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© Benefits and Drawbacks of Forfaiting
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Bill Discounting
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____ FINANCIAL SERVICES © 1a -4
Financial services refer to services provided by the finance

industry ,
The financial services industry covers a broad range of organizations
that deal with the management of money. Banks, Insurance (1
companies, credit card companies, consumer finance Companies,
/
financial planners and advisers, stock brokerages, merchant ban
ker, l
investment funds, venture capital, hedge funds, mutual funds
ar (i
some of the organizations within the financial services industry.
Financial services are concerned with the design and del
ivery ot
advice and financial products to individuals and businesses within
the above referred areas.
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Introduction to Traditional Finany ial Services ;
Banking
Insurance Capital
Markets
FINANCIAL
SERVICES
Venture
Mutual
Capital Funds
Merchant
Banking
Fig. 1 : Financial Services
Definition
As per Section 65(10) of the Finance Act, 1994, ” banking and financial
services’ means the following services provided by a banking
company or a financial institution including a non banking financial
company, Viz,
(i) financial leasing services including equipment leasing and hire
purchase by a body corporate
(ii) credit card services

(iii) merchant banking services
(iv) securities & foreign exchange broking
(v) asset management including portfolio management, all forms
of fund management, pension fund management, custodial
depository and trust services, but does not include cash
management,
(vi) advisory and other auxiliary financial services including

investment and portfolio research and advice.
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\
4\, Innovative Financial Services
(FYBAF: SEM-IL, TYBMgg, 1b
Pion of Financial Services/Scope of Fina, /
Services Sy in
TI
The scope of financial services is very wide. This is because iti, yA.
a wide range of services. % 7
The functions of financial services can
be broadly ClasSifieq Intg ;
(a) Fund based services (or asset based services) and : L
(b) Non-fund based services (or fee-based services) -
(a) Fund Based Services tn

The fund based or asset based services include the following. 8.
Il. Underwriting 9.
2. Dealing in secondary market activities It
I. Participating in money market instruments like : 11
(Commercial Papers), CDs (Certificate of Deposits) etc A 17
4. Equipment leasing or lease financing 12
9. Hire purchase n
6. Venture capital *
/. Bill discounting i»
8. Insurance services 7
9. Factoring
10. Forfaiting
11. Housing finance
12. Mutual fund 2
(b) Non-fund Based Services
The financial service companies or fina
ncial intermediaries provid
services on the basis of non-fund activities al
so. Such services4
also known as fee based services.
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Introduction to Traditional Financial Services
5
The non-tund based services include
the following:
l. Securitisation
Merchant ban King

1-3
Credit rating
£43
4. Loan syndication
5. Project advisory services
7. Services to foreign companies and NRIs
8. Porttolio management
9, Merger and acquisition
10. Capital restructuring
11. Debenture trusteeship
12. Custodian services
13. Stock broking

The most important tund based and non-fund based services may
be briefly discussed as below:
Asset/Fund Based Services

A. quipment leasing/Lease financing; A _ is an agreement
under which a firm acquires a right to make use of a capital
asset such as machineryon payment of an agreed fee called
lease rentals), ‘The person or the company which acquires the
rightis knownas lessee, He does not get the ownership of the
asset. He acquires only ‘the right to use the asset:‘The person or
the company who gives the right is known as lessor. )
=!
-
Hire purchase and consumer credit:| Hire purchase is an

alternative to leasing. Hire purchase is a transaction where
goods are purchased and sold on the condition that payment is
made in instalments w hich includes cash price and interes=
The buye r gets only poss essi on of good s, He does not g
OW nership, He gets ownership only after the payment of the
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M - I L , T Y B M S. Sta, st
[Innovative Financid I Se
pices (FYBAF : SE
6
-anv instalm ent, ek h
.
last instalmentJIE the buyer
fails to pay an) Introduction to Traditional Financial Services
aj
can repossess the goods. the happening of certain event for a payment of consideration.
£” . P oo of bill is fund based ¢ It is a contract between the insurer and insured under which
en ce companies. In the case ca the insurer undertakes to compensate the insured for the loss
ee _— rot
a SDE ified period, the hold In, arising from the risk insured. In fact insurance is a device by
Service Pe = 1
bill which is payable aftera SPE"
attor
EF q er which a loss likely to be caused by uncertain event is spread
ait ti aturity or due date, if he is In neec of Mone ey
over a large number of persons who are exposed to it and who
is a ade bill with his banker. ane at — Q a i voluntarily join together against such an event, The document
oy nt in
amountas a discount, the ba nker credits the net am which contains all the terms and conditions of insurance (i.e.
account. Thus, the bank purchases the bil] th,
customer's the written contract) is called the ‘insurance policy’. The amount
credits the customer's account with the amount of the bin for which the insurance policy is taken is called ‘sum assured’.
s payment to by
discount. On the due date, the drawee make The consideration in return for which the insurer agrees to make
over
banker. If he fails to make payment, the banker will rec good the loss is known as en 7 as m’. This premium
amount from the customer who has discounted the bill Th is to be paid regularly by the insuretL It may be paid monthly,
discounting of bill means giving loan on the basis of the seo, zarterly, half yearly or yearly
of a bill of exchange.
Factoring: Factoring is an arrangement under which the factor
Venture capital: Venture capital refers to capital hich j purchases the account receivables arising out of credit sale of
A
) It involy
available for financing the new business venturés goods/services and makes immediate cash payment to the
lending finance to the growing companies as well t is I supplier or creditor, Thus, it is an arrangement in which the
investment ina highly-risky project with the objective o earnin account receivables of a firm /client are purchased by a financial
high rate of TY In short, venture capital means long wg institution or banker. Thus, the factor provides finance to the
isk capital in the forny of equity finance. client /supplier in respect of account receivables. The factor
undertakes the responsibility of collecting the account
5. / Housing financeHousing finance simply refers to provid; receivables. The financial institution / factor undertakes the
finance for house building) {t emerged as a fund based financig isk. The factor charges a fee for these services.
service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988 It 1s an apex housing finance” a Forfaiting: Fortaiting is a form of financing of receivables
institution in the pet os now, a number of SPecialiseg relating to international trade. It is a non-recourse purchase by
financial institutions/companies have entered in the'fielg of a banker or any other financial institution of receivables arising
housing finance) Some of the institutions are HDFC, Lc from export of goods and services. The exporter surrenders his
Housing Finance, Citi Home etc.) right to the forfaiter to receive future payment from the buyer
2 to whom goods have been supplied. Forfaiting is a funding
S$ Insurance services: Insurance isa contract between two Parties method that helps the exporter sell his goods on credit and yet
( One party is the Insured and the other party is the insure receives the cash well before the due date. In short, in forfaiting
Ynsured is the person whose life or property is insured with the: arrangement, a forfaitor discounts an export bill and pays ready
insurer./Nhat is, the person whose risk is insured is called cash to the exporter.
insured, Insurer is the insurance company to whom riskis
transferred-by the insured, /T hus the person who insures the 9, Mutual fund: Mutual funds are financial institutions which
risk of insured is called ifisurer. It is a contract in which the mobilise savings from the people and invest them ina mix of
insurance company undertakes to indemnify the insured on corporate and government securities in debt and equity market.
The mutual fund managers manage this portfolio of securities
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Innovative Frnanctal S¢ pices

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and eam in Introduchon to Traditional Financial Services g
The income is eventually passed on to the mutua] fur By 5 Loan syndication: Loan syndication is an arrangement where
/ holders. \ a group of banks participate to provide funds fora single loan.
d Financial Service One of the banks acts as a lead manager. This lead bank is
(¥) Non-Fund Based/Fee Base : usually decided by the corporate enterprises. Thus, loan
Merchant banking:(The merchant banker acts 2 syndication is very similar to consortium financing.
. $3 $A main job is to transfer capi $ Ss :
interme arm main job Fy " ae FR tal from thog., 7 6. Securitisation of debt: Loans given to customers are assets for
own it to those who need 1h foc ee a rchant banker acts Y the bank. They are called loan assets. Unlike investment assets,
- 5 | + a - :
intermediary which understands the requirements of 9 loan assets are not tradable and transferable. Thus loan assets
promoters on the one hand ~ financial institutions are not liquid, The problem is how to make the loan ofa bank
a Ke spon ae Eee : Mere a uid. - ea ED oy ea! by pero the oe
ers defined as, V $ ‘din 1 busing into marketable securities. [his is done throug € Process oO
of issue management either by making arrangements Teas securitization. Securitisation is a financial innovation. It is
selling, buying or subscribing to securities or acting as m le conversion of existing or future cash flows into marketable
consultant, advisor, or rendering corporate ad Visory ae securities that can be sold to investors. It is the process by which
in relation to such issue management’. ” "Via financial assets such as loan receivables, credit card balances,
hire purchase debtors, lease receivables, trade debtors etc. are
Credit rating Coed rating means giving an expert Opinion) transformed into securities. Thus, any asset with predictable
a rating agency on the relative willingness and ability of g cash flows can be securitised.
issuer ofa debt instrument to meet the financial oblioSation
ak...s. Sa e. SIRE $7. |
e
time and in full. It measures the relative risk of an issuer's abil ND wee ea — il eben nia oe
and ws RY TOE ) nae rele and principal OVer th market. In short, securitization is the transformation of illiquid,
period of ihe rated mstrument itisia judgement about
a fing non- marketable assets into securities which are liquid and
financial and business prospects. In short, credit rating meap marketable nccats
assessing the creditworthiness of a company by an ind ependey
organisation. : | of ‘ ‘ =
5 [Importance of Financial Services
3. as fry.
Stock broking:\Now Stock broking has emerged as;
professional advisory service. Stock broker is a member of; The
successful functioning
recognized stock exchange. He buys, sells, or deals in shares) the range of financial servicesof offered
any financial systemservice
by financial depends upon
industry,
securities. It is compulsory for each stock broker to get himsel The importance of financial services may be understood from the
{ registered with SEBI in order to act as a broker. following aspects:
4 Custodial services: In simple words, the services providedh of”~ mn growth : The financial service industry mobilises the
a custodian are known as custodial services fae oustodiaa savings of the people and channels them into productive
services. Custodian is handed over securities by the . investments by providing Various services to people and
owners for safe custody. Custodian is a ire eg publi corporate enterprises. The economic growth of any country
proper ty or securities. Custodians are intermediaries betwe depends upon these savings and investments.
compa :
=e py = ane oe . renderin; g these services, he ge!_2°
For Promotio; n of savings: The ; Sr =
financial service industry mobilises
10N called custodial] charges. the savings of the people. It provides liability, asset and size
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F i n a n c i a l Se !— YBAE SEM-[]
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tran sf or ma ti on o f p
o m a large n u m b e r Introduction to Traditional Financial Serpices Tt
co ll ec te d f r
deposits and effectively to ensure overall growth of the economy is one
n e ia l se rv ic e In du st ry facilitay |
formation: Fin a of the most important objective of financial services,
“Capital capital market inte, 3
r m a t i o n by r e n d e r i ng arious Py
fo for ecOnom ie
BTOws I
c Hom 15 | he basis
= — =_
: Re
SOTVICES. Capital forma Financial Intermediaries
Y
ancjaj
Creation of employment opportunities : [he Fin Saver
industry creates and prov ides employment OPPortunj. *,
millions of people all ever the world. Financial Markets
.
to GN P (Gross
[ National Produc
5 ontribution has bee n in ) : a
ncia | services to GN P Fig. 2: Mobilisation of Savings
contribution of fina
st c ountries.
vear after vear in almo Selection of project and monitoring performance of
hu
industry Pr industries: [he objective of financial services is to provide

Provision of liquidity : The financial service: ich
nancial system by allocating and reaj "M
liquidity in the fi
advisory services on project selection in terms of cost benefit
savings ED and bear
investment rarious avenues
into various ave of F ©cOnop, study and other techniques of analysis. Undertaking subsequent
performance check of the industries and / or corporates, for the
activity. It facilitates easy conversion of financial aSSets w investors decision making is also the function of financial
of Fg
liquid cash. services.
Benefit to Government : The presence of financial Sery; Provide for an efficient and effective payment, clearing and
la
enables the government to raise both short-term and lo settlement system: Another objective of financial services 15 to
funds to meet both revenue and capital expenditure. Throyg provide for a swift and securéd payment mechanism for transfer
the money market, government raises short term funds by& of funds across geographies or regions for the smooth
issue of Treasury Bills. These are purchased by commer functioning of trade and commerce. It is also required to ensure
banks out of their depositors money. fairand transparent clearing and settlement mechanism in the
debt market, stock market, currency market and derivative
In addition to this, the government is able to raise long-term
market.
funds by the sale of government securities in the SECUTItix
market which forms a part of financial market. Even foreig: Offer portfolio valuation: To offer suitable portfolios to the
exchange requirements of the government can be met in th investors to match the risk and return of different categories of
foreign exchange market. securities with that of the investor is an objective of financial
SETVICCS.
_ZOBJECTIVES / FUNCTIONS © Provide advisory services: The financial services are required
wn
to provide timely and accurate advisory services to facilitate

informed economic and financial decision making pertaining
Objectives of financial services can be listed as follows : to investment, disinvestment, acquisition, merger and
liquidation.
I. M obilization and allocation of savings: Connecting the saves
and investors to mobilize and allocate the savings efficienth Provide for fair and transparent system of financial
transactions: It is an objective of financial services to provide
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cial 5 eices (FYBAF :SEM-ILTYBMs.. +
Innovative Finan
ocuured syy stem for al) I] fin. an, ©
sec
a n d
fair, transparent Id
transactions.
|
; Introduction to Traditional Financial Services
ee és 4 Dominance of human element: Financial services are

d e co st ef fi ci en t a n d prompt fin dominated by human element It requires competent and skilled
Provi Ee io Vid:
3
et I
ate
Cm
ial services SO dt
| personnel to market the quality financial products.
cost efficient financ!
8 :
ncial
su er s b o t h is an tm p o rtan
and is Information based: Financial service industry is an information
wn
se ll in g of fi na nc ia l as sets: Ons based industry. It involves creation, dissemination and use of
d
Facilitate buying 4" ia l se rv ic es Is to facilitate % information. Information is an essential component in the
© f fi na nc
important objective l
lling of all varieties of financia production of financial services,
function of buying and se
ia l d e e p e n i n g a n d broader.
na nc
Promote the process of fi ancial deepening
:
Promoting the » pro proces
ces s
s of
O° © fin \ OBEF A
and broa dest
_ FINANCIAL SERVICE MARKET ic
financial Serv ices Network
with the help of well designed
elo pme nt and gro wth of any eco no h

really critical to the dev Banks in a financial Service market provides wide range of
It basically refers to an increase of variety of financia] ad services besides traditional banking operations, There isa huge
and size of the assets. competition amongst the different category of banks such as
PSU banks, private sector bank and foreign banks in terms of
ne ICS |LY
CHARAC} TERIST
services and convenience to the customers.
jet Electronic revolution resulting into new distribution and service
marketing have widened the reach to the customers and
Intangibility: Financial services are intangible. Therefore, reduced the cost of marketing.
cannot be standardized or reproduced in the same form, Th
Speed of service is also considerably improved in the financial
institutions supplying the financial services should have a bot. service market.
image and confidence of the customers. Otherwise, they
not succeed. They have to focus on quality and innovationg Insurance sector has witnessed the launch of innovative
their services. Then only they can build credibility and gai products in the market. Online application for policy and faster
the trust of the customers. settlement of claim are some of the important features of the
current insurance services market.
Inseparability: Both origination and supply of financial servicg
have to be performed simultaneously. Hence, there should Mutual funds’ AUMs (Asset Under Management) have
perfect understanding between the financial service institution increased sharply with increasing emphasis on transparency,
and its customers. ease of transactions, efficiency of fund management, reduction
in the transaction costs and effective regulatory control by SEBI
Variability: In order to cater a variety of financial and related over AMCs.
needs of different customers in different areas, financial servic
organisations have to offer a wide range of products and NBFCs have been serving the unbanked customers by
services. This means the financial services have to be customise pioneering into retail asset backed lending and microfinance.
to meet requirements of customers. The service institution Further NBFC are aspiring to be one stop shop for all financial
differentiate their services to develop their individual identity
services,
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ial Servi ces (FYBAF - SEMHII, TYBAjG Yr: SR ey
14 Innovative Financ
“My Introduction to Traditional Financial Services 15
A. FINANCIAL MARKETS
Primary Market: [tis a market for new issues to public. The primary
market deals with those securities which are issued to the public for
- the first time.
|. Booming Capital Market , oe hives
> Increasing transparency Nb Financial cn secon dary Market: lt is a market for secondary sale of securities.
3. Regulator, control over Es aan: \ After the initial public offer of securities by the issuer to the public,
es wel a “WES 10 Choy, the securities are quoted in the stock exchange and a continuous
4. Innovative ucts Eg ione and regular secondary mark >t fo ning -alline ac Ir Hoc
5. Rise in disposable income Se NOR ig | cowlhe FES a nO AC Gh AEA
6. High penetration of private 7 RE DS ie VSemeny
; | .. os
play 8. Lack of 2 human
3nd privacyY th
tone oo . =
Forex Market: This : market facilitates the trad ing
;
of foreign exchange.
$ Generation of employment online applications 9 Capital Market: This market deals with long term securities.
Fig.io, 3: 3: Opportunitics
Uppo and Threats A capital market isa financial market in which long-term debt (over
a vear) or equity-backed securities are bought and sold.
noes Money Market:
_ [his isSam:
a market for dealingg with
with fi 1; assets ;
financial
| FINANCIAL SERVICE and securities which have a short term maturity period.
MARKET CONSTITUENTS Credit Market: Credit market refers to the market through which
companies and governments issue debt to investors, such as
= fie ES. investment-grade bonds and debentures.
CONSTITUENTS OF FINANCIAL SERVICE MARKET | = |
= Financial Assets: A financial asset is a tangible liquid asset that gets
its value from a contractual claim. Stocks, bonds, bank deposits are
examples of financial assets. Unlike land, property, commodities or
Financial Assets | Financial Markets | | Financial Ins titutions other tangible physical assets, financial assets do not necessarily
~ have inherent physical worth. The main classes of financial assets
_ are equity and debt.
| NBR Financial Institutions: A financial institution is an establishment
that conducts financial transactions such as investments, loans &
deposits. Banks and Non-banking Finance Companies (NBFCs) are
the main categories of financial institutions in the financial services
| Forex Market | | Capital Market | Money Market Credit Marks system.
Fig. 4 : Financial Service Ma

rket Constituents
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Services (EYBAF - SEMI, Typag =
lé Ianoratire Financial : a
GROWTH OF FINANCIAL SERVICES Jy | 1

