IPO Pricing in Indian Primary Market

In the case of Jet Airways, though the issue received good response due to strong market conditions, the share could not sustain the issue price after some time.
This is definitely a clear case of over pricing since the postissue performance of a share is what vindicates its pricing. Biocon was more evenly priced and therefore, provided good returns to investors in the medium term. Tech Mahindra could be called an under-priced issue due to the fact that the share opened very strongly and posted more than 450% growth in six months after listing.

Sampling Analysis of IPO Pricing in Indian Primary Market

From the above discussion on IPO pricing, the following conclusions can be drawn:. IPO pricing is all about 'setting an offer price' as distinguished from valuation which is about finding the intrinsic value of a company. Valuation for an acquisition is the consideration to the seller for giving up the right to accrue future cash flow. IPO pricing is about setting an entry price to the right to accrue future cash flow.

Sampling Analysis of IPO Pricing in Indian Primary Market

IPO pricing is a combination of various parameters in addition to valuation.
Companies that over-price their issues would eventually find their share not being able to support its offer price. Qualitative justifications do not sustain price in the long term if they are not backed by financial performance. . Under pricing is also not a good feature as it amounts to under selling the company. This would be evident if the share price climbs significantly post-listing and stays buoyant thereafter in the long term.

Reliance Power.
In January 2008, Reliance Power came out with its initial public offering of Rs. 10 per share face value and 26 crore equity shares. The company priced it at Rs 450 per share (i.e. Rs. 440 per share premium). It is an IPO so premium pricing is justified and to top it off it was a Reliance brand. With this premium pricing the company intended to raise a total of approximately Rs. 11,563 crore (after IPO expenses).

Reliance Power.
The companys annual financial report ending March 2007 shows it had a net profit after tax of Rs. 16.10 lacs.
Based on the equity base at that point in time, the earrings per share was Rs. 0.01 only. In addition, it was stated in the IPO prospectus that the money is being raised to buy lands and build power stations, meaning to buy assets for the company. There was kind of slip through on how it will use these assets to generate earnings. After buying assets one needs resources to make it operational (fuel, water, transmission, power purchase agreement, etc)

Reliance Power.
So what is the valuation for the company at IPO. [450 per share] divided by [0.01 earning per share]. In general, market valuations are anywhere from PE of 20 to 50. The company will have to generate earnings per share of Rs. 22(450/20) to Rs. 9.00(450/50).

As March 2008, the Reliance Power had EPS of Rs. 0.17.

Reliance Power.
NTPC which is Indias biggest power producer. It has a capital base of Rs. 8245 crore (Reliance power had Rs 2259 crore including IPO), and generates earning per share of Rs. 9. This is approximately four times the capital base to generate Rs. 9 per share.

How will Reliance Power achieve that level with only Rs. 2259 crore?
NTPC is a very well established player with the full supply chain in place. i.e. coal, power, transmission, purchase agreements, easy access operational capital, etc. In addition, during January 2008, the NTPC stock traded in the range of Rs. 188 to Rs. 282.

Reliance Power.
Investors need to see if there is justification for such high premiums. Compare its investment preposition with industry practice to see if it makes sense.

Grey market
Price is market determined.
Sellers place sell orders. Buyers place buy orders.

The point where both match is the price.

Grey market prices are speculative...people just trying to guess...no logic behind them. You can place order if you broker allows you to.

Coal India Ltd..

Grey Market.. Functioning

A high networth individual or institution expecting a stock will outperform the IPO price band uses brokers to arrange extra shares at a premium over the listing price.
These brokers, in turn, approach their prospective clients with the offer. On the day of the listing, a premium is paid in cash to the seller. Lets take a company that is coming up with an IPO and the allotment price is at Rs 100 a share. The grey market premium is Rs 10 a share and a seller commits his stocks to a broker at that price.

Grey market Grey Market.. Functioning

On the listing day, the price of the stock moves between Rs 103 and Rs 105, and closes at the higher band. The buyer pays the seller Rs 5 in cash through the broker.

In case the share price closes at Rs 120, higher than the premium price, the seller pays the buyer Rs 10 in cash. Thats because the buyer pays the difference between the closing price and the premium set, if the latter is lower.

Grey Market.. Functioning

The actual trading of shares may not happen. It is at the discretion of buyer and seller.

Premium amounts depend on demand for a stocks issue.

Higher the oversubscription numbers, higher is the premium.

Grey market
The market regulator has asked stock exchanges to crack down on common irregularities such as brokers involvement in the grey market and unregistered trading terminals. Grey market means trade through channels which, while legal, are unofficial or unauthorised.

Grey market
The grey market in small towns of Gujarat, Rajasthan, Maharashtra, West Bengal and some north Indian states has revived of late.
Sebi found grey market operations by intermediaries such as stock brokers and merchant bankers which often misled investors, who got influenced by the high premium on an issue before it opened in the official markets.

After listing, punters (mainly high net worth individuals) who bet on the issue in the grey market buy shares on the exchanges to settle grey market trades and the share price witnesses a spurt.

Grey market 2009

Sebi found a total of 45 commonly observed irregularities by stock brokers and trading members.
Some of these include pledging of shares of clients without their consent. Another common finding was unregistered trading terminals. Sebi and the National Stock Exchange (NSE) had conducted raids on top Kolkata-based stock brokers and found a huge unauthorised trading terminal network. Trade details found during the raids led to transactions that did not have any NSE order or trade numbers or trade time indicating these were done off the floor.

Grey market
Sources say there could easily be over 1,000 such terminals in Indias small towns.

Green-shoe Option
Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investors perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. TCS Public Issue

In a book built issue allocation to Retail Individual Investors (RIIs), High Net Worth Individuals (HNI) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.

Retail individual investor means an investor who applies or bids for securities of or for a value of not more than Rs.2,00,000. Any bid made in excess of this will be considered in the HNI category.

Change/Revise .. bid
The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue.

Safety Net
Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities.

Syndicate Member
The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an Underwriter as syndicate members.

The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.

E IPO Hard underwriting Soft underwriting

Open book/closed book

Presently, in issues made through book building, Issuers and merchant bankers are required to ensure online display of the demand and bids during the bidding period. This is the Open book system of book building. The investor can be guided by the movements of the bids during the period in which the bid is kept open. Under closed book building, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

Differential pricing
Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing.
In DIP Guidelines differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made.

The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters contributions.

Qualified Institutional Buyer (QIBs)

Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a Qualified Institutional Buyer shall mean:
a. Public financial institution as defined in section 4A of theCompanies Act, 1956; b. Scheduled commercial banks; c. Mutual funds; d. Foreign institutional investor registered with SEBI; e. Multilateral and bilateral development financial institutions;

Qualified Institutional Buyer (QIBs)

f. Venture capital funds registered with SEBI. g. Foreign Venture capital investors registered with SEBI. h. State Industrial Development Corporations. i. Insurance Companies registered with the Insurance Regulatoryand Development Authority (IRDA). j. Provident Funds with minimum corpus of Rs.25 crores k. Pension Funds with minimum corpus of Rs. 25 crores)

These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.

Rights Issue
Issue of new shares to existing shareholders on a basis Why rights? pro-rata

to reward shareholders to reflect the stocks true worth to hike promoters stake

Preferential Allotment
An issue of shares to a select group of persons under Section 81 of the Companies Act. Select group consists of
Promoters Foreign partners Technical collaborators Private equity funds

Why preferential allotment? To enhance promoters holding

To cash in on the bull run To takeover of company Quick fund raising at low cost

Capital Market Participants

Primary Market
Merchant banker Registrars to the issue Bankers to the issue Underwriters Brokers to the issues Custodians and Depositories

Resource Mobilisation from International Capital Markets

The company deposits a large number of its shares with a bank located in the country (foreign country) where it wants to list indirectly.
The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).

These receipts are then sold to the people of this foreign

country (and anyone who is allowed to buy shares in that country). These receipts (Depository Receipts) are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and the fundamentals of the underlying company

Bonds issued by Indian companies in foreign currency
Fixed interest/coupon rate Convertible into ordinary shares Bonds listed and traded abroad

Supplement domestic resources
Low cost of borrowing Two routes of access
Automatic Approval

Gujarat Pipavav
Gujarat Pipavav Port is coming out with its IPO which will open on 23rd August, and close on 26th August. The IPO is priced between Rs. 42 48, and has been graded 4 out of 5 by CRISIL, which denotes above average fundamentals.

