Topics of Investment Banking:-        Introduction        Meaning        Overview                ~Evolution of Investment ...
origins to the financial markets in USA, due o which, American investment banks have banks havebeen leaders in the America...
Most small to medium sized companies do not have a large in-house staff, and in a financialtransaction may be at a disadva...
o   Research is the division which reviews companies and writes reports about their                  prospects, often with...
through major exchanges, such as the CBOE, and are almost as commoditized as general equitysecurities.In addition, while m...
Investment banks provide four primary types of services: Raising capital, advising in mergers and acquisitions, executing ...
and             stay             in            for             the             long             haul.The proper time to bu...
of the transaction. Capital gains taxes are higher for gains on investments held less than one year,so its often wise to i...
If youve transitioned from a debt situation to paycheck-to-paycheck situation to a saving somemoney every month situation,...
If youre going to invest in stocks, learn as much as you can about the companies you’reconsidering. Understand before you ...
Initial Public OfferingsInitial Public Offerings (IPOs) are the first time a company sells its stock to the public. Someti...
underwriters offer the shares first to the clients who have brought them the most businessrecently. By the time the averag...
The SEBI has been entrusted with both the regulatory and development function. Theobjectives of SEBI are as follows:      ...
agencies or a body operating in the capital market and it has announced guidelines for all playersin markets, including a ...
As part of its efforts to receive the dressed primary market, the SEBI has relaxedthe listed norms for I.T. sector compani...
Negotiated Deals:                 A negotiated deal in listed company has to be reported to stock exchange within15 minute...
Products and ServicesVenture Capital:                 Venture capital is risks money, which is used in risky enterprises e...
A beginning was made in this direction by the setting up of venture capitaldivisions under the aegis of ICICI, IDBI & IFCI...
was made by the finance minister in his 1988-89 budget speech and detailed guidelines forproviding such finance by registe...
guidelines for their registration and control by itself a code of conduct for them to operate as inthe case of capital mar...
Rules on Venture Capital Funds:                 The norms of Venture Capital Funds are liberalized early January 2000. Whi...
Merchant banks in foreign countries undertake a larger number of activities. They operateboth in the money market and capi...
When the financial institutions directly subscribes to the equity/preference shares and/ordebentures issued by the company...
Why Merchant Banks?     The following are some of the reasons why specialist merchant banks have a crucialrole to play in ...
resources in order to avoid the high cost of making public issues.Underwriting     The main work of merchant banks relates...
(b) Authorised Activity   (i)     Issue Management  (ii)     Corporates Advisory services relating to the issue  (iii)    ...
(xii) Merchant Bankers performing or planning to perform portfolio management servicesshall furnish the details in the pre...
Type                    Nature                   Penalty Points-----------------------------------------------------------...
Investment banking
Investment banking
Investment banking
Investment banking
Investment banking
Investment banking
Investment banking
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Investment banking

  1. 1. Topics of Investment Banking:- Introduction Meaning Overview ~Evolution of Investment Banking ~Its Mechanism (statement of investment banking) Products/Services Offered ~Lists of explanation ~Special services How these services server the purpose of clients? Risks associated with investment banking? ~Types ~Explanation (example){problem impact} How the risks are managed effectively? ~Why risks management? ~Ways (example){problem action} Future Scenario ConclusionINTRODUCTIONAt a very macro level, ‘Investment Banking’ as term suggests, is concerned with the primaryfunction of assisting the capital market in its function of capital intermediation, i.e., themovement of financial resources from those who have them (the Investors), to those who need tomake use of them for generating GDP (the Issuers). Banking and financial institution on the onehand and the capital market on the other are the two broad platforms of institutional thatinvestment for capital flows in economy. Therefore, it could be inferred that investment banks arethose institutions that are counterparts of banks in the capital markets in the function ofintermediation in the resource allocation. Nevertheless, it would be unfair to conclude so, as thatwould confine investment banking to very narrow sphere of its activities in the modern world ofhigh finance. Over the decades, backed by evolution and also fuelled by recent technologiesdevelopments, an investment banking has transformed repeatedly to suit the needs of the financecommunity and thus become one of the most vibrant and exciting segment of financial services.Investment bankers have always enjoyed celebrity status, but at times, they have paid the price forthe price for excessive flamboyance as well. To continue from the above words of John F. Marshall and M.E. Eills, ‘investmentbanking is what investment banks do’. This definition can be explained in the context of howinvestment banks have evolved in their functionality and how history and regulatory interventionhave shaped such an evolution. Much of investment banking in its present form, thus owes its
  2. 2. origins to the financial markets in USA, due o which, American investment banks have banks havebeen leaders in the American and Euro markets as well. Therefore, the term ‘investment banking’can arguably be said to be of American origin. Their counterparts in UK were termed as‘merchants banks’ since they had confined themselves to capital market intermediation until theUS investments banks entered the UK and European markets and extended the scope of suchbusinesses.Investment banks help companies and governments and their agencies to raise money by issuingand selling securities in the primary market. They assist public and private corporations in raisingfunds in the capital markets (both equity and debt), as well as in providing strategic advisoryservices for mergers, acquisitions and other types of financial transactions.Investment banks also act as intermediaries in trading for clients. Investment banks differ fromcommercial banks, which take deposits and make commercial and retail loans. In recent years,however, the lines between the two types of structures have blurred, especially as commercialbanks have offered more investment banking services. In the US, the Glass-Steagall Act, initiallycreated in the wake of the Stock Market Crash of 1929, prohibited banks from both acceptingdeposits and underwriting securities; Glass-Steagall was repealed by the Gramm-Leach-Bliley Actin 1999. Investment banks may also differ from brokerages, which in general assist in thepurchase and sale of stocks, bonds, and mutual funds. However some firms operate as bothbrokerages and investment banks; this includes some of the best known financial services firms inthe world.More commonly used today to characterize what was traditionally termed” investment banking” is“sells side." This is trading securities for cash or securities (i.e., facilitating transactions,market-making), or the promotion of securities (i.e. underwriting, research, etc.).The "buy side" constitutes the pension funds, mutual funds, hedge funds, and the investing publicwho consume the products and services of the sell-side in order to maximize their return oninvestment. Many firms have both buy and sell side components.DefinitionAn individual or institution, which acts as an underwriter or agent for corporations andmunicipalities issuing securities. Most also maintain broker/dealer operations, maintain marketsfor previously issued securities, and offer advisory services to investors. Investment banks alsohave a large role in facilitating mergers and acquisitions, private equity placements and corporaterestructuring. Unlike traditional banks, investment banks do not accept deposits from and provideloans to individuals. Also called investment banker.Who needs an Investment Bank?Any firm contemplating a significant transaction can benefit from the advice of an investmentbank. Although large corporations often have sophisticated finance and corporate developmentdepartments provide objectivity, a valuable contact network, allows for efficient use of clientpersonnel, and is vitally interested in seeing the transaction close.Most small to medium sized companies do not have a large in-house staff, and in a financialtransaction may be at a disadvantage versus larger competitors. A quality investment banking firmcan provide the services required to initiate and execute a major transaction, thereby empoweringsmall to medium sized companies with financial and transaction experience without the additionof permanent overhead, an investment bank provides objectivity, a valuable contact network,allows for efficient use of client personnel, and is vitally interested in seeing the transaction close.
  3. 3. Most small to medium sized companies do not have a large in-house staff, and in a financialtransaction may be at a disadvantage versus larger competitors. A quality investment-bankingfirm can provide the servicesOrganizational structure of an investment bankThe main activities and unitsThe primary function of an investment bank is buying and selling products both on behalf of thebanks clients and also for the bank itself. Banks undertake risk through proprietary trading, doneby a special set of traders who do not interface with clients and through Principal Risk, riskundertaken by a trader after he or she buys or sells a product to a client and does not hedge hisor her total exposure. Banks seek to maximize profitability for a given amount of risk on theirbalance sheetAn investment bank is split into the so-called Front Office, Middle Office and Back Office. Theindividual activities are described below:Front Office Investment Banking is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance (often pronounced "corpfin"). Investment management is the professional management of various securities (shares, bonds etc) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds) . Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring. o Sales and Trading is often the most profitable area of an investment bank , responsible for the majority of revenue of most investment banks In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need.
