Merchant Banking & Financial Services

Lecture – 1
Financial Services Industry – Development Activity

T H I YA G A R A J R A N G A S A M Y MBA.,PGDED.,PGDRMB (UK)

CONSULTANT – FINZINE ASSOCIATES

ADVISOR – INFINITE SUM MODELING INC

VISITING FACULTY (FINANCE) – PARK GLOBAL B-SCHOOL

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 CONTENTS
 Introduction
 Meaning of Financial Services
 Classification of Financial services Industry
 Emergence and Development of Financial Services in India
 Functions of financial services Institutions
 Factor Affecting Access to Financial Services
 Steps involved in Leasing
 Types of Leasing

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 CONTENTS
 Merchant Banking
 Mutual Fund
 Financial Engineering
 National Securities Depository Limited (NSDL)
 Asset Reconstruction company India Limited
 Challenges of financial services sector
 Issues Management Intermediaries
 Functions of Merchant bankers

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 CONTENTS
 Corporate Counselling
 Project Counselling
 Capital Restructuring Services
 Working capital finance
 Foreign Currency Financing
 Lead Managers
 Maintenance of Books of Records

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 Introduction
 The Development of a sophisticated and matured financial system in
India, especially in the era of Liberalization, Privatization and Globalization
led to the emergence of a new sector known as Financial Services Sector.
 The bundle of Institutions that make up an economy's financial system
can be seen as “ brain of the economy “ providing the bulk of the
economy’s need for many functions.

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 Meaning of Financial Services
 The term financial services in its broader sense refers to Mobilizing and
allocation of savings.
 Financial services also include Financial Intermediaries such as Merchant
Bankers, Venture capitalists, commercial banks, Insurance Companies etc.
 The financial services include all activities connected with the
transformation of savings into investment.
investment

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 Classification of Financial Services Industry
 The financial services Industry can be traditionally classified in two
categories
Capital market intermediaries, consisting of term lending
institutions and investing institutions providing long –term funds.
Money market intermediaries including commercial banks
cooperative banks and other agencies which supply funds for short-term
requirements.
The term financial services include all kinds of organization, which
act as intermediary and facilitate financial transactions of both individual
and corporate customers

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 Emergence and Development of financial services
in India
 Financial services sector is blooming in India and it has passed through various
phases as mentioned below
Initial Phase (1960 -80)
80) Merchant Banking Era
Second Phase ( 1980 – 1990) Investment Companies Era
Third Phase ( 1990 -2002
2002 ) Modern Services Era
Initial Phase : Innovative services like merchant banking, Insurance and lease
finance are introduced at the initial phase.
phase The functions of merchant bankers
start from project appraisal and end at mobilization of funds.

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 Emergence and Development of financial services
in India
 Second Phase : Value added services like over the counter share transfers,
pledging of shares, mutual funds, factoring, discounting, venture capital and
credit rating are introduced in the second phase.
Capital market malpractices have come down due to the introduction of
credit rating services.
 Third Phase : Post liberalization financial services sector introduced new
financial instruments and setup new institutions. During this phase
contemporary issues like depositories, online trading, paperless trading,
dematerialization, stock lending schemes and book building method of stock
issues are initiated.

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 Functions of financial services Institutions
 They help the firm or corporate not only to raise fund but also for efficient
deployment of funds
 They help to construct the capital structure of the company.
 They also do the factoring and forfaiting services.
 They do both traditional services like financing bills discounting and
contemporary services like e-commerce,
commerce, securitization of debts etc.
 The specialized services like credit rating, venture capital, lease financing ,
depository, credit card, housing finance etc.

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 continu
continu…
 The major components in the financial system are
Financial Instruments
Market players
Specialized Institutions
Regulatory bodies
Financial Instruments
Financial instruments in the Indian financial systems may be categorized
into Money market instruments and capital market instruments.

