The document discusses the difference between asset-based and fee-based financial services. [1] Asset-based services help raise funds and open investment opportunities through products like leasing, hire purchase, and consumer credit. [2] Fee-based services charge commissions for advisory work like arranging capital issues, mergers and acquisitions, and project advice. [3] While fee-based services do not directly create assets/liabilities, they can become asset-based if guarantees or letters of credit are invoked, with payment liability falling on the bank.

1. SMU
ASSIGNMENT
SEMESTER – 4
MA0042
SUBMITTED BY:
DEVESH NIDARIA (MBA)
ROLLNO:-581125616

2. Q1 Identify the role of merchant banking as financial Intermediaries.
Ans: Merchant banking in India
The need for merchant banking was felt with the rapid growth in number of issues made and
initiated into Indian capital market. The National and Grindlays Bank (NGB) then got the
license from RBI in 1967. Later in 1970, First National City Bank (FNCB) set up a merchant
banking division. As a commercial activity, merchant banking took shape in India through the
management of public issues of capital and loan syndication. During that time the main
services offered by the merchant banks to the corporate enterprises involved management
of public issues and financial consultancy. State Bank of India was the first Indian bank to set
up its Merchant Banking Division in 1972. There was a boom for merchant banking
organisations in the country in mid-seventies as various financial institutions and commercial
banks entered into the field of merchant banking. From 1992, reform measures were
introduced in the capital market. The reform measures included conferring of statutory
powers on the Securities and Exchange Board of India (SEBI) and the repeal of Capital
Issues Control Act. These measures brought about major improvement in the regulatory and
functional efficiency of the market. The measures also enabled the merchant bankers to take
legal and moral responsibility towards the investing public. It includes public sector, private
sector and foreign players. Some of the registered merchant banks in India are Kotak
Mahindra Capital, HDFC Bank, ICICI Bank, IDBI Bank, and so on.
Merchant banking helps with the following:
· Channelise the financial surplus of the public into productive investment prospects.
· Coordinate the activities of intermediaries to the share issue such as bankers, registrars,
underwriters, and brokers.
· Ensure the compliance with the rules and regulations governing the market.
As per the SEBI guidelines, a Category I merchant banker must be a corporate body with a
net worth of Rs.5 Crores and has to compulsorily register with the SEBI in the interest of the
investors. In order to get the registration with SEBI the merchant banker must meet following
requirements:
· Capital adequacy – The merchant banker has to fulfil the minimum prescribed capital
adequacy norms in terms of net worth.

3. · Infrastructure – The merchant banker needs to have adequate infrastructure.
· Expertise – The merchant banker must be professionally competent to undertake
merchant banking business.
· Responsibility – The merchant banker has to make payment of the prescribed fee to
SEBI and also needs to adhere to the obligations, responsibilities and to the code of conduct
prescribed by SEBI.

4. Functions as financial intermediaries
Financial intermediation is a process by which capital is mobilised from a large number of
investors and is made available to all those who need them, mainly to corporate customers.
Merchant banking is a financial intermediary which helps to transfer capital from one who
owns it to those who require it.
Merchant banks invest their capital in client companies and provide fee-based services for
mergers and acquisitions. Many companies approach merchant banks to enhance their
financial stability or to meet an essential capital requirement. Due to their knowledge in
international finances, merchant banks specialise in dealing with multinational corporations.
Merchant banks do not offer regular banking services to the public.