  4. 4. o Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank. o Structuring has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.Middle Office Risk Management involves analysing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent bad trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty) correctly (as per standardised booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now include measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.Back Office Operations involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security of the divisions within an investment bank, it is a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. The staff in these areas are often highly qualified and need to understand in depth the deals and transactions that occur across all the divisions of the bank.Recent evolution of the business New productsInvestment banking is one of the most global industries and is hence continuously challenged torespond to new developments and innovation in the global financial markets. Throughout thehistory of investment banking, many have theorized that all investment banking products andservices would be commoditized. New products with higher margins are constantly invented andmanufactured by bankers in hopes of winning over clients and developing trading know-how innew markets. However, since these can usually not be patented or copyrighted, they are very oftencopied quickly by competing banks, pushing down trading margins.For example, trading bonds and equities for customers is not a commodity business butstructuring and trading derivatives is highly profitable .Each OTC contract has to be uniquelystructured and could involve complex pay-off and risk profiles. Listed option contracts are traded
  5. 5. through major exchanges, such as the CBOE, and are almost as commoditized as general equitysecurities.In addition, while many products have been commoditized, an increasing amount of profit withininvestment banks has come from proprietary trading, where size creates a positive networkbenefit (since the more trades an investment bank does, the more it knows about the market flow,allowing it to theoretically make better trades and pass on better guidance to clients).Possible conflicts of interestPotential conflicts of interest may arise between different parts of a bank, creating the potentialfor financial movements that could be market manipulation. Authorities that regulate investmentbanking (the FSA in the United Kingdom and the SEC in the United States) require that banksimpose a Chinese wall which prohibits communication between investment banking on one sideand research and equities on the other.Some of the conflicts of interest that can be found in investment banking are listed here: Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable. Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running.Types of investment banksInvestment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their ownaccounts, make markets, and advise corporations on capital markets activities such as mergersand acquisitions.Merchant banks were traditionally banks which engaged in trade financing. The modern definition,however, refers to banks which provide capital to firms in the form of shares rather than loans.Unlike Venture capital firms, they tend not to invest in new companies.
  6. 6. Investment banks provide four primary types of services: Raising capital, advising in mergers and acquisitions, executing securities sales and trading, andperforming general advisory services. Most of the major Wall Street firms are active in each ofthese categories. Smaller investment banks may specialize in two or three of these categories.Raising CapitalAn investment bank can assist a firm in raising funds to achieve a variety of objectives, such as toacquire another company, reduce its debt load, expand existing operations, or for specific projectfinancing. Capital can include some combination of debt, common equity, preferred equity, andhybrid securities such as convertible debt or debt with warrants. Although many people associateraising capital with public stock offerings, a great deal of capital is actually raised through privateplacements with institutions, specialized investment funds, and private individuals. Theinvestment bank will work with the client to structure the transaction to meet specific objectiveswhile being attractive to investors.Mergers and AcquisitionsInvestment banks often represent firms in mergers, acquisitions, and divestitures. Exampleprojects include the acquisition of a specific firm, the sale of a company or a subsidiary of thecompany, and assistance in identifying, structuring, and executing a merger or joint venture. Ineach case, the investment bank should provide a thorough analysis of the entity bought or sold,as well as a valuation range and recommended structure.Sales and TradingThese services are primarily relevant only to publicly traded firms, or firms, which plan to gopublic in the near future. Specific functions include making a market in a stock, placing newofferings, and publishing research reports.General Advisory Services:Advisory services include assignments such as strategic planning, business valuations, assisting infinancial restructurings, and providing an opinion as to the fairness of a proposed transaction.Terms Related To Investment BankBuying and SellingBuyingDeciding on the proper time to purchase a security that you would like to add to your holdingscan be a daunting task. If the price drops immediately after you buy, it may seem as if you missedout on a better buying opportunity. If the price jumps right before you make your move, you mayfeel as if you paid too much. As it turns out, you should not let these small fluctuations influenceyour decision too much. As long as the fundamentals that led you to decide on the purchase havenot changed, a few points in either direction should not have a large impact on the long-termvalue of your investment.Similarly, the fact that an investment has been increasing in value of late is not a sufficient reasonfor you to purchase it. Momentum can be very fickle, and recent movement is not necessarily anindicator of future movement. Therefore, buying decisions should be based on sound andthorough research geared toward discerning the future value of a security relative to its currentprice. This analysis will probably not touch upon price movement in the very recent past. As youlearn more about investing youll get better at deciding when to buy, but most expertsrecommend that beginners avoid trying to time the market, and just get in as soon as they can
  7. 7. and stay in for the long haul.The proper time to buy a security is quite simply when it is available for less than its actual value.These undervalued securities are actually not as rare as they sound. However, the problem issimply that they are never sure bets. The value of a security includes estimates of the futureperformance of factors underlying the value of the security. For stocks, these factors includethings like earnings growth and market share. Changes can be predicted to a degree, but they aresubject to fluctuation due to forces both within and beyond the control of the company.The overall economic climate, changes in the industry or even bad decisions by management canall cause a security poised to ascend in value to become an under performer. Therefore, it isessential to practice your analysis before putting your money into action. Make some mockpurchases based on your personal analysis technique and track the results. Not all of yourdecisions will lead to the results you were expecting, but if most of your choices turn out to begood and there are mitigating factors that you can learn from to explain your missteps, then youmay be ready to put your analysis technique and investing strategy into action.At this point, the need to continuously monitor your investments does not disappear. Both underperformers and overachievers should be studied carefully to fine-tune your strategy. You shouldalso regularly look at your securities to make sure that the fundamentals for success that led youto buy in the first place are intact. If not, you may need to prepare to cash in and start looking forthe next opportunity.One way to avoid the hassles of deciding when to buy altogether is to practice dollar-costaveraging. This strategy advocates investing a fixed dollar amount at regular intervals. The pricewhen you first invest is relatively unimportant (as long as the fundamentals are sound) becauseyou will be purchasing shares at a different price each time you buy. The success of yourinvestment then lies not with short-term fluctuations, but with the long-term movement of thevalue of the security.Selling:There comes a time when investments must be liquidated and converted back into cash. In aperfect world, selling would only be necessary when investment goals have been reached or timehorizons have expired, but, in reality, decisions about selling can be much more difficult. For onething, it can be just as hard to decide when to sell as it can be to decide when to buy. No onewishes to miss out on gains by selling too soon, but, at the same time, no one wishes to watch aninvestment peak in value and then begin to decline.Investors often seek to sell investments that have dropped in value in the short-term. However, ifconditions have not changed significantly, drops in price may actually represent an opportunity tobuy at a better price. If the initial research, which led to the purchase, was sound, a temporarydecline does not preclude the success that was originally predicted. Of course, things change, andif the security no longer meets the criteria that led to its purchase, selling may in fact be the bestoption.Selling may also become necessary if investment goals change over time. You may need to reducethe amount of risk in your portfolio or you may have the opportunity to seek out greater returns.Additionally, a security may have increased in value to the point that it is overvalued. This createsan excellent opportunity to cash in and seek out new undervalued investments. Often you willneed to make this type of sale in the course of rebalancing a portfolio necessitated by gains andlosses in different areas.Selling can be especially difficult when an under performing stock must be dumped. Someinvestors let their emotions dictate their actions and hold on to stocks that have fallen in valuerather than to sell, thinking that selling at a loss is like admitting that they made a mistake.However, realizing the loss and moving on to better investments is often preferable to continuingto hold onto a loser in the hopes that it will somehow rebound.When considering any sale, you must factor in the costs of the sale itself. Fees and taxes will eatinto profits, so they must be subtracted from any increases in value to understand the true impact
  8. 8. of the transaction. Capital gains taxes are higher for gains on investments held less than one year,so its often wise to invest for the long term rather than to buy and sell quickly. On the other hand,it can be dangerous to hold an investment longer than you want to, simply to reduce the taxburden.It is essential to remember that just because an investment increases in value after it has beensold does not necessarily mean that it was sold prematurely. Managing risk and diversification areoften more important than capitalizing on short-term gains in a particular security. Keeping inmind the initial goals for the investment and adjusting them to fit your present goals will allowyou to make smarter decisions about selling.Principles of Investing1. Start Investing NowWe say this not just to discourage procrastination, but because an early start can make all thedifference. In general, every six years you wait doubles the required monthly savings to reach thesame level of retirement income. Another motivational statistic: If you contributed some amounteach month for the next nine years, and then nothing afterwards, or if you contributed nothing forthe first nine years, then contributed the same amount each month for the next 41 years, youwould have about the same amount. Compounding is a beautiful thing.2. Know YourselfThe right course of action depends on your current situation, your future goals, and yourpersonality. If you dont take a close look at these, and make them explicit, you might be headedin the wrong direction. Current Situation: How healthy are you, financially? Whats your net worth right now? Whats your monthly income? What are your expenses (and where could they be reduced)? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns? What are your expenses? Goals: What are your financial goals? How much will you need to achieve them? Are you on the right track? Risk Tolerance: How much risk are you willing and able to accept in pursuit of your objectives? The appropriate level of risk is determined by your personality, age, job security, health, net worth, amount of cash you have to cover emergencies, and the length of your investing horizon.3. Get Your Financial House In OrderEven though investing may be more fun than personal finance, it makes more sense to get startedon them in the reverse order. If you dont know where the money goes each month, you shouldntbe thinking about investing yet. Tracking your spending habits is the first step toward improvingthem. If youre carrying debt at a high rate of interest (especially credit card debt), you shouldunburden yourself before you begin investing. If you dont know how much you save each monthand how much youll need to save to reach your goals, there’s no way to know what investmentsare right for you.