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 continu
continu…
 Money market Instruments
The Instruments which deal in the money market are of short term
nature. Their maturity period usually between 14 and 364 days money market
instruments
Treasury Bills
Bills of Exchange or Trade Bills
Finance bills or promissory note
Commercial paper and Certificate of Deposits

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 continu
continu…
 Capital Market Instruments
The instruments which deal in capital market are of long term
nature. Equity shares, Preference Shares, Debentures, Gilt edged securities,
Zero coupon Bond, Deep discount bond, option bond and derivatives.

Market Players : Commercial banks, finance companies, stock brokers,

consultants, underwriters and market makers.
makers

Specialized institutions are providing financial services in various forms such as

acceptance houses, Discount houses, Factors, Depositories, credit rating
agency, venture capital etc.

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 Factors Affecting Access to financial services
 A number of factors affecting the access to financial services have been
identified these are
 Gender Issues, Age factor, Legal identity, Limited literacy, Place of Living,
psychological Barriers, cultural barriers, social barriers, social security
payments, level of Income , Bank charges, terms and conditions, types of
occupations, caste and religion, wrongful assessment, Employment barriers,
Lack of Opportunities, Owning assets.

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 Steps involved in Leasing
 A Contract of lease provides a person an opportunities to use an asset which
belongs to another person. The following steps are involved in a leasing
transaction.
The lessee identities the need for the equipment and selects the
suppliers.
The lessee approaches a leasing company or lessor to lease the
equipment needed.
After the lease agreement is signed, the lessor request the manufacturer
to supply the asset to lessee.

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 Types of Leasing
 Financial Lease : It is an alternative to borrowing money and buying the
equipment
The machinery is selected from the supplier by lessee based on his
requirement.
The payment for purchase is made by lessor and he is the legal owner
of the machinery.
The risk of obsolescence and responsibility for maintenance are to be
borne by lessee.
Lessee has to pay rent regularly..

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 Types of Leasing
 Operating Lease : It is a rental agreement and its features are as follows
The period of the operating lease is generally shorter than the
economic life of the leased asset.
The lessor bears the risk of obsolescence and responsibility of
maintenance of asset.
SALE AND LEASE BACK : It is an agreement between owner of the asset and
leasing company. The firm sells the asset to the leasing company and leases it
back simultaneously.

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 Merchant Banking
 The term merchant banker was used in relation to a wealthy merchant, who
developed the banking side of one’s business in England.
 Role of Merchant bankers in the capital market
The role of merchant banker in the process if issue management is vital
and his services are broadly categorized as pre-issue management and post
issue management
Pre issue - Obtaining approval for the issue from SEBI, Drafting of prospectus
and getting it approval by various authorities concerned

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 Merchant Banking
 Underwriting, Process of advertisement, Arranging press conferences for
brokers and investors
 Listing of securities in stock exchange
Post issue
Collection of application form
Screening the applications
Deciding allotment procedure
Mailing of letter of allotment
Issue of share certificate
Mutual funds

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 Financial Engineering
 Financial Engineering is the life blood of nay financial ability
Financial engineering is the design, the development and the
implementation of innovation financial instruments and processes
and the formulation of creative solutions to problem in finance.
 Wall street has developed numerous innovative financial
instruments in recent years. These new financial instruments are
classified according to the following traditional categories
Debt Instruments
Equity Instruments
Hedging Instruments

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 Financial Engineering
 Debt Instruments
Commercial Paper : Unsecured short term (up to 270 days) obligations
issued through brokers or directly. The interest is usually discounted. Universal
commercial paper is foreign currency denominated commercial papers that
trades and settles in the united states.
Convertible Bonds : Debt securities those are convertible into stock of
the issuer at a specified price at the option of the holder.
Convertible Bonds with a premium put : Convertible bonds issued at face
value with a put option entitling the bondholder to redeem the bonds for more
than their face value.

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 Financial Engineering
 Equity Instruments
Dutch action Preferred stock is an action in which the securities are sold
at the lowest yield necessary to sell the entire time. Several investment banks
have issued these instruments under such registered name as CAMPS –
Cumulative Auction Market Preferred Stock.
Stock
CMPS –Capital Market preferred stock
It is a convertible money market preferred stock that can be converted
into common stock = FRAPS – Fixed rate Action preferred stock
MAPS - Market auction preferred stock
STARS – Short--term auction rate cumulative preferred
stock

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 Financial Engineering
 Hedging Instruments
A strategy employed in the futures, options and warrants markets to
reduce risk by making a transaction in one market to protect against a loss in
another.
Traditionally a commodity produces (say, a cocoa grower) would agree
to sell his goods at a stated price at a stated time in the future.
Butterfly spread : Option strategy involving two calls and two puts in the
same or different markets with several maturity dates.
Calendar spread : Options strategy that involves buying and selling option on
the same security with different maturities.
maturities

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securities and exchange board of India (SEBI)
 The controlling system was emerged to control the stock market scams.
Hence the SEBI was established in the year 1992 as the regulatory body of the
Indian capital market.
 SEBI has statutory status and governing body of Indian stock exchanges.
 The financial intermediaries who want to deal as stock brokers, share transfer
agents, banker to an issue, trustee of trust deed, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisors in
the securities market must register with SEBI.

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National Securities Depository Limited (NSDL)
.NSDL is the first depository in India, which was established Depositories Act in
the year 1996.
 The purpose of setting up of NSDL is to remove the hindrances of physical
transfer of securities and convert the physical transfers of securities into the
electronic form (demat)
 It receives the securities of depository participants
 It maintains investor holding in the electronic form
 transfer of securities
Bonus and rights issues shares accepted in the form of electronic.

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 Asset Reconstruction Company India Limited
 Asset Reconstruction company India limited is a financial institution which
was established under reserve bank of India under section 3 of the SARFAESI
act 2002.
 It was formed a securitization and reconstruction company to acquire
nonperforming assets (NPA) from financial institutions and bank with the
objective of focused management of these assets and maximization of
recovery.

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 Challenges of financial services sector
 Lack of qualified Personnel : - The expert knowledge is essential to provide
innovative financial services successfully.
successfully The trained and qualified personnel
are lacking in this sector. Lack of professional personnel is impeding the growth
of financial services.
 Lack of Investor Awareness : - The knowledge about the financial products
and instruments is essential to investors for the success of innovative financial
ideas.
 Lack of specialization : - All financial intermediaries are providing all types of
financial services and dealing in different varieties of instrument in india.

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 Issue Management Intermediaries
 The origin of merchant banking is Italy.
Italy The Italian grain merchants provided
fund for commodity traders and cargo owners.
owners
 Their other activities were buying , selling and shipping of goods.
 The new issue market was regulated under the provision of capital issue
(control) act 1947 and rules made under it.
 Many intermediaries who play an important role in the process of selling new
issues emerged.
Merchant Bankers, Lead Managers, Underwriter, Bankers to issue, Brokers to
an issue, Registrars to issue and share transfer agent, debentures

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 Functions of merchant Bankers
 Corporate counselling – Diversification based on the government’s economic
and licensing policies.
Project counselling – Review of project idea, conducting feasibility study and
providing advice for implementation.
 Pre investment studies – Analyzing environment and regulatory factors,
Estimation of demand.
 Capital restructure- Determination of optimum capital structure conforming
to legal requirements.

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 Functions of merchant Bankers
 Credit syndication and project finance – Estimating the total cost of the
project and drawing up a financial plan for the total project cost. Selecting
institutions and banks for participation for financing.
 Issue management and underwriting – is concerned with the activities of
management of the public issues of corporate securities.
 Portfolio management , working capital finance, acceptance of credit and
bill discounting , Merger, Amalgamation and takeover, venture capital and
lease financing, Foreign currency financing, fixed deposits broking and
mutual funds.

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 Any questions ?

Thank you

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