Merchant Banking, Leasing, Hire Purchase, Venture Capital, Housing Finance and Factoring

2.  Non-Bank Financial Intermediaries (NBFIs)
is a heterogeneous group of financial
institutions other than commercial and co-
operative banks. They include a wide variety
of financial institutions, which raise funds
from the public, directly or indirectly, to lend
them to ultimate spenders.

3. The Notification of the Ministry of Finance
defines a merchant banker as, ’any person
who is engaged in the business of issue
management either by making arrangements
regarding selling, buying or subscribing to
the securities as manager, consultant,
advisor or rendering corporate advisory
service in relation to such issue
management’

4.  Entering of London merchants in financing
foreign trade through acceptance of bill
 They helped government of under developed
countries to raise long term funds
 Extended their activities to Domestic business
 Later these merchants formed an association
which called ”Merchant Banking and Securities
House Association”

5.  prior to the enactment of Indian companies act
1956, managing agents acted as issue houses
for securities and few share broking firms also
functioned as merchant bankers.
 rapid growth in the number and size of the issues
made in the primary market
 The merchant banking service by foreign banks,
‘Grindlays Bank’ in 1967 and the city bank in
1970.
 the banking commission recommended the
setting up of merchant banking institution by the
commercial banks and financial institutions in
1972.

6.  In the mid-eighties the banking regulations
act was amended permitting commercial
banks to offer a wide range of financial
service through the subsidiary route.
 The state bank of India was the first Indian
bank to set-up merchant banking division in
1972 followed by ICICI, bank of India, Bank
of Baroda, Canara bank, Punjab national
bank, UCO bank.
 The merchant banking gained prominence
during 1983-84 due to new issue boom

7. Commercial Banks Merchant Banks
Deals in debt and debt-
related finance
Deals in equity and equity-
related finance
Asset oriented Management Oriented
Risk averse Accepts risk
Mere Financiers Varied Functions

8.  Corporate Counselling
Covers the entire field of merchant banking but
is limited to giving suggestions and opinions to
clients
 Project Counselling
 preparation of project reports
 deciding upon the financing pattern
 appraising the project relating to its technical,
commercial and financial viability
 filling up of application forms for obtaining
funds from financial institutions.

9.  Loan Syndication
 Assistance rendered to raise loans for
projects
 can be obtained from a single institution or
a consortium
 Appraisal of the project
 Designing Capital Structure
 Fixing of Preliminary meeting
 Filling and submitting the application along
with other documents

10. A. Pre-Issue Management
 Issue through Prospectus, offer for sale and
Private Placement
 Co-ordinating the activities with Government,
public bodies, professionals and private
agencies
 Obtaining the copies of consent from experts,
legal advisor, attorney, solicitor, bankers,
brokers and underwriters
 Send the prospectus to be vetted by SEBI
 After clearance from SEBI, file the
prospectus and necessary documents with
the registrar of Companies
 Appointment of brokers to the issue, Principal
agent and bankers

11.  Marketing
 Arrange a meeting with company
representatives and advertising agents
 Selection of media
 Decide the number of copies to be printed
 Deliver the material to the stock exchange,
brokers to the issue and the bankers atleast
21 days before the issue opens

12.  Pricing of issues
 Free pricing of issue
 Premium to be decided after considering
NAV, profit earning capacity and market
price
 Justification of price in prospectus

13. B) Post-issue Management
 Collection of application forms and statement
of account from bankers
 Screening applications
 Deciding allotment procedure
 Mailing of allotment letters, share certificates
and refund orders
 Allotment/refund orders to be sent within 70
days from the close of the issue

14. C) Underwriting of Public issue
 Only category I, II, III merchant bankers
permitted
 The outstanding commitments of any
merchant banker must not exceed 5times of
his net worth
 Lead managers must mandatorily
underwrite 5% of the issue or Rs.2,50,000
whichever is less

15. D) Managers, Consultants or Advisors to the
issue
 SEBI insists atleast one authorised
merchant banker as lead manager for an
issue
 Not more than two merchant bankers to
be associated as lead managers
 Upto 4 managers permitted in issue
above Rs. 100 crores