Eg,
Introduction lo Tradihonal Financial Services
a fast pace. Further, India’s leading bourse Bombay Stock Exchange

predominantly a banking Sets (BSE) will set up a joint venture with Ebix Inc. to build a robust
The financial sector in India is
for More than 64 per cent I Wy insurance distribution network in the country through a new
commercial banks accounting ty distribution exchange platform. The relaxation of foreign investment
system.
assets held by the financial rules has received a positive response from the insurance sector,
fi na nc ia l sector undergoing rapid ey with many companies announcing plans to increase their stakes in
India has a diversif ie d
financial Service. th joint ventures with Indian companies.
both in terms of strong growth of existing
the market. The Sector com 'ty
and new entities entering Over the past few years India has witnessed a huge increase in
commercial banks, insurance companies, non-banking f; Phi Mergers and Acquisition (M&A) activity undertaken by investment
Nang,
companies, co-operatives, pension funds, mutual funds and banks.
smaller financial entities
In September 2018, SEBI asked for recommendations to strengthen
The Government of India has introduced several! refor rules which will enhance the overall governance standards for
liberalise, regulate and enhance this industry. The Governmen: issuers, intermediaries or infrastructure providers in the financial
Reserve Bank of India (RBI) have taken various measures {, facil market.
easy access to finance for Micro, Small and Medium Enterpys The Government of India launched India Post Payments Bank
(MSME5s). These measures include launching Credit Guarantee £4
(IPPB), to provide every district with one branch which will help
Scheme for Micro and Small Enterprises, issuing guideline thay increase rural penetration.
regarding collateral requirements and setting up a M icro Uni
Development and Refinance Agency (MUDRA). India is today one of the most vibrant global economies, on the back
of robust banking and insurance sectors.
In 2017, anew portal named Udyami Mitra’ has been launchedh x,
the Small Industries Development Bank of India (SIDBI) with
aim of improving credit availability to Micro, Small and Medina PROBLEMS IN FINANCIAL SERVICES SECTOR
Enterprises’ (MSMEs) in the country.
With a combined push by both government and private sector, Ind Financial service sector has to face a lot of problems or challenges.
Is undoubtedly one of the world’s most vibrant capital marke Some of the important problems are listed below:
Along with the secondary market, the market for Initial Public Offs Lack of qualified personne! in the financial service sector
(IPOs) has also witnessed rapid expansion.
There is a gap between demand and supply of qualified
The mutual Fund (MF) industry in India has see personnel in the financial services sector.
n rapid growths
Assets Und er Management (AUM). Total AUM of Po
the industry stow
at T 2.52 trillion between April - August 201 FX Lack of investor awareness about the various financial services
8. At the same time tt
number of Mutual fund (MF) equity a
a highs There is a lack of investor awareness about several financial
© 74.6 million as of June Du” quity portfolios reached
Services and products such as mutual funds, venture capital
and insurance services.
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SOLE 0.
ative rina mou! Services (FYBA F : SEM- [I TYRA; I

18 Janet
mm th e di sc lo sure require . My
3 Lack of tr an sp ar en cy rvices Ns laftnaduction to Traditional Finanaal Serowes
1's
ng to financial Se
practices relati
| = accounting
ro l ov er di sc BANK ING AND NON- BANK ING COMPANIES

Though there 15 4 regula—_— tory cont. |
an d ac co un ti ng Pr ac ti ce s relating to f; Oy,
requirements sp ar en cy . Na y, | According to Section 5 of the Banking Regulation Act, 1949, a
of tran
services, there is still lack banking company means the accepting, for the purpose of lending
baa Ser |
i satij on
speciaalli c 1 in eren
diffe e t| financj or investment, of deposits of money from the public, repayable on
4 Lack of 5p
one Or 4 draft, order, or
(specialisation on ly in
demand or otherwise and withdrawn by cheque,
otherwise.
fin anc ial Ser vic es spe cia liz e in one or tw o gory;
Most serve Bank of India has defined NBFC as:
and a very few can offer gamut of ser vic es to Cu st om er . 0 Re
serv icg ris a financial institution which is a company;

5 Lack of adequate data to take fin anc ial S
decisions * a non-banking institution which is a company and which has

as its principal business the receiving of deposits, under any
to ena ble cop,
At times adequate data is not easily available scheme or arrangement or in any other manner, or lending in
decision making. any manner;
6 Lack of efficient risk management system in the Finang e such other non-banking institution or class of such institutions,
service sector as the RBI may, with the previous approval of the Central
Government and by notification in the Official Gazette, specify.
Lack of an efficient risk management system in the banks
other financial sector companies is one of the problems face Difference between Non-Banking Financial Company and a Bank
in financial service sector.
It is of prime importance to understand the basic difference between
7. Many financial organizations would not recover from the log a bank and a Non-Banking Financial Company (NBFC).
of data that cannot be retrieved which leads to damage g
1. Demand deposits cannot be accepted by NBFC: Demand
reputation to their customers and suppliers.
deposits are those that can be placed by anyone in the financial
Inadequate security of data resulting into loss of data may lex institution and can be withdrawn at any time as per the wish
o damage to their customers. of the depositor without any prior notice to the institution e.g.
current accounts in banks. NBFCs are not allowed to accept
The competition within the financial sector is very strong such deposits as per the RBI guidelines.
Higher competition results into reduction in the profits for
itt 2: Unlike banks, NBFC is not a part of payments and settlements
financial services sector. system regulated by RBI: Payment and settlement systems in
| India include cheques, credit cards, debit cards, Real Time Gross
The above challenges are likely to increase in number
with tk Settlement (RTGS), National Electronic Fund Transfer (NEFT)
growing requirements of the customers. How
ever, the finands etc. NBFC cannot do these operations as per RBI regulations.
services system in India at present jc in;
yh
transformation. P esent 15 a process > of rapi
NBFC cannot issue cheques on its name: As the NBFCs are
restricted to be a part of payments and settlement system by
IO
the RBI, they cannot issue cheques on its name.

ee
©.
eC ee ee ee ee
I EE 43-9
4
a
i
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Se a Oh Hae rae
Innovative Financial Services (FYBAF: SEM-II, T YBMs SE

‘tors in NBFC the deposit insura n My
4. For the en mie por ation iS not ay ail ae ‘aciti, Introduction to Traditional Financial Services
creditI g uvaran Credit Guarantee Corporation 7 e: ;
(Dy De (ii) hire-purchase
Insurance ce and that insures all the deposits
Su “Ge i
diary ry of RE imi * (iii) CN as, loan and
subsidia
fixed, recurring etc. upto a linut of T 1,00,000 for each ©
it faci liti es, Thi s faci) ; dey, iv) inv est men t companies.
and provides a guarantee for cred
T "HV BI.
extended to NBFC Þ) Hen 5 The other types of NBFCs are regulated by other regulators.
= . = 7 b | : : as, ih Ie : ' Sy
| They can be' further classified
|
into those accepting deposits and those
REGULATORY FRAMEWORK' jot accepting deposits.
The registered NBFCs are required to invest in unencumbered
The scheme of regulation of the working and opera tions .,. approved securities worth at least 5 per cent of their outstanding =
(1) RBI Act Every NBFC is required to create a reserve fund by transferring at a
least 20 per cent of its net profit before declaring any dividend. : :
eo) Feel SORE The RBI can regulate/ prohibit solicitation of deposits from public. i
iT ALM (Asset-Liability)
(iii) -Liability) Framework | is
It can give directions to NBFCs relating to a
(iv) Guidelines of Fair Practices Code (i) prudential norms for income recognition, accounting standards, i
(iv) Credit Information Companies Act, 2005 provisioning on capital adequacy and 65
The RBI regulates and supervises the NBFCs under the RBI 4 (ii) deployment of funds.
oe
The regulatory and supervisory objective is to : It can also issue directions for providing information relating to
(a) ensure the healthy growth of NBFCs deposits or for conduct of business.
Drs Wat ters

. . For contravention/ defaults by an NBFC, the RBI can impose penalty.
(b) ee AER they function as part of the fina ncial system wit [t can also cancel
€ policy framework in such a manner that their existencex registration of an NBFC.
functioning do not lead to any systematic aberration and The RBI Guidelines relating to ALM focus on interest rate and
| liquidity risk management systems in banks, which form a part of
(c) ensure that the quality of surveillance and Supervision! the ALM function. The main elements of the ALM system
sustained by keeping pace with the developments that ts inform are ALM
ation system, ALM organization and ALM process.
place in this sector of the financial SVStem.
;
It is mandatory that every NBFC should be registered with thell The Reserve Bank of India vide its circular dated September 28, 2006,
issued guidelines on Fair Practices Code (FPC) for all NBFCs
fo commence / carry on any business.
fim 4 ; to be
adopted by them while doing lending business. The guidelines
‘ - ‘ . ;
The NBFCs which can covered general principles on adequate disclosures on the terms
be registered with the RBI are and conditions ofa loan and also adopting a non-coercive recovery
(i) equipment leasing
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En
22 Innovative F inancial Services (FYB AF: SE
A revis ed in VIEW
M-IL, TYBug. Sp
of the recent d ey " |
RE
.
method. The same Introduciion to Tradifonal Frnancial Services
i n c l u d i n g creation of New Ca tegory of NB FE, by
with sector “age?
MFI and also the ra ar was iss ued on March 26, 2015 Nt kris!
ci rc u!
jewellery. Revised
on Fair Practices Code for NBFCs Pert:
Guidelines
applications for loans
an d their processing are listeg q. "iy down _ INTRODUCTION
(a) All Communic
language Or a languag "TOWerp. | receivables. Although these fund based financial services constitute
\Loan| application
b) which forms should include necessary inf. |
"may acntical
countries regment
, they of the
appeared Financlal
on the services
Indian scenario
financial in the
scene
advanced
only in the
ets the
affects |
the interest © f the borrower,ef, 50 that. a mean; TR; nee a
initiatives.
comparison with the terms and conditions offereg by hy early nineties as a result of RBI
NBECs can be made and informed decision can be taken 4 EY | spas
borrower. The loan application form may indicate. vi MEANING, y
Wy LNALNGS, |
documents required to be submitted with the applications
The NBECs should devise a system of giving acknowled gemeny Factoring is a fund based financial service which provides resources
receipt of all loan applications. Preferably, the time frame with ta finance receivables as well as facilitates the collection of
which loan applications will be disposed of should also be indica receivables. It involves the outright sale of receivables at a discount
in the acknowledgement. to a factor to obtain funds.
Note; There are several guidelines issued by RBI on fair practi Factoring ei - CY Jo Uh Lb ny ey ”
Code for NBFCs which can be referred by the students on the welg cd Hang out Sa £ 6 goo S/ Services are so IV cl : rm /c lent to the
f RBI | | | | ‘factor (a financial intermediary) as a result of which the title to the
0 Le. www.rbiorg.in | | :
goods/services represented by the said receivables passes on to the
Credit Information Com panies Act was enacted in 2005 to facilig factor, Henceforth, the factor becomes responsible for all credit
the efficient distribution of credit and to provide for regulation control, sales accounting and debt collection from the buyer. Ina
Ee es
CICs. Credit information includes (a) nature of loans. advan! full service factoring (without recourse facility), ifany of the debtors
amount under credit cards, other credit facilities: (b) natures falls (BERS ASS REESE, GF ie ARERRAL Rea I
=< ty; (c) guarantee /non-fund based facility; (4) credit worthing PRODI ERY,» HAE TAGES NSS IO BORO TIE WOES,
of a borrowe i Mk | h ; ;
Wer and Sqwgn. Forefaiting is a mechanism by which the right for export receivables
The main-elements of CIC's mon ofa ont of an exporter (Client) is purchased by a Financial Intermediary
registration, manage 5 (Forfaiter) without recourse to him.
a - management, auditors, functions, information privs
principles and offences / penalties.
TYPES OF FACTORING
Factoring arrangement can be of different types depending upon
the need of client or business. The collection of receivables and sales-
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np Frnanctal SEFVICes (FYBAF :SEM-J1 Typ phe tL el) uf ied
Inmmoodth i Ms : Sky,
[Sais 4 common
admini=stration le: ure of all types -
ſeat iN
im po rt an t fo rm s of fa ct or in g ar e &x Plain ‘fac Introduefion to Traditional Financial Services

ngement. The
C T O R I N ¢ “Che 2 /ADVANCE AND MATURITY FACTORING
RECOURSE AND NON-RECOURSE FA | he Features of Advance Factoring
ing
Features of Recourse Factor a, The factor pay's a pre-specified portion, ranging between three
The factor has recourse to the client if the deb Purch, fourth to nine-tenths, of the factored receivables in advance,
coverable. the balance being paid upon collection/on the guaranteed
receivables factored turns out to be irre payment date.
The factor does not assume credit risks ASSOCiated With, b
h ‘ The drawing limit as a pre-payment, is made available by the
receivables. factor to the client as soon as the factored debts are approved.
mal -
If the customer defaults in payment, the client has to a The client has to pay interest on the advance between the date
the loss inc urr ed by the fac tor . of such payment and the date of actual collection from the
The factor is entitled to recover from the client the a mounts, customer or guaranteed payment date.
in advance in case the customer does not pay on maturity. The rate of interest on advance ts calculated on the basis of the
prevailing short-term rate, the financial standing of the client
Credit risk is with the client. and the volume of the turnover.
Factor does not participate in the credit sanction process | B. Features of Maturity Factoring/Collection Factoring
g. In India, factoring is done with recourse. | a The factor does not make any advance payment to the client.
|
The factor pays on guaranteed payment date or on the date of

l
B. Features of Non-recourse Factoring
collection of receivables.
Factor purchases receivables on the condition that the fat
has no recourse to the client, if the debt turns out to ben The guaranteed payment date is usually fixed taking into
recoverable. | account previous collection experience of the client.
Credit risk is with the factor. d. Nominal commission is charged by the factor.
Higher commission is charged to compensate for the loss aris eC. There is no risk to the factor.
out of irrecoverable receivables, The additi
onal fee is charg
by the factor as a premium for risk bearing referred to asad
3 FULL FACTORING
credere commission. This’ is the most comprehensive form of factoring combining the
Factor Participates in credit sanction features of almost all the factoring services specially those of non-
process and appi recourse and advance factoring. Full factoring provides the entire
credit limit given by the client
to the customer.
| “ spectrum of services such as collection,
credit protection, sales-ledger
In USA/UK, factoring is commonly done administration and short term finance.
without recouls
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26 Innovative Financial Services (FYBAF : SEM-IT, TYBMs. SEM
VI
4/ DISCLOSED AND UNDISCLOSED FACTORING Introduction to Tradittonal Financial Services
In disclosed factoring, the name of the factor is disclosed in invoices, bills of lading and supporting documents are delivered
invoice by the supplier of the goods asking the buyer to mat to the export factor.
payment directly to the factor. Generally, the factors assume y° ¢ The export factor gives the works of credit checking,
risk of non-payment under non-recourse arrangements. The j;,.. maintaining sales ledger and collection to the import factor.
within which the factor works as non-recourse Is specified jpn
agreement beyond which the dealings are done on a recourse basi, * The import factor collects the payment from the importer and
remits payment to the export factor on assignment or collection
The name of the factor is not disclosed in the undisclosed factorin as per the terms of assignment in the currency of the invoice.
although the factor maintains the sales ledger of the supplier. The
Finally, the exporter factor makes payment to the exporter upon
entire realization of the receivables is done in the name of the Cliery °
assignment or maturity or collection as per the arrangement.
company but all control remains with the factor. He also Provide
Short-term finance against sales invoices. International factoring provides a non-recourse factoring deal. The
exporters have hundred per cent protection against bad debt loss
5. / DOMESTIC AND EXPORT / CROSS-BORDER | oncredit approved sales. The factors take required assistance and
INTERNATIONAL FACTORING avail facilities provided in the exporting country for export
. — —_— promotion. Factor covers exchange risk also in case of international
Domestic factorin g is the factoring in which the buyer, seller-su Pplier f4¢ toring.
and factor are domiciled in the same country. |
Cross-border Factoring is similar to domestic factoring except that

there are four parties, viz.,
© THEORETICAL FRAMEWORK
Exporter,
Parties to Factoring Arrangement
Export Factor,
Import Factor, and | There are three parties to factoring services arrangement.
importer. 1. The Buyer: The buyer negotiates terms of purchase. He receives