  9. 9. If youve transitioned from a debt situation to paycheck-to-paycheck situation to a saving somemoney every month situation, you’re ready to begin investing what you save. You should start byamassing enough to cover three to six months of expenses, and keep this money in a very safeinvestment like a money market account, so youre prepared in the event of an emergency. Onceyouve saved up this emergency reserve, you can progress to higher risk (and higher return)investments: bonds for money that you expect to need in the next few years, and stocks or stockmutual funds for the rest. Use dollar cost averaging, by investing about the same amount eachmonth. This is always a good idea, but even more so with the dramatic fluctuations in the marketin the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips.And remember; never invest in anything you dont understand.4. Develop A Long Term PlanNow that you know your current situation, goals, and personality, you should have a pretty goodidea of what your long-term plan should be. It should detail where the money will go: cars,houses, college, and retirement. It should also detail where the money will come from. Hopefullythe numbers will be about the same.Dont try to time the market. Get in and stay in. We dont know what direction the next 10% movewill be, but we do know what direction the next100% move will be.Review your plan periodically, and whenever your needs or circumstances change. If you are notconfident that your plan makes sense, talk to an investment advisor or someone you trust.5. Buy StocksNow that youve got a long term view, you can more safely invest in riskier investments, whichthe market rewards (in general). This requires patience and discipline, but it increases returns.This approach reduces the entire universe of investment vehicles to two choices: stocks and stockmutual funds. In the long run, theyre the winners: In this century, stocks beat bonds 8 out of 9decades, and theyre well in the lead again. According to Ibbotsons Stocks, Bonds, Bills andInflation 1995 Yearbook, here are the average annual returns from 1926 to 1994 (before inflation): Stocks: 10.2% (and small company stocks were 12.1%) Intermediate term treasury bonds: 5.1% 30-day T-bills: 3.7%But is it really worth the additional risk just for a few percentage points? The answer is yes. 10% ayear for 20 years is 570%, but 7% a year for 20 years is only 280%. Compounding is Gods gift tolong-term planners.If you buy outstanding companies, and hold them through the markets gyrations, you will berewarded. If you arent good at selecting stocks, select some mutual funds. If you arent good atselecting mutual funds, go with an index fund (like the Vanguard S&P 500).6. Investigate Before You InvestAlways do your homework. The more you know, the better off you are. This requires that you keeplearning, and pay attention to events that might affect you. Understand personal finance mattersthat could affect you (for example, proposed tax changes). Understand how each of yourinvestments fits in with the rest of your portfolio and with your overall strategy. Understand therisks associated with each investment. Gather unbiased, objective information. Get a secondopinion, a third opinion, etc. Be cautious when evaluating the advice of anyone with a vestedinterest.
  10. 10. If youre going to invest in stocks, learn as much as you can about the companies you’reconsidering. Understand before you invest. Research, research, Read books. Consider joining aninvestment club or an organization like the American Association of Individual Investors.Experiment with various strategies before you put your own money on the line. Examine historicaldata or participate in a stock market simulation. Try a momentum portfolio, a technical analysisportfolio, a bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, anintuition portfolio, a mega trends portfolio, and any others you think of. In the process youll findout which ones work best for you. Learn from your own mistakes, and learn from the mistakes ofothers.If you dont have time for all this work consider mutual funds, especially index funds.7. Develop the Right AttitudeThe following personality traits will help you achieve financial success: Discipline: Develop a plan, and stick with it. As you continue to learn, you’ll become more confident that youre on the right track. Alter your asset allocation based on changes in your personal situation, not because of some short-term market fluctuation. Confidence: Let your intelligence, not your emotions; make your decisions for you. Understand that you will make mistakes and take losses; even the best investors do. Re-evaluate your strategy from time to time, but dont second-guess it. Patience: Dont let your emotions be ruled by todays performance. In most cases, you shouldnt even be watching the day-to-day performance, unless you like to. Also, dont ever feel like its now or never. Dont be pressured into an investment you don’t yet understand or feel comfortable with.The following personality traits will hurt your chances of financial success: Fear: If you are unwilling to take any risk, you will be stuck with investments that barely beat inflation. Greed: As an investment class, get rich quick schemes have the worst returns. If your expectations are unrealistically high, youll go for the big scores, which usually don’t work.It is generally a good idea to avoid making financial decisions based on emotional factors.8. Get Help If You Need ItThe do-it-yourself approach isnt for everyone. If you try it and its not working, or youre afraid totry it at all, or you just dont have the time or desire, theres nothing wrong with seekingprofessional assistance.If you want others to handle your financial affairs for you, you will nevertheless want to remaininvolved to some degree, to make sure your money is being spent wisely.
  11. 11. Initial Public OfferingsInitial Public Offerings (IPOs) are the first time a company sells its stock to the public. SometimesIPOs are associated with huge first-day gains; other times, when the market is cold, they flop. Itsoften difficult for an individual investor to realize the huge gains, since in most cases onlyinstitutional investors have access to the stock at the offering price. By the time the general publiccan trade the stock, most of its first-day gains have already been made. However, a savvy andinformed investor should still watch the IPO market, because this is the first opportunity to buythese stocks.Reasons for an IPOWhen a privately held corporation needs to raise additional capital, it can either take on debt orsell partial ownership. If the corporation chooses to sell ownership to the public, it engages in anIPO. Corporations choose to "go public" instead of issuing debt securities for several reasons. Themost common reason is that capital raised through an IPO does not have to be repaid, whereasdebt securities such as bonds must be repaid with interest. Despite this apparent benefit, thereare also many drawbacks to an IPO. A large drawback to going public is that the current owners ofthe privately held corporation lose a part of their ownership. Corporations weigh the costs andbenefits of an IPO carefully before performing an IPO.Going PublicIf a corporation decides that it is going to perform an IPO, it will first hire an investment bank tofacilitate the sale of its shares to the public. This process is commonly called "underwriting"; thebanks role as the underwriter varies according to the method of underwriting agreed upon, but itsprimary function remains the same.In accordance with the Securities Act of 1933, the corporation will file a registration statementwith the Securities and Exchange Commission (SEC). The registration statement must fully discloseall material information to the SEC, including a description of the corporation, detailed financialstatements, biographical information on insiders, and the number of shares owned by each insider.After filing, the corporation must wait for the SEC to investigate the registration statement andapprove of the full disclosure.During this period while the SEC investigates the corporations filings, the underwriter will try toincrease demand for the corporations stock. Many investment banks will print "tombstone"advertisements that offer "bare-bones" information to prospective investors. The underwriter willalso issue a preliminary prospectus, or "red herring", to potential investors. These red herringsinclude much of the information contained in the registration statement, but are incomplete andsubject to change. An official summary of the corporation, or prospectus, must be issued eitherbefore or along with the actual stock offering.After the SEC approves of the corporations full disclosure, the corporation and the underwriterdecide on the price and date of the IPO; the IPO is then conducted on the determined date. IPO’sare sometimes postponed or even withdrawn in poor market conditions.PerformanceThe aftermarket performance of an IPO is how the stock price behaves after the day of its offeringon the secondary market (such as the NYSE or the NASDAQ). Investors can use this information tojudge the likelihood that an IPO in a specific industry or from a specific lead underwriter willperform well in the days (or months) following its offering. The first-day gains of some IPO’s havemade investors all too aware of the money to be had in IPO investing. Unfortunately, for the smallindividual investor, realizing those much-publicized gains is nearly impossible. The crux of theproblem is that individual investors are just too small to get in on the IPO market before the jump.Those large first-day returns are made over the offering price of the stock, at which only large,institutional investors can buy in. The system is one of reciprocal back scratching, in which the