One Billion = One Hundred Crores 100 crores 1 billion = 1000 million, 1million= 10 lacs 10 million=1 crore or 100 lacs

Purpose Of Resource Mobilization

1. How can an organization raise the income needed to carry out its mission? 2. Where are the required resources? 3. How do you sustain organization and work?

Researching The Current Situation

The legal situation Tax consequences Tax relief for individual or corporate

Orders are sorted by time.

The earliest orders are executed first.

Take this example: Buy 1 @ 150 (first order as trading starts). Sell 1 @ 120 Sell 1 @ 115 Buy 1 @ 125 As there was a 150 buy order, the 120 sell order will get executed at Rs 150. After that a 115 sell order is placed.

As there was a 115 sell order, the 125 buy order will get executed at Rs 115.

Securitization : Concept India Experience

Way of recourses mobilization banks and NBFC

Dr. Anjala Kalsie. Faculty Finance

Newspaper Quotes
'Banks will have to unload bad loans to Asset Reconstruction Companies by FY2007' Read a leading business newspaper headline sometime back. A bank selling its bad loans! This might sound strange, but it is

Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Securitisation is the process of conversion of existing assets (asset-backed) or future cash flows into marketable securities (future-flows).
Securitisation deals with the conversion of assets which are not marketable into marketable ones.

Examples: Assets that can be securitised

Car loans, Housing loans, Future cash flows like ticket sales, Credit card payments, car rentals or any other form of future receivables

Example: Future cash flows

Suppose Mr X wants to open a multiplex and is in need of funds for the same. To raise funds, Mr X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money. This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself.

Creation of a special purpose vehicle to hold the financial assets underlying the securities; Sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets; Issuance of securities by the SPV, to investors, against the financial assets held by it.

This process leads to the financial asset being take off from the balance sheet of the originator, thereby relieving pressures of capital adequacy, and provides immediate liquidity to the originator.

The Process and Participants

Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors.
To free these blocked funds the assets are transferred by the originator (ABC Bank in this case) to a special purpose vehicle (SPV).

The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile. Only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities.

These securities issued by the SPV to the investors and are known as pass-throughcertificates (PTCs). The cash flows (principal repayment, interest and prepayments) received from the obligors are passed onto the investors (investors who have invested in the PTCs). The difference between rate of interest payable by the obligor and return promised to the investor investing in PTCs is the servicing fee for the SPV.

The administrator or the servicer is appointed to collect the payments from the obligors. The servicer follows up with the defaulters and uses legal remedies against them.

In the case of ABC bank, the SPV can have a servicer to collect the loan repayment installments from the people who have taken loan from the bank.
Normally the originator (ABC Bank) carries out this activity.

Once assets are securitised, these assets are removed from the bank's books and the money generated through securitisation can be used for other profitable uses, like for giving new loans.

For an originator (ABC bank ), securitisation is an alternative to corporate debt or equity for meeting its funding requirements.

Who can invest

Mutual funds, Financial institutions (FIs), Scheduled commercial banks, Insurance companies, Provident funds, Pension funds, State industrial development corporations,

Impact on Banking
Incremental Credit Deposit Ratio What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. The growth of credit off take though has not been matched with a growth in deposits.

Securitization and Reconstruction companies

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act -approved by parliament in November 2002. These companies -regulated by RBI.

The security receipts issued by these companies will be securities within the meaning of the Securities Contract (Regulation) Act, 1956. These companies would have powers to acquire assets by issuing a debenture or bond or any other security. once an asset has been acquired by the asset reconstruction company, such company would have the same powers for enforcement of securities as the original lender.

Asset Reconstruction Companies

ARCs, act as debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities.

Asset Reconstruction Companies

Asset Reconstruction Company of India Limited (ARCIL) was the first to commence business in India. ICICI Bank, Karur Vyasya Bank, Karnataka Bank, Citicorp (I) Finance, SBI, IDBI, PNB, HDFC, HDFC Bank and some other banks have shareholding in ARCIL. A lot of banks have been selling off their NPAs to ARCIL.

What is happening right now

Banks and FIs have been selling their NPAs to ARCIL and the same banks and FIs are picking up the PTCs being issued by ARCIL and thus helping ARCIL to finance the purchase.

A report in a business daily quotes , Rajendra Kakkar, ARCIL's Chief Executive as saying, "We have got a buyer, we have got a seller, it so happens that the seller is the loan side of the same institutions and buyer is the treasury side."

What is happening right now

The risk from the balance sheet of banks and FIs is not being completely removed as their investments into PTCs issued by ARCIL will generate returns if and only if ARCIL is able to affect recovery from defaulters.

Assert backed securities ( ABS)

Housing Loan- Mortgage Backed Securities (MBS) Bond Receivables- Collateralized Bond Obligation (CBO) Industrial Loan ReceivablesCollateralized Loan Obligation (CLO)

Indian Securitisation Markets

Indian retail asset securitization market declined to Rs.193.1 bn in FY09, as against Rs.300 bn in FY08. The single loan collateralized loan obligation (CLO) market grew from around Rs.280 bn in FY08 to around Rs.310 bn in FY09 . The single loan CLO transaction involves a bank giving a loan to a corporate, the receivables from which are assigned to an SPV/trust and then sold to investors in the form of PTC.

Indian Securitisation Markets

FY09 also witnessed introduction of new asset classes, like gold loans, microfinance loans and loan against property, in the securitization market. The microfinance loans are categorized as loans to weaker sections under priority sector lending norms which enhance the attractiveness of this asset class.

Indian Securitisation Markets

Securitization continues to remain an attractive alternative source of capital, which could infuse liquidity and boost economic growth in India. The Indian Securitization markets, in recent times, have seen a slowdown 2009 result of lack of appetite in securitized instruments globally due to the sub-prime crisis and the stringent regulations in India. Stimulus to make the securitized assets attractive, expand the asset classes which could be securitized and increase the scope of investor profile for this financial instrument. Supervision to ensure, excesses are prevented and investor capital is protected.

Securitization Market Scenario

Unlike developed countries where Mortgage Backed securities (MBS) are more prevalent, it is the Asset Backed securities (ABS) which have been the main driver of Securitisation market in India. The market for MBS has been comparatively subdued with lack of investors interest in long term paper and high interest rate risk prevalent in the paper.

What Banks are doing

Selling their investments in government securities. Statutory liquidity ratio (SLR) To increase interest rates. Securitisation: Banks can securitise the loans they have given out and use the money brought in by this to give out more credit.

Indian Securitisation Markets

Single loan CLO market was larger than ABS / MBS market, with mutual funds being the single largest investor class in the segment. Single loan CLOs issuances have sharply dropped in recent months after mutual funds withdrew from the market and RBIs proposal of minimum lock-in period requirement for underlying loans.

Dr. Anjala Kalsie Faculty- Finance

Securitization Primer
The Credit Rating Agency (CRA) assigns the rating on the instrument based on
the risks in the transaction, credit quality of the pool, the transaction structure and the credit enhancement mechanism.

The stringent regulation of the Reserve Bank of India, conservative origination standards and simple structures ensured the damage caused by sub-prime structures in US, UK and Europe, were not witnessed in the Indian markets .

India & Global Securitization markets

The Sub-prime crisis had its roots in excessive lending to the sub-prime sector based on expectations of continued rise in property prices rather than ability of the obligors to repay the loan. This was compounded by the complex structures, excessive leverage and use of the Originate and distribute model .

India & Global Securitization markets

The Indian securitization market, consists predominantly of prime loans based on robust underwriting standards and simple structures. The Indian securitization market depends less on originate and distribute approach.

India & Global Securitization markets

Some of the commentators have blamed excessive Securitisation for the recent global credit crisis affecting the western world; however blaming "securitization" for the recent global mess is like blaming airplanes for air crashes. Securitization is just a tool and its outcome - good or bad will depend on its proper or improper use. Indian securitization market is relatively small as compared to global volumes and there has so far not been a single reported instance of default on securitized paper.

India & Global Securitization markets

The Indian Securitization Industry could continue to remain attractive source of capital for the Indian Financial Industry.

The intrinsic inadequacies in the Indian debt markets have also compounded to the shrinking trade volumes and value.

April 27, 2010 icra report

First, the Reserve Bank of Indias proposed stringent norms for retaining loans on books kept lenders away. The recent Reserve Bank of India (RBI) move to tighten securitisation norms is likely to further impact the volumes. RBI had specified a lock-in of one year for securitisation products. It has asked the originators to retain at least 10 per cent of the pool of assets being securitised.