delivery of goods with invoice. Buyer makes payment to factor
As two factors are involved in the deal, it is also called Two Factor on due date.
System of Factoring.
2. The Seller: The seller sells goods to the buyer as per mutual
The exporter informs the export factor about the ex port of goods understanding. He delivers the copies of invoice, delivery
to a particular importer domiciled in a specified country. challan and instruction to make payment to factor. The seller
receives 80 per cent or more payment in advance from factor
The export factor write to the import factor domiciled in the on selling the receivables. He receives the balance payment from
country of importer enquiring about the credit worthiness of factor after deduction of factor’s service charges.
the importer.
2 The Factor: The factor enter into an agreement with the seller
On getting satisfactory information from the im port factor, the for rendering factor services. On receipt of copies of sale
exporter delivers the goods to the importer. The relevant documents makes payment to the seller of 80 per cent of the
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wrepces (t YBAI ; SEM. if. YB.
Se
28 Innovat TOW x saciid
i Sp
ys a debt. The factor receives Payment fx, | i
price of th
to the Seller After g COL roduc ton lo Traditional Financial Services 29
on due date and remits the money
his charges. “ty client fixes credit limits for approved customers. Within these
= -_ limits, the factor undertakes to purchase all trade debts of the
" Credit Sale of Goods SY customer without recourse. Thus the factor assumes the risk of
default in payment by customers, The credit-worthiness of
[ Customer | Invoice Client customers is assessed by factors on the basis of information
from number of sources such as credit rating reports, bank
reports and trade reterences.
Pay the
Amount (3) (2) (5. Advisory Services: By virtue of their specialized knowledge
= Factor == and experience In finance and credit dealings and access to
| extensive credit information, factors can provide a variety of
1. SuSubmbmititss invoiccee copy | incidental advisory services to their clients such as:
.
2, Payment upe to 80nt
3, Pay balanc
% initially
amou
| e snst
Cu il's
esomer e perception of the client's products, emerging
Fig. 5: Factoring Mechanism e Audit of the procedures followed for invoicing, delivery
and dealing with sales returns.
Functions of A Factor
I.
* FACTORING COST |
Administration of Sales Register: The factor maintains,
CHER : eee Wise gs: wb an 51Ves Periodic regThe factors provide various services at a charge. The charge for
to the client on the current status of his receivables, receipkcollection and sales ledger administration is in the form of a
payments from customers and other useful information, commission expressed as a per cent of the value of debt purchased.
2. Provision of collection facility: The use of trained Man It is collected up-front/in advance. The charge for short term
poy finan
with sophisticated infrastructural back-up enable: cing in the form of advance part-payment is in the form of
to syst p enables the interest charge for the period bet ween the date of advance payment
; ematicalVen
ly follow up and make > ti timely demand on!
s
debtors , to make payments, Collection of wereceivables can| and; the date of collection /{SHOguar d pay .Itis. al:
as discount charge. POPE DLOAR PIERO
considered as the most important function of a factor. |
3. Financing Trade bills: The unique feature of factoring
factor purchases
ist! ~~ ADVANTAGES AND DISADVANTAGES
the book debts of his client at a price and!
debts are assigned in favour of the factor who is usually will
OF FACTORING
fo grant advances to the extent of 80-85 per cent of
the assign
debts. The balance 15-20 per cent is
retained as a factor resen
4, Creddit
i contro!: : Assumption
i of credit risk 15 one of Advantages
functions of a fac | the impore
:
factored withou t recourse. ; Th IS ; provided
whe‘here dé ]
c | hb” Immediate Cash inflow: Factoring shortens the cash collection
€ factor in consultation wi Hel Ne
cycle. It provides swift realization of cash by selling the
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Innovative Financial Seroices (FYBAF:$ EM-1
yables to a factor: Availability of liquiq
pr ity is
factor inany busine ss. Liqui d Cash 31
eal ie traduction fi Traditional Financial Seruices
ok for capital expenditures or me
can be used “Ung, { Useful to small businesses: Another important advantage Is
% that factoring can be used by a small business. Trying to get a
Focus on business operations and STOW tEh- T
operatio
businesss from ne by
ns anys byt regular business loan or line of credit Is difficult as lender
_— > = ale aboutcorecollection
worry on customer a require volume to ensure their profitability,
receivables to factor. Resources employed in . (0. Reduced current liability: The amount received from the
| department can be directed towards busines. * ty factoring is used to pay off the bank borrowings and other
future growth. "Þery current liabilities comprising of trade creditors. As a result,
current liabilities are considerably reduced, The liquidity
3 Fvasion of bad debts: Under without TeCOUrse | position of the firm is strengthened further.
had debts loss is borne by the factor. The Sells ar
| obligation to the factor after selling receivable, . ‘Disadvantages
factoring arrangement helps the seller in evadin Me me
nr —
out of bad debts. Sly Expensive: Factoring is a costly method of financing as the cash
: 4 ;
price ;
of the accounts receivabl
a1 es 1sis discount
di ted by\ the factor
L | ;
* ek ”— an o arias Pr OVide fy company. The upfront cash price is usually 70-90% of the face
se : Fr apt ied lang 1 Scoring COMpanis value of receivables depending on the credit history of the
a; faster. | customers.
_ i
-I 5, No requirement of collateral: The advances are ev. Possible harm to the customer relationship: Selling company
7 the Dasis of the strength of accounts receivables gives the charge of collecting receivables to the factoring
creditworthiness. Factors do not require any collasea) company which may adversely affect company’s relationship
to be pledged/hypothecated, New businesses can ay with their customers.
the advances provided they have strong receiya bles ea
, Company's image distortion: In the past factoring was
43
6. Sale not loan: Factoring tra considered as a sign of financial difficulties of the company.
nsaction is a transactio
n ot a loan. Uninlili ke other n of However, in recent times, this perception has changed and it
types of finances, factor
result in an increase ase inin lia
Jiabbil
iljtiti; es of :¢ ing dy has been considered as a normal way of doing business.
are no adverse impacts siness. Heng
he busine
conversion of boo
on the financial ratios. It fat Constraints on business: In the case of non-recourse factoring,
k debts Into
liquid cash. the factoring company pre-approves the selling company’s
customers, This may cause delay in placing new orders, Further
seller regardin 2 th the factoring company applies its credit limits to individual
e credit worthine customers which may create constraints on business.
s!
better terms with the cust .
Enhanced administrative burden: Every time the seller wants
an advance, he needs to submit a schedule of accounts
Sales ledger.
PTicin
D ue 5: 1t i a cost effective wa y of outs! receivables alongwith a copy of invoices and other
O existen
Prices are usually c ce of many facto documentations.
OMPetitive. rin comp?
:
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ncel Services (FYBAF : 5 EM-IT. T1 Ba
32 Innocanie F ca g. $
receivables of a
reputed ©OMPanig
6. Purchase of accoun ts SS vables
< only purchase the recei
Introduction to Traditzonal Financial Serv
ices
of | ; gs
Sometitnes ac new company may not 6... Ey [he main provisions of the FRA are:
company ' and therefore, a : : Set thebs,
of factoring.
(i) registration of factors
No funding for capital expenditure: Another disadva, (ii) assignment of receivables

>
factoring is| that it can only solve one problem je C Fg, (iii)
iii) rights
righ andd obliga
obligati tions h contract f for assignment
of f parties tothe
problems created by slow-paying customers. It does Not
F fe ! stom :
= of receivables
any. capital expenditure.
: ment
(iv) registration of assign
= FACTORING IN INDIA } (v) offences and penalties.

- ae . (vi) miscellaneous.
Factoring service is of recent origin in India, It was recom en WK ates | ‘
by the Kalyan Sundaram Study appointed by the RBI ie au = oe eceivables (Government) Rules,
Pursuant to the acceptance of these recommendations, the Rp; _
guidelines for factoring services in 1990. The main features of the rules framed by the Government under the
| FRA relate to:
SBI Factors and Commercials Ltd. was the first factoring compe,
to start its operation in India in April, 1991. ' (1) registration of transactions of assignment of receivables
There was no legal framework to regulate factoring in Indiaz (1) time limit for registration/condonation of delay
recognising the importance of the factoring Services in the emergin (iii) inspection of records of central register and
financial services scenario in the country, the legal framework ky
been codified recently. The three elements of the framework are (iv)
tees
(i) Factoring Regulations Act, 2011, RBI's Non-Banking Financial Company-Factor Directions, 2012
(11) Registration of Assienment of Receivables (Government)Rug [he RBI had issued the NBFC - Factor Directions in 2012 under the
2012, and Factoring Regulation Act. There are some specific directions
‘ab — applicable to the NBFC Factors.
(111) RBI's Non-Banking Financial Company-Factor Di
. rections2, =
. They relate to the following :
Factoring Regulations Act
a
(i) registration
e object of the FRA is t
| 's to provid"ie for and regulate (ii) net owned fund
1) assignment of
gn of recrecej
eivables through registration and (111) principal business
(lili)) ririggh ts and obli gati
t ons of partners to the co
ntract fo7 r assign? |i,.) conduct of
Si Sec eel Assignment means transfer by agreement business
Ividual interest of any assignor in any receivable
duei (V) asset classification
any debtor in favour
of a factor in India.
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34 Inno Ae
ri sk m a n a g e ment and Introduction to Traditional Financial Services

(vi)
i n g :
SS
/ e x p o r t f a c t o r |
(vii) import le Cost
Cost of forfaiting is borne by the
| - AF ORING v/s FORFAITING

| [Cost of factoring is borne by the
feller
Wer
(cient)
(client}.
,
Verses:
Ac
15 T%
buyer.
10, Dealing with Negotiable

—_ ESD Instrumenttts
Forfaiting is evidenced by bills of
[ FACTORING FORFAITING There is no dealing with negotiable]
exchange, promissory note or letter
instruments under factoring.
PP ce cw: eS
Meaning of credit.
Forfaiting ao aTangemens;
a
t is an arrangement that converts PO Type of Goods

which the forfaiter Pure <5
é receivables into ready cash by Factoring involves trade receivable Forfaiting usually takes place
selling these to factor.
from the exporter in reg, tn fon he”
on ordinary good Ss.) trade receivable on capital goad
—
| 2, Domestic/Foreign Trade
. Finance
WORKING OF FORFAITING
‘Factoring is both domestic and Fortaiting is only fina NCing gf
foreign trade finance. foreign trade.| |
—
Meaning
3. Maturity of Receivables
Factoring involves account orfaiting involves account
The term forfaiti ng is origina ted from a French word ‘forfait’, which
Seivables of short matu rities.) receivables of medium to longts
maturities” means to surrender one’s right on something to someone else,
Forfaiting is the discounting of international trade receivables such
—_— —
4 Extent of Finance
Factoring provides only 80% of 00% finance is provided in as promissory notes and bills of exchange for cash. This is the
Invoic e.) orfa ting.” ] arrangement under which the exporter is provided finance against
Letter of Credit his bill by the forfaitor.
SS
There is no letter of credit involved fo orfaitin

In factoring.
g gre q uires lett er or cet |
req All risks and collection problems are fully the responsibility of the
forfaiter who pays cash to seller after discounting the bills/ notes.
6. Recourse or No Recourse
Factoring may have recourse to
seller in case of default by buver.
There is no recourse to exporter Working
forfai ting.
7. Scope for Discounting in
—$—__
—
The importer places an order with the exporter to import goods

Secondary Market
Factoring does not provide
| on a deferred pay ment basis.
scope Forfaiting provides scope for
for discounting in the ma
only 80% is financed
rket as discounting the bill in the second# 6 The exporter will refer the order to the forfaiter and check
market due to 100% finance. whether the forfaiter can provide forfaiting services.
8. Series of Sales or
Single Sale
——_—
Factoring may be fo
r financing a
The forfaiter agrees to provide services after assessing the credit
series of sales involvin Only a single shipment is finance worthiness of importer,
g bulk
under forfaiti ng.
i n= nn
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nancial Services (FYBAF: SEM-I] TYBMg
36 Innocative FI
Is the go ods and receives the bj Is =
e The exporter sel Intro inction to Tradihonal Fin
ancial Services
e x p o r t e rs. [t reduces
from the importer. | % forfai ti ng ca n be a ve ry d e p e n d a b l to ol fo r e
e d n o t e s / bi ll s to t h e hs, default risk.
avail
The exporter sells the f a i t i n g a g r e e m e n t py
ourse. T h e f o r deb ts caused
discount without rec Su ch as cog 671 4. Reductio n in bad deb ts: The pos sib ili ty of bad
by importer's bank inability to pay Is drastically reduced.
of the ar r a n g e m e bo
for the basic terms erest etc The
fe
FI5$,
es , ra
| te of me int |
ers
Tool to expand sale: It is an excellent tool for the export
margin to Cover 6
nt ch ar ge d by th e fo fa it er de pe nd , : ts;
interest/ di sc ou
l, th e cu rr en cy in wh ic h jt je deter who wishes to expand sales in international market. There 1s
terms of the note/ bil tra de opp ort uni ty. The exp ort er is abl e to gra nt credit
etc. inc rea sed
the country risk of the importer the
to his importers freely and thus be more competitive in
e Payment by forfaiter to the exporter of the face Value «& market.
bill /note less discount, Protective tool: Forfaiting acts as a protective tool when it comes
The forfaiter holds these notes/ bills till maturity for to international finance. It is better than insurance mainly due
by the importer's bank. Pay, to the fact that it provides immediate liquidity for the exporters.
© The biggest advantage for the exporter is that he Zets by 7.

=
Reduced administration cost: By using forfaiting, the exporter
immediately. Bad debt is avoided in export transaction will spare himself from management of the receivables. Thus
| administration costs are reduced.
guarantee is given by the bank.
To Banks
Been AND DRAWBACKS OF FORF T Banks can offer a new product range to clients, which enable
the client to gain 100% finance against 80-85% in other
discounting products,
Benefits \
Banks gain fee based income.
(A) To Exporter | Lower credit administration and credit follow up for the banks.
1. 100% financing: Forfaiting is without recourse and doesg Drawbacks
of Forfaiting
he exporter's credit line. Once the ex
porter obtains the fun
e will be exempted from the re
sponsibility to repay thedd Forfaiting is not available for deferred payments especially
1.
<a oe Wor
while exporting capital goods for which payment will be made
king capital is not locked as
on a deferred basis by the importer.
current beg | ios RN torfaiting bank. Receivables becs
improve fins ein and it is beneficial to the exporters! 2. There is no international credit agency which can guarantee
ee
raising ca Pacity. status and liquidity- SO as to improve the fun for forfaiting companies which affects long term prospects
forfaiting business.
2: Risk reduction: Politi -
are eliminated Only selected currencies are taken for forfaiting as they alone
with fo:rfa iting. -
enjoy international liquidity.
Protection again In certain countries,
st cred ‘€ wh
conomi c and Political risk 15 hig
ED
—
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Se
fsa oggh hls Brat Se ies
ive F mm ct al Ser vic es f FY BA F: SEM -II , T YBM $
38 Inovat
Yo, to Traditional Financial Services 39

te dee RACTICAL PROBLEMS th Y
' ;
_—_—_— eee ee eee ON
(B) Alternative 2: Bank Advance
[[lustration T : Cost of Bank Advance:

The turnover of F Ltd. is ¢ 60) lakh of WINES Per Cent iso taterest (X 4,00,000 x 90% x 15% x 1/12) 5,400
Debtors are allowed one month

is ed
FO
on cre
: oar
dit :
=
hay
P
Pr oc
the
es si dues,
ng
ina
fee s
fees
(T 4,0 0,0 00 x 2 4%) 8,000
e
willing to advanc 90 per ce nt of the bil ls ra
? per centa month plus COMMISSION of 4 per cent on the total Bad debts (# 4,00,000 x 1%) 4 000
u lt of this arrangge metnt
emen isjs lik .1
j;©..ely ies
of debts. F Ltd. asas aa resresu
7 21,600 annually in management costs and avoid bad a; Oy
percent on the credit sales. 4 Note : It is assumed that F Ltd. will continue to incur management
|
costs.
A bank has come forward to make an advance equal to 90
of the debts at an annual interest rate of 18 per cent. How 1 Gince the costs of both the alternatives are equal, F Ltd, is likely to
processing fee will be at 2 per cent on the debts. Would you Ver; be indifferent between factoring and bank advance.
factoring or the offer from the bank? acy
‘Illustration 2:
Solution:
| The Delhi Manufacturers Ltd. sells goods on credit. Its current annual
To decide whether to accept factoring or bank adv = _ credit sales amount to 900 lakh, The variable cost ratio is 80 percent.
ance, we comp The credit terms are 2/10, net 30. On the current level of sales, the
the monthly costs of both the options as under :
| bad debts are 0.75 per cent, The past experience has been that 5U per
(A) Alternative 1: Factoring Arrangement cent of the customers avail of the cash discount, the remaining
customers pay on an average 50 days after the date of sale.
Cost of Factoring:
| The book debts (receivables) of the firm are presently being financed
Fee [(% 48,00,000/ 12) x 90% x 2%] 7 _ in the ratio of 2: 1 by a mix of bank borrowings and owned funds
Commission (X 4,00,000 x 4%)
4 which cost per annum 25 per cent and 28 per cent respectively.
Tl As an alternative to the in-house management of receivables, Delhi
231 Manufacturers Ltd. is contemplating use of full advance non-
Less: Savings in Cost: recourse factoring deal with the PNB Factors Ltd. The main elements
of such a deal structured by the factor are (i) factor reserve, 15 per
Management costs (© cent; (ii) guaranteed payment date, 24 days after the date of purchase;
21,600 /12)
1,800 (iii) discount charge, 22 per cent and (iv) commission for other
Bad debts (7 4,00,000
x 1 %) 4.000 58 Services (payable up-front), 4 per cent of the value of receivables.
Net cost of factor
ing 174 The finance manager of Delhi Manufacturers Ltd. seeks your advice,
—* as a consultant, on the cost-benefit of the factoring arrangement.
What advice would you give? You can make your own assumption,
where necessary.
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VICES (FYBA F . SEM-II, TYB 6 fsa tis bhi ET SAL
40 i Sty
| Introoadi duction to tO Trad itio