5. Q 2. Describe the issuance process of depository receipts.
Ans Issuance Process of Depository Receipts
A Depositary Receipt (DR) which is traded on a local stock exchange is a type of
transferable financial security. It represents a security, usually in the form of equity that is
issued by a foreign publicly listed company. The DR, which is a physical certificate, permits
investors to hold shares in equity of other countries.
Issue of Indian Depository Receipts (IDRs)
As per the definition given in the Companies (Issue of IDRs) Rules, 2004, IDR is an
instrument in the form of a depository receipt created by the Indian depository in India
against the underlying equity shares of the issuing company. In an IDR, foreign companies
would issue shares, to an Indian depository, which would in turn issue depository receipts to
investors in India. The actual shares underlying the IDRs would be held by an overseas
custodian, which shall authorise the Indian depository to issue the IDRs. The IDRs have the
following features:
· Abroad custodian - Foreign banks that have branches in India require an approval from
Ministry of Finance to act as a custodian. They also require a registration of Indian
depository with the SEBI.
· Consents for issue of IDRs - The IDR issue requires consent from SEBI before the issue
opening date.
· Listing - IDRs will be listed on stock exchanges and will be freely transferable In India.
Eligibility
The following are the eligibilities which the company must fulfil to issue an IDR:
· Capital requirement - The foreign company must have paid up capital and free reserve
of at least USD 100 million, in order to issue IDR.
· Sales turnover of companies - There must be an average turnover of USD 500 million
for previous three years.
· Profits or dividend – Company must have made profits in the previous five years and
must have confirmed dividend of at least 10 percent for each of the previous year.
· Debt equity ratio – The pre-issue debt equity ratio must not be more than 2:1.

6. · Level of issue – The issue during a particular year must not go beyond 15 percent of the
paid up capital plus free reserves and the size of issue must not be less than Rs. 500 million.
· Redemption – The IDRs will not be redeemable into original equity shares before one
year from the date of issue.
· Valuation – The IDRs will be valued in Indian rupees, irrespective of the value of original
shares.
· Profit – In addition to other opportunities, IDR will be an extra investment opportunity to
Indian investors for overseas investment.

7. Q3. Explain the operational guidelines that need to be followed by
a merchant banker.
Operational Guidelines
Let us now understand the operational guidelines issued by the SEBI for the
standard disclosure of the offer document.
Submission of draft and final offer document
First, the lead merchant banker files the offer documents of size up to
Rs. 50 crores with the regional office of SEBI under the jurisdiction of the registered
office of the issuer company. Then the lead merchant banker or stock exchange
makes the draft offer document available to the public.
The lead merchant banker makes ten copies of the draft offer document available to
the Board, and 25 copies to the stock exchange(s), where the issue is proposed to
be listed. Within three days of filing the offer document with registrar of companies or
the stock exchange(s), the lead merchant bankers submits two copies of the final
printed copy of the offer document to dealing offices of the Board and one final
printed copy to the primary market department, SEBI, and head office.
The lead merchant banker also submits a computer floppy containing the final
prospectus or letter of offer to the primary market department, SEBI, and head office
within three days of filing the final prospectus or letter of offer with the registrar of
companies or concerned Stock Exchange.
While offer documents are filed with any department or office of the Board, the
details like registration number, date of registration or renewal of registration, details
of any enquiry or investigation conducted by SEBI at any time, penalty imposed by
stock exchange, and the date of expiry of registration will be given by the lead
merchant banker in the forwarding letters.
Instructions on post-issue obligations
The merchant banker ensures compliance with the following post-issue obligations:

8. Association of resource personnel
A public representative nominated by the Board will be associated with the process
of finalising the basis of allotment in case of over-subscription in public issues. The
lead merchant banker informs the nominated person about the date, time, venue and
other details with regard to the process of finalisation of basis of allotment.
The expenses of the public representatives associated in the allotment process of
oversubscribed issues will be borne by the lead merchant bankers and recovered
from the issuers.

9. Redressal of investor grievances
The merchant bankers assign high priority to investor grievances and take all
measures to minimise the number of complaints. The lead merchant banker sets up
proper grievance monitoring and redressal system in co-ordination with the issuers
and the registrars to an issue, and takes all steps to resolve the grievances as soon
as possible. The merchant banker has to actively associate with the post-issue
refund and allotment activities and regularly monitor investor grievances emerging
there from.
Submission of post issue monitoring reports
The lead merchant banker submits the post issue monitoring reports in duplicate
within three working days from the due dates either by registered post or delivers it
at respective regional offices or head office.
The lead merchant banker sends a copy of the report to the Board’s head office,
Mumbai stating the location where the regional office of the Board has dealt with the
offer document.
During the intervening period of the reports, the lead merchant banker informs the
Board regarding important developments about the particular issues handled by
them.
Issue of No Objection Certificate (NOC)
The issuer companies deposit 1% of the amount of securities offered to the public
and/or to the holders of the existing securities of the company with the regional stock
exchange based on the listing agreement of the stock exchanges. The deposit
amount can be released by the concerned stock exchange only after obtaining an
NOC from the board. The issuer company to the board submits an application for
NOC in the required format.
Registration and renewal of registration of Merchant Bankers
Merchant bankers make the application for renewal of certificate of registration as
per Regulation 9 of SEBI.