April 27, 2010 icra report

The guidelines are likely to impact the corporate securitisation market more than the retail as the retention period in the later is higher. Second, the low credit off-take meant lenders and financiers were blessed with comfortable resource position, reducing needs to offload some assets to get resources.

SKS Microfinance and ICICI bank conclude securitisation deal

SKS Microfinance, India`s largest and world`s fastest growing microfinance company and ICICI Bank, have completed a securitisation deal worth Rs. 2 billion which allows the bank to purchase loans extended to weaker sections. For the first time in the MFI history, a pool comprising receivables exclusively from the weaker sections of the society is securitised and placed with ICICI Bank. SKS will continue to manage these receivables for ICICI Bank through the term of these receivables.

Microfinance institutions are increasingly opting for securitisation

The Hyderabad-based MFI SKS had tied up with ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra, Punjab National Bank and YES Bank for securitisation. The microfinance institutions are increasingly opting for securitisation of their portfolios with banks as a viable option for fund-raising.

Microfinance institutions are increasingly opting for securitisation

Spandana is looking at Rs 1,300-crore securitisation before March 31 2011. The pipe-line deals for Spandana include Rs 600 crore from ICICI Bank, Rs 200 crore from Punjab National Bank, among others. It had already tied up with Fullerton (for Rs 100 crore non-agri portfolio), HDFC Bank (Rs 100 crore) and Kotak Mahindra Bank (Rs 100 crore).

Indian Securitization marketsome Recommendations

Recommendations to Securities and Exchange Board of India (SEBI) Market Maker To improve liquidity in securitization market, there is a strong need for a Market Maker. It is recommended that SEBI may consider formulating regulations that will encourage market making in securitized assets.

2. Allowing SPVs to enter into interest rate swap for mitigating interest
rate risk

Presently, SPVs are not eligible to enter into interest rate swap. In a transaction with significant interest rate risk, like a long tenure MBS, there is critical need to mitigate it through tools such as interest rate swap.

Lack of availability of such tool creates a major hindrance in the growth of the market.
It is recommended that SEBI many consider SPVs to be included in eligible entities to enter into interest rate swap to mitigate interest rate risk for a securitized pool.

3. Enlarging the Investor base

At present only Qualified Institutional Buyers (QIB) can invest in Security Receipts (which are backed by Nonperforming assets). The definition of QIB does not include NBFCs, Private Equity funds, Venture Capital funds, etc which limits the investor base for Security Receipts.

Allowing FIIs to invest in securitized paper

It is recommended that SEBI may consider including securitized papers in the definition of eligible debt securities for FIIs.

Issuing disclosure guidelines for unlisted PTC for Mutual Fund

It is recommended that SEBI may consider specifying minimum information guidelines for Mutual Funds, seeking to invest in securitized papers. The minimum information guideline should make it mandatory for Mutual Funds to ask for information on pool, collection performance, historical information, from the Originator/Issuer before investing in the securitized paper. The information requirement can be similar to what is specified in SEBIs Public Offer and Listing of Securitized Debt Instruments Regulations, 2008.

This will enhance the transparency and help develop the market.

Recommendation to Ministry of Finance, India

Securitization by banks in India received a setback owing to a decision of the Gujarat High Court in the case of Kotak Mahindra Bank versus APS Star.

The Gujarat High Court ruled that an assignment of debt by a bank amounts to trading in debt and cannot be permissible activity for a bank under the Banking Regulation Act. Since this is the 60-year old Act, it is not in tune with the current financial products, trading and business practices.

12th Jan 2009

Inter-se transfer of NPAs among banks permissible Supreme Court

In an important pronouncement which shall assist in meeting the objects of Securitisation and Reconstruction of Non-Performing Assets in a significant manner, Supreme Court of India held that transfer of Non-Performing Assets (NPAs) between banks is permissible under the Banking Regulation Act, 1949.

The judgment came to be passed in a dispute between ICICI Bank and Kotak Mahindra Bank one side while APS Star Industries challenging the assignment of NPAs on the other side.

30 th sep 2010

Inter-se transfer of NPAs among banks permissible Supreme Court

Chief Justice SH Kapadia and Justices KS Radhakrishnan and Swatanter Kumar passed the judgment setting aside Gujarat High Courts judgment which was challenged by ICICI and Kotak Bank. Senior advocate Harish N Salve appeared for the banks, senior advocate TR Andhyarujina appeared for APS Star.

Inter-se transfer of NPAs among banks permissible Supreme Court

Gujarat High Court had earlier ruled that assignment of debts between the banks is not an activity which is permissible under the Banking Regulation Act, 1949 and consequently all executed contracts of assignment of debts were illegal. According to the impugned judgment the assignee banks (Kotak in this case) were not entitled to substitution in place of original lender/ assignor (ICICI in this case) in proceedings relatable to companies whose liquidation was pending in the Company Court.

Inter-se transfer of NPAs among banks permissible Supreme Court

Judgment by the Supreme Court clarifies that, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 was enacted enabling specified securitisation companies to buy NPAs from banks that by itself does not follow that banks cannot transfer their own assets inter se amongst banks.

The Dispute

On 31.3.2006 a Deed of Assignment (deal for sale of assets of insolvent debtor) was executed between Kotak Mahindra Bank Ltd. (as assignee) and ICICI Bank Ltd. (as assignor) by which an aggregate of Rs 52.45 crore (principal amount outstanding under the trade credit facilities) was due and payable by the borrowers to ICICI Bank Ltd. One of the borrowers of ICICI Bank at the relevant time was APS Star Industries Ltd., a company which subsequently went under liquidation, whose application for winding up was pending before Company Court. Kotak Mahindra Bank had then moved Company Application for being substituted in place of ICICI Bank Ltd.

The Repercussion
The decision can go a long way in strengthening the securitisation and restructuring process as the sale of NPAs inter se among banks will result in asset consolidation in the hands of one or fewer banks facilitating sale of NPAs and their restructuring by Asset Reconstruction Companies under Securitisation Act in a better manner.

Recommendation to Ministry of Finance, India

A review of the Act is needed to bring all activities (including securitization) permitted to be undertaken by banks by the Reserve Bank of India within the scope of permissible banking business within the meaning of section 6 of the Act. The Central Government in consultation with the Reserve Bank of India may consider issuing a notification in the official gazette specifying assignment of debt as a form of business in which a banking company may engage. Assignment of loans is statutorily permissible only if the assignee is registered under SARFAESI Act.

In light of the supreme court decision Obsolete recommendations

Uniformity in Stamp Duty

The Stamp duty on assignment of debt is levied ad-valorem in most states in India and varies across states. Even though few states have reduced the stamp duty on assignment of debt and also placed a cap on stamp duty but the variation in stamp duties and absence of cap in some states is a major hurdle for securitization transaction.

It is recommended that the Central Government in consultation with the State Government may consider bringing necessary rationalization and uniformity in Stamp Duty and Registration.

Allowing Pension/Provident Funds to invest in securitized papers

Long term investors are needed for the development of the securitization market. Players like Insurers, Pension Funds, Provident Funds etc are required to play a key role in the market. The Ministry of Finance should formulate a policy to allow these players to invest in long-term PTC/Securitized Assets.

This would increase the size of the market and also the scope of assets being securitized.
It is also recommended that the Ministry of Finance get the approval of the Ministry of Labor to authorize Pension/Provident funds to invest into securitized paper.

Recommendations from Reserve Bank of India (RBI) perspective

The second quarter review of RBIs Monetary Policy 2009-10 has proposed minimum seasoning of 12 months for securitization transactions. (Already done) It will discourage the Originate and Distribute model and its consequent ill effects. Some of the asset classes like microfinance loans, gold loans, etc. have short tenure typically of one year itself. Hence the securitization of such loans will not be possible.

Development of a interest rate index

To build market for long-term securitized paper based on residential or commercial mortgage loans, it is recommended that RBI may consider development of MIBOR or an interest rate index.

National Institute of Securities Markets November, 2009 various reports. Business standard various issues.

Securitisation of corporate loan sees sharp fall January 1, 2010

The volume of corporate loan securitisation in AprilSeptember this financial year was close to Rs 9,000 crore, as against Rs 32,000 crore in April-September last financial year, data from credit rating agency Icra showed. Last year, the share of the telecom sector in the corporate loan securitisation market was the highest at 24 per cent, followed by oil (23 per cent), NBFC (20 per cent) and real estate (10 per cent).