16.  Carefully blended asset combination
 Maximize returns and minimise risk
 Safety, liquidity and Profitability
 Conduct surveys to analyse
 Monetary and Fiscal policies of the
government
 Financial statements of various corporates
 Secondary market condition
 Changing pattern of the industry
 Competition between industries

17.  Negotiator between offeree and offeror for
purchase consideration and mode of
payment
 Safeguard interest of the shareholders
 Appraise the proposal for financial and
technical feasibility
 Draft scheme of Amalgamation
 Get approval from Government and
Financial institutions

18.  Long term foreign currency loan
 Joint venture abroad
 Financing exports and imports
 Foreign collaboration arrangement

19.  Advisory services
 Securing necessary clearance from RBI

20.  Find out the lead managers in the
prospectus published
 SEBI Vs Imperial Corporate Finance &
Services pvt ltd

21.  Method of selling goods
 Goods let out on hire by finance
company(creditor) to the hire purchase
consumer(hirer)
 Periodic installments to be paid
 Ownership passes on to the hirer on the
payment of last instalment

22.  Buyer takes the possession of goods
immediately
 Periodic instalments treated as hire charges
 Ownership transferred to hirer on the payment
of last installment
 Any default in payment by hirer, the seller can
reposses the goods and forfeit the hire charges
already received
 Hirer can terminate the agreement by returning
the goods but cannot recover the hire charges
already paid

23.  No specific format but has to be in writing
and signed by both the parties
 Must contain the following
 The description of goods
 The hire purchase price
 The date of commencement of
agreement
 The number of instalments to be paid
and due date

24.  Industrial Development in UK
 Henry Moore, a piano maker in UK 1946
 Cooperwait & Sons, a furniture dealer in US
1807
 Idea developed by Wagon companies who
bought wagons and let it on hire purchase to
collieries
 Financed by manufacturers or dealers
themselves
 Consumer articles, automobiles, Industrial
Machinery

25.  Pre-Independence period, businesses
extending credit to buyers
 Non-banking Finance companies entered in
50s and 60s
 Pioneers were Commercial Credit
Corporation Ltd, Motor and General Finance
ltd. And Investment Supply Ltd.

26.  In 1987-88 Hire purchase business was
around Rs. 635 crores of which 55%
contributed by automobiles
 The growth of 20% pa in Indian middle class
and their willingness to mortgage future for
today’s enjoyment also covered consumer
articles
 NSIC, IDBI, ICICI etc

27.  Customer
 Purpose
 Amount
 Period
 Repayment
 Security
 Monitoring and Control

28.  According to the Dictionary of Business and
Management, “Lease is a form of contract
transferring the use or occupancy of land,
space, structure or equipment, in
consideration of payment, usually in the form
of a rent”.

29.  Agreement between two parties
 Leasing company or lessor and user or lessee
 The former arranges to buy capital equipment
for the use by the latter
 Predetermined and payable at fixed intervals of
time
 Lessor remains the owner of the equipment
over the primary period
 Lease rentals are tax deductible

30.  Modernisation of business
 Balancing equipment
 Cars, scooters and other vehicles and
durables
 Items entitled to 100% or 50% depreciation
 Assets not financed by banks/Institutions

31.  Lessee decides the asset required and selects the supplier
 Lessee enters into an agreement with the lessor. The
agreement must contain
 Basic lease period during which it is irrecoverable
 The timing and amount of periodical rental payments
 Details of any option to renew lease or purchase asset at
the end of the period
 Details regarding payment of cost of maintenance and
repairs, taxes, insurance and other expenses
 The lease agreement is signed, the lessor makes payment to
the manufacturer after the lessee has received and accepted
the asset

32.  Financial Lease
 Operating Lease
 Leverage Lease
 Sale and Lease back
 Cross-border lease
 Wet Lease and Dry Lease
 Vendor Leasing

33.  Also known as capital lease, long-term lease,
net lease and close lease.
 Irrevocable and non-cancellable contractual
agreement
 The lessee is responsible for the maintenance
and insurance of the equipment and also bears
the risk of obsolescence
 Non-cancellable clause, purchase option
 Leasing company also charges nominal service
charges and other costs

34.  Also known as service lease, short – term
lease or true lease.
 Contractual period less than the full
expected economic life of equipment
 For a limited period say a month, six months,
a year or few years
 Terminable by giving stipulated notice
 Lease rentals comparatively higher

35.  The lessor is responsible for the
maintenance and insurance of the
equipment and also bears the risk of
obsolescence
 Lease is suitable for
 Equipments that are sensitive to
obsolescence
 For tiding over a temporary problem

36. Basis Financial Lease Operating Lease
Nature of Lease Instalment Loan Rental agreement
Provision for
maintenance or taxes
To be paid by the lessee To be paid by the lessor
Risk of obsolescence Assumed by the lessee Assumed by the lessor
Contract Period Medium to Long term Intermediate to short
term
Cancellation Non-Cancellable Cancellable
Function by Lessor Financial Function Service Function
Examples Air craft, Land and
Building, Heavy
Machinery etc
Computers, automobiles,
office equipments etc

37.  Involves 3 parties – the lessor, the lessee
and the lender
 Lessor finances only a part of the total
investment and the balance is provided as a
loan to the lessor by a lender
 Loan is secured by mortgage of the asset
besides the assignment of lease rental
payments
 Example, Railroad, Coal mining, electricity
generating plants, ships etc

38.  Attractive investment features
 For lessor, Depreciation and interest
charges are tax deductible
 For Lessee, Lease payments can be
debited to P&L a/c

39.  A firm sells the asset to leasing company
and gets it back on lease
 Sold at its market value
 On a net-to-net basis
 Repurchase option
 Examples, Retail stores, office buildings,
shopping centres etc

40.  Permit alternate use of funds
 Faster and cheaper credit
 Flexibility
 Facilitates additional borrowing
 Protection against obsolescence
 No restrictive covenants
 100% Financing
 Boon to small firms

41.  Not suitable mode for project Finance
 Certain tax benefits/incentives not available
on leased equipment
 Increase in value of real assets
 High cost of financing
 High penalties for terminating a contract
 Lessor faces loss if lessee defaults
 Lessee not entitled to any protection
 Absence of exclusive laws

42. Private
Sector
Pure leasing
Companies
Hire purchase and
Finance companies
Subsidiaries of
manufacturing
group companies
Public
sector
Leasing divisions of
Financial institution
Subsidiaries of public
sector banks
Other public sector
Leasing
organizations
In -
House
Vendor

43.  Ownership
 Method of financing
 Depreciation
 Tax benefits
 Salvage value
 Deposit
 Rent purchase
 Extent of Finance
 Maintenance
 Reporting

44.  The Housing Finance Company is yet
another form of non-banking financial
company which is engaged in the principal
business of financing of acquisition or
construction of houses that includes the
development of plots of lands for the
construction of new houses.

45.  Large Investment
 Long-term advance
 High Inflation rate
 High stamp duties
 Defective title
 High delinquency rate
 Keen competition

46.  Surplus funds with bankers due to capital
markets
 Greater risk of lending to industries
 Entry of Foreign players with innovative retail
products
 High competition with varied products
 Increase in the middle income group
 Shift in the attitude from ‘save and buy’ to
‘buy and repay’

47.  Low cost construction techniques
 Reduction in Interest rates
 Expanded period of loans
 Government Initiatives
 Tax relief
 Repealing of Land Ceiling Act in 1999
 Diversification of risk

48.  RBI initiatives
 Housing loans under priority sector
advances
 Risk weightage reduced from 100% to 50%
 Deregulating interest rates
 Reducing the CRR and SLR

49.  Housing Loan for Purchase of Homes
 Home construction Loan
 Home Extension Loan
 Home Improvement Loan
 Flexible Repayment Plan
 Flexible Loan Instalment Plan
 Home Transfer or Conversion Loan

50.  Home furnishing Loan
 Housing Repayment or Refinance Loan
 Housing Loan Transfer Plan
 Bridge Loan for Housing

51.  Definition
“A financing institution which joins an
entrepreneur as a co-promoter in a project
and shares the risks and rewards of the
enterprise”

52.  Venture Capital is a long term risk capital to
finance high technology projects which
involve risk but at the same time has strong
potential for growth. Venture capitalists pool
their resources including managerial abilities
to assist new entrepreneurs in early years of
the project. Once the project reaches the
stage of profitability, they sell their equity
holdings at a high premium.

53.  Usually in the form of equity participation,
may also take the form of convertible debt or
long term loan
 Investment only in high risk but high growth
potential projects
 Only for commercialisation of new ideas or
new technologies
 Venture capitalists joins the entrepreneur as
co-promoter and shares the risks and
rewards

54.  Continuous involvement by the investor after
making an investment
 Once the venture reaches full potential, the
venture capitalists disinvests his holdings
either to the promoters or in the market. The
objective is capital appreciation not profit.
 Investment is usually made in small and
medium-scale businesses
 Not just injection of money but also input
needed to set up the firm, design its
marketing strategy and organise and
manage it.

55.  Promoter’s buy back
 Public issue
 Sale to other venture capital funds
 Sale in OTC market
 Management buyouts

56.  Providing seed capital
 Providing additional capital at various stages
of growth
 Bridge Finance/Project Financing
 Equity financing for taking over other
companies
 Capital to new entrepreneurs in foreign
operations

57.  Capital for expansion, diversification and
restructuring
 Research and development financing for
product development
 Start-up capital for initial production and
marketing
 Development financing for facilitating public
issue
 Acquisition or buyout financing
 Turnaround financing

58.  Development of an idea- seed finance
 Implementation stage- start-up finance
 Emerging stage/First stage
 Expansion stage
 Mezzanine/ pre IPO/ Bridge stage

59.  VC able to reduce malpractices by
management
 VC able to analyse the prospects of the
business
 VC having representatives on the Board of
Directors ensures business conducts its
affairs prudently

60.  VC provides long-term equity financing
 Eliminating the efforts of the entrepreneurs
and letting them concentrate on the activities
of business
 Assistance from VC does not require huge
expenditure
 Business partner
 Mentoring
 Alliances

61.  Reduces the time lag between a
technological innovation and its commercial
exploitation
 Helps in developing new processes/
products
 Acts as a cushion to support business
borrowings
 Channelize investment in new high-tech
business

62.  Helps in stabilizing the industries and also
contributes to faster industrial development
 Intermediary between investors and
entrepreneurs
 Paves the way for private sector to share the
responsibility with public sector

63.  Equity Participation
 Conventional Loan
 Conditional Loan
 Income notes
 Debentures

66.  In the words of Kohok, “Factoring is an asset
based means of financing by which the
factor buys up the book debts of a company
on a regular basis, paying cash down
against receivables, and then collects the
amounts from the customers to whom the
company has supplied goods”.

67.  Factoring agreement
 Preparation of invoice
 Goods sent without raising Bills of exchange
but accompanied by invoice
 Debt due by the purchaser assigned to the
factor and advising the customer to pay the
due amount to the factor

68.  Invoices, copies of receipt delivery challans,
copies of other documents handed over to
factor
 80% of the assigned invoice amount is paid
immediately to the client and the rest 20% is
paid after realizing the debt

69.  Assignment of debt in favour of the factor
 Selling limits of the client
 Conditions within which the factor will have
recourse in case of non payment
 Circumstances under which the factor will
have recourse in case of non payment
 Details regarding the payment to the factor

70.  Interest to be allowed to the factor when
credit has been sanctioned to the supplier
 Limit of any overdraft facility and the rate of
interest to be charged by the factor

71.  Purchase and Collection of debts
 Sales ledger management
 Credit investigation and undertaking of credit
risk
 Provision of finance against debts
 Rendering consultancy services

72.  Full service Factoring or without recourse
Factoring
 With recourse Factoring
 Maturity Factoring
 Bulk Factoring
 Invoice Factoring
 Agency Factoring
 International Factoring

73.  Supplier’s guarantee Factoring
 Limited Factoring
 Buyer based Factoring
 Seller based Factoring

74.  Financial service
 Collection service
 Credit risk service
 Provision of expertise ‘Sales ledger
Management’ service
 Consultancy service
 Economy in servicing
 Off- balance sheet financing

75.  Trade Benefits
 Miscellaneous service