10. The renewal application for the certificate of registering as a merchant banker
provides a statement that highlights the changes in the information submitted to the
Board in an earlier registration. The earlier registration is accompanied by a
declaration that there will not be any further changes in the statement.
Registration with Association of Merchant Bankers of India (AMBI)
The registered merchant bankers will inform the board of members of their
registration with AMBI, accompanied by relevant details.

11. Q 4 Explain the basic features of securities lending and borrowing
scheme.
Ans: Securities lending and borrowing
To provide necessary momentum to short sell, a scheme for Securities Lending and
Borrowing (SLB) was introduced. With the introduction of short selling by institutional
investors, a full-fledged security lending and borrowing scheme was introduced.
The following are the characteristics of the scheme of securities lending and
borrowing:
· Eligibility – Under the Securities Lending Scheme (SLS), 1997 the securities
transacted in F&O segment are authorised for lending and borrowing. The scheme is
open for all market members in the Indian securities market.
· Operation – The scheme is operated on an order-matching, screen based,
automated platform, provided by the Approved Intermediaries (AIs). This platform is
independent of other trading platforms.
· Participation – The scheme permits participation by all sections of investor. This
included retail, institutional and so on. The AIs sets up the platform for lending and
borrowing which is accessed by the borrowers and lenders through the clearing
members (CMs), banks and custodians who are authorised by the AIs. For the
authorisation of AIs, the AIs, CMs and the clients enter into an agreement. This
agreement specifies the rights, obligations and responsibilities of the parties to the
agreement.
· Agreement – The agreement consists of the basic conditions for lending and
borrowing of securities that is recommended in the scheme. The AIs also include
appropriate conditions in the agreement for proper execution, settlement of lending
and borrowing transactions and risk management. The roles of the AIs, CMs and the
clients are given in the agreement between the AIs, CMs and clients. The first part of
the agreement is between the AIs and the CMs .The second part of the agreement is
between the CMs and the clients.

12. · Identification – The AIs allocates unique identification (ID) to each client which is
mapped to the Permanent Account Number (PAN) of the clients. The AIs ensures
that a client does not obtain multiple client IDs by placing systematic safeguards.
· Tenure – The tenure of lending and borrowing is fixed as standardised contracts.
· Settlement – The settlement of the lending and borrowing transactions is
independent of normal market settlement. The settlement cycle for the scheme is
based on T+1. The abbreviation T+1 denote the settlement date of security
transaction date plus one day. The netting of transactions at any level is not
permitted as settlement of the lending and borrowing transactions is done on a gross
basis at the level of the clients.
· Risk management systems – The AIs frame suitable risk management systems
to provide guaranteed delivery of securities to the borrower and return of securities
to the lender. The AIs conducts an auction for obtaining securities if the lender or
borrower fails to return securities to the AI.
· Position limits – AIs in consultation with SEBI decides the position limits at the
level of market, CM and client.

13. Q 5. Discuss the difference between asset and fee based financial
services.
Ans: Financial Services
Financial services are a very important part of the financial system. Financial services enable
mobility and allocation of savings through the transformation of savings into investments. A
well functioning financial system provides better financial services which empowers
individuals, integrates with the economy, contributes to development, and provides
protection against economic shocks. Financial services are offered by specialised institutions
which help the client to raise funds, manage funds, and transform savings into investments.
Financial services are classified into two categories based on the asset creation function of
these services
· Fund based or asset based category and.
· Fee based or advisory based category.
We will study these financial services in the following sections of this unit.
Asset or fund based
Asset based financial services facilitate corporate and other business entities to mobilise
resources at lower rates and open up investment opportunities with enhanced returns. These
services enable the corporate institutions, in particular, to reject the traditional bank finance
and opt for the more competitive financial market. The debt market enables a borrower to
organise his borrowings and structure the repayments to match future cash flows. The
investment options have widened significantly to enable the corporate entities to use their
surplus cash in short-term maturities and increase the revenue. The agreement to asset
based securities is facilitated by financial intermediaries through fee based services.
The asset based financial service has emerged as an important supplementary source of
finance in the industry. The following are some of the asset based financial services:
· Leasing – Leasing is a contractual arrangement or transaction in which a party owning an
asset provides the asset for use to another party over a certain period of time in return for
rent.

14. · Hire-purchase – It is a mode of financing the price of the goods to be sold on a future
date. The goods are let on hire with an option to the hirer to purchase them
· Customer credit – Consumer credit includes all asset-based financing plans offered to
individuals for acquiring durable consumer goods. The main suppliers of consumer credit are
multinational banks, commercial banks and non banking finance companies.
· Factoring – Factoring is a fund-based financial service that provides resources to finance
receivables as well as facilitates the collection of receivables.
· Forfaiting – Forfaiting is financing of receivables arising from international trade.
· Bill discounting - Bill discounting is encashing or trading of bills at less than its par value
and before its maturity date.
In the next section, we will discuss the various types of fee based corporate financial
services offered by the financial intermediaries
Fee based or advisory
Fee based financial services are not used to create assets or liabilities. These financial
services facilitate certain financial functions such as managing capital issues, making
arrangements for the placement of capital and debt instruments, and arrangement of funds
from financial institutions. They also undertake the responsibility of getting all government
and other clearances. In addition, this sector does a large number of other services like
rendering project advisory services, plan mergers and acquisitions, and guiding in capital
restructuring to their clients.
In fee based services, the intermediaries charge fees for their financial services, like
merchant banking services, assisting in mergers, stock broking and so on. The following are
some of the fee based financial services:
· Issuing of Letters of Credit (LC) – LCs successfully complete their purpose to facilitate trade
by substituting the credit of the bank for the credit of the customer. There are mainly two
types of letters of credit - commercial and standby. The commercial letter of credit is the
primary payment mechanism for a transaction, whereas the standby letter of credit is a
secondary payment mechanism.
· Issuing Letters of Guarantee (LGs) – LGs can be with or without collateral security deposit.
While there are different forms of LGs in the context of business usually, Letters of guarantee
are concerned with providing safeguards to buyers that suppliers will meet their obligations

15. and are issued by the customer's bank depending on which party seeks the guarantee. The
bank essentially becomes a co-signer for the buyer. It pays the seller only if the buyer cannot
pay and so the initial buyer-seller agreement depends on the seller's credit.
· Other services – The other important fee based financial services generally offered by
banks and non banking financial companies include cash management services, foreign
exchange services, merchant banking services, registrar, underwriting, custodial services,
and credit rating services.
For these financial services the bank will charge fees. However, they are associated with
risk. For example, in the event of invocation of guarantee or letters of credit, the payment
liability immediately falls on the banks and then becomes a fund based. It will of course have
recourse against the defaulter in whose favour the bank has issued the LC or LG

16. Q 6. Describe accounting and reporting for operating lease in detail.
Ans: Accounting and reporting for operating lease
Let us examine the operating lease in the financial statements of lessees.
The entire payment is charged to the profit and loss account. IAS 17 requires the
rental to be charged on a depreciation basis over the lease term, if the payments are
not made on such a basis. If the term of the lease requires a heavy initial payment, a
percentage of the payment can be treated as prepaid expense. Since the lessee will
not consider the risk of ownership, the lease expenditure is treated as an operating
expense in the income statement; the lease does not affect the balance sheet. The
operating lease will not show up as part of the capital of the firm.
A lease agreement allows the use of an asset, but does not convey rights similar to
ownership of the asset. The accounting treatment for an operating lease is simple for
both the lessor and the lessee. The lessee has acquired an operating expense, so
the lease rental to be paid is written off in the profit and loss account. The lessee will
have to disclose in the notes to the accounts the total amount charged in the year
and the total amount of the payments to which the entity is committed at the year
end. The lessor has made revenue from renting out the asset and consequently
recognises the lease rental receivable as income in the profit and loss account.