Securitisation of corporate loan sees sharp fall January 1, 2010

A significant part of corporate loans that were securitised in the first half of last year were to NBFCs, oil public sector units, real estate companies and telecom entities.

In the current year, for reasons of their own, the borrowing needs of this set of borrowers were lower. Secondly, investor appetite for some sectors, mainly NBFCs and real estate, reduced, mostly arising out of the experience of October-November 08

Securitization Primer
Securitization is the process of converting loans into marketable securities. Under the securitization process, pool of illiquid bilateral loans is converted into marketable securities.

The originator (lender) transfers his financial interest (called an assignment) to an investment vehicle (called a Special Purpose Vehicle or SPV).
The SPV, in turn, uses the future cash flows from receivables to issue securities called Pass Through Certificates (PTCs) to investors.

Securitization Primer
If the underlying assets are corporate loans, the instrument is referred as Collateralised debt obligation (CDO) If the underlying assets are retail loans, the instrument is referred as Mortgage backed securities (MBS consisting of housing loans) or Assets backed securities (ABS consisting of other retail loans like auto loans, commercial vehicle loans, unsecured personal loans etc). In India, the Direct Assignment structure is more prevalent in which there is no intermediate SPV and the transaction is on a bilateral basis between seller and buyer.

Indian Securitisation Markets

Indian retail asset securitization market declined to Rs.193.1 bn in FY09, as against Rs.300 bn in FY08, The single loan collateralized loan obligation (CLO) market grew from around Rs.280 bn in FY08 to around Rs.310 bn in FY09. The single loan CLO transaction involves a bank giving a loan to a corporate, the receivables from which are assigned to an SPV/trust and then sold to investors in the form of PTC.

Securitization Market Scenario

Unlike developed countries where Mortgage Backed securities (MBS) are more prevalent, it is the Asset Backed securities (ABS) which have been the main driver of Securitisation market in India. The market for MBS has been comparatively subdued with lack of investors interest in long term paper and high interest rate risk prevalent in the paper. FY09 also witnessed introduction of new asset classes, like gold loans, microfinance loans and loan against property, in the securitization market.


A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities Various investment avenues available to an investor such as : o Real estate, o bank deposits, o post office deposits, o shares, o debentures, o Bonds Mutual fund is just one more type of investment avenue available to investors



Professional advice

Offer Diversification Convenient Administration : Return Potential: Low Costs: Liquidity: Transparency: Flexibility: Through features such as Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP) and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Choice of Schemes :


Mutual Funds in India follow a 3-tier structure Ist tier Sponsor 2nd tier Trustees 3rd Tier AMC ( Asset Management Company) Sponsor - thinks of starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India (SEBI) Trustees Their Job is to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund. Difference between Sponsor & Trustee - They are two separate entities. Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund.

Sponsor is the person who acting alone or in combination with other body corporate, establishes a mutual fund


Business in financial services for not less than five years with positive net worth in all the immediately preceding five years.

Net worth of the immediately preceding year should be greater than the capital contribution of the sponsor in asset management company.
Not found guilty of fraud or economic offences.

Trustees of the mutual fund mean the board of Trustees or the trustees Company who hold the property of the mutual fund trust for the benefit of the unit holders.


Company registered under Companies Act,1956 Asset Management Company must be approved by the SEBI

Manage the funds of mutual funds

Enter into agreement with the trustees of the mutual funds to formulate schemes Raise money against the issue of the securities

AMC Characteristics
AMCs Board of Directors must have at least 50% of Directors who are independent directors . An AMC Has to be approved by SEBI AMC in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees Charges a fee for providing its services. SEBI has prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a percentage of the schemes net assets

Appointed by the Board of Trustees ROLE OF A CUSTODIAN Safe keeping of physical securities Keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested Participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities

NFO( New fund offer )

Once the 3 tier structure is in place, the AMC launches new schemes, under the name of the Trust, after getting approval from the Trustees and SEBI The launch of a new scheme is known as NEW FUND OFFER an invitation to the investors to put their money into the mutual fund scheme by subscribing to its units a New Fund Offer (NFO)


Perform the role of maintaining investor records
All the New Fund Offer (NFO) forms, redemption forms (i.e. when an investor wants to exit from a scheme, it requests for redemption) go to the RTAs office where the information is converted from physical to electronic form.
How many units will the investor get, at what price, what is the applicable NAV, how much money will he get in case of redemption, folio number, etc.is all taken care of by the RTA.


The investor has to fill the form after reading the offer document which is available with the distributor. In case the investor does not read the OD, he must read the Key Information Memorandum (KIM), which is available with the application form. Investors have the right to ask for the KIM/ OD from the distributor. Once the form is filled and the cheque is given to the distributor, he forwards both these documents to the RTA. The RTA after capturing all the information from the application form into the system, sends the form to a location where all the forms are stored and the cheque is sent to the bank where the mutual fund has an account. After the cheque is cleared, the RTA then creates units for the investor. The same process is followed in case an investor intends to invest in a scheme, whose units are available for subscription on an on-going basis, even after the NFO period is over.


On the basis of Flexibility
Open Ended Scheme - An open ended scheme allows the investor to enter and exit at his convenience, anytime (except under certain conditions) In an open ended scheme investors can buy the units even after the NFO period is over Close Ended Scheme restricts the freedom of entry and exit. Freedom to invest after the NFO period is over is not there in close ended schemes However, in order to provide entry and exit option, close ended mutual funds list their schemes on stock exchanges. No longer there

On the basis of Objective

Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based Funds. Diversified funds These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.

Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Not listed

Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. Lock in period of 3 years. Debt/Income Funds These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.

Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.

Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks

Fund of Funds
These are funds which do not directly invest in stocks and shares but invest in units of other mutual funds which they feel will perform well and give high returns. Such funds are relying on the judgment of other fund managers.

ENTRY LOAD..no longer

This is charged to meet the selling and distribution expenses of the scheme A major portion of the Entry Load is used for paying commissions to the distributor.

The distributor (also called a mutual fund advisor) could be an Independent Financial Advisor, a bank or a large national distributor or a regional distributor etc. EXAMPLE. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units.

EXIT LOADno longer

As there are Entry Loads, there exist Exit Loads as well. As Entry Loads increase the cost of buying, similarly Exit Loads reduce the amount received by the investor. Not all schemes have an Exit Load, and not all schemes have similar exit loads as well If the investor exits early, he will have to bear more Exit Load and if he remains invested for a longer period of time, his Exit Load will reduce. Thus the longer the investor remains invested, lesser is the Exit Load EXAMPLE - Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10


Expense Ratio is defined as the ratio of expenses incurred by a scheme to its Average Weekly Net Assets. annual expenses/ average weekly net assets

It means how much of investors money is going for expenses and how much is getting invested.
This ratio should be as low as possible.

Assume that a scheme has average weekly net assets of Rs 100 cr. and the scheme incurs Rs. 1 cr as annual expenses, then the expense ratio would be 1/ 100 = 1%. In case this schemes expense ratio is comparable to or better than its peers then this scheme would qualify as a good investment, based on this parameter only.

Portfolio Turnover is the ratio which helps us to find how aggressively the portfolio is being churned. This churning can be done very frequently or may be done after sufficient time gaps While churning increases the costs, it does not have any impact on the Expense Ratio, as transaction costs are not considered while calculating expense ratio


Fixed Maturity Plans
Close ended debt schemes.
Debt securities with maturities coinciding with the maturity of the scheme. Fund manager may sell these securities earlier Giving a relatively higher indicative yield, it may be investing in slightly riskier securities, look at the credit ratings of the securities. Indicative yield is pre-tax. Investors will get lesser returns after they include the tax liability.

Capital Protection Funds

Close ended funds Debt instruments - with the objective of capital protection. Equities or derivatives instruments like options - provides the higher return potential. Although the name suggests Capital Protection, there is no guarantee that at all times the investors capital will be fully protected.

Monthly Income Plans

Hybrid fund Provide regular income to the investor by paying dividends No guarantee that these schemes will pay dividends every month. Investment in the debt portion provides for the monthly income whereas investment in the equities provides for the extra return which is helpful in minimising the impact of inflation.

Child Benefit Plans

Debt oriented funds, with very little component invested into equities. The objective here is to capital protection and steady appreciation as well.