TEAML ONAS FO ncial SServicescs
nal Fina
a ;
advice to continue
,
with In-House
To decide whether toa
alternative or factoring
"tly Eligible amount of advance = 0.85 x (T 900 lakh - T 36 lakh)
6
annual costs of bath the a ternatives as under ;
-H ou se M a n a g ement = £ 734.4 lakh
(A) Altern ati ve 1: In
lakh
| Niscount charge = (7 734.4 lakh x 22% x 24/360) = T 10.77
Relevant Costs Amount Reman
ESE ‘Decision Analysis : Cost Benefit of Non-recourse Factoring
ASE CUR Ps lakh x 50 77D Amount @ lakh)

Cost of funds in receivables 19.50 | As per working ng, i
Bad debts losses 6.75 | 2900 x 0.75% *l ponefits (savings of cost as per
In-House Management alternative 35.25
Total
Old
~~ Cost (of non-recourse factoring alternative) 49.86

Working Note 1 | |
orking Note I:
Net Loss (14.61)
Ree ae eee Recommendation: New Delhi Manufacturers Ltd. should not go

Average collection period = (10 days x 50%) + (50 days x 9 5 for factoring alternative.
=5 + 25 = 30 days i.e. 1 month sm | | | |

Average investment in debtors = € 900 lakh x 1 /12 = F 75 lakh. BULL DISCOUNTRNS Rosita
Cost of bank funds = (T 75 lakh x 2/3 x 25%) =E 12.5 lakh
Cost of owned funds = (€ 75 lakh x 1/3 x 28%) =T 7 lakh | | ia INTRODUCTION

Total cost = F12.5 lakh +F 7 lakh=F 19.5 lak
h. Bill discounting is an arrangement whereby the Seller recovers an
amount of sales bill from the finan cial intermediaries before it is
B) Alt ive 2: Non- . ,
(B) Alternative 2: Non-recourse Factoring due. Such intermediaries charge a fee for the service. lt isan advance
| elon: Costs
elevant =Remarks _ selling of a bill to an intermediary before it ts due to be paid after
Amount reducing administrative charges, fees and interest. Bills and invoices
E actoring obs are technically known as a ‘bill of exchange’.

commission 7 7 |
Discount charge | I © 900 lakh x 4% In bill discounting, a bank earns a discount /fee from a seller to
Cost of owned funds 10.77 | As per working note2*| ,geago funds before the credit period ends. The bill is presented to
invested in receivables 3.09 oy _—_ 34 lakh) caller's customer on due date and full amount is collected.
'
lot ak X £0 /0 x
7 3
’ ; :
— fe Bill discounting is also known as Invoice Discounting.
= = ”
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Innovativetir Financ 3
42
— ting helps the sellers get funds earlier On py by
4.5
also helps the bank earn some © int roduction to Tradi tHonal Financial Services
un | It
P y Ney
RYallRon i s c o
sm fe e or d
; ey on the due date of the
Vi
hy, acceptor does not make the payment to the bank, then the drawer
seller's customer pays mons) credjy * to take this liability and will
who has discounted the bill will have
disco untin g is| a SOU rce of working capital finance for the, Pay cash to the bank.
)
Bill Ks i
of goods on credit. Until the bill is honoured on the due date, there is
always a chance
th e bi ll a m o u n t a n d the amoy nt Paig; that the drawer will become liable on the bill.
This is called a
The difference , betw: een = company . The fee3 wil] d conti ngent liabil ity for the draw er- a liabi lity that will only arise, it
‘the invoice discounting Pen %
and the perce ived risk & + ce rt ai n ev en t oc curs - t he acceptor does not honour the bill.
sir ef before payment date
invoic es under bill disco untin g are| legal}, the: Need for Bill Discounting
ls or
The bil
IS a negotiable instrument
exchange’. A bill of exchange why The buyers and sellers of goods have conflicting objectives. The seller
na me . Ou r cu rr en cy is a bj] of
nego b leby endo
bf tiab
rsi ng the
ritten over it to | the bearer of| the instr, "ts
ha vishes to get paid immediately and the buyer wants a long credit
It provides value W oriod. Bill discounting is the solution to the problem which creates
of bill discounting, such bills can be either Payable 0 qa win-win Situatl on. The seller gets his money almost instantly on
©
os
=
P
bearer or payable to order. ayment of a small charge and is able to satisfy its customers with
P 3 d. The bill discounting is an easy way of getting finance.
\ credit perio
For example, a drawer has a bill for © 10,000. He discounteg this
with his bank three months before its due date at 10% Pa. Tal Conditions of Bill Discounting
discount. Discount will be calculated as the follow:
[1 A bill must be usance bill.
$10,000 x 10/100 x 3/12 = % 250 ,
It must have been accepted and bears atleast two signatures of
Thus the drawer will receive a cash worth T 9,750 and will by reputed individuals or banks or companies etc.
loss of T 250, F
The bank will normally discount trade bills only.
[_Prver moo Pravee ] 4 Where a usance bill is drawn at a fixed period after sight the
bill must be accepted to establish the maturity.
Bills Receivable Acceptor |. The discount tenor starts from the date of discount and expires
at the maturity of the bill.
—
Drawer discounts bil]

On maturity the bank ‘Export bill discounting’ is commonly used term in
with bank. Bank takes
Possession of the bill. presents the bill and international trade.
receives cash.
When there is an export to an overseas buyer on credit basis, the
Fig. 6 : Bill Discounting Proces
s exporter needs finance immediately on shipment of his goods.
The bank will keep this He approaches his banker to finance against his exported goods
bill in possession till the due date?
maturity i.e. due date, th by producing documentary proof of export and avail finance.
e ba nk wil] r ‘ h ccept
, :
and WU!rill receive: cash from him* ifWU! the pres ent the bill to t h e a Export bill discounting is common in International trade.
bill is honoured. In case, 8
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44 Innovative Fi
‘ j ? [nfrodtic ‘Howto
ly a te Tradiio
chao mie al Services
nal Financi VIC | 453
7 ae
ort bill discou nting work
How does exp goods and received T 5,000 worth of bill of exchange from its =
| . goods move out of the factory, the Custom, creditors and if the company chooses to discount bill then bank
Once the go x py exporter completes customs forma}; % will immediately give the amount to the seller and provide
Agents app! 0 5 : and delivers the necessary Customs doc, instant liquid ity to the business after deducting fees.
and shipping bill; &Ce egy _—_ |
sform calities completed Sent
behalf of export Another benefit of bill discounting as far as banks are concerned
Once customs 70 to shippin Carrier Ny i 2.
exporter can panic one
Fg "cl
rs PPM tO
at buyer's place. After hang, car is that banks earn commission on the bills discounted and iit
: ; |
goods to final destinatio cue; Bill of Lad; Un t leads to extra income for the banks and this type of income 15
-areo to shipping carrier, they 155 hi INS unde less risky as compared to other types of finance/loan given by
. a ee
or Airway bill — Lading/airway Nec banks.
shipments
| nee Hike Bill of bill, cam," | |
export Rn + certificate of origi, bill of exchange 3 As far as the seller is concerned there is no need for collateral
invoice, packing ited with bank with a request Of disc, | and hence the assets remain with the business only and there
OO . | \
|
P! are 5U orcan discount export
orc {er copy documents withOlhsNi is no additional burden of mortgaging the asset with the bank.
| export bills. Export es to discount
ve ri fi es al l d o c u m e n t s an d ar rang export DISADVANTAGES OF BILL DISCOUNTING
Bank _ | | |
and transfer funds to the exporter's account. If the eXPortors
| is in any foreign Currency, he can either convert amount in} 1. In the case of bill discounting, bank discounts the bill upfront
currency\ or he y can open a foreign currency account and tran from the customers
By : leading to extra cost for the holder of the
il] is concerned.
amount accordingly.
2, As faras bank is concerned, it puts an additional burden on the
How to repay the amount financed by bank under export © jank as there are chances of creditors not honouring his bills
discounting? | and also incurrence of additional administrative expenses
After the bill is discounted by bank against exports, the amoy related to bill discounting. Bank receive only small amount of
i aa ae | fees from discounting transaction.
of discounted bills is collected from the buyer as per the agny
terms and conditions of buyer and seller. For example, if expat 3. Another disadvantage of bill discounting is that it is a short
extended a credit period of 60 days to buyer, the bank adjus term source of finance and complete dependency on this type
the amount of bill discounted received from buyer on maturt of finance is not advisable for the business.
date on 60" day. The necessary bank interest till the date , a,
receipt of amount from overseas buyer and other bank charg Dep inh om Sq einen ane ne = Nd nd
are debited to exporter's account. © choose to adopt bill discounting route for its financing requirements
after considering both advantages as well as disadvantages.
ADVANTAGES OF BILL DISCOUNTING
l. The first and foremost ad vant _ FRAMEWORK
age of bill discounting is th
get the cash immediatelyforor 4; at!
Ez 5
dav to racthy i the bust
and as you all know thay 1; + _ mene Ines xi Lhe process of bill discounting can be explained as under;
is for human 1an bod V that liquidity is to business is what
body, j aL | .
Survive h2 JuSt as without water a human aly. The seller sells the goods on credit and raises invoice on the
in the sam e way wi thout liquidity 4 busi buyer,
rie aa ive for long. For example, y
if the compan has?
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Finan’ ai services (FYBAF : SEM-II, Ty,
Innovative $
the Inevf oice. By accepting the fy
y er
e r 4 ° a c c e pts . th
The bu ges pay
ent on due date. Wo Introduction to Traditional Financial Services
led
buy. er acknow finance company or bank =
|
.
the communication networks like the Structured Financial
approaches
Seller
creg;,
ag Messaging System (SFMS) and adopt the system of 'value
"og
e le gi ti ma cy of th e bi ll an d dating’ of their clients’ accounts.
The bank verifies th
of the buyer. Banks should open letters of credit (LCs) and purchase/
fu nd s to th e se ll er afte; 4 discount/ negotiate bills under LCs only in respect of
de s
The bank provi fe es as pe r no rm s, dug genuine commercial and trade transactions of their
un t/
appropriate disco borrower constituents who have been sanctioned regular
d u s e s it f o r b u s i n e s s
The seller gets the funds an credit facilities by the banks. Banks should not, therefore,
extend fund-based (including bills financing) or non-fund
da te of p a y m e n t , the financial interm
diary a
On the due based facilities like opening of LCs, providing guarantees
the money from the buyer. and acceptances to non-constituent borrower or/and non-
constituent member of a consortium/multiple banking
| arrangement. However, in cases where negotiation of bills
Master circular of RBI addressed to all scheduled com, drawn under LC is restricted toa particular bank, and the
banks has given below stated guidelines on Discount
beneficiary of the LC is not a constituent of that bank, the
Rediscounting of Bills by Banks. (For Reference Purpose oy bank concerned may negotiate such an LC, subject to the
Banks may adhere to the following guidelines while Purchas condition that the proceeds will be remitted to the regular
discounting/negotiating/rediscounting of genuine commen banker of the beneficiary. The prohibition regarding
trade bills: negotiation of unrestricted LCs of non-constituents will
continue to be in force. Bank Guarantee (BG)/LC may be
(i) Since banks have already been given freedom to deci issued by scheduled commercial banks to clients of co-
their own guidelines for assessing / sanctioning Work operative banks against counter guarantee of the co-
capital limits of borrowers, they mav sanction works operative bank. In such cases, banks may be guided by the
capital limits as also bills limit to borrowers after Prop provisions of paragraph 2.3.8.2 of the Master Circular
appraisal of their credit needs and in accordance Further, banks must satisfy themselves that the concerned
with
loan policy as approved by their Board of Dire co-operative banks have sound credit appraisal
ctors and
monitoring systems as well as robust Know Your
(i!) Banks should clearly lay down a bills di Customer
approved by their Board of Directors,
ronsistent with their policy of Sancti
scounting pol
which should) os pedo Coke Gos mae
oning of worl themselves é KYC
that ae : been FS
rh ie properly
his, in ththese —
cases.
In this case, the procedure for Board app
res Sometimes, a beneficiary of the LC may want
to discount
theeebills 1a ne tend
e Paer
nkeds coojre operating process from thet the bills with the LC issuing bank itself
. In such cases, banks
these are realised. Banks may discount bills drawn by benefi
rating pr esses and simplify® ciary only if the bank
ae re IN Fespect of bills finaoc
ncin g. In order ‘oad
has sanctioned regular fund-based
credit facilities to the
“cited problem of delay in beneficiary. With a view to ensuring
realisation of bills, ba that the beneficiary’s
take ady bank 1s not deprived of cash fl
ows into its account, the
beneficiary should get the bills
discounted / negotiated
RS Ey ee ey toe ee
Rite oF fete htc Eee eS aa pe 282
Ty ee la eee EASY Set ESR a es ee ge pl [;
——
Mee Gm
EEE
-
|
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«aye aoe (EYBAF | SEM-I, ee
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50 Inno! ating Financial services ( RAGA shy
S BI L MARKET SCHEMES 4 Int roduction to Traditional Financial Services 51
— | (vii) According to the modification of the scheme in 1971, the bills

of exchange relating to the sale of goods to government
: | ‘nts < re » ies well as to
BS = i ‘on sei ee aah ea Scanner he scheme.
wnIntro ducts
--1roduced a new bill market scheme in Nove
A i ; « . 1
The RBI ae nf developing a genuine bill Market jp Ing; | Advantages
to time. As per the a,j)
WO! ea sad { since then from time | _
under the scheme mug; The advantages of a genuine bill market to the banking system are
= lees the bills covered
i.e bills which evidence
wal i bilat ln sale and/or dispatch g | stated below.
+ bills by the RBI which jc <
and rediscounting of Hes bills by ch is called 1, Normally, bills are self-liquidating and the date of repayment
Rediscounting Scheme . of a bank's advances by way of the discounting/rediscounting
O definite. | In contrast,
f bills s isis definite. self- liquidat
cash-credit is not t self-
trast, cash-credit liquidating.
|
Features 2. Bills offer greater liquidity to their holders as they can be shifted
. | to others in the market in case of need for cash.
The main features of the New Bill Market Scheme are as folloy ; ;
'3:, A well-developed bill market helps greatly m evening out
(i) All licensed scheduled commercial banks including the ny liquidity throughout the financial system, as those with short-
sector banks will be eligible to offer bills of exchange ty term surplus funds of whatever duration can invest them in
Reserve Bank for rediscounting. | bills of desired maturities and can always hope to unload their
holdings of bills to others in the market whenever they need
(ii) The bills covered under the scheme must be genuine trad cash. Thus, the short-term surpluses of some become available
relating to the sale or dispatch of goods. | through the market to meet the short-run deficits of others.
(iii) The Reserve Bank rediscounts these bills. That is why} 4. The commercial bill rate is higher than the Treasury bill rate.
scheme is also called ‘Bills Rediscounting Scheme’] Therefore, commercial banks and other financial institutions
Bu
rediscounting facility should be available at the Reserve with short-run surpluses to invest find bills attractive not only
offices at Mumbai, Kolkatta, Chennai and New Delhi. Toa for their liquidity but also for their return.
ee of large number of small bills, such bills sht - To the borrower, the cost of bill finance is lower than that of
given in bunches. a 5X
© ones | cash credit, because the bills carry the additional security in
(iv) te Should be drawn on and accepted by the purchs the form of acceptor's signature, are time-bound.
= Ry eee 2 bank is not a licensed sched uledte 6. Extensive use of bills as an instrument of short-term commercial
scheduled bank in addition bear the signatures of a I& credit and rediscounting of bills by the RBI makes the monetary
TG system
: Bll) elastic. Whenever the economy) is in need of more
highly
(v) The bills should have maxim £90 cash, banks can get a part of the bills in their portfolios
um of 90 days. rediscounted with the RBI and thereby increase the supply of
(vi) The bills should bear at least two good signatures money. The bill discounting process helps to meet the enhanced
needs of busy-season finance.
elie
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52 Jymnnonative. Emanctal vefeer: (FYBAF . SEM-i1, YB,

a =
ithou scrutin RY —_— act

ted bills witho y Mtroduction to Traditional Financial Services A at.
Bankers discoun | £1
The Enforcem
ent Directorate (ED) attached proper; AY FACTORINGG, © BILL DISCOUNTING
ent extile export fj
¥ 14.5 crore of Gujarat-based Wy P "ARE Coli. Definition:
Bill discounting is a source of short
Pvt. Ltd. in May 2018 for ee a 5 by 04.49 1 Factoring receivables is a source
' availing bill discount facitle. WES I ‘Sains of shart term finance in which the term finance in which the seller of
and its direct, trader sells their unpaid invoices goods draws up a bill of exchange
Cs). The firm ABC Cotspin
Credit ("=>
2 e
id against the banks by availing bill gic" "to factoring companies such as on the buyer of the goods and then,
and financial institutions at discounts the said bill of exchange
acilities si
rc riches of SBI and BOB agains; LC», i Wy | .aLinks
disco untnted rate. Th Then these‘
discou with a bank or financial company.
: ; ing
jthout making any genuine
any
2014-15, the director, W {documents 1; *XPort factoring companies immediately
prepared and signed the expor re . nts . ke com sav the value of their invoices
INVOICE, certiticate of origin, certuicate of quality f Cer tifica, Oa fee to the trader.
quantity, phytosamtary ETA — list, 5 ills of exc 2, Funding Arrangement:
requesi letter to bank for discounting DIE bills He alse The factor gives maximum part The entire bill is discounted and
prepared bills of lading by shipping agents like Seaman {1 of the amount as advance when paid, when the transaction takes
Far Sailing Shipping Company and United Container Lines ,| the transaction takes place and place.
prese nied those to SBI and BOB. The bank officials of Spy .| the remaining amount
at the time
BOB discounted the export bills without proper scrut nv, with Of Settlement.
ensuring that the shipping bills were issued by the cg 3, Parties :
authorities, which is mandatory. The bank officials There are three parties involved The parties involved in bill
discounted export bills on the basis of LCs issued by Indugg in factoring viz, Factor, Debtor discounting arrangement are
and Client. Drawer, Drawee and Payee.
and Commercial Bankof China, which was restricted.
aed nips — 4. Control of Sales Ledger:
In factoring, the bank giving Whereas bill discounting requires
FACTORING V/S BILL DISCOUNTING) om tive <ates ledger, control of credit takes the onus of checking Seller's own accounts team to take
care of the sales invoice and follow-
IN RECEIVABLE MANAGEMENT {| jonge css oak The work ups.
at collection and follow up is