  12. 12. underwriters offer the shares first to the clients who have brought them the most businessrecently. By the time the average investor gets his hands on a hot IPO, its on the secondarymarket, and the stocks price has already shot up.SEBI Guidelines The Government has setup Securities Exchange Board of India (SEBI) in April 1988.For more then three years, it had no statutory powers. Its interim functions during the period were: i. To collect information and advise the Government on matters relating to Stock and Capital Markets. ii. Licensing and regulatory and Merchant Banks, Mutual Fund, etc.. iii. To prepare the legal drafts for regulatory and developmental role of SEBI and iv. To perform any other functions as may be entrusted to it by Government. The need for setting up independent Government agency to regulate and develop the Stock and Capital Market in India as in many developed countries was recognised since the Seventh Five Year was launched (1985) when some major industrial policy changes like opening up of the economy to out side the world and greater role to the Private Sector were initiated. The rampant malpractices noticed in the Stock and Capital Markets stood in the way of infusing confidence of investors, which is necessary for mobilisation of large quantity of funds from the public, and help the growth of the industry. The malpractices were noticed in the case of companies, Merchant Bankers and Brokers who are all operating in Capital Markets. The need to curb the malpractices and to promote healthy Capital Market in India was felt. The security industry in India has to develop on the right lines for which a competent Government agency as in UK (SIB) or in USA (SEC) is needed. As referred to earlier, malpractices have been reported in both the primary market and secondary market. A few examples of malpractices in the primary market are as follows: a) Too may self styled Investment Advisers and Consultants. b) Grey Market or unofficial premiums on the new issues. c) Manipulation of markets before new issues is floated. d) Delay in allotment letters or refund orders or in dispatch of Share Certificates e) Delay in listing and commencement of trading in shares.A few examples of malpractices in the Secondary Market are as fallows: a) Lack of transparency in the trading operations and prices charged to clients. b) Poor service due to delay in passing contract notes or not passing contracts notes, at all. c) Delay in making payments to clients or in giving delivery of shares. d) Persistence of odd lots and refusal of companies to stop this practice of allotting shares in odd lots, which disappeared with the introduction of Demat form of trading. e) Insider trading by agents of companies or brokers rigging and manipulating prices. f) Takeover bids to destabilise management.Objectives:
  13. 13. The SEBI has been entrusted with both the regulatory and development function. Theobjectives of SEBI are as follows: a) Investor protection, so that there is a steady flow of savings into the Capital Markets. b) Ensuring the fair practices by the issuers of securities, namely, companies so that they can raise resources at least cost. c) Promotion of efficient services by brokers, merchant bankers and others intermediaries so that they become competitive and professional.SEBI AND FREE PRICING OF EQUITY SHARES With the repeat of Capital Issuers Control Act of 1947 in May 1992, the SEBIissued fresh guidelines for new Capital issues from June 11, 1992. Pricing of Shares expect in caseof new companies with no track record is left to free market forces. The new Companies have toissues shares at par only. The existing unlisted companies if they desire listing can make publicissue upto 20% of equity and price can be determined by free market forces, as determined by theissuer or the lead manager. Similarly, an existing listed company can also fix the price of issuedepending on the markets forces. In all these cases, the reasons for such price fixation,transparency and proper disclosers are insisted upon by the SEBI. The draft letter of offer to thepublic is to be vetted by SEBI, which was delegated to lead merchant bankers by SEBI after 1996. As per SEBI guidelines, 12 months should elapse between bonus issue and publicor rights issue. A private placement of promoters’ quota is not permitted. Merchant bankers heldresponsible for ensuring that prospectus is fair and disclosures are full and correct and thathighlights and risk factors are slept out in all issues. Although free pricing is permitted, therationale of such fixation is to be provided to the SEBI when it examines the drafts letter of offer.SEBI POWERSThe SEBI powers on stock exchanges and their member brokers and sub brokers were exercisedunder SEBI (stock brokers and sub brokers) Regulations of October 23 1992. These relate toregistration, licensing, code of conduct, and inspection of books accounts, etc. These powers wereexercised under Section 12 of SEBI Act. SEBI was delegated more powers of administration of SC (R) Act in respect ofmany provisions including recognition of stocks exchanges (Sec.3, 4&5) and control andregulation of stocks exchanges under Sections 7, 13, 18, 22 and 28 etc., These were concurrentpowers wielded by both Government and SEBI, effective from September1993. Subsequently, by an ordinance in January 1995, the SEBI was given further powersto impose penalties on insider trading and capital markets intermediaries for violation of SEBIregulations and companies for not complying with Listing agreement. In particular penalties canbe imposed in monetary terms, for failure to furnish books of accounts, failure to enter intoagreements with clients, failure to redress investor grievances, defaults in case of mutual funds,and non-disclosures of acquisition of shares and take over etc. Venture capital funds like mutual funds were brought under the control of SEBI.Earlier to that, the SEBI has started licensing and regulations the underwriters, debenture trustees,collecting bankers, and all intermediaries in the capital market.SEBI in the New Millennium: SEBI has got all the needed powers to regulate the Capital Market including allaffairs of listed Companies, Venture Funds, MMMFs, etc. Already it has been regulating the foreign
  14. 14. agencies or a body operating in the capital market and it has announced guidelines for all playersin markets, including a code of conduct.Institutional Agencies: All the FIIs together can invest upto 24-30% of the company’s paid up capital, ofwhich a limit of 50% is allowed to foreign individuals and corporates investing in India through FIIs;this limit of 30% was raised to 40% by the Central Budget for 2000-01.The SEBI has also allowed the domestic Mutual Funds to invest in foreign listed securities and tomanage foreign portfolios. According to some amendments to Mutual Fund regulations of SEBI,the Mutual Funds are required to send a complete statement of their portfolios to all unit holderswithin one month from the close of each half-year. In order to deter mutual funds from delay indespatch of redemption warrants, SEBI has directed mutual funds to provide for payment ofinterest to the unit holders on this delayed payment, wherever applicable.Latest Primary Markets Reforms In pursuance with the recommendations of the Informal Group on PrimaryMarkets, the SEBI has dispensed with the requirements of issuing shares at fixed par value ofRs.10 and Rs.100. They are now free to issue shares at any value of Rs.1 and above. The SEBImodified the existing framework for the book building. Some issues following the book buildingprocess have already been issued in 1999-2000. In order to encourage Initial Public Offer, the SEBI has relaxed the guidelinesstipulating “the ability to pay” criteria in place of existing criteria of “actual payment of dividend”by the issuing companies to be eligible to make public offers. The regulations for Credit RatingAgencies were finalised and published by the SEBI. The categories of promoters who are eligible topromote CRA’s are laid down.Book Building Process:The changes in book building guidelines: The modified framework makes display of demand at terminals optional. The reservationof 15% of issue size for individual investors bidding upto 10 marketable lots is no longercompulsory. Allotment in Book Building process should be in Demat form only and otherrequirements shall be the same as for any public issue. The issuer is allowed to disclose either theissue size or number of securities to be offered to the public. The regulatory mechanism on secondary market was strengthened during1999-2000, through the rationalisation and refinement of margin system and through mark tomarket margins, volatility margins, incremental carry forward margins, etc. The circuit breakersfor the volatility have been fixed by SEBI at 8% to 12% to be raised upto 16%. The exposure limitsfor members are also fixed.Informal Group on Primary Market
  15. 15. As part of its efforts to receive the dressed primary market, the SEBI has relaxedthe listed norms for I.T. sector companies to make initial public offers with a minimum offer of10%, instead of 25% for all other companies. Book building norms are to encourage new issues.The norm of 90% subscription as the minimum for enabling the company offering public issue tomake allotment was waived. Similarly, the stipulation of actual payment of dividend in three out ofthe past 5 years for the company to come out with a public issue was replaced by requirements of“ability to pay” the dividends. As recommended Informal Group on primary market, measuresinitiated to improve the sentiment in the Primary Market. The SEBI has given freedom to theCompanies to determine the par value of shares issued by them in accordance with section 13(4)of the Companies Act, 1956. the companies with dematerialized shares have been allowed to alterthe par value of share indicated in the Memorandum and Articles of Association Reference wasalready to changes in Book Building Norms. SEBI has also accepted the introduction of a system of using the existinginfrastructure of stocks Exchanges for marketing of IPOs and NSE has offered these servicesthrough its wide network terminals spread all over the country.Demat Coverage: From January 2000, the scrips for trading in Demat form was raised to 200. Withthis, the compulsory trading in Demat form has raised the proportion of market deliveries inDemat form to 90% of the total deliverers. The physical deliverers of shares has come downdrastically. The transaction costs have been reduced and volume have increased phenomenallydue to electronic form of trading and in demat form.Committee on Market Making: A committee on the Market Making under the Chairmanship of Shri G.P. Guptawas set by the SEBI to study the various facets of the market making, including the merits anddemerits of order driven system and quote driven system. The committee was of the view thatshares should be classified into the categories namely liquid and illiquid and market makingfacility should be provided to the illiquid category of shares. Market making should be madecompulsory in such cases and market markers have to give two way quotes for each such scrip.The mechanism pf market making and risked involved in it are to be understood by marketmakers.Legal Framework: In the legal field, the securities Laws, 1999 was passed by the Parliament inDecember 1999. This has incorporated the derivative instruments in the definition of securitiesunder Securities Contract Regulation Act, 1956, as also the units of Collective InvestmentsSchemes, with a view to facilitating their transaction and regulation. The new Act provided fortransfer of Appellate functions under the securities Laws Securities Appellate Tribunal (SAT). Thestamp duty payable on derivative transactions those in demat Form was withdrawn by necessarylegal changes. Banks now accept the ownership pf securities in Demat Form.
  16. 16. Negotiated Deals: A negotiated deal in listed company has to be reported to stock exchange within15 minutes and information in such deals has to be disseminated to all Stock Exchanges. Anegotiated deal is defined as any transaction which has on order value of 25 lakhs or trade volumeof not less than 10,000shares at one price, not formed on Stock Exchanges and through the ordermatching system. But with a view to enhance the price discovery process and improve thetransparency, SEBI made such deals not permissible in 1999. Guidelines were issued to permitnegotiated deals only if they are executed on the screen of Stock Exchange, following the priceand order matching system of the exchange.SEBI Committee on Corporate Governance: The committee on Corporate Governance, set up by SEBI has reported and thereport was accepted by SEBI and implemented. The Stock Exchanges listing agreement wasamended to include a clause on corporate governance to be observed by listed companies. It is animportant tool for corporates listed on Stock Exchange. The SEBI code on Corporate Governancewas released in January 2000 for adoption by listed companies. It is expected that this measuresmay raise the standard of corporate governance in India and improve the disclosure standards andinvestor protection.SEBI Guidelines on Listing: In February 2000, the SEBI has asked the Stock Exchanges to amend the listing agreementby adding clause 49, providing for corporate governance mandatory for companies seeking listingfor the first time. The companies which are included Group A of BSE and in S&P CNX Nifty Indexhave to comply with the requirements by March 31, 2001. Besides listed companies with paid upcapital of Rs.10crores and above or networth of Rs.25crores or more have to comply with thisrequirement by March end 2002. Other listed companies with a paid up capital of Rs.3crores andabove have to comply with this requirement of corporate governance by March end 2003. The SEBI has also directed the companies listed, to reduce the No-delivery period to oneweek in the case of Demat shares. A committee was set up to streamline the existing riskcontainment measures namely the margin system and simplify it.SEBI’s Record: The SEBI has set a creditable record of regulation for the growth of a healthyCapital Market during the period of 1995-2000. In the year 2000, it has set for itself the tasks ofspeeding up the following measures. 1) Pursuit of healthy Corporate Governance Regulations. 2) Strengthening of Rolling Settlement System by adding 500 more scrips to its. 3) Introduction of Derivative Trading. 4) Development of the internet practices by brokers. 5) Promotion of trading in debt market and in securities debt instruments.
  17. 17. Products and ServicesVenture Capital: Venture capital is risks money, which is used in risky enterprises either as equityor debt capital. It may be in new sunshine industries or older risk enterprises. The funds, whichfinance such risky, venture capital funds. Ventures capital was originated & popularised in USA in sixties. In developedcountries, this capital came from pension funds, insurance companies & even large banks. Somelarge companies with excess funds may provide this capital to achieve diversification, marketexpansion & ‘window on technology’ or to share in this result of R&D of others. In India, as the majority of the above institutions are in the public sector, only thegovernment or public financial institutions can provide the funds for venture capital.What is Venture Capital? Venture capital is a post-war phenomenon in the business world, mainlydeveloped as a sideline activity of the rich in USA. To connote the risk & adventure & someelement of investment, the generic name of ‘venture capital’ was coined. In the late 1960’s a newbreed of professional investors called venture capitalists emerged whose specialty was to combinerisk capital with entrepreneurial management & to use advance technology to launch newproducts and companies in the markets place. Undoubtedly, it was ‘venture capitalists’ astuteability to assess and manage enormous risks & export from them tremendous returns thatchanged the face of America. Innovative, hi-tech ideas are necessarily risky. It is here that the concept ofventure capital steps in. Venture Capital provides long start up costs to high risks & returnsproject. Typically, these projects have mortality rates and therefore are unattractive torisks-averse bankers & private sectors companies.Venture Projects: Proposals come to the venture capitalists in the form of business plans. Heappraises the same, giving due regard to the credentials of the founders, the nature of theproduct or services to be developed, the market to be saved & the financing required. If satisfied,he will invest his own money in the equity shares of the new company, known as the assistedcompany. In addition to money, managerial & marketing assistance may also be providedthat is, the venture capitalist not only provides funds but also on line operational advice. In short,he identifies himself with the project as much as the innovator promoter & as such works hard toaccomplish ambitious targets & consequents higher appreciation of his capital.Indian Position: In India, most project financing schemes require at least 25 per cent of theproject cost to be contributed by the promoters, while the latter can raise barely 5-10 percent. Forlong, there were a few agencies such as IFCI’s subsidiary company, Risks Capital And TechnologyFoundation of India, which provides finance to bridge the shortfall in the promoter’ contribution,but they could fulfill the requirements of a great many budding entrepreneurs. As results ofpromoters not being able to bring in those vital initial inputs of money, many of their goodprojects were hanging fire. Venture capital could remedy this situation as well.
  18. 18. A beginning was made in this direction by the setting up of venture capitaldivisions under the aegis of ICICI, IDBI & IFCI. Encouraged by the response to technologyfinancing, ICICI floated a separate company ---Technology Development and InformationCompany of India (TDICI) includes, apart from venture capital financing, technology, consultancyas well as entrepreneur escort services such as marketing, business management, vendordevelopment etc. The successful operation of this fund will hopefully spark off some interest fromthe private sector, which will then consider entering this line of activity. Ultimately, it is only whenventure capital financing becomes more broad-based and widespread that it will truly taking rootin economy. In tune with its tradition of pioneering new ideas, ICICI deviated from the beaten pathto usher in an unusual type of financial support. Addition to equity participation (up to maximumof 49 percent) undertaken by typical venture capital companies, TDICI offer the conditional loans.The entrepreneur neither pays interest on it nor does he have to repay the principal amount. If theventure capital succeeds, TDICI recoups its investment in the form of royalty on sales whichranges between two and eight percent. On the other hand, if the venture fails to take off evenafter five years TDICI will consider writing off the loan.Public financing agencies : It is to be noted that the floating venture capital companies are the financialinstitutions or banks (the Andhra Pradesh Industrial Development Corporation, Canara bank andothers). This can be directly attributed to the Government guidelines, which restrict private sectorparticipation in venture capital funds to a maximum of 20 percent. But if the concept is to make a mark in the economy it needs private sectorinitiative and not institutional or government patronage. In fact, herein lies the strategicsignificance of the venture capital. It paves, the way for the private sector to share the burden ofindustrial finance, particularly risk finance with the public sector. The activities of the venture capital fund of ANZ Grindlays bank include makingequity investments in new companies, which may or may not involve any new technology or othersuch related risk. This activity of the direct subscriptions by financial institutions and banks hasbeen going on for decades and cannot be termed as venture capital activity. The difference in ANZGrindlays bank activity id one of the nomenclature and not of means of financing. Also, on thewhole, venture capital is provided more in the nature of mezzanine loans than equity.Private Agencies: One Venture Capital fund set up the private sector in India is Credit CapitalVenture Capital (India) or CVF for the short, the principal shareholders of which are Credit CapitalFinance Corporation, Bank of India, Asian Development Bank, and CommonWealth DevelopmentCorporation. Another set up in the private sector jointly by the ICICI 20th Century FinanceCorporation, bank of Baroda, Asian development Bank and Asian Finance and investmentCorporation is the 20th Century Venture Capital Corporation Ltd. One reason why privatecapitalists are generally shy may be the high rate of capital gains tax applicable to the profit ofVenture Capital Funds. Though the guidelines provide for a concessional rate of capital gains tax,the move can hardly be deemed as a ‘concession’ in view of the enormous risks involved in theactivity.Policy Initiatives: The idea of providing venture capital finance (VCF) to the new entrepreneurs inIndia was mooted by the then finance minister in the long-term fiscal policy announced by him in1985. A fresh reference to the “difficulties faced by new entrepreneurs in raising equity capital”
  19. 19. was made by the finance minister in his 1988-89 budget speech and detailed guidelines forproviding such finance by registered companies or funds were announced. In India, the government has set up a Venture Capital Funds with a contribution of Rs.10crore. The fund was brought into operation on 1st April 1986 by the IDBI. For financing this fund, a levy was imposed on all payments made by Indian industries for the acquisition of foreign technologies. This fund finance projects with minimum and maximum project costs of Rs.5lakhs and Rs.250lakhs respectively. Grindlays Bank has set up the Indian Investment Fund to Finance the start up cost of entrepreneurs. This fund was subscribed mainly by Non-resident Indians. The Government of India also announced on 1989 a National Equity Fund for financing small-scale entrepreneurs setting up units in rural areas and urban areas population of below Rs.5lakhs. Institutions like ICICI,IFCI,SBI Capital Markets Canbank Financial Services and others have also set up their own funds for providing Venture Capital Finance. However, in general, the experience is that the Indian financial institutions are yet to reorient their financing policies to meet the Venture Capital maxims. The traditional conservation of these organisations makes their approach unacceptable. They fail to recognise that normal criteria of debt-equity ratio, existence of security etc., are not the criteria for evaluating venture capital projects. The policy of Government with regard to Venture Capital Funds has changed in 1999-2000. The Government has allowed a free hand and transparency for I.T. Venture Funds Foreign Funds are allowed freely into these Funds.Difficulties in India:Fundamentally, there are no private pools of the capital of finance risk ventures in India. Thefinancial institutions perforce occupy a dominant position in the provision of long-term capital toIndian industry. They and the State development agencies do provide limited amount of equityfinance to assist the development of new business but there is no private, professionally managedinvestment capital sources. There are no private sector insurance companies or the pension fundsgathering regular premium income and virtually no private banks willing to devote a small portionof their resources to the venture capital niche. It is unlikely that such enterprises will be created inthe foreseeable future to mobilise private saving for investments. As an answer the situation,mutual funds and investment trusts are permitted to set up and to commit the part of theirresources to the venture capital area. As a part of the broader equity investment fund, givensuitable standards of the valuation for unquoted investments, it should be possible for the fundmanagers to commit the portion of there portfolios to venture capital situations. The participationof the private sector in venture capital funding, as it has come to be defined in the narrow Indiancontext, is not possible in isolation from the opportunity to develop a broadly spread investmentbusiness.Tax Treatment: The tax treatment of the venture capital funds in India is ungenerous and fallswell short of what is required. Whereas the Mutual Funds established by the governmentcontrolled financial institutions and nationalised commercial bank suffer no tax on either incomeor capital gains, a venture capital fund would suffer at 20 per cent on dividend income and asimilar rate on long-term capital gains. Given an adequate investment spread and tax incentives,mutual funds step into the early stage financing arena, professionally assess and the monitorinvestments assist the launch of new medium size businesses. SBI Mutual Fund is reallyundertaking investment work with its ‘brought deals’. The creation of more funds to participate inthis area of the market is now clearly seen. Early stage financings could then be syndicatedbetween number of professionally managed funds and sound, competitive situation between themmight also be created. The Government has since 1995-96 been treating the venture funds like Mutualfunds for tax benefits and brought them under Regulation of SEBI. The SEBI has set out the
  20. 20. guidelines for their registration and control by itself a code of conduct for them to operate as inthe case of capital market mutual funds and for their investment and operations on the fund. Inthe Central Budget for 2000-01 the income of the Venture Capital Fund is taxed at the rate of 20%,although the dividends declared in the hands of the investors are tax-free.Need for Growth of Venture Capital: There is need for encouragement of risk capital in India, as this will widen theindustrial base of, high-tech industries and promote the growth of technology. The initial step might be to permit the launch of the mutual fund by all thosebanks authorise to conduct business in India, at the same time extending the investment range ofsuch funds to embrace unquoted stocks. Liberating the capital market would bring greater depth to the capital market as awhole, introducing more genuine investors of substance with long time horizons, provide avenuesfor the institutions to realise their equity portfolios more easily (freeing funds for more newinvestments), and generally improve market liquidity. This would improve equity cult. So moves towards a freer and less regulated market are important in consideringmeasures to simulate the entry of the private sector into the risk capital formation.Latest Policy Charges: In the year of 2000 of new millennium, the I.T. industry along-with many start upindustries like Telecom, Biotech, Multimedia etc…have experienced rapid growth potential butwith Scarcity of the Venture Funds. To encourage Venture Capital Funds to grow rapidly to helpthese industries, the Government has announced the following measures early in 2000. 1. SEBI to be the sole authority for the regulation of Venture Capitals. 2. The single window clearance facility is extended without the need for going for clearance with the government RBI and I.T. Authorities. 3. In the first Millennium Budget, 2000-2001, Venture Capital have got “on par” Status with Mutual Funds for the purpose of the tax treatment under section 10(23D) of I.T. Act. Tax exemption is granted to Venture Capitals like those of Mutual Funds, so that double taxation is avoided and tax is levied only at one level, namely at the hands of investors. 4. The IPO norms are liberalised for the Venture Capital Funds for the purpose of listing. Appraisal and finding are allowed to extent of 10% of the equity capital of a start-up company. The condition of 3 years track record of profitability is waived. Even a public issue of 10% of paid up capital is enough for the I.T companies for the purpose of listing. 5. The Government have set up a separate ministry of I.T and started an I.T Venture Fund of Rs.100crores for the financing new start up I.T projects. 6. Venture Funds were set up by ICICI, UTI, IDBI, Tatas etc.Venture Capital Vs. Mutual Fund In the matters of tax, venture capital funds and mutual fund are kept on par.Foreign Venture funds are given a free hand tom flow in for the investments permitted for foreigninvestment. During the first quarter of 2000, about $17 billon have flowed in as Venture Fundsmostly invested in the technology based small companies, according to a Survey Conducted byprice waterhouse coopers (PWC) Company. Among the measures to promote the capital market banks are now allowed toinvest in equities and bonds on a discretionary basis and to invest in Venture Capital Fundsbeyond the permitted ceiling of 5% of their funds in shares and securities of the companies during1999-2000.
  21. 21. Rules on Venture Capital Funds: The norms of Venture Capital Funds are liberalized early January 2000. While earlier, a Venture Capital Funds could not acquire more than 40% of equity of a high risk business or a start up company, now there is no such ceiling and Venture Capital Funds is free to invest as it likes. However, the only restriction that remains is that the Venture Capital Funds cannot invest more than 25% of its own Fund base in any one company. Now Venture Capital Funds can hold upto even 100% of equity of a start up the company as that ceiling of 40% is now removed, but it can now hold up to 25% of its own fund in any company’s equity. Foreign Venture Capital is made eligible to participate in book building process since July 2001. There is no lock in period for the pre issue share capital of an unlisted company held by Venture Capital Funds and FVCFs. Mutual Funds are now eligible to invest in units of the Venture Capital Funds, like investments in listed and unlisted securities. There has been a considerable liberalisation in investments by Venture Capital Funds as much as investments in Venture Capital Funds. Merchant bankingWhat is Merchant Banking? Merchant banks are issue houses rendering such services to industrial projects or corporateunits as floatation of new ventures and new companies, preparation, planning and execution ofnew projects, consultancy and advice in technical, financial, managerial and organisational fields.A number of other function such as restructuring, revaluation of assets, takeovers, acquisitions,etc, are also undertaken by them. A major function of merchant banking is the issue management. The issue can be publicissue through prospectus, offer of sale, or private placements etc.Issue Management The issue management involves the following functions in respect of issue throughprospectus:(a) Obtaining approval for the issue from the SEBI(b) Arranging underwriting for the proposed issue.(c) Drafting and finalizing of the prospectus and obtaining its clearance from the underwriters,stock exchanges, auditors, solicitors, Registrar of Companies and other necessary consentsrequired for filing the prospectus.(d) Drafting and finalization of other documents such as application forms, stock exchanges.(e) Selection of the registrar to the issue, printing press, advertising agencies underwriters,brokers and bankers to the issue and finalisation of the fees and charges to be paid to them. (f) Arranging through the advertising agency the press, brokers and investors conferences. (g) Co-coordinating the printing, and advertisements relating to the issue, and work of the registrars to the issue, the receipt and processing of applications and preparation of the basis ofallotment, negotiation of the same with the stock exchanges and preparation of register ofallotment.In the case of management of debentures, apart from the Managers to the issue have to do thefollowing things:(a) To finalize the terms of the issue which will make the debenture issue attractive; and(b) To assist in the finalisation of the relative security or mortgage documents and obtainingapproval there to from the Companys solicitors and trusteesOther Functions
  22. 22. Merchant banks in foreign countries undertake a larger number of activities. They operateboth in the money market and capital market, undertake direct and indirect lending portfoliomanagement for institutions, trusts, charities, etc, funds management for existing companies,underwriting for new and old companies etc. They are also active in the money market anddiscount market operations in undertaking bills discounting and investing the short-term funds intreasury bills, commercial bills and other money market instruments. In India, these functions arecarried on by banks themselves with the result that their merchant banking divisions confine tounderwriting, consultancy, new issue business, involving management of issues and relatedactivities. The Indian merchant banking is still in its infancy and their activities are, therefore,limited to a few selected activities of new issues market at present such as project planning,financial consultancy, advice and planning and execution of these projects, involving thepreparation for the public issue, observance of necessary formalities for such issued applicationsto SEBI, RBI and for listing on the stock exchange, collection and allotment of share applicationmoneys, underwriting etc .sOffer of Sale Usually, when the closely-held companies, whose shares are not listed on the stock exchange,approach the financial institutions for assistance for the expansion of their existing operations ordiversification, the financial institutions stipulate a condition that the company should get itsshares listed. Where the capital base of the company is already large and issuing further equitycapital is not justified from the servicing angle, the promoters can offer such part of their existholding for sale through a letter of offer to the members of the public as Is necessary to get theequity shares of the company listed on the stock exchange. Although the letter of offer is notgoverned by the provisions of the Companies Act, 1956, in practice, the letter of offer contains allthe similar provisions which are to be found in the prospectus. The offer for sale must give all material particulars relating to the company as if it were aprospectus issued under the Companies Act. In particular, it should include information regardingthe shares on offer and the terms of sale, its capital structure, and capitalisation of reserves, anyrevaluation of assets or schemes of arrangements or reorganizations, last five years profit andloss account summarised accordance with the prescribed listing requirements. Any document by which the offer for sale to the public is made shall, for all purposes, bedeemed to be a prospectus issued by the company and all enactments and rules of law as to thecontents of prospectuses and as to the liabilities in respect of statement’s or omissions fromprospectuses otherwise relating to the prospectus, shall apply as if the shares or debentures hadbeen offered to the public for subscription and as if the persons accepting the offer in respects ofany shares or debentures were subscribers for those shares or debentures. The said letter of offer will have to be signed by the persons offering the shares or debenturesfor sale in the same manner as the directors of the company sign the prospectus in terms ofSection 60 of the Companies Act. The offers collectively and individually accept full responsibility for the accuracy of theinformation given in this offer of sale and confirm that to the best of their knowledge and beliefthere are no other facts, the commission of which makes any statement in the offer for salemisleading, and they further confirm that they have made all reasonable inquiries to ascertainsuch facts. The offers have to certify that neither the stock exchange to which an application for officialquotation is made nor the Central Government or SEBI has any responsibility for the financialsoundness of this offer, or for the price at which the offer of sale is made, or for the statementsmade or opinions expressed in the offer of sale. The initial issues should normally be at par and if further issues are made at a premium, thishas to be justified by acceptable norms by the merchant bankers.Private Placement
  23. 23. When the financial institutions directly subscribes to the equity/preference shares and/ordebentures issued by the company, the company is said to have privately placed these securitieswith the financial institutions. This does not require either a prospectus or letter of offer. Theterms and conditions subject to which the financial institutions agree to subscribe to the privatelyplaced shares or debentures are usually incorporated in the debenture subscription agreement orthe investment agreement entered into between the financial institutions and the company. The company could, if it so desires, approach, in the place of financial institutions, awell-identifiable body of persons like merchant banks for private placement. The provision of theAct are to be interpreted strictly and therefore, if the company sends the offer to Mr. X and theoffer is accepted by Mrs.X to whom the allotment is finally made, it could deem to be the publicoffer necessitating compliance of requirements of the prospectus.This exercise is, therefore, to be undertaken with great caution to see that the final transfer takesplace only to those for whom the original offer was made. In practice, till recently the companieshardly took any recourse to this mode of private placement of their securities due to theserestrictions. The company has to agree upon the list of persons to whom the offer is to be sent much inadvance and its is thereafter necessary that the company should send offers to the same personsas per the list approved by the Company with a clear-cut instructions to the officers that thesecurities offered are strictly to be subscribed for by them and them alone and the officers are notsupposed to pass on the offer of the company to someone else. He would also ensure that thecompany would receive subscription only from those persons to whom the original offers hadbeen sent by the company and finally, the company would allot securities to the same persons.Services of Merchant Banks Merchant banking is normally considered to be related only to the services associatedwith public issue management but they also offer domestic project finance syndication.Large merchant banks in the country offer a wide range of services. Merchant banks offergenerally the following services. (a) Pre-investment studies for investors: These are in the nature of financial feasibilityexplorations in selected areas of interest of the client. They include such studies forforeign companies wishing to participate in joint adventures in India, and often involve apackage covering advice on the nature of participation and Government regulatory factors. (b) Project finance: Once the decision embark on a particularproject/expansion/modernisation scheme has been taken, assistance in working out acomprehension package for the project funding and pattern of financing is available fromthe merchant banks. They work in close liaison with the client, his technical consultants,and the funding institutions, prepare and submit complete e financial dossiers, andarrange for the various sources of finance. Assistance in legal documentation for thefinance arranged is also provided. (c) Working capital: Finance for working capital, particularly for new ventures, oftenneeds to be syndicated on behalf of the promoters, and merchant banks assist in this aswell. For existing companies, non/traditional sources such as through the issue ofdebentures for this purpose, and others have been successfully tapped by merchantbankers. (d) Foreign currency finance: Of late, India has become increasingly active in theinternational money markets, and this trend is likely to continue. For import of capitalgoods and services from overseas, the arrangement of various kinds of export creditsfrom different countries is also required. In addition to this wide range of services, some of the larger banks are also involved inareas such as the arrangement of lease finance, and assistance in acquisitions andmergers etc.
  24. 24. Why Merchant Banks? The following are some of the reasons why specialist merchant banks have a crucialrole to play in India: 1. Growing industrialisation and increase of technologically advanced industries. 2. Need for encouragement of small and medium industrialists, who requirespecialist services. 3. Growing complexity in rules and procedures of the Government. 4. Need to develop backward areas and states which require different criteria. 5. Exploring the possibility of joint ventures abroad and foreign markets. 6. Promoting the role of New Issue Market in mobilising savings from of public.Functions With increasing industrialisation of the country and the growing emphasis in the FiveYear Plans on industrialisation, merchant banking in India has a very extensive role to play.The National & Gsrindlays Bank was the first to set up merchant banking division in Indiafollowed by the State Bank of India and other banks.Functions of the merchant banking divisions are as follows:1 advice and liaison obtaining consent of the Central and Stat e Government, for theproject if necessary; 2. Preparation of economic, technical and financial feasibility reports; 3. Initial project preparation, pre-investment survey, and market studies; 4. Help in raising rupee resources from financial institutions and commercial banks; 5. Underwriting and also for subscription, if necessary, to the new issues or syndicationof loans, etc; 6. Assistance in raising foreign exchange resources so as to enable the industrialconcerns to import machinery and technical know-how and secure foreign collaboration. 7. Advice on setting up turnkey project s in foreign countries and locating foreignmarkets; 8. Help in financial management and in designing proper capital structure anddebt-equity ratio, etc, for the company. 9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc; 10. Management of investment trust, charitable trusts etc;11. Management aid and entrepreneurial aid (management audit providing designs of thecomplete system, operational research and management consultancy); and12. Recruitment (selection of technical and managerial personnel), etc.Role of Merchant Banks To promote the new issue market there is need for a qualitative improvement in theoffer of new issues both in terms of time taken and the cost of floatation. The time takenfor organising a new issue is between 12 to 18 months and the cost of raising new capitalvaried from 3% to 8% and sometimes even 20%. This has been brought down relatively byspecialised merchant banking institutions by catering to the requirements of both largeand small industrial units. Cost of floatation of equity and preference capital is higher fornew companies than for existing companies, indicating thereby the difficultiesexperienced by new companies in making a new issue. Merchant banks help saving in thecost of new companies and of small companies. The new issue market has not succeeded fully in mobilising savings partly due to thepreferences of the public to company deposits and partly due to low yields on equities ascompared to those on fixed interest securities. There has been a decline in theproportion of share capital in the total capital employed due to the steep rise in the costof new issues. There are certain minimum costs to be incurred in respect of fees tobrokers, promoters expenses, underwriting commission etc, irrespective of the size ofthe project. While bigger companies are able to manage this, small units find it extremelydifficult to meet this minimum cost with uncertain prospects of their own internal
  25. 25. resources in order to avoid the high cost of making public issues.Underwriting The main work of merchant banks relates to underwriting of new issues and rising ofnew capital for the corporate sector. Of the amount underwritten, some part devolves onthe underwriters, which varies depending on the state of the capital market, and theintrinsic worth of the project. The SEBI has made underwritingCompulsory for all issues offered to Public first but later it was made optional. SEBI madeit necessary for merchant bank to undertake or make a firm commitment for 5% of issuedamount to the public.Type of Expertise Required The type of staff required for a merchant bank will depend upon its functions which arethemselves flexible. The merchant bank should have an organisation large enough to dealwith a number of applications at a time. The issue house which acts as the merchantbanker normally pays visits to the companys plant, warehouses, and other physical assetsand if a company is making its first issue, it might secure independent reports fromChartered Accountants, industrial consultants, technical experts etc. The issue house,which is a merchant bank also, requires, plant, management, labour, competitors, profitmargins, taxations, etc. They have to keep ready all the information needed in the form ofdossiers with respect to the affairs of the company generally enquired into by theinvesting public, lending financial institutions and the government. Secondly, a merchant bank has to suggest an appropriate time of issue and provisionalterms. Once these terms are settled the share certificates, prospectus and otherdocuments are drafted by the merchant bank with the assistance of lawyers, accountantsand others. They have to satisfy the Companies Act and other SS requirements of law.Subsequently, the merchant bank may have to get ready the application to the SEBI for thepublic issues. This requires familiarity with the regulations under the Companies Act andthe SEBI guidelines and the procedures to be followed and the authorities to beapproached. The provisions under the MRTP Act regulating monopoly practices and otheractivities of big industrial houses should also be looked into. Thirdly, they may have to make an application to the appropriate stock exchange forquotation and satisfy the stock exchange authorities with respect to the terms of issueand prospectus.Listing requirements are to be observed and familiarity with the stockexchange rules and bye-laws as well as the provisions of the Securities ContractsRegulations) Act would be essential. They may have to advise on the desirability orotherwise of listing on the stock exchange as well as help the companies go through theprocess of getting their shares listed. Advertisements containing all the informationlegally required to be given in the prospectus must be published in all the leadingproposed date of opening and closing, a summary of the company’s business history,balance sheet, etc, to which a reference was made earlier. Once the issue made, the workof the merchant bank relates to arranging for the allotment of shares in consultation withthe company and the stock exchange authorities with the help of Registrars.SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) MERCHANT BANKING -ROLE &FUNCTIONS(a) Authorisation Any person or body proposing to engage in the business of Merchant Banking wouldneed authorisation by SEBI in the prescribed format. This will apply to those presentlyengaged in the Merchant Banking activity, including as Manager, Consultants or Advisersto issues.
  26. 26. (b) Authorised Activity (i) Issue Management (ii) Corporates Advisory services relating to the issue (iii) Underwriting (iv) Portfolio Management Services (v) Managers, Consultants or Advisers to the issue(c) Authorisation Criteria All Merchant Bankers are expected to perform with high standards of integrity andfairness in all their dealings. A code of conduct for the Merchant Bankers is prescribed bySEBI which will take into account the following:(i) Professional Competence(ii) Personnel, their adequacy and quality and other infrastructure(iii) Capital Adequacy(iv) Past track record, experience, general reputation and fairness in all their transactions.(d) Terms of Authorisation (i) All Merchant bankers shall have a minimum net worth of Rs.5 crore.(ii) The Authorisation will be for an initial period of 3 years.(iii) All issues should be managed by at least one authorised to Merchant bankerfunctioning as the Lead Manager or sole Manager. Issue Amount No. of Lead Managers Up to Rs. 50crores Not more than 2 Over Rs. 50 crores not more Not more than 3 Than Rs.100 crores Over Rs.100 crores Not more than 4(iv) The Merchant Bankers shall exercise due diligences independently verifying thecontents of the prospectus. The Merchant Bankers of the issues shall certify to this effectto SEBI.(v) In respect of issues managed by the Merchant Bankers, they would be required toaccept a minimum 5% underwriting obligation in the issue subject to a ceiling of Rs. 25lakh.(vi) Lead managers would be responsible for ensuring timely refunds and allotment ofsecurities to the investor.(vii) The merchant banker’s involvement will continue till the complete on of essentialfollow-up steps including listing of the shares and dispatch of certificates and refund.(viii) The Merchant Banker shall make available to SEBI such information, returns andreports as may be called for.(ix) Merchant Bankers shall adhere to the code of conduct which shall prepared by SEBI.(x) Merchant Bankers to ensure that Publicity / Advertisement material accompanyingthe application form to the issue meets the requirement of GOI/SEBI.(xi) SEBI shall be informed well before the opening of the issue the Inter allocation ofactivities/sub-activities, among lead managers to the issue.
  27. 27. (xii) Merchant Bankers performing or planning to perform portfolio management servicesshall furnish the details in the prescribed format.(e) Classification of merchant Bankers----------------------------------------------------------------------------------------------------------------------- Category Requirement Authorised to Act as (1) (2) (3) -----------------------------------------------------------------------------------------------------------------------Category 1 Minimum Net worth Rs.50 crore Lead Manager/co.manager Adviser/consultant to an issue, Portfolio manager and underwriter to an issue is Mandatory required.-----------------------------------------------------------------------------------------------------------------------(f) Grading of ProspectusGrading of Prospectus will be done by SEBI using the following parameters:(i) Objective description of the project, its status and implementation.(ii) Track record of the promoters and their competence.(iii) Disclosure about Demand - Supply position, Market and Marketing arrangements,Raw materials availability and infrastructural facility.(iv) Disclosure of Risk factors.(v) Objective assessment of Business prospects and profitability.If highlights are provided the following deficiencies will attract negative points:1. Absence of Risk Factor2. Absence of Listing3. Extraneous contents in prospectusThe Maximum grading points of prospectus will be 10 Points CategoryMore than or Equal to 8 +AMore than or equal to 6 but less than 8AMore than or equal to 4 but less than 6BLess than 4 C(g) Penalty Point System SEBI has introduced penalty point system for Merchant Bankers who fail to comply withthe various provisions. The areas of non-compliance/defaults have been categorised intofollowing four categories. The activities are classified within these four categories:
  28. 28. Type Nature Penalty Points----------------------------------------------------------------------------------------------------------------------- I General Defaults 1 II Minor Defaults 2 III Major Defaults 3 IV Serious Defaults 4INVESTOR PROTECTIONIntroduction The term "Investor Protection” is a wide term encompassing various measuresdesigned to protect the investors from malpractices of companies, brokers, merchantbankers issue managers, Registrars of new issues, etc. "Investors Beware" should be thewatchword of all programmes for mobilisation of savings for investment. As allinvestment has some risk element, this risk factor should be borne in mind by theinvestors and they should take all precautions to protect their interests in the first place.If caution is thrown to the winds and they invest in any venture without a properassessment of the risk, they have only to blame themselves. But if there are malpracticesby companies, brokers, etc, they have every reason to complain. Such grievances havebeen increasing in number in more recent years.The complaints of investors come from two major sources: (i) Against member brokers of Stock Exchanges; (ii) Against companies listed for trading on the Stock Exchanges. Besides, there can be complaints against sub-brokers, agents, merchant bankers,issue managers, etc, which cannot be entertained by the stock exchanges as per theirrules. However, complaints against registered sub-brokers can be entertained.Complaints against Members Investors have complaints against brokers regarding the price, quantity etc. at whichtransactions are put through, defective delivery or delayed delivery, delayed payment ornon-payments etc, non-settlement of vyaj badla ducs, non-payment of agreed brokerageto authorised assistants, etc. In the event of default of a member broker, the dues ofclients are also to be looked into. There is a Grievance Cell in many Stock Exchanges which attends to investorcomplaints. Of the total, nearly 95% are against companies and they are more difficult tosettle, as many companies do not attend to the complaints promptly despite remindersand warnings by the stock exchange, in view of the fact that penal powers of theExchange are limited SEBI has been given these penal powers in respect of listedcompanies by an amendment to the SEBI Act in 1995 and many other subsequent aamendments including the latest in 2002.

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