Attracts 40% of the industry AUM Known as money market mutual funds Average maturity of less than 1 year Normally do not carry any interest rate risk Advantage of liquid fund: Less risky Better returns than a bank current account Liquid paper having maturity of less than 182 days is valued using cost plus interest accrued method

Long term capital gain-pay STT(security transaction tax @.25% of selling price) Incase the investment is 100% in foreign equity then it is not an equity scheme from taxation point of view and tax has to be paid even on long term capital gain Marginal rate-For non equity schemes incase the investor makes capital gain within 12 months then the capital gain along with income is taxed as per the tax slab

Indexation is a procedure by which the investor can get benefit from the fact that inflation has eroded his returns.

An investor buys a unit @ Rs 10 and sells at Rs 30 after 5 years. Profit = Rs 30 - Rs10 = Rs 20 But the profit of Rs 20 needs to be adjusted for inflation because inflation reduces your purchasing power Suppose inflation is @12% Adjusted cost of purchase of unit=Rs 10*(1+.12) Profit= Rs 30 - Rs11.2 = Rs18.8 So by reducing profits his tax liability has gone down

The choice of having or not having indexation is upon the investor Without indexation:

Profit=Rs 20 Tax@10%=Rs2
With indexation:

Profit=Rs 18.8 Tax@20%=Rs 3.76 So investor would chose paying tax without taking benefit of indexation


Lets say an investor has decided to invest Rs 5,000 every month,such that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the month. This means that the Rs. 5000, which will get invested in stages till 25th will remain in the savings account of the investor for 25 days and earn interest @ 3.5% If the investor moves this amount of Rs. 5000 at the beginning of the month to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice, then not only will he get the benefit of SIP, but he will earn slightly higher interest as well in the Liquid Funds as compared to a bank FD. As the money is being invested in a Liquid Fund, the risk level associated is also minimal. Add to this the fact that liquid funds do not have any entry/ exit loads


Here the investor invests a lumpsum amount and withdraws some money regularly over a period of time. This results in a steady income for the investor while at the same time his principal also gets drawn down gradually Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20 = Rs. 1,00,000 per annum. This translates into Rs. 8,333 per month. In this example we have not considered the effect of compounding. If that is considered, then he will be able to either draw some more money every month, or he can get the same amount of Rs. 8,333 per month for a longer period of time

The conceptual difference between SWP and MIP(STP) is that

SWP is an investment style MIP is a type of scheme.

SWP the investors capital goes down MIP the capital is not touched and only the interest is the investor as dividend

paid to


ETFs are mutual fund units which investors buy sell from the stock exchange through a broker. Index fund listed on SE. An investor must have a demat account for buying ETFs.

AMC issues units to a few designated large participants, called as Authorised Participants (APs), who in turn act as market makers for the ETFs. Relatively lesser costs as compared to a mutual fund scheme. While a typical Index fund would have expenses in the range of 1.5% of Net Assets, an ETF might have expenses around 0.75%.

MARKET MAKING BY APS (Authorised Participants)

There are huge reductions in marketing expenses and commissions as the AP are not paid by the AMC APs are like market makers and continuously offer two way quotes (buy and sell). They earn on the difference between the two way quotes they offer, known as bid-ask spread. They provide liquidity to the ETFs
Last traded price of a G-ETF is Rs. 1000, buy offer, ETF unit at Rs 999 sell an ETF unit Rs. 1001.

Thereby earning Rs. 2 as the difference. Also this transaction is that the AP does not increase/ decrease his holding in the ETF.

This is known as earning through Dealer Spreads.

Retail investors get liquidity by selling their units as well.

Assets in ETFs
Practically any asset class can be used to create ETFs. Globally there are ETFs on Silver, Gold, Indices In India, we have ETFs on Gold and Indices (Nifty, Bank Nifty etc.). We also have ETFs which are similar to Liquid Funds. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8,2002.

An index ETF is one where the underlying is an index, say Nifty.

The APs deliver the shares comprising the Nifty, in the same proportion as they are in the Nifty, to the AMC and create ETF units in bulk known as Creation Units
Once the APs get these units, they provide liquidity to these units by offering to buy and sell through the stock exchange. An index ETF should replicate the index return. However due to expenses there is the difference between the return received and that of the benchmark to imitated. Due to lower expenses, the Tracking Error for an ETF is usually low.

G-ETFs are a special type of ETF which invests in Gold and Gold related securities. Gives the investor an option to diversify his investments into a different asset class, other than equity and debt. Holding physical Gold can have its disadvantages:
Fear of theft Payment Wealth Tax No surety of quality Changes in fashion and trends Locker costs Lesser realisation on remoulding of ornaments

G-ETFs score over all these disadvantages, while at the same time retaining the inherent advantages of Gold investing.

In case of Gold ETFs, investors buy Units, which are backed by Gold. Thus, every time an investor buys 1 unit of G-ETFs, it is similar to an equivalent quantity of Gold being earmarked for him somewhere. Thus his units are as good as Gold. Example 1 G-ETF = 1 gm of 99.5% pure Gold. Buys 1 G-ETF unit every month for 20 years would have given the investor a holding of 240 gm of Gold. After 20 years the investor can convert the G-ETFs into 240 gm of physical gold by approaching the mutual fund or sell the G-ETFs in the market at the current price and buy 240 gm of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007.

The G-ETF is designed as an open ended scheme . Investors can buy/ sell units any time at then prevailing market price. In case of open ended funds, investors get/redeem units at a price based upon that days NAV In case of ETFs, investors can buy/sell units at a price which is prevailing at that point of time during market hours. For all investors of open ended schemes, on any given day their buying/redemption price will be same, whereas for ETF investors, the prices will vary for each, depending upon when they bought/sold units on that day.

During New Fund Offer (NFO)

AMC decides of launching G-ETF

Investors give money to AMC and AMC gives units to investors in return
AMC buys Gold of specified quality at the prevailing rates from investors money EXAMPLE
Amount Invested (Rs.): 5000 Price of 1 gm of Gold (Rs.): 1000 Since 1 ETF unit = 1 gm of Gold Issue Price (Rs.) = 1000 Units Allotted (Number = Investment/ Issue Price): 5

On an on going basis
Authorised Participants give money/ Gold to AMC AMC gives equivalent number of units bundled together to these AP APs split these bundled units into individual units and offer for sale in the secondary market Investors can buy G-ETF units from the secondary markets either from the quantity being sold by the APs or by other retail investors Retail investors can also sell their units in the market

The custodian maintains record of all the Gold that comes into and goes out of the schemes Portfolio Deposit. The custodian may appoint a sub-custodian to perform some of the duties.

The custodian charges fee for the services rendered and has to buy adequate insurance for the Gold held. The premium paid for the insurance is borne by the scheme as a transaction cost and is allowed as an expense under SEBI guidelines.
This expense contributes in a small way to the tracking error.

Difference in price of Gold and G-ETF

The price of ETF will be determined by market forces, and although it is linked to the prices of Gold, it will not mirror the exact movements at all given points of time. This will happen due to excess buying or selling pressure on the ETFs, due to which prices may rise or fall more than the Gold price. Such exaggerated movements provide opportunity for arbitrage, which the APs exploit and make risk less gains. This process also ensures that prices of ETF remain largely in sync with those of the underlying.


Growth OptionGrowth option is for those investors who are looking for capital appreciation Say an investor invests Rs 1 lakh in an equity scheme Say scheme gives return @12% after 1 year His money would grow by Rs 12,000 Assuming he invested with NAV of Rs100 Current NAV=Rs112 Notice here that neither is any money coming out of the scheme, nor is the investor getting more units. His units will remain at 1,000 (1,00,000/ 100) which he bought when he invested Rs. 1 lakh @ Rs. 100/ unit

Dividend Payout OptionAfter 1 year Dividend=Rs 12 So NAV would fall by Rs 12 to Rs 100 in an year Here he will not get any more number of units (they remain at 1,000), but will receive Rs 12,000 as dividend (Rs. 12 per unit * 1,000 units) Dividend Payout will not give him the benefit of compounding as Rs. 12,000 would be taken out of the scheme and will not continue to grow like money which is still invested in the scheme

Dividend Reinvestment OptionIn case of Dividend Reinvestment option, the investor chooses to reinvest the dividend in the scheme Rs. 12, which he receives as dividend gets invested into the scheme again @ Rs. 100
Thus the investor gets Rs. 12,000/ Rs. 100 = 120 additional units. Here although the investor has got 120 units more, the NAV has come down to Rs. 100

Hence the return in case of all the three options would be same. For Growth Option, the investor will have 100 units @ 112, which equals to Rs. 1,12,000.

Dividend Reinvested Option the investor will have 1120 units @ Rs.100 which again amounts to Rs. 1,12,000. Thus it can be seen that there is no difference in either Growth or Dividend Reinvestment Plan
For equity schemes there is no Dividend Distribution Tax, however for debt schemes, investor will not get Rs. 12 as dividend, but slightly less due to Dividend Distribution Tax. In case of Dividend Reinvestment Option, he will get slightly lesser number of units and not exactly 120 due to Dividend Distribution Tax

REGULATIONS Important one

Regulations ensure that schemes do not invest beyond a certain percent of their NAVs in a single security No scheme can invest more than 15% of its NAV in rated debt instruments of a single issuer. This limit may be increased to 20% with prior approval of Trustees. This restriction is not applicable to Government securities No scheme can invest more than 10% of its NAV in unrated paper of a single issuer and total investment by any scheme in unrated papers cannot exceed 25% of NAV No fund, under all its schemes can hold more than 10% of companys paid up capital No scheme can invest more than 10% of its NAV in a single company

If a scheme invests in another scheme of the same or different AMC, no fees will be charged. Aggregate inter scheme investment cannot exceed 5% of net asset value of the mutual fund No scheme can invest in unlisted securities of its sponsor or its group entities Schemes can invest in unlisted securities issued by entities other than the sponsor or sponsors group. Open ended schemes can invest maximum of 5% of net assets in such securities whereas close ended schemes can invest upto 10% of net assets in such securities. (NA) Schemes cannot invest in listed entities belonging to the sponsor group beyond 25% of its net assets


AMFI (Association of Mutual Funds in India) is the industry association for the mutual fund industry in India which was incorporated in the year 1995 Principal objective of AMFI are to: Promote the interests of the mutual funds and unit holders and interact with regulators- SEBI/RBI/Govt./Regulators To set and maintain ethical, commercial and professional standards in the industry and to recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management To increase public awareness and understanding of the concept and working of mutual funds in the country, to undertake investor awareness programmes and to disseminate information on the mutual fund industry To develop a cadre of well trained distributors and to implement a programme of training and certification for all intermediaries and others engaged in the industry


Corporate Restructuring

Types of corporate reorganization

1. Integration of two or more corporate B/S (existing companies)
A Through transfer of asset merger and amalgamation

B. Through transfer of Equity-change in shareholding pattern-resulting in change in ownership or control-the integration is not at the balance sheet level
acquisition and takeover

2. Restructuring of existing companies with or without a split up of balance sheet

To create long term holding structure- Aditya Birla group23/07/2002 , TATA group mid nineties. To restructure balance sheet with a view to reflect the asset and liability profile better or to increase the asset base and fund base-Mahindra & Mahindra Ltd. To facilitate distribution of assets and family business settlements-Reliance ,Bajaj, Thapar, Chhabrai s, Modies Apollo Tyres Group. To exit non core business- Times Bank,TISCO cement business. Strategic divestitures-company is nurtured with a strategic sale in mind- VC backed firms-sale of Spectramind to Wipro, Indiaworld to Sytyam Infoway. Entry and exit of business partner-JV-UB group-the united breweries group hived off its beer division into a separate SPV, which inducted Scottish &Newcastle as a strategic partner. To capture forward and backward linkages in value chain-RPG group-tyre and rubber division 2002.the rubber business consolidated in CEAT ltd- backward linkages. CEAT investment portfolio was demerged to a separate subsidiary.

Rationale of corporate REORGANIZATION

Corporate Restructuring
Internal and external Internal-no change in the legal entity financial debt(debt swap, bailout), equity(capital reduction), operational- change in the organization structure, divisionalzation-separate division with in the same company.

External (splits ups)- change in corporate structure and control

Transfer of asset- asset based route
A. Hive-off/asset sale/reconstruction B. Divestiture(sell off) C. Demerger(spin off)-

Transfer of equity
Subsidiarisation of business undertaking
De- Subsidiarisation through spin off De- Subsidiarisation through equity crave route

External (splits ups)- change in corporate structure and control I Transfer of assetA. Hive-off/asset sale/reconstruction1.An existing business segment(ASSET AND LIABILITIES) or division is transferred to a new company or another existing company-separate from one B/S to another. non core assets and surplus asset that can be sold off at a later date.
2.The transferee company is a group company, associate or a subsidiary. Transferor retain strategic control.

3.Involves transfer of assets (and liabilities if chosen) from the transferor to transferee company.
4. Consideration is usually in stock by the transferee co. to the transferor co. the shareholder of the parent company do not directly hold stakes in hived off entity. 5. No court approval. Section 391-394 of CA 1956 6.Aditya Birla Nova Group Subsidiarisation through hive-off-TCS ,JINDAL Group-economic times 9th Jan 2003

Hive off- transferor company transfer all its business undertaking to a new company-transferor company is dissolved-reconstructions-bankrupt companies. Asset sale Hive off is restricted to sale of some (surplus /redundant)asset Subsidiarisation through hive-off 100% Subsidiary new company or existing company Separation of business activity, inviting strategic or business partner, eventual exit route. CASE jindal group , TCS

B. Divestiture(sell off)/Slump sale1.The transferor retains no future interest in the business or asset sold off.(no longer considered as core activity)
2. Sell off-direct, two stage process first hive-off and then sale.

3.Considiration is usually in cash or securities.

4.The buyer is an outsider 5.Individual asset and liability valuation or lump sum consideration(slump sale)-section 2(42C) of IT ACT.

C. Demerger(SPLIT UP) A demerger is a method of reconstruction under which the share holder of the parent company are given direct representation in the demerged business in the same proportion in which they hold shares in the parent company. Mirror shareholding pattern in the parent and demerged co. Parent company B/S sizes shrinks. Resulting company-company to whom the business is transferred (it can be an existing company or a new company) parent company that shrink in its size is called the demerged company. Section 391-394 of companies act.-sanction of HC is must. Income tax act- sec 2(19AA)
demerger should be a scheme of arrangement under section 391-394 of company act 1956+ approval of HC is must. It must full fill all the conditions to avail tax benefits:

all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; BOOK VALUE the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; the transfer of the undertaking is on a going concern basis;
In case of demerger of a listed company of its undertaking, the shares of the resulting company are listed on the stock exchange where the demerged companys shares are traded. -Reliance Industries wherein its 4 businesses

Structured demerger
The parent company directly holds upto 25% of share capital in the resultant company. The balance of 75% is held by the share holders of parent company in proportion to their holding in parent company.

Structured demeger can be in any ratio- if the ratio is more than 25% -demerger is not covered under IT act. L&T cement division(demerged company ultra tech cement(resulting company).


SEC 390 of company act Sec391-394 of company acts 293(1)(a)-approvals from members HC approvals & sec 100 reduction of capital of the transferor company Sick companies SICA-BIFR-National Company Law Tribunal company act SCRR 1957 rule 19-listing

Spilt up-transfer or dilution of ownership/controlTransfer of equity

There is no alienation of assets and liabilities from one company to another. There is no need to dissolve the transferor company due to split up. Less cumbersome

Spilt up-transfer or dilution of ownership/controlTransfer of equity

Subsidiarisation of a business
De-Subsidiarisation through spin off-no increase in share capital of the subsidiary. Name of the respective shareholders change-from parent company to shareholders of parent company.
RIL demerger

De-Subsidiarisation through equity crave out/dilutionparent company stake in the subsidiary company is diluted either in one step or in gradual step.
IL &FS De- Subsidiarisation TCS

STATUTORY FRAMEWORK FOR SPILT UP Through transfer of equity

BOD approvals. Sec 372 A of company act Section 108A-108I-certain transfer which require prior of the central govt. Stamp duty on transfer of shares has to be paid. Income tax no benefit under IT act there can be incidence of capital gain for the recipient shareholders based on the valuation of such shares. FEMA-RBI POLICH , FDI POLICY



Factoring is of recent origin in Indian Context. Kalyana Sundaram Committee recommended introduction of factoring in 1989. Banking Regulation Act, 1949, was amended in 1991 for Banks setting up factoring services. SBI/Canara Bank have set up their Factoring Subsidiaries: SBI Factors Ltd., (April, 1991) CanBank Factors Ltd., (August, 1991). RBI has permitted Banks to undertake factoring services through subsidiaries.

Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.

CLIENT(firm) CUSTOMER (debtor)


So, a Factor is,

a) b)
c) d)

A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and Takes responsibility for collection of payments. normally requires no collateral.

The parties involved in the factoring transaction are:a) b) c) Supplier or Seller (Client) Buyer or Debtor (Customer) Financial Intermediary (Factor)


1. 2. 3. 4.

Follow-up and collection of Receivables from


Purchase of Receivables with or without recourse. Help in getting information and credit line on customers (credit protection) Sorting out disputes, if any, due to his relationship with Buyer & Seller.

Factoring Process








Client concludes a credit sale with a customer.

Client sells the customers account to the Factor and notifies the customer.
Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance. Factor maintains the customers account and follows up for payment. Customer remits the amount due to the Factor. Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.

The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor. The Factor, after scrutiny of these papers, allows payment (,usually upto 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve. The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts. Once the invoice is honoured by the buyer on due date, the Retention Money credited to the Clients Account. Till the payment of bills, the Factor follows up the payment and sends regular statements to the Client.


Factor charges Commission (as a flat percentage of value of Debts purchased) (0.50% to 1.50%) Commission is collected up-front. For making immediate part payment, interest charged. Interest is higher than rate of interest charged on Working Capital Finance by Banks. If interest is charged up-front, it is called discount.

Recourse Factoring Non-recourse Factoring

Maturity Factoring
Cross-border Factoring

Upto 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of collection. Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client(company). Credit Risk is with the Client. Factor does not participate in the credit sanction process. In India, factoring is done with recourse.

Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non-recoverable. Credit risk is with the Factor. Higher commission is charged. Factor participates in credit sanction process and approves credit limit given by the Client to the Customer. In USA/UK, factoring is commonly done without recourse.

Factor does not make any advance payment to the Client. Pays on guaranteed payment date or on collection of Receivables. Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. Nominal Commission is charged. No risk to Factor.


It is similar to domestic factoring except that there are four parties, viz., a) Exporter, b) Export Factor, c) Import Factor, and d) Importer. It is also called two-factor system of factoring. Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor. Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, Factor covers exchange risk also.

International factoring


BILL DISCOUNTING Bill is separately examined and discounted.


1. 2.

Pre-payment made against all unpaid and not due invoices purchased by Factor. Factor has responsibility of Sales Ledger Administration and collection of Debts.


Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts. No notice of assignment provided to customers of the Client.



Notice of assignment is provided to customers of the Client.


FACTORING Factoring can be done without or without recourse to client. In India, it is done with recourse.


BILLS DISCOUNTING Bills discounting is usually done with recourse.



Financial Institution can get the bills re-discounted before they mature for payment.


Factor cannot re-discount the receivable purchased under advanced factoring arrangement.


In order to revive the business and render liquidity specifically to the small and medium enterprises, the Finance Minister in the last Parliament session had tabled a pilot bill to bring the factors business in India under regulation through The Regulation of Factor (Assignment of Receivables) Bill, 2011. up till than Factoring transactions in India are governed by the following Acts:Indian Contract Act, Sale of Goods Act, Transfer of Property Act, Banking Regulation Act & Foreign Exchange Regulation Act.


Banks reluctance to provide factoring services Banks resistance to issue Letter of Disclaimer (Letter of Disclaimer is mandatory as per RBI Guidelines). Problems in recovery. Factoring requires assignment of debt which attracts Stamp Duty. Cost of transaction becomes high.


Amalgamations- Merger

What is merger/ amalgamation/

Not defined under the Companies Act, 1956 What is defined under Companies Act? Arrangement- includes a re-organisation of the share Capital of p the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods What is defined under Income Tax Act? Amalgamation [sec. 2(1B)] Demerger [2(19AA)] Meaning of the terms in common parlance: Amalgamation - combination of two or more independent business corporations into a single enterprise Demerger transfer and vesting of an undertaking of a company into another company Reconstruction- re-organisation of share capital in any manner; varying the rights of shareholders and/or creditors Arrangement- All modes of reorganizing the share capital, including interference with preferential and other special rights attached to shares

Regulatory Framework

Applicable Indian Laws Companies Act, 1956 [Sec 391-394] Listing Agreement Accounting Standard 14 SEBI Takeover Code (in case of acquisition by/of a listed company) Company Court Rules FEMA (in case of merger of companies having foreign capital) Competition Act, 2002 Income Tax Act, 1961
Indian Stamp Act

Accounting standard 14 Accounting for Amalgamations

Amalgamation in the nature of merger is one which satisfies the following conditions: All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. Shareholders not less than 90 percent of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. No adjustment is indeed to be made to the books value of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of the accounting policies.
Amalgamation in the nature of purchase is defined as an amalgamation which does not satisfy any one or more of the conditions specified above.

Income-Tax Act, 1961 (Act) defines amalgamation as sec 2(1B)

Amalgamation, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that:: all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; shareholders holding not less than three-fourths(75%) in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, and not as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company; Thus, the satisfaction of the above conditions is necessary to ensure tax neutrality of the amalgamation.

IT ACT-75 % shareholders
Amalgamation through merger for preferred tax treatment. Amalgamation through purchase as normal commercial transaction.

AS 14-90% shareholders

Horizotional mergers-same lines of business Vertical merger synergies through value chain RIL
Reliance petrolum

Methods of Accounting
The pooling of interests method (for Amalgamation in the nature of merger) The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts Reserves of the transferor company appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company.

The balance sheet of the combined entity is arrived at by a line by line addition of the corresponding items in the balance sheets of the combining entities. No asset write-up or write-down. No goodwill.

The purchase method (for Amalgamation in the nature of purchase)

The transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation

There is no question of bringing to the books of the transferee the profits/reserves of the transferor
The amount of the consideration is deducted from the net assets of the transferor company acquired by the transferee company and the difference, if any, is debited to goodwill or credited to Capital Reserve, as the case may be. Goodwill arising on amalgamation is treated as an asset and amortized over a period of five years.

AS 14
The transferor and the transferee companies have conflicting accounting policies, a uniform accounting policy must be adopted following the amalgamation. Treatment of Reserves on amalgamation.
Amalgamation in the nature of a merger- the identity of the reserves is prescribed and they appear in the financial statements of the transferee company in the same form in which they appeared in the statements of the transferor company.

Balance in the profit and loss account

Amalgamation in the nature of merger- the balance in the profit and loss account appearing in the financial statement of the transferor company is aggregated with the corresponding balance appearing in the financial statement of the transferee company.

An alternative method is also provided to transfer it to the General Reserve, if any.

Amalgamation in the nature of purchase- balance in the profit and loss account appearing in the financial statement of the transferor company, whether debit or credit, loses its identity.

Standard prescribed certain disclosure to be made in the first financial statements following the amalgamation : 1. 2. 3. 4. 5. Names and general nature of business of the amalgamating companies, Effective date of amalgamation for accounting purposes, The method of accounting used to reflect the amalgamation, Description and number of shares issued, together with the percentage of each companys equity shares exchanged to effect the amalgamation The amount of difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party,
Disclosure should be made in accordance with AS 4, Contingencies and Events Occurring After the Balance Sheet Date, The amalgamation should not Incorporated in the financial statements. be

Additional requirements for Listed Companies- clause 24

File the scheme with the SE, for approval, at least a month before it is presented to the Court Explanatory statement u/s 393 should contain pre and post-arrangement or amalgamation (expected) capital Structure

shareholding pattern
Obtain fairness opinion from an Independent merchant bankers on valuation of assets / shares done by the valuer While submitting the scheme with the SE, also submit an auditors certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting

Legal/ Statutary approvals

Sections 391 to 394 of the Companies Act, 1956 1. Shareholder approval-75% of the shareholders 2. Creditors/Financial Institutions/Banks approval 3. High Court approvals 4. Reserve Bank of India approval 5. SEBI's Takeover Code for substantial acquisitions of shares in Listed companies

Private Equity.. The latest in Indian financial resource

Private Equity Players

These are established investment bankers - invest into proven/established businesses. PE investors can be domestic (established as trusts, or a company) or foreign private equity firms. Foreign Institutional Investment (FII) for investments in listed companies Foreign Direct Investment (FDI) for investment in unlisted companies.

Various Concepts

Private Equity Investors are individuals or firms which provide private equity funds to different ventures. They generally receive a return on their investment through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization
Private Equity Capital It is the form of capital that buys majority stakes in companies and/or entire business units to restructure its capital, management and organization. Usually the targets are held private for three to five years

Private Equity firms are firms which provide private equity funds to different ventures. They generally receive a return on their investment through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization

Regulations for Private Equity Investors and Venture Capital Investors

Companies Act, 1956 (the "Act"), Foreign Exchange Management Act, 2000 Securities and Exchange Board of India Act, 1992 along with the rules and regulation therein. SEBI Venture Capital Regulations, 1996 SEBI Foreign Venture Capital Investors Regulations,(2000), FDI and RBI FEMA provisions. Guidelines issued by the Central Board of Direct Taxes (CBDT).

Why PE Investments in India?

Indian growth story PE firms have its spillover effect on various fronts such as Corporate governance standards, Knitting global connectivity, Building executive teams, Improving/raising organizational capability, enhancing evaluations and creating liquidity. PE firms also provide the domestic entities the necessary mentoring and advice without having to go to public markets.

Opportunity for SMEs

Whether big or small everybody has a desire to grow

Governance Activities Accountability Transparency Corporate Governance Global Standard Practices human Resources Management, Financial Planning, Reporting and Investor Relations.

Exit strategies of PEs

Direct sale to investors seeking a shareholding in a firm acquired by the fund. The initial public offering (IPO) is a preferred exit option in developed PE markets. Post-purchase listing of the company permitting sale of equity through the stock market. Sale to another private equity firm, referred to as a secondary buyout.

Mergers and acquisitions : As the Indian economy's growth has kept a steady pace, industry-wide consolidations are an attractive route for a PE investor to make an exit

Some Recent Examples

Schools turn smart to woo PEs

Rp.100 crore deal that Reliance Equity Advisors Reliance Capitals PE arm struck with Pathway World School This was the first PE investment in any school in the country

Schools turn smart to woo PEs

Private limited entity under Section 25 of the Companies Act, 1956, and not as a trust. The reason: The company sees this as an alternative way of having a scalable model (which the trust structure does not allow as its bars payment of dividends). Schools that cannot go for the Section 25 option have begun turning to smart equity from private equity (PE) players to expand access to new technologies, build new set of services and add resources.

Temasek to invest Rs 880 cr in GMR

10 Apr 2010
Singapore-based Temasek Holdings has signed an agreement with GMR Energy Ltd (GEL) to raise capital for energy expansion plans. Temasek Holdings would invest $200 million (about Rs 880 crore) through its wholly-owned subsidiary Claymore Investments (Mauritius).

Blackstone to Invest INR 2250 Million in Jagran Media Network 07 Apr 2010
The Blackstone Group (NYSE: BX), will be investing INR 2250 million (approximately USD 50 million) in Jagran Media Network Private Limited, which will hold majority share of Jagran Prakashan Limited (JPL).
JPL is Indias leading media and communications group, with the groups flagship brand, Dainik Jagran, being the most widely read newspaper in the world with a total readership of 54.6 million.

Jagran Media Network Private Limited -approvals for the investment from the Foreign Investment Promotion Board

Major India Private Equity / Venture Capital Funds

ICICI Ventures UTI Ventures Kotak Private Equity Group CVC International JM Financial Evolvence New Bridge Financial Advisors Carlyle Apax Blackstone Warburg Pincus Temasek Holdings General Atlantic 3i Chrys Capital www.iciciventure.com www.utiventures.com www.kotak.com www.citigroupai.com www.evolvenceindia.com www.newbridgecapital.com www.carlyle.com www.apax.com www.blackstone.com www.warburgpincus.com www.temasekholdings.com.sg www.generalatlantic.com www.3i.com www.chryscapital.com

Major India Private Equity / Venture Capital Funds

Oaktree New Vernon Capital Ascendas India Property IREO Och Ziff Capital Trikona Motilal Oswal TPG 2i Capital (India) Private Ltd SCFPL - Siemens Venture Capital Acer Technology Ventures APIDC-Venture Capital Limited Creditcapital Venture Fund (India) Ltd. GE Capital Services India Ltd TDA Capital Partners Inc Infinity Technology Investments Pvt Ltd Karnataka Information Tech Venture Walden International India Jina Ventures Samara Capital TVS Capital Funds Limited www.oaktreecapital.com www.ascendas.com www.trikonacapital.com www.motilaloswal.com www.texaxpacificgroup.com www.2icapital.com www.siemensventurecapital.com www.acervc.com www.apidcvc.com www.tdacapital.com www.infinityventure.com www.kitven.com www.waldenint.com www.jinaventures.com www.samaracapital.com

Major India Private Equity / Venture Capital Funds

Actis Baring GW Capital Oak Hill Capital ILFS IDFC West Bridge Capital JumpstartUP IFC Intel Capital SIDBI GVFL Pequot Capital www.act.is www.bpep.com www.gwcaps.com www.oakhillcapital.com www.ilfsinvestmentmanagers.com www.idfcpe.com www.wbcp.com www.jumpstartup.net www.ifc.org www.intelportfolio.com www.sidbi.com www.gvfl.com www.pequotcap.com

Portfolio Investments by PE.. Classification ICICI Ventures

By Fund By Sectors By Strategy
By Fund IAF Series 1 IAF Series 2 Real estate Fund ICICI Emerging Sectors Fund/Others Mezzanine Fund

ICICI Emerging Sectors Fund/Others

Bill junction/Techprocess Mars Restaurants Miditech Naukri.Com Avesthagen Biocon Medicorp Shoppers' Stop TV Today (Aaj Tak) Crossword Pantaloon Retail Trinethra Infowavz Rel Q

Few Concluding Remarks

The main barriers to entry for PE in India are: Complex regulatory issues Increasing number of PE players looking at the same investment opportunities Despite taking minority stakes in deals, managers requested a seat on the Board, Infrastructure, retail, consumer durable, financial services, medical and health care.

Venture Intelligence (Press Release from www.india infoline.com) EMPEA, March 2009 Global Private Equity Report, 2008 PWC

One Billion = One Hundred Crores 100 crores 1 billion = 1000 million, 1million= 10 lacs 10 million=1 crore or 100 lacs


Tax relief to the selling company

Sec47(vi)-exemption from capital gain taxcapital gain arising from transfer of asset.

Tax relief to the shareholders of selling company

Sec47(vii)-exemption from capital gain tax- capital ga arising from transfer of Shares by the shareholders of selling company

Tax relief to the purchasing company

72A-Carry forward and set off of accumulated loss and unabsorbed depreciation (1) Where there has been an amalgamation of (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or (c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business, The amalgamated company (subject to fulfillment of certain conditions) carry forward the loss for a period of eight assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was effected.

(2) Accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless (a) the amalgamating (selling) company (i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years; (ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation; (b) the amalgamated (purchasing) company (i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; (iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

Accumulated Loss
accumulated loss means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head Profits and gains of business or profession (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or conversion or amalgamation or demerger had not taken place;

Unabsorbed Depreciation
unabsorbed depreciation means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place;

Expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking One-fifth of such expenditure for a period of five successive years beginning with the previous year in which such amalgamation or demerger takes place. Indian Company Qualifying Assessee

No deduction would be allowed in respect of such expenses under any other provisions of the Act

Section 35(5)- expenditure on scientific research.(unwritten portion) Section 35D(5)- treatment of preliminary expenses. (unwritten portion). Section 35ABB(6)-expenditure for obtaining a licenses to operate telecommunications services


Stamp duty is payable on the value of immovable property transferred by the amalgamating/ transferor company or value of shares issued/consideration paid by the resulting/ amalgamated/ transferee company.

In certain States there are specific provisions for levy of stamp duty on amalgamation/ demerger order viz. Maharashtra, Gujarat, Rajasthan etc.
Where there is no specific provision, there exists an ambiguity as to whether the stamp duty is payable as per the conveyance entry or the market value of immovable property. Stamp duty is payable in the States where the registered office of the transferor and transferred companies is situated. In addition to the same, stamp duty may also be payable in the States in which the immovable properties of the transferred business are situated.

Normally, set off for stamp duty paid in a particular State is available against stamp duty payable in the other State. However, the same depends upon the stamp laws under the various States.

Additional stamp duty on issue of shares is also payable based on the rates prevailing in the State in which shares are issued. The Department of Revenue, Ministry of Finance in May 2010, released the draft Amendment Bill containing certain proposed amendments to the Indian Stamp Act, 1899. One of the key amendments is to extend the scope of application of the Stamp Act by levying stamp duty on every order of the HighCourt/Tribunal sanctioning the scheme of amalgamation or reconstruction of companies, including banking companies, by which property is transferred.


Nothing contained in section 45 shall apply to the following transfers (vi) Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company;

(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if (a) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and (b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated;


(vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if -

(a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
(b) The amalgamated company is an Indian company;