As both factoring and bil] discounting are sources of Short outsourced to the bank.
finance which are offered by banks ana financial instituia 3. Size of Business:
knowing the difference between factoring and bill discountiq Factoring is useful for larger Bill discounting might be useful for
helpful in receivable management. Exotorin and bill discoutl businesses where an entire line-up small businesses. Also, bills might
offer sellers, the facility to collect their ales faster wilt ' not be available on a continual basis
_k] mi y oe Since the use of factoring and bill discounting?
bloc . : a
anaged. ne for discounting.
cues a oo these sources of Short-term finance ad 6. Type:
"
§ traders and are useful in international trade a5* Factoring can be of two types In bill discounting is under recourse
oa :
Despite their Simi recourse and non-recourse. only.
larities, there
between factoring and bill discon tS ary
unting.
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s ( (FY
Innov.ative F i| nanciaat l SeSerrvviice
54
1winent :
7, Company Involt Bill Discounting require. introduction to Traditional Financial Services
allows
- the 55
Taking factor services <5 and team to be involveg in th 4 22, Explain the process of Bill Discounting,
his bust oe
seller to focus ON
who wan exper
process Of recover y &
ty 23 What are the features of Bill Market schemes,
the factor | ne of credi
i adit to 24. Distinguish between Factoring and Bill Discou
nting.
field can providea an ‘an services.
| 25. Describe the types of factoring in detail.
him along with collectio - - ~ | 26, What are the parties involved in factoring arrangeme
nt?
8 Governing Statute: Bill Discounting ; . oe Describe functions of a factor.
an)
Factoring 1s not governed by Explain features of Recourse and Non-R ecour
se Factoring.
specific Act
Explain features of Advance and Maturity Factoring,
9. Compensation to Bank or ae Describe advantages and disadva ntage of factoring.
Financier: | Distinguish between factoring and fofaiting.
The bank receives
In factoring bank or financier, discouns | 32. Explain mea
ning and working of fofaiting.
charges commissiis on along wirith charges for bill d iscounting 33, State merits and demerits of forfait;
ng.
| interest. _ —_— = — ij | 34. Write short notes on:
(i) Definition and types of financial
' REVIEW QUESTIONS (ii)
|
importance of financial services
services
(iii) Objectives/ Functions of financ

ial service market
(iv) | Characteristics of financial servic
I. Define financial services. What are the types of finane e market
ja| Seryig (v) Financial Service Market
2. Whatis the importance of financial services market? | (vi) Financial Service Market Co
3. Describe objectives of financial service market. ns tituents
(vii) Growth of Financial Services in In
4. State the characteristics of financial servic dia
e ma rket in brief (viii) Problems in Financial Services
5. Explain important aspects of Financial Servic Sector
e Market. (ix) Banking v/s Non-Banking Financ
6. Explain in brief the Financial Serv e Companies (NBFC)
ice Market C onstituents (x) Regulatory Framework
f What are the problems in Financial Se
rvices Sector? | (x1) Factoring
5. Distinguish between Bankin § an
d Non-Banki ng Companies. (xi) Forfaiting
Explain in brief the regulatory
9.
framework of NBEC (xii) Types of Factoring
10. Describe the types of fa |
ctoring in detail. (xiv) Parties to factoring arrangemen
1. Whatare the Parties
involved in factoring ar
| t
rangement? (xV) Functions of factor
12. Describe functions |
of a factor. (xi) Ad vantages of factoring
i. DFnin. Cman.res :ao: Eai and MaNotun-rityRecure Factorin | (xvii) Disad vantages of factoring
b
is. Dinan cae
a “al
Factoring, gvantage of factoring.
|
(XViii)
(xx)
Fac toring in India
Factoring v/s Forfaiting
17, Explan Co * "Ms and fofaiting. | (xx) Working of forfaiting
Ecco se | (xxi) Advantages of forfaiting
a Ing of fofaiting.
ren “merits | (xxii) Drawbacks of forfaiting
Bill Discounting anofd fo
iterfaitinoe&
A. Eamon
x Explain
(xxiii) Domestic and Export Fa
features. ctoring
| (xxiv) Advance and Maturity
vantages of Bill Discoun Factoring
et Schemes wit ting. (xxv) Recourse Factoring
h their advantages,
| (xxvi) Non-Recourse Factorin
g
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——_ <4 Financial Sermices (FYBAF: SEM-[1, TY
Ba
5. Sy
ae iS
Wot
2
Innovative Fama
57
es Dor ed disadvantages of Bill DiScouny Introduction to Tradztronal Financial Services
(xxvil)
Rill Hjscounting Hig 9, _— unarket facilitates the trading of foreign exchange.
(xxvii Aare
(xxix) Feature” at aie ounting (a) Capital Market (b) Money Market
xXx} Condition _ a (c) Commodity Market (d) Forex Market
(xxxi) Bil] Markel = neouriing Ans.: (1) - (a), (2) - (a), (3) - (c), (4) - (a), (5) - (b), (6) - (a), (7) - (c), (8) - (d),
(xxxil) Factoring ¥/“ 2 [Market Schemes (9) - (a)

(xXX111) Advantages of - vo Schemes 'B, Fill in the blanks:
(xxxiv) Features of Bill Marke" 1. refers to capital which is available for financing the new
| business ventures.
te OBJECT IVE QUESTIONS | 7. is an apex housing tinance institution in the country.
> — — NR 3. is defined as a process of transformation of illiquid asset into
| security which may be traded later in the market.
Select the appropriate options and rewrite the following | 4; are in charge of the issue process.
‘te should have maximum of days, 5 is a fund based financial service which provides resources to
finance receivables as well as facilitates the collection of receivables,
‘mall.
Tee (b) 180

(a) 1) (d) 120 6 factoring provides the entire spectrum of services such as
(c) 30 A
Instrum ents collection, credit protection, sales-ledger ad ministration and short term
in g is governed by the Ne go ti ab le
Bill Discount finance.
(a) Negotiable [nstru ments Act 7 Thenameot the factor is not disclosed in the factoring although
(b) The Contract Act | the factor maintains the sales leclger of the supplier.
(c) Sale of Goods Act (d) None of the above 8: is only financing of foreign trade.
The introduced a new bill market scheme in November 9. — requires letter of credit.
(a) SEBI (b) SBI Ans.: (1) Venture capital (2) National Housing Bank (3) Securitisation
(c) RBI (d) None of the above (4) Merchant bankers (5) Factoring (6) Full (7) undisclosed
Inthe factoring, the factor does not make any advance pay PO rene ane
(a) Maturity (b) Advance | Column A Column B

c) Botha) & O — — =
(<) 5 E 4 (b) (d) None of (a) & (b) 1. Bill Discounting (a) Under recourse or no
100% finance is provided in : ee: 7 :
; ai 2, Factoring recourse
(a) Factoring (b) Forfaiting 3. Opportunity (b) Booming capital market
(c) Both (a) & (b) (d) None of (a) & (b) 4. Threat (c) Non-fund based service
—— may be for financing a series of sales involving bulk trade 5. Securitisation (d) Fund based service |
(a) Factoring (b)b) Forfaitin g 6, Underwritin g fe) Under recourse
(c) Both (a) & ) (d) None of (a) & x (b) (t)fi Financial «cams
A is defined as, "any person who is engaged in the busins 4c
issue Management", ; (1) = (e), (2) = (a), (3) - (b), (4) - {f), (5) - (c), (6) - (d)
(a) factor
| State whether true or false:
(b) manager
(c) merchant banker p Under hire-purchase the buyer gets ownership only after the payment
(d) insurer
Financial Services are ' of the last instalment.
(a) intangible 2: The non-fund based services are called asset based services.
(©) ‘Variable (b) inseparable
(d) all of the above
4 ‘FOO a Oe TS eT i
D or
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ISSUE MANAGEMENT
| AND SECURITISATION |
Issue Management and Intermediaries

, e Introduction
7 e Merchant Banker/Lead Managers
q e Underwriters
"_ Bankers to an issue
e Brokers to an tssue
* Stock Broking
h oe Introduction
e Stock Brokers, Sub Brokers, Foreign Brokers
e Trading and Clearing/ Self Clearing Members
e Stock Trading (Cash and Normal)
, © Derivative Trading
Securitisation
e Definition
e Securitisation v/s Factoring
| e Features of Securitisation
e Pass Through Certificates
e Securitisation Mechanism
e Special Purpose Vehicle
ge a Pe a — LB a
ah | | pe i nibs tae A es
ol; (HE SE
eT Go ee oe
Pd ELDLTLEL mia ite opel ed gi rts FAME Mt. e MEETS HT hia Teh Mes Mn in
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1 Goroidts (FYBAF: SEM-II, Tyan,
a a Financial: ( vN
{) Imnovarnee -s¢ets ‘ :
rece Managementand Securitisation 61
R e Tu nae fisa tion
=securitisable
_ Securl . |a | | (ee
|
s Benefits 9/ af = bone
© on Securitisation ” MERCHANT BANKERS / LEAD
desis asinine
MANAGERS .
ee eee eee ——_
NR Guideline TT
@ Neil a
are the Merchant Bankers?

No
D_INTERMEn,
h
bankers
wo by
' Merchant ankers
p provide p
advice to entrepreneurs right from the g
age of conception of the projecta till the commen cement of
| UE MANA GEMENT AN ) A Sig aed _
[SS \roductiony Merchant bankers are in charge of the issue process.5
[hey act as(5 Intermediaries between the company and the investors.)
!
CTION .
::
de id
They ”
are also responsible for preparing
a . “i ] 1
the prospectus ” an q
3 JNTRODU : ve marketing the issue.
I's.
kets In India have 4 long history The
The on ED = “the oldest stock exchange which com me Securities |
t
: ws in 1875. rior to independence, the securities mark, Investor
was regula soos | Merchant Banker
ound Thus,9 the new issues In the market
unreguiated. , >
|
the anions Capital Issues CCI) as per the PrOViSiong | BR
Issues (Control) Act, 194 ‘How ever, trie Act was re
Capital |
and the office of the CCI was abolished in 1992.
| : ulatory body to
j
Fig.ig. 1 :1: Role of Merchant Banker |
There was a need felt tor Setting UP 4 reg
investor protection and for the promotion of Securities Marke =
Securities and Exchange Board of India (SEBI) was congtigy Definitions of Merchant Banker
12" April, 1988 and established as a statutory body on 21st Fehr, =
1992. Regulation of Indian securities market required SyAs per SEBL, a merchant banker refers tof “Any person who is
simultaneously perform both disciplinary and developmenij,engaged in the business-of issue management either by making
The disciplinary dimension involves providing for disincentiy,atrangement regarding buying, selling or subscribing to securities
penalties for unfair practices, The development dimension ©* acting as manager, consultant or rendering corporate advisory
positive aspect that involves providing incentives to mservices in relation to such issue management”:
participants to engage in a constructive role. el
Thus merchant bankers are the persons who are engaged in the
Intermediaries are indispensable in capital market. They gpusiness of issue management. Issue means an offer for sale of
pivotal role in today's capital market. While some trade ded Cuties by any body corporate to public. It is mandatory that all
ma In ‘e F
public issues should be managed by merchant bankers functioning
transactions requires several intermediari
es at different levek
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fostie’ Managenten! amd Sccurtiisation
63
en I com
pulsory registration With | The Merchant Banker has to ensure the compliance of all the laws
Yand regulations governing the securities market.
i
SEBI
Regulatory | Compliance
Picmiewinrk
n Carry On a.
-
s in th is ca te go ry , ca MERC j Returns
| INVESTOR
Capital
-hant Bank er ve
Catego ry ( e r ta na ge me nt LE. pr ep ar ation of Prog ISSUER
Market
NCR
BANKER Protection
related to SUE or _ tie-up of financiers, final. Information

ti ee of <ubscription etc. could alLoy
deternuning
Cy
Guidance | Co-ordination
Te So
of securities, managers, unde ers OF portfoli in.
g
v i s o r s , c o n s u l t ani
ts,
ad | INTERMEDIARIES
er s ca ” ac t as ad vi so rs , COnsy Itan
erchant Ba nk g
Category II portfolio managers.)
©
managers, unde
rwriters and Fig. 2 : Scope of Merchant Banking
an| t B a n k e r s ca n ac t as unde TI'WTlters, ay The services provided by Merchant Bankers are as follows :
Category III (Merch
153Y6-
and consultants to an VM Raising finan Merchant Bankers help their clients in ra isin
t o n l y as a d visor oy c o n g
t B a n k e r s ca n ac finance by way of issue of a debenture, shares, bank loans, ete.)
Category| - Merchan
to an issue) They tap both the domestic as well as the international markets.
Finance raised by this method may be used for commencing a
can act as lead m an agersh
Only categ@l Merchant Bankers new project or business or it may even be used for expansion
issve/Category | Merchant Bankers are registered by thes wy! and modernization of an existing business.
—
2/ Management of public offer:[This is - rayon operation for

Services Provided by Merchant Bankers the most Merchant Bankers in Indid4) He has to assist his
corporate clients in raising funds from the market. He may also
The Merchant Banker plays a vital role in channelizi
ng the finan be required to advice the client on various matters that affect
surplus of the society into productive investment avenues, ] their finances.
Merchant Banker hasa fiduciary role in relation to the invest
or
has to ensure that only quality issues are published by the The main area of his role includes:
firm
is required to exercise due diligence to ensure
the adequacy _- Designing of instrument
mec na
appropriateness of the disclosures made in
he er among al the ier

the offer document]
_@ Pricing the issue
the activities of the Reoj By Co Registration of offer document
gistrar to theasissue, a
Bankersei to me
the
Underwriters , Brokers, etc.
e Underwriting
e Marketing of the issue
A
aT e -
2S
See
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wes (FYBA F: SEM-II. TYR
! seri
orale sania
—
Jesu Management ani Secerefesalrot (0.7
Allotment : ; ages
ting anvstack e™
- XC 1d i
—_— banks, long-term lendin
*
g ins
;
tit
=
uti‘ ons, and the Board for
—_ The dis
tribution SEAT tribut ion Ne Industrial and Financial Reconstruction (BIFR). They also plan
; t and dis
| issified as
~
mink
institution,
1 1
‘
Ww
Oy, and execute
ow
full revival
Why,
packages.a
: Placemen Banker aan be clk nvestors CONSISE of | ha | |
Merc sof tution Mer cha nt bankers now also act as the paying
The k oftio
insnal actors,
he banks etc. M wah) 0 Servicing issues:
"A oar silty
Mr” tabt"
ne |
estor Hh af tH \ The sj 2h agents for service of the debt- securities and act as the registrars
Foreign Ins ants the wholesale an hy a2 lerq any , 3s well as the transfer agents. In this way, they maintain the
network RE research report woule Ne'p Merchan, registers of the shareholders and the debenture holders and
A good Pe nvestment recom Of, Th a, also arrange the paym ofe
din tnd and or the interest that 1s
vide
iustif
to JuS HE.y. the
fepends upon the »networking 8 wi With the inJS ts due to them.
|
distribution <
Merchant B ces;
ad v jsory Services Corte n Panker, IX Other services: Along with all| the services te e,
| mentioned abov
at
Corpor | e nitions to the financial problems of the; P to, the merchant bankers also offer certain other specialized
customized solu "Or advisory role is financial rest Th services such as advisory services on matters such as mergers,
One of the key hs ise iS rehabilitation and t "Ucty amalgamations, tax related matters, on the matter of recruitment
Another area er dey UInay, of executives, the cost of audit as well as its management among
mana gement. several others. The scope of functions, activities and the services
o r y : M e r c h a n t B a n k e r s a r e s o m e times ase provided by the merchant bankers are ever increasing and
5 Project advis
m th e e a r l y s t a g e o f t h e i r P r oject. y growing with the constant development in the money market.
"with their clien t s f r o
Bankers provide poinputs
rt .
to their cents In Prepa ratio n
g Obli gati ons and Resp onsi bili ties of Merc hant
detailed pr oj ec t re
rc ha nt Ba n k = ar ra ng e to tie| y Bankers as per SEBI
_6. Loan sy nd ic at io n: Me
r clientns. pro
for theinta Th ecedMe rc ha nt Ba nk er al so he lp s th e Cli e) So me of th e obligations of Merchant Bankers are listed below;
docume tio ures.
1. Amerchant banker shall make all efforts to protect the interests
7/ Advise on modernisation and expansion: Merchant ban} of investors.
| advise on amalgamations, mergers,
foreign collaborations, diversification acquisitions, takeoy
of business, technol 2. A merchant banker shall maintain high standards of integrity,
up-gradation, joint-ventures, etc. dignity and fairness in the conduct of its business,
i Special assistance to entrepreneurs and small compan 3. A merchant banker shall fulfil its obligations in a prompt,
ethical, and professional manner
Merchant banker advises entrepreneurs and smal! compa
ae i ss . Opportunit 4.
on avallabilitylity and exiJ stence of busine A merchant :
banker shal| l at all tim . i
es exercise due diligence,
ons, incentives and gov,ernment policies
I es
andle ensure proper care and exercise
; ;
ind :
ependent professional
them to take advantage of this option available to
them, tol judgment.
best of their Ca pabiliti
ities.
5. Amerchant banker shall endeavour to ensure that - (a) inquiries
9. Revival ~ of. Sick
feels sj units:
790 A merchant bank he] ps in reviving | :
from investors are adequately dealt with; (b) grievances of
RES, They negotiate with various agencies suc investors are redressed ina timely and appropriate manner; (c)
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TT,ays Fyne
: [serv (0547-5601, 7,, | WR
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suas
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omptly ; the
\y
$, |
%
\
Ef
ho Wk
66 [7706 ri "we “6 nat remedied a J's
WW cnt p l by
re a COMP ir steps be AWaj Wy josie iN fanagenient wad Securitisation
ve n ma
evstem. la
j - oe bs
A merchant banker shall not divulge to anybody either orally
n — of any =
ad\ pres under the regulatory ©
» that adequate ,: orin writing, directly or indirectly, any confidential information
PSPS ate dis Oe
ban ker sha ll — in 3 about its clients which has come to its knowledge, without
- amerchan te e ina timely Maine er ID accor, day, a 4 taking prior permission of its clients, except where such
= » investor Jel s s
able regulate-onPn
mesade tolicthe 5 IG
s and ZU dec NESon SO as to “Na
EHisi , h | disclosures are required to be made in compliance with any
ar a
femake slanced and inform
= Welle ~ 4 law for the time being in force.
tO :
hall |
attempt
that the fo ensure
A merchant banker shall ensure that any change in registration
anker shal
_ true and adequate informatig ny
16.
status/any penal action taken by the Board or any material

OF exaggerated Claim. “i‘ change in the merchant banker's financial status, which may
; W misleading
ani aie made aware of the atten |
making al Ds
,
adversely affect the interests of clients/investors is promptly
;
7
ay
informed to the clients and any business remaining outstanding
-
ta ti on
=
srepresen n
=
an y’ i n v e s tment decisio
cents that 3 is transferred to another registered intermediary in accordance
to e n s u r e
a n k e r sh al l endeavour with any instructions of the aftected clients.
A merchant b r be a
letter of offe
document,
- the prospectus,
e
offer
to th e i n v e s t o r . 4 a 17. A merchant banker shall not indulge in any unfair competition,
avail a b l
related literature 15 made : such as weaning away the clients on assurance of higher
of issue or the offer. premium or advantageous offer price or which is likely to harm
ri mi na te amongst its the interests of other merchant bankers or investors or is likely
rch ant ban ker sha ll not di sc
9 Ame
| and commercial cons ideration to place such other merchant bankers in a disadvantageous
save and except on ethica position while competing for or executing any assignment.
10. A merchant banker shall not make any statement, either Oy 18 A merchant banker shall maintain arms length relationship
written, which would misrepresent the services thay between its merchant banking activity and any other activity.
merchant banker is capable of performing for any client
rendered to any client. "49. A merchant banker shall have internal control procedures and
financial and operational capabilities which can be reasonably
11. A merchant banker shall avoid conflict of interest anda expected to protect its operations, its clients, investors and other
adequate disclosure of its interest. registered entities from financial loss arising from theft, fraud,
and other dishonest acts, professional misconduct or omissions.
12. A merchant banker shall put in place a mechanism to reg
any conflict of interest situation that may arise in the cond =0- A merchant banker shall not make untrue statement or suppress
of its business or where any conflict of interest ari SES, any material fact in any documents, reports or information
Shall
reasonable steps to resolve the same in an equita furnished to the Board.
ble mann
13, A merchant banker shall make appr
opriate disclosure to) 21. A merchant banker shall maintain an appropriate level of
client of its possible source or potentia knowledge and competence and abide by the provisions of the
l areas of conflict of da
and interest while acting as Act, regulations made thereunder, circulars and guidelines,
merchant banker which wa
impair its ability to render which may be applicable and relevant to the activities carried
fair, objective and unbi
ased sent on by it. The merchant banker shall also comply with the award
14. A merchant banker
s hall alway of the Ombudsman passed under the Securities and Exchange
Possible advice to th always endeavour to render thet
Board of India (Ombudsman) Regulations, 2003.
e clients having regard to their needs
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IJ
_e(EYBAF:SEM-IL TYByg
IS
ee wRD m
— 1 Sep TIC
22
‘8
A merch
Inno
panierShall OP ogal proceedtngs, ye PPO jue Man
pout any act
? oe
all en:
af
.
“eal breach or noncompy;

le :
. : r
iy
a Mana rementand
ualified to act
-
|
Sccurttisation
|
in the capacity so employed
' eh
or appo
; ‘
non
(including having relevant professional training or experience).
i
informed iy2 osres sect OF mater! lirections of the Boarg “°h

againstit WN" "* sgulatiOons, & Or. Foe! | | |
Ni jaw, rules: aay t Every lead manager has to enter into an agreement with the
other regulatorY — fits employees shal] issuing, Companies to determine their mutual rights, liabilities
sanker or any O° 1ent adv; not and obligations relating to such issues.
23. (a) Amerchant ane! | any investn dvice ay, %
directly ing blicly accessible media, Whethg, & A Merchant Banker should not lead manage an issue if he isa
eecurity in a | ame unless a disclosure of his It promoter/director/ associate of the issuer. However, he may
time or non-rea Be -hort position, in the said Secur be appointed if he is involved only in the marketing of the issue.
ch advice. Yh A Merchant Banker is prohibited from acquiring securities of
:ployee of the merchant any company on the basis of unpublished price sensitive
the merchant banker Shay % information obtained during the course of any professional
ao such advice, Ps: gy assignment.
ee sh a 11
ov dependen also dis clo se the inte rest .
t family memb| ers l a
employer me rcne hant ba nk

ty
er
,
,
wh
i
il
n
e
c l
r
u
e
d
n
i n g th ei r lo
dering Such a hy
ng oral
_ UNDERWRITER _
l se cu ri
position in the sa
d
e t h e r e s p o n s i b i l i t i es 4
e r c h a n t b a n k e r sh al l d emarcat
24. A m it cle “ar
arllyy 50 as to ay, Definition
ari app oin ted by -
various intermediaries
description.
anv conflict or confusion In their job Underwriting can be defined af “an agreement with or without
25. A merchant banker shall provide adeq uate freedom and Powe conditions to subscribe to the securities of a body corporate, when
to its compliance officer for the effective discharge of§ the existing shareholders of such body corporate or the public do
compliance officer's duties. not subscribe to the securities offered to them’ In other words, the
underwriter agrees to subscribe a specified Number of securities in
26. A merchant banker shall develop its own internal code; an issue, in the event of non-subscription of the same. Thus,
conduct for governing its internal operations and laying dow underwriting is in the nature of contingency planning in issue
its standards of appropriate conduct for its employees a management,
officers in carrying out their duties. Such a code may extend;
the maintenance of professional excellence and standard Meaning
integrity, confidentiality, objectivity, avoidance or resoluty
- conflict of interests, disclosure of shareholdin gs and interes
An underwriter is a person who engages in the business of
etc.
underwriting the public issue of securities of a particular company.
27. A merchant banker shall ensure that good co They agree to take up securities which are not fully subscribed, They
rporate policy
and corporate governance ar
a
make a commitment to get the issue subscribed either by others or

e in place
by themselves. Underwriting an issue is optional and not mandatory.
28. A merchant bank
er shall ensu Underwriters are appointed by the issuing companies in consultation
appoints to conduct "Rs re that anyy person it employs $ with the lead managers/ merchant bankers to the issues. A statement
is fit and proper and others
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“a wees
iia (FYBAF - SEM-IT, TYBMs sg
=]
Inmovation Financia ot
- 2
0 E /
Management and Securitisation
to the effect that in the opinion of
the lead manager, the under,
; 6 p . festit ‘i . .
eir 0 bligation Shouts be Neo 1i facilitates the geographical dispersal of
4
securities bec ou
ause
assets are adequate to meet th maintain contacts with inves

N orally, the underwriters
in the prospectus. "Tay
throughout the a
‘ t n e are pose
expos e d to tl te risk of under Subse;; Ption
The underwriters “Dav ng und |
forassuming the risk they are remu nera ted by payi Trigi “ft nak
cjassification of Underwriters
commission.
on from the SEBI iswg mandatory : fox actin : underwriters in India may be classified into:
Certificat mts trati
if e of regis i }
re IStr Ss By |
A I F = Io # a? the certificate of
Dee BE | aliens 1 ike “10H,

ads & 7 [nstitutional Underwriters
e e
SEBI considers wheth er the neces saT)
past eXPerieng,*
office space and manpower are available, i Non-institutional Underwriters
and cap ita l ade qua cy req uir eme nts .
underwriting
A. Institutional Underwriters
_Importance Of Underwriter The following are the Institutional Underwrite
rs:
Underwriting has become very important in recent years w ith k rio Banks
growth of the corporate sector. It provides several benefits ho Sommereial Banks
company : i SE
fo
” Insurance Companies
. | [trelieves the company of the risk and uncertainty of marketiy L
ve Securities, State Finance Corporations
oc Underwriters have a specialised knowledge of the Capj The Development Banks are also known as Industrial Banks. they
—_—
market. They offer valuable advice to the issuing companyl “have got long term deposits and are in a position to enter in o ng
the preparation of the prospectus, time of floatation and th term investments.| The Industrial banks help the companies by
price of securities, etc. They also provide publicity Service underwriting their shares and debentures: Whenan Industrial Unit
the companies which have entered into underwritj i approaches tor underwriting the Shares and tor direct financial aid,
agreements with them, 7 the industrial banks investigate the prospects of the industry, the
© Ith elexi soundness of the financial requirements, the feasibilities and the
U Nel
Sie p Psstiinngfin
rojanco:ing5 of new enterprises and j
P nthe expansioi ng utilities of the schemes, If the shares and debentures are not fully
a subscribed or the minimum subscription is not taken up by the public
@-|
- j aEIt S builds up iny ‘estors’ of confidence
; within a specified period, the Development Banks come to the rescue
; einj the issue of secu _ i and take up the residual amount of shares and debentures,
Uf ociati on of well-known
underwriters lends pres
e
compe any! and c theainvestor tige to the
S feel that the i] ssue is The Commercial Banks also carry out underwriting.
IS Ssound enough
. fhe issuin
suing company j | The insurance companies are also involved in underwriting
(mportant pros Pi ate : the availability of fonda business.
aVec Or want of f — FE
unds. The State Financial Corporations are also involved in underwriting
| / business for stimulating the capital market.
Arr 7 Th ig + pop row

oe Ly
Auer
,
hs *
ad
um A\ A eke
ity aie 4
f UH r EET, RS
aA J IT
J
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© Financial Services (FYBAF : SEM-II, TYBMS ; $ Eh, W , co
is my y tenl and
pa |
at n
Securifigcntio 73
= i if cc Mi pragen
iM ‘e
B Non-Institutional Underwriters
| F institutional underwriters j 4 jaintain an appropriate level of knowledge and competency
There are two types Of non-institugonal Underwriters in India. I’ and abide by the provisions of the SEBI Act.
Stock brokers 12. Not indulge
2 in any unfair competition which is harmful to other
; we a nderwriters.
_ Individuals
. rc 2 sve
Develop ttits OWN internalal code
cod of conduct for ‘erm
governing its
The Stock brokers act as intermediaries in the purchase.angd Sale Fr :nternal operations, =
s in the primary and secondary markets) hey rapig
‘Securities
supply ap coll i
plication forms or even go to the extent © ting mo Ie;| | underw
very any riter has to enter into an agreement with the issuing
. | The agreement provides for
from the 1
underwriting. , the period during which the agreement is in force,
a
; |
viduvidu
The >» IndiIndi als/ in-f
p nies obtaain-fu
als/Inves tment Commpa n unds fro; N a lax allocation of duties and responsibilities between the ;
number of inves . 7
tors by sellin j
g the shares; ey do ac} a; . underwrite1
r and the client,
underwriters. /
the amount of underwriting obligations,
; hs 8
General Obligations and Responsibilities Of , the period within which the underwriter has to subscribe to
Underwriters the issue after being intimated,
— — —
® the amount
a of commission/ n/ broker:
brokerage etc.
1. Anunderwriter should make all efforts to protect the interes,
of its clients. General Responsibilities
2. Maintain high standards of integrity, dignity and fairness jp An underwriter cannot derive any direct or indirect benefit from
conduct of its business: underwriting the issue other than by the underwriting commission.
I, Ensure ethical act while dealing with issuer. | ; m obligation under all underwri
The maximu : ting agreements of; an
underwriter cannot exceed twenty times his net worth. Underwriters
4. Ensure prompt and efficient dealing with issuer. have to subscribe for securities under the agreement within 45 days
of the receipt of intimation from the issuers.
I Render high standards of service and exercise due diligence.
6. Anunderwriter should not make misrepresentative statements mS B ANKERS TO AN ISSUE i

7, Avoid conflict of interest and make adequate disclosure. =
8. Resolve conflict of interest, Introduction
9. Maintain an appropriate level of knowledge and
5 SES This was one capital market activity which lacked regulatory clarity
10. Not make any untrue statement. for a long time. The ambiguity arose because it was unclear as tc
whether RBI regulated public issue banking or SEBI. As ;
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as (EYBAF 2 SEM-IL, TYBMS - 6 _—
——— tal Seer
2 Innooat!
shen" Pena [ MM.
\; Management and Securitisation
TN
=
ow
[NVe»ctOrsKEY suffered from several regularitiessare Inve] I;
roa [WI :
wes, i ie? wa
conse ue ee’, \ocoptance of late applications after the Closur, \
:
io the registrar to the Issue on the closure of issue subscription.
a ITS, 4 7 =
refund OP:
:
The situation Was set right, with the NOU Ficaticg \ 4
ry iti . > . 4 i
' a % Ee '
hey 4lso he Ip the ISSuUeCr im marketing the issue by distributing
the issue, Ofc: am
Issue)
bl id
Rules, 1994, by bringing Issue bang, ih
; '
he application forms and publication materials.
= to
t
“Tf -
Banke
3
SEBI.
a, EB
of
ambit
The new circular of the SEBI js applicable for all public issues
y
i u
reg lator
-— ‘ the
un
ng on oF after January 1, 2016. The facility allows the bid

The Bankers to an sue ae eneeere a aie
applicati
applicatic on moneyey fromt, :a
related a en
to remain in the applicants account till the time the shares
ications ons «
wIce of applicati
‘
alongwit i t h h
Di
acceptanc
5 amount
are fina [ly allotted,

‘ teanes | ital 1 ret nd of ap | ' . C
. Y sital and rerune
of issues OF Ca
investors In res pect rt F P Catig,
monev. ——
Rankers to the issue collect the application forms and the Money ‘ pefinition
cash, cheque or ASBA (Applications Supported by Blocked Amoun,
a
Depending on the size of the issue there may be many collectig a scheduled bank carrying
\<\s þ per SEBL, "Banker
5 to an is$ue” means
EE
centers and manv bankers. They are appointed in consultation Wit lowing
all or any of the fol vities, ely:- acti nam
lead manager. Infrastructure facilities available, manpower, Pas, a
experience, location of branches, efficiency and cost effectivenes,

i
(i) acceptance of application and application monies;

otc. are the factors considered for selection of bankers to the issue
or call monies;
(il) acceptance of allotment
The Lead Merchant Banker shall ensure that Bankers to the Issue iii) refund of application monies;
are appointed in all the mandatory collection centers. The Lea,
manager also ensures follow-up with bankers to the issue to ge lv) payment of dividend or interest warrants.
quick estimates of collection and advising the issuer about closure
of the issue, based on the actual figures. Þ
LEE ae
Application Supported By Blocked Amount (ASBA)

To carry On activity as a banker, a person must obtain a certificate of
This is a new mode of payment for applying for a public issue, initial as well as permanent registration from the SEBI. The SEBI
ASBA is an application containing an authorization to block the grants registration on the basis of following requirements;
application money in the bank account, for subscribing to an
issue. If an investor is applying through ASBA, his application (i) the applicant has sithnge nefaceciss ar y in fr as tr uc tu re ,ercomm un icct ioelny
ativ
lities and manpow to ef fe
money shall be debited from the bank account only if his/her and data proces
application is selected for allotment after the basis of allotment discharge his activities;
is finalized. Under ASBA facility, investors can apply in any
(ii) the applicant or any director of the applicant is not involved in
public issues by using their bank account. Investor submits the any litigation connected with securities market;
ASBA form to their banking branch by giving an instruction to
block the amount in their account. Self-Certified Syndicate Bank (iii) the applicant is a scheduled bank;
(SCSB) is a Banker to an Issue registered under SEBI (Bankers to
an Issue) Regulations, 1994 which offers the service of ASBA. (iv) grant ofa certificate is in the interest of the investors and;
The banker to the issue will transfer all the applications received (v) the applicant is a fitand proper person.
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= —_—
TYBMS. SEA, wu. il —
a =" Cc
<(FYBAF: SEM-II,
t financial whee ' 1 books of |
. jnnomar _ equired to maintain HOOKS OF accour), a josie! Management and Securitication 77
Abad banker 0's an 3issue FT
of three rs
years ty
listing permiss1on is granted by the Stock exchange to the body
: TIL
corporate; (e) delay in issuing the final certificate pertaining to
the collection figures to the Registrar to the Issue,
Everv bankers i the lead
as ?
compa nv:
manager and the body corporate and such figures should be
submitted within seven working days from the issue closure
nduct For
Bankers To An= Iss ue
date.
Code of C0
— ‘gsue shall make all efforts to protect the iN ter. A banker to an issue shal] be prompt in disbursing dividends,
4 banker foal! interests, Or any Such accrual income received or collected by
J. :
of investor him on behalf of his clients.
ssue shall in the conduct of its business, 9
2. A banker to anissue sis, A banker to an issue shall not make any exaggerated statement,
high standards of integrity and fairness In the conduct of i,t whether oral or written to the client, either about its qualification
business. or capability to render certain services or its achievements in
regard to services rendered to other clients.
3. A banker to an issue shall fulfil its obligations in a Promp,
ethical and professional manner. 10. A banker to an issue shall always endeavour to render the best
possible advice to the clients having regard to the clients’ needs
4 A banker to an issue shall at all times exercise due diligence and the environments and his own professional skill.
on,
ensure proper care and exercise independent Professi
judgment. A banker to an issue shall not d ivulge to anybody either orally
or in writing, directly or indirectly, any confidential information
5. A banker to an issue shall not at any time act in collusion With about its clients which has come to its knowledge,
other intermediaries or the issuer in a manner that is detriment without
taking prior permission of its clients except where such
to the investor.
disclosures are required to be made in compliance with any
law for the time being in force
»- A banker to an issue shall endeavour to ensure that - (a) inquirig
from investors are adequately dealt with; (b) grievances 12. A banker to an issue shall avoid conflict of interest and
investors are redressed in a timely and appropriate manng make
adequate disclosure of his interest.
(c) where a complaint is not remedied promptly, the investor
advised of any further steps which may be available to th A banker to an issue shall put in place a mechanism to resolve
investor under the regulatory system. any conflict of interest situation that may arise in the conduct
of its business or where any conflict of interest arises, shall take
A banker to an issue $shall not - (a) allow blank application reasonable steps to resolve the same in an equitable manner.
forms bearing brokers stamp to be kept at the bank premisesgq
peddled anywhere near the entrance of the premises; (b) accep - Abanker to an issue shall not indulge in any unfair competition,
applications after office hours or after the date of closure of th which is likely to harm the interests of other bankers to an issu
e
issue or on bank holidays; (c) after the closure of the publi or investors or is likely to place such other bankers to an issue
issue accept any instruments such as cheques/ demand drafts) ina disadvantageous position while competing for or execut
ing
stock invests from any other source other than the desi onatel any assignment. 15. A banker to an issue shall not discrimin
ate
Kegistrar to the Issue; (d) part with the issue proceeds unti amongst its clients, save and except on ethical and commer
cial
considerations.
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«< (FYRAF : SEMI, TYBMS , g EM,
SCF.
wi =*1{ 29
rpg 006 0985
a]
and Securitisation
Jnr wiorer jean’ Management
wat th
ISSUE ſr
O AN
is ex pe ct ed to pa y br ok er ag e within two
| g Company
TIye issuin
Bb ROKERS 3 e of all otm ent and fur nis h to the bro ker , on
A member ot a stock ©xcha
months from the: dat
the particulars of allotments ations
made against applic
L PF 11118
4 quest,
req
ns per wn
SEBI, err
SE als any anperson no t being B a membe
£ r of st a pearing irssta
their my »» Wi
WW ithout any charge.
- a who ) ac” -ts on thebehalf

and “sub-broket of a stack broker as an agent ATE) ” F
investors In buving, Selling or dealing :
| ae |
ah a
weohint
exchange —
vise fOr aSSISUNG
rough such stoc stock brokers m e SE G29 STOCK BROKING | Wal
othen
w i t h th e p r o c u remen,
» pe rs on s mainly concerned or s. Compan,
|
INTRODUCTION
| m th e p r o s p e c t i v e in ve st
Brokers on co the -ssue fro
oo oe e al
ngag
; of brokers to market the new issue, 7)
WW numbe brokers and they send their own circula þ is
aps may
brokers Me, © One li ca ti on s to th e cl ie nt s and follow up The SEBI was set up to ensure that the stock exchanges discharge
materials and app
ublicity n. heir self regulatory role stopers its prevent malpractices in trading
ing the subseriptio
V4 rork for canvass and to protect the rights of investars, the SEBI was mandated
the
e Is su e is no t ma nd at or y fo r Publ;
of Brokers to th monitoring function, requiring brokers to be registered and stock
lines, but th
eir expertise and contacts Wig
issues as Per S
EBI gu ide
y i exchanges to report on their activitie—s.|
be us ed for ma rk et ing | he issue. The compan
inv estors could
ve brokers After the SEBI began to monitor brokers, stock broking has emerged
consultation wit h the stock exchange writes to all acti ts of
ers to the ISSye asa professional advisory service in tune with the requiremen
all exchanges and obtains their consent to act as brok automated
addr esse s of the brok ers to the issu e are requireg, a highly matured, sophisticated, screen-based, ringless,
The name s and
. exc hanges in the country.
be disclosed in the prospectus |
ao HE |
br ok er s to is su e are |
The main functions of the
BROKERS, SUB BROKERS, |
3 STi
Offer marketing support for the issue;
ESP FOREIGN BROKERS
ov id in g for dis tri but ion of iss ue for ms at the retail investy
Pr
level;
about the issue; Stock Broker
Disseminate information to the investors
Provide advance market intelligence on the expected respons INTRODUCTION
to the issue. i
iat ts and according t | A bro ker is a me mb er of a rec ogn ize d sto ck exc
SEC O han TEs BY t h o ho is
ce hin the limi sted : 5
Brokers may be paid brokerage wit een -ba sed trading sys yestem of
other out -of -po
-of- c per
: mit ted to do tra des on/
apse the scr
ther connditi ibeded.. The mailing cost and
ditonsions prescrib os L b s L th dif fer ent sto ck exc han ges ) He is enr oll ed as a mem ber with the
= on = = Re pablic
- of :
eee Se! Pee EIG wu concerned exchange and is registered with SEBI.
stock brokers and no payment on that account is made by
companies. A clause to this effect must be included in the agreemen
to be entered into between the broker and the company.
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i
‘ es (FYBAF > SEM-II, rYBMS . SE
87
H seat g Manageme” and Securitisation
/ whether he has any past experience in the business of buying,
Stock broker means a member of - (c) selling or dealing in secu
toy rities:\,
/
eee he was subjected to disciplinary proceedings under
- broker means a person having trading rights In ( he rules, regulations and bye-laws of a stock exchange with
A ad stock exchange including a trading membe;) % respect to his business asa stock broker involving either himself
or any of his partners, directors or employees; and
of registration from the SEBI is mandatory boy
254 broker. (e) ‘hether he is a fit and proper person. SEBL, on being satisfied
reg ist rat ion 15 req uir ed for a SEBI - regist, at the stock bro ker is eligible, shall grant a certificate of
No separale .)
registration to him
ie in more than one stock exchange sy bjecs
broker to Opera
concerned stock exchange. t
the approval of the CON DITIONS OF REGISTRATION
A SEBI registered clearing member (Le, a person having clear “she registration of a broker with the SEBI would be subject to
and settlement rights in any recognized clearing COrPorati, conditions that he
including a person having clearing and settlement rights on.
. holds the membership of any stock exchange,
uire.
commodity derivative exchange) would also not req
separate registration to act as a broker in the concerned Sto (11 would abide by all the applicable rules/ regulations and bye -
exchange with its approval. A clearing corporation is an eng / laws of the stock exchange,,
that undertakes clearing and settlement of trade in SECUTitig
Avould obtain SEBI's prior a pproval to act as a broker after a
traded on a stock exchange. (iil)
change in control, ~>
REGISTRATION OF STOCK BROKERS (iv) pa y the requisite fee to
theSEBI, )
An application by a stock broker for grant of a certificateg we
“(v) would take adequate steps for redressal of investor grievances
registra tion shall be made in Form A through the Stock exchange,
within one month of the receipt of the complaint and keep the
stock exchanges, as the case may be, of which he is admitted as;
SEBI informed about the number, nature and other particulars
member. The stock exchange shall forward the application form,
of investors complaints,
SEBI within 30 days from the date of its receipt. SEBI may requin
the applicant to furnish information or clarifications regarding th (vi)
at all times, abide by code of conduct |
dealings in securities to consider the application for granting;
certificate of registration. | (viiymaintain the specified minimum net worth.)
SEBI shall take into account the following aspects before granting: CODE OF CONDUCT
certificate:
General
jar whether the stock broker is eligible to be admitted as a mem
ofa stock exchange; \ A stockbroker has to maintain high standards of integrity,
promptness and fairness with due skills, care and diligence in
—
(b) <whether he has the necessary infrastructure like adequate offia

space, equipment and manpower to effectively discharge hi the conduct of all his business.
| activities;
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Innovative Financial Services (FYBAF : SEM-IL TYBMs Sty i
* |
2
|
83 |
He should not indulge in manipulative, fraudulent ord \ fqnagement and Sectiritisation
d
1
transaction or spread rumours with a view to distort the ma ld ha ve ad eq ua te ly tr al in ed st af f an os |

y .A <t ockbroker shou
NheT arrangements to render fair, prompt and competent service:
|
equilibrium or making personal gains.

al
wf his clients.
He should not create a false marke t either singly or jin colly,
%
=
with others. ctockbrokers vis-a-vis Other Stockbrokers

He has to abide by all the provisions of the SEBI Act
ang A broker Should coo perate with other brokers in comparing
and regulations issued from time to time by the Gove ng,
unmatched transact
ions.
the SEBI and the stock exchanges.
He should give full cooperation to other brokers in protecting
n the interests of his clients.
Duty to the Investors
with other brokers, he
The duties of a broker to the investors are as follows; While carrying out his transactions
the settlement
* should comply with his obligations in completing
In his dealings with cle nts and the general investing Pubs of transactions with them
.
4 fall; execute the orders for buving and $4. _—_
ne NORL SSLY or ailable market price and not ref,Selly A stockbroker should not advertise his business publicly unless
of securities at the best av Se ° permitted by the stock exchange.
deal with asmall investor merely on the grounds of the yoy
of business involved. He should promptly inform He should not resort to unfair means to induce clients from
his Clign e
about the execution or non-execution of an order, make Promp other stockbrokers.
payment in respect of secu rities sold and arrange for p ro Mp)
« Astockbroker should not deal with any person as a sub-broker
He should issue contract note to the client without delay jn thy unless he has obtained a certificate of registration from the SEBL.
\®
form specified by the stock exchange.

He should not disclose confidential information of the clien Sub Broker
=
with any one else.
DEFINITION
He should not give false or misleading advice or informatin -
with the sole objective of earning commission and brokerage / 4 sub broker is a person who is registered with SEBI as such and is
(Affiliated to a member of a recognized stock excha nge.
He should avoid dealing with a client who has failed in hg
commitment with another stockbroker. As per the SEBI, “sub-broker” means any person not being a member
He should disclose that there is no conflict of inte of stock exchange who acts on behalf of a stock broker as an agent
rest andj
such conflict rises he should inform the cli or otherwise for assisting the investors in buying, selling or dealing
advantage.
d inform the client and seek persona jn securitasies through such stock broker: s.)
A stockbroker should provide inv MS .

All Sub-brokers are required to obtain a Certificate of Registration
accessible media after P disclosininvest ment advice in the public
g his interest.
from SEBI without which they are not permitted to deal in securities.
SEBI has directed that no broker shall deal with a person who is
acting as a sub-broker unless he is registered with SEBI and it shall
be the responsibility of the member-broker to ensure that his clients
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TYBMs Sey, |
3
od Innovative Financial Services (EYBAF : SEM-I,
yy een Managemen! and Securitisation 85
are not acting in the capacity of a sub-broker unless the
registered with SEBI as a sub-broker. y ay, r eligible, shall grant
SEBI on being satisfied that the sub-brokeis
Itis mandatory for member-brokers to enter into an *Sreementy, awk re eng ee ean |
all the sub-brokers, The agreement lays down the "ghts
responsibilities of member-brokers 45 well as Sub-brokers. Ay Conditions of Registration
Where a sub-broker merely changes his affiliation from one ; jv registration granted by SEBI shall be subject to the following
broker to another stock broker being a mem wy of the Same, « eondition> : |
ining
e ement of obtain certifj fresh h Certificate _
exchange, there is= no requir ing he shall abide by the rules, regulations and bye-laws of the stock
exchange which are applicable to him;
_ALIGIBILITY FOR REGISTRATION
he shall pay fees charged by SEBI;
The stock exchange on receipt of an application shall ver; (b)
information contained therein and shall also certify that the appli he shall take adequate steps for redressal of grievances, of the
TIE EEe FXfor registration
is eligibl iteria specifi
DS as ae per crite’: sp ed below: : i, investors within one month of the date of receipt of the
complaint and keep SEBI informed about the number, nature
(1) Inthe case of an individual: and other particulars of the complaints received from such
investors; and
—{a) the applicant is not less than 21 years of age;
: FER p t been convicted of any of d) he is : authorized in writing by a stock-broker being a member
(by the Se or inns: Y offeng | of a stock exchange for affiliating himself in buying, selling or
involving frau dealing in securities.
(6) the applicant
= has at least passed 12th standard
sast passe equiy
standard equivaley The sub-broker has the following general obligations.
in at io n fro m an Ins tit uti on re co gn is ed by 4,
ex am
Covernment. However, SEB] may relax this criterion @ la) pay the fees;
hav regard to the applicant's experience;
merits having reg (b) abide by the Code of Conduct specified ;
th licant is a fitand proper person.
A se appears per (c) enter into an agreement with the stock broker for specifying
(2) Inthe case of partnership firm or a body corporate, the partner the scope of his authority and responsibilities;
or directors as the case maV be shall comply with th ah th 5
requirements stated above, It is also to be assessed whetherth (4) _— with the rules, regulations and bye laws of the stock
exchange;
applicant has necessary infrastructure like adequate offic
space, equipment and manpower to effectively dischargehi (e) the sub-broker shall keep and maintain the books and
activities. The applicant should be person recognised by th documents specified in the Regulations.
stock exchange as a sub-broker affiliated to a member broke
of the stock exchange. The stock exchange shall forward th Duty to the Investors
application form of such applicants, alongwit
recommendation letter issued by the stock broker with whon Sub-broker has duties toward the investors such as :
, TE
>,
he is affiliated alonewitha
gwith a
aiti
recognition letter
exchange to SEBI within 30 days from the date of
i
issued by 7 thestod , faithful execution of orders of purchase and sale of securities,
its receipt.
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oy © Emancial SOPPICES__upyBAF:
(FYBA SEM-U, TYBM MS:6c. 5 Ey | a
ality h ee Management and Securitisation &
46 prnorttioe ©
maintain confident : dvice ~ in Stock Trading
not to gi
ce false or misleading aQVisss
hh
7
step> | | | | 7
° onflict of interest, Following are the steps involved in the trading of securities at a
e snsure
ens Wa
no ¢ \vice about SeCUTIHES In public; media with exchange.
stock 4. exchang
te AC Zn —
e not to Bhi terest. % ,/ Order Placing: [he first step in the trading of securities 15
disclosing lacement of an order by an investor with the broker either to
adequately trained Staff and arrangeme
have buy or sell certain number of shares at a certain specified price.
He should pt and competent servic|; es to his| client, 4
prom
render fair, kinds of orders. For instance, where in an
| . ; compliance with the There are various
e He has to ensure continuous compiia the regula, % order, the client places a limit on the price of the security; It 1s a
system.
case of ‘limit order’. Where the order is to be executed by the
broker at the best price, such an order takes the name of “Best
Rate Order. An Immediate or Cancel Order” is one that has to
TRADING AND CLEARING / be executed immediately and may have to be cancelled if the
order is not executed immediately. A Limited Discretionary
SELF CLEARING, MEMBERS Order allows the broker to buy and sell within the specified
price range and/or within the given time period as per the best
A certificate of registration should be obtained from SEBI to actag judgement of the broker. Where the client orders the broker to
clearing member. However, any SEBI-registered broker who act , sell as the price reaches a particular level, it is a case of “Stop
clearing member with the approval of the clearing corporation woul; Loss Order’. Under the ‘Open Order’, the client does not fix
not require a separate registration. Similarly a separate reg iStratig, any price limit or time limit on the execution of the order and
would not be required for a SEBI-registered clearing member t relies on the judgement of the broker.
operate in more than one clearing corporation. 5 /
Order Execution: Broker executes the orders placed by the client
Aclearing /self clearing member would pay required fees and Satish for the purchase or sale of scripts. The execution takes place
the minimum net worth and deposit requirement for the segmen during the trading hours and during the working days of the
for which membership is sought. exchange online.
The provisions relating to general obligations/ responsibilitie Contract Note Preparation: When an agreement is reached
FX
applicable to brokers would apply to clearing/self-clearing between the parties concerned as regards price, a contract note
members. is made out between the broker and the client. Particulars such
as the price, number of scripts, date of transaction, names of
party, brokerage, etc. are shown on Contract Note.
/ STOCK TRADING + 4 Delivery and Clearing: Delivery and clearing of share takes
place through a clearance house.
Meaning
F. Demat account credit and debit: For the purpose of effecting
The act of buying and selling of secu the transfer in the name of the transferee, the parties accounts
rities Onas i
known as stock market trading. tock exchange 5 are either debited or credited.
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88 Innovative Finan ial Services (FYBAF * SEMI, IYBMs ey +
My, C
is the WEss of netting Of t
ransag, |
6 Settlement: Settlement is the process wh © S josie
Mannix yncnt anid Securitisation 89
and actual delivery or receipt of Sec urities against rece:

i a A a
pay ment of agreed amounts. It is : of

necessary odd Lot Market
transact to Make a ng
lions dy ri *Uttle by
to know the net effect of a serie
Ney,
are
Sly, all orders whose order size is less than the regular lot size
period. market. These orders do not have any
traded in the odd-lot
The rolling settlement systems Is adopted in stock eXchang, epecial terms attributes attached to them. In an odd-lot market,
both the price and quantity of both the orders (buy and sell)
Rolling Settlement: In this system each day “ONStitytes should exactly match for the trade to take place. Currently the
settlement period (T + 2 System). Under rolling S€ttlen, i add lot market facility is used for the Limited Physical Market
the trades done on a particular day are settled after a Bi as per the SEBI directives.
number of business days. In case ol Rolling Settlements Pa 0 Auction Market
and pay-out of both funds and securilles 1 completed oi
same day. Each trading day 1s considered as a trading resi In the Auction Market, auctions are initiated
by the Exchange
and trades executed du ring the day are settled to obtain then, on behalf of trading members for settlement related reasons.
obligations for the day in a rolling settlement. There are 3 participants in this market.
Initiator- the party who initiates the auction process is called an
x...
Clearing and Settlement | initiator
=
——
—
NSE introduced for the first time in India, fully automated Screen Competitor - the party who enters orders on the same side as of
RY
based trading.
ee
the initiator
©...
=
It uses a modern, fully computerised trading system d eSigneg Solicitor - the party who enters orders on the opposite side as of
==
—
to offer investors across the country a safe and easy way to in Vest the initiator
9
oe
i
The NSE trading system called ‘National Exchange for
The Capit al Mark et (Equi ties) segm ent of NSE facil itate s trading
a,
Automated Trading’ (NEAT) is a fully automated screen baseg in the following instruments:
ee
z
trading system, which adopts the principle of an order driven
—
r=
market, 1. Shares
| The NEAT system has different types of market. They are: i. Equity Shares
ii. Preference Shares
Normal Market
| ?. Debentures
All orders which are of regular lot size or
multiples thereof ili. Partly Convertible Debentures
traded in the Normal Market. For sh
ares that are traded in the
compulsory dematerialised mode iv. Fully Convertible Debentures
the market lot of these ae
Te Normal market consists
of various book types wherein v. Non Convertible Debentures
orders are segregated as Regula
r lot orders, Special Term
orders vi. Warrants/Coupons/Secured Premium
#
£
CTs
a
Notes/ other
|
Hybrids Bonds
ee eee 3, Units of Mutual Funds
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SOIT!ICES (FY BAF:SENM-T 7 YBMS ' SEM
Jranocatiae’ry’ nA
Francia
|
: ; MX) io MA HAgONENTA md Securitisation a1
DERIVATIVE TRA DIN G market allows him to conduct transactions without actually
er selling his shares — also called as physical settlement.
b 2 penefit from arbitrage: When an investor buys low in one

ivative
Definition of Der market and sells high in the other market, it is called arbitrage
which derives | trading, Fle can take the advantage of differences in prices 1n
7 contrac + between Iwo parties the two markets,
a t i v e 15
A deriv in de rl ym g asse lt
fr o m a n t |
value/ price o d i t i e s , c u r r e ncies, exch 4, protect securities against fluctuations in prices: The derivative
socks, indice s , c o m m
market offers products that allow an investor to hedge himself
_Fhese could be Anterest ang, #1
against a fall in the price of shares that he possesses. It also

rates or the rate > of inte ——
ITEOL, |
of interest
to make profits offers products that protect him froma rise in the price of shares
ancial instruments help investors that he plans to purchase. This is called hedging.
hese fin _
asset.
;
So,
=
their val, a 4
ns; on the future value of the underlying

1nis 1s whyV ththey a 4 z
Ss In = 5 | d % ] 4 7 =" ‘i Tl a = i þ if
© derived from thatat ofof t the underlvine

yu, « asset. an t us e of th es e de rivatives is
Transfer of risk: An ot he r im po rt
4 Der iva tiv es” . Th e tra din g of the se derivatives on the Stor rket riskRisk
the transfer of mafor fromveri sk -ainveversste orin ve st or
des ritovati
th osse
ve
alle . risk. -a rse s use
xchange is cal led Derivative
eee
Trading. with an appetite
eculators
e risk-loving investors likes.spTh
to enhance safety, whilan
The value of the underlying assets changes every now and then, conduct risky, contrari trades to im prove profit is way,
the risk is transferred.
For example, the value of stock may rise or fall, the exchange rate a
g indices may fluctuate, commog; ity
a pai r of currencies may change, ; :
Types of Derivative Contracts
rices may increase or decrease. These changes can help an invest,
make profits. They can also cause losses.
There are different types derivative contracts available in the stock
It could help al Investor make additional profits by correctly market- forwards, futures, options.
guessing the future price, or it could act as a safety net from logs; '
in the spot market, where the underlying assets are traded. {1 Futures and forwards: Futures are contracts that represent an
agreement to buy or sell a-set of assets at a specified time in the
future for a Specified amount. Forwards are futures, which are
Use of Derivatives
not standardized. They are not traded on a stock exchange. |
In the Indian markets, futures and options are standardized _2. Options: These contracts are quite similar to futures and
contracts, which can be freely traded on exchanges. forwards./However, there is one key difference. There is no
obligation to hold the terms of the agreement. _
The uses of derivatives can be listed as follows: a
gf”
' This means, even if one holds a contract to buy 100 shares by
|. Earn money on shares that are lying idlé: If an investor does |
“the expiry date, there is no obligation to buy /Options contracts

not want to sell the shares that he bought for long term, but - /
are traded on the stock exchange.
wants to take advantage of price fluctuations in the short term. Fj
In that case he can use derivative instruments. Derivatives

a
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- Financial Services (EYBA F:SEM-II, Ty BAS Se, >
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AREDER IVATIVE CONTRACTS LINKED TO Stoo ==
jt 4
scheduled to
Settlement Trader can wait until the contract is
HOW
| TIS 5 xpiry to 5ettle the trade. In such a case, he can pay the whole
PRICES ? _ 4 Futures contract of TCS shares a, T3 0%, amount outstanding, or he Can enter Into an opposing trade.
Sup]ypoase VOU buy the IT company currently in the spot m

-L price Of contracts 1s similar to
Thus, buving stock futures and option
ag ing
later, th buying shares of the same underlying stock, but without tak
+ tradingat*
500. This means, vou make : Profiy © delivery of the same.
the stack ES F
e
I
g e t t i
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n g
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¢
he S
to ck s
ks .
a ta cheaper , It Of
- x SN are, as VOU ar
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The Price remained
Ha
nothhiinn
| g
g . S i:mmi
0i
$0 A wl
.laarrll
s
yV,
e
if the
c a n
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stock
5 e e , t h e
price
a b o v
fell bytraTct800, peSsyou
e c o n
ae
d e n
r
d s 1,: Ouly SECURITISATION
have lost* sha res . Sim ila r 0
the price of the underlying ass et - TCS
s also Ni y,
derivativ es tra
Futures Is a VerV commonly
din g can be con duc ted on the
traded derivatives contract ii the
ind ice
_ DEFINITION
stock markets. The underlying security in the case of a Nig |
II
Futures contract would be the 50-share Nifty index. securitisation is the process of turning assets into securities. Specific
= — -bearing
assets are pooled together and repackaged as interest
—
securities. Securities are financial or investment vehicles that are

Trading in Derivatives Market bought and sold in financial markets similar to how stocks and bonds
are traded. The purchasers of the new, repackaged interest-bearing
Following steps are required to be followed while trading in th securities receive interest and principal payments.
derivative market.
illiquid
itis the process of pooling and repackaging of homogenous
of =
I” ResearchiJt is important to do research in the derivative financial assets into marketable securities that can be sold
to
market. Different strategies are required to be followed in the investors. [The process leads to the creation of financial instruments
derivative market. that represents ownership interest in pool of assets. The pool of
2 securitized assets from which cash flows are generated 1s known
2. Arrange for the requisite margin amount: Trader is constant)
required to maintain his margin amount, This means, he canngt as collateral. Securitized assets are usually loans and receivables,
and securities are backed or collateralized by any kind of income
withdraw this amount from his trading account at any Point in
time until the trade is settled. yielding assets.
The margin amount changes as
the price of the underlying stock rises or falls. RBI in its circular on Securitisation of Standard Assets, describes
Conduct the transaction through trading account: Securitisation, “as a process by which assets are sold to a
A trader wil bankruptcy remote special purpose vehicle (SPV) in return for an
have to trade in derivatives through his tra
ding account. He immediate cash payment”.
can place an order online or on phone with his
broker.
4. =_ Selection: He will select his stocks An asset that can be converted into cash quickly is called a liquid
and their contracts on
€ Dasis of the amount a vailable, asset. An asset that takes longer to convert to cash and will likely
the margin requirements, the
price of the underlying <harec
- \ e S
sell for a price lower than market value is called an illiquid asset.
contracts. / 8 S, as well as the price of the
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94 Innovative Financial Services (FYBAF : SEM-II, TYRagg “SE > 95
Sale of Assets Issue Of Securities ‘y »Management aud Securttisation
Wi [
[<1
the company there 15
5
cince factoring involves only bank and
no need for any credit rating while securitisation involves many
=
Originator Special Purpose In Ves to rs ‘investors and therefore, it is necessary to take credit rating
Vehicle
before going for securitisation of receivables.
Consideration for
Assets Purchased
Subscription of Securities
Credit Rating of Securities
FEATURES OF SECURITISATION—
issuer,
[ Rating Agency | A eecuritised instrument, as compared to a direct claim on the
will £ enerally have the following features:
[ Structure process of converting illiquid assets into liquid assets:
1.
Securitisation is the process of converting illiquid assets into
Fig. 3 : Securitisation Process liquid assets by converting longer duration cash flows into
shorter duration cash flows
SECURITISATION V/S FACTORING — pe Marketability: The main purpose of securitisation is to ensure

the instrument is
es marketability to financial claims. Hence,
structured in such a way that it becomes marketable. This is
While both factoring and securitisation involves capitalizing th one of the most significant features of a securitised instrument.
receivables of the company, there are some differences betwee,
factoring and securitisation as stated below : Marketability involves two concepts :
Lh. While factoring is arrangement between the banks/ financig (i) the legal possibility of marketing the instrument;
institutions and a company in which financial INSt
itutiog (ii) the existence of a market for the instrument.
purchases the book debts of acompany and pays the
money
the company against receivables whereas securi Liquidity is ensured to a securitised instrument by introducing
tisation is the
process of converting illiquid assets into liq itin to a securities exchange so that it can be bought and sold at
uid assets ly
converting longer duration cash flows into market-determined prices.
shorter dura tion cast
flows.
' Merchantable Quality: A securitised product should be of
Under fa= 0
fd
2. ctoring there are two parties viz.,

the bank and the merchantable quality. Merchantable quality, in case of physical
company while under securitisa
tion there are many investor goods, is the quality which is acceptable to merchants in normal
involved who invest in the
securitised asset, trade. When applied to financial products, it would mean that
Wh—_ile factoring
PRE is .
is done for short ferm accoun the financial commitments embodied in the instruments are
t receivables
ee a oe month to 6 months whereas securitisa secured to the investors’ satisfaction. The originator of the
ng term receivables of the tioné Securitised instrument secures the instrument based on the
com pany
needs of the investors.
with or Without recourse whereas The rating is for the benefit of the common investor, who is not
ina position to appraise the degree of risk involved.
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innovative Financial Services (FYBAF : SE
M-IL, 7 YBA1S : b
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In case of securitisation of receivables, the FO
u
ement and Securitisation

RCED E: 5 My
5 ;
undergoes a drastic change, making rating a basic req 'q [= apt’ Martas
ati ons are pri vat ely P place:d
| d. Hen ce, mos t sec uri tis
the
for securitisation.
“en, with professional investors. Howev er, it is likely that un
Wide Distribution: The basic purpose of securitisa, future, retail investors could be attract ed into buying secur itised |
distribute the product. The extent of distribution Whi
originator would It |
like to achieve is based on a cOMm
analysis of the costs and the benefits that can be achievepag "a,
4
"PASS THROUGH CERTIFICATES '
wider distribution, the issuer is able to market the pr Ody h
- - a
lower financial cost to him. But a wide investor base inv wy ifies transfer
% »,65 through Cer tificate ; is an instrument whicn sign
the high cost of distribution and servicing. I tn fav our of the hol der of the Pass through
interest in the rec eiv abl e
0 ;
Commoditization: Securitisation ts the Proces Certiiica te.
commoditization, where the basic idea is to take the ene ¢ tif ica te (PT C) is a cer tif ica te tha t is giv en to an
of this process into the capital market. Thus, the resy}t fe , pass through cer s that lie with
securitie
securitisation process is to create certain instruments which, dies against certain mortgaged-backed bonds
certificate can be compare ‘og securities (like
oe 1SSUCT. The
be placed in the market. deb ent ure s) tha t ma y be iss ued by ban ks and oth er co mpanies
ind
to investors.
Homogeneity: To serve as a marketable instrumeny
instrument should be packaged into homogenous | ff er en ce be in g th at th ey ar e is su ed ag ai ns t un de rl ying
The only di
Homogeneity is a function of retail marketing. Most Security, ri ti es . Th e in te re st th at is pa id to th e is su er on these securices
-ecu
instruments are broken into lots affordable to the mars; con mes to the invest
or in the form of a fixed income.
investor and hence the minimum denomination become
relative to the needs of the smallest investor. Investors in such instruments are usually financial institutions like
banks, mutual funds and insurance companies.
Integration and Differentiation: Securitisation is the Proces
of integration and differentiation where the entity tha Many banks and private organizations have incomes or receivables
securitises its assets first pools them together into a comma that are due to them in lieu of loans or services that they have offered
hetch pot. This is the process of integration. Then, the pool its in the past. Securitisation involves the conversion of these incomes
is broken into instruments of fixed denomination. This is the or receivables into debt instruments which are then sold to investors.
process of differentiation. For this purpose, the parent organization sets up a Special Purpose
Vehicle (SPV) which issues these debt instruments.
Deconstruction: securitisation is the proces
s of deconstruction
of an entity wherein, one envisages an entity By making these debt instruments available in the markets, the
’s assets as bei organization manages to make their assets liquid and can then use
composed of claims to various cash
flows, the phat an investor
securitisation would split apart these the funds for some other productive business. When
cash flows into differen
—_— a them and sell these classified parts buys these debt instruments, the investor is givena PTC. However,
f $ accordin
to different this does not mean that the investor owns the assets. Rather, when
teat
the entity into en on haan
the original lender recovers money from the original borrower (as
"ATE interest or otherwise), it is then passed on to the SPV, which then
Diffi
erate understand for retai| investors: disburses it to the investor in the form of a fixed income.
"Issues are difficult In practice,;
for retail investors to
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market are rated by agencies like.Cp IS] "ty,

bh :
os he
Tt si re ibn ati s tell the investo r about a
4 th
99
e PTC: others The rating le
wane first deal of securitisation in India between Citibank
and GIC Mutual Fund was in 1990 for % 160 million.
wy”) resi *earnedT on
thre the g receivable
ina PIG:
Uonferest
-
l gh certificat€ e,Is# inter
directly Passe
e
rest
eds, Hts a F Pe Securitisation of cash flow of high value customers of
Feceiy oy
tree, e
holder: wher assed to the holder of the unit Ing
,
the rece!’ ab
les is not P to them. Rajasthan State Industrial and Development Corporation
WwW securities
in 1994-95 was done by SBI Cap.
epy issues Me
securitisation of Sales Tax deferrals by Government of
©
e
SECU R I T I S A T I O N M E C H A N I S M , Maharashtra in August 2001 forT 1500 million with a green
ee ET $hoe option of & 75 million,
OO
The securitisalt on process or mechanism ts listed below. s India’s first floating rate securitisation issuance by Citigroup
off 2,810 million in 2003. The fixed rate auto loan receivables
Assets are originated through receivables
shins .
or any other gi
¥ 4, F +
I, i of Citibank and Citicorp Finance India included in the

debt by a company and funded on its balance shee My
securitisation.
company is referred to as the ‘originator’.
e India’s largest securitisation deal by ICICI Bank of £19,299
2. Once a large portfolio of assets has been originated, the 2 million in 2007. The underlying asset pool was auto loan
are analysed as a portfolio and then sold or assigned toa . receivables,
party, which is normally a special purpose vehicle com
(SPV) formed for the specific purpose of funding the a a
The SPV is owned by a trust. “se * SPECIAL PURPOSE VEHICLE (SPV) —
3, The administration of the asset is then sub-contracted back,
the originator by the SPV. It is responsible for co] lecting inte SPV is an entity specially created for the purpose of executing
and principal payments on the loans in the underlying boat securitisation deal.
assets and transfer to the SPV.
SG SPV is an entity which would buy the assets to be securitized
4. TheSPV issues tradable securities to fund the purchase from the originator.
of asso,
The performance of these securities is direct
ly linked to th e Itmakes the payment to the originator for the assets purchased.
performance of the assets,
e An SPV is typically a low-capitalised entity with narrowly
5. The investors purchase the securitjes because defined purposes and activities,
they are satisfid
that the securities would be paid in full an
d on time from th
cash flows available in the asset pool. The It has independent trustees/ directors.
proceeds from th
sale of securities are used to pay the
originator. | e The mainobjective of securitisation is to remove the assets from
ee SI J V agrees to pay any surpluses the balance sheet of the originator, The SPV holds the assets in
which, may arise durin
a
*
its funding of the asset, back its books and makes the upfrent payment for them to the
to the originator,
originator.
as one me arise on
FG A
p 7
the assets, these are
Pay funds to the invest used by the SPV
ors in the securities
q
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ticaltion 101 |
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rating& th.le risk festté _ |
TOX
- The biggest 20" aa \, come of the securitisable assets can be listed as follows : |
ng up fre te : |
frees up
+ the SPV and the sponsol
a in
Ig Py
#
are Proty, , Term loans
esull
Asarst risks like insolve iS" cy,: which may arise during | ly 7 —
* again 8 ON - Commercial Loans
of operation. . Receivables from Government

; o
3 stan
.
waa n,
d on its feet, indep| “Nde |
Vehicle Loans
F wood SPV should be able ta st
Sa a any yrtunately, this does no of #
the SP onsoring company. Uni ve i ose of th : "app, | Lease Finance
tice. One of the reasons for the collapse Of the Enrgn Spy)!
In run
pracuee. ™ gf furtheringI >
i became a vehicle for the ends of the 3 Parey, Mortgage Loans ;
ompany in violation of the prudential norms of COrporg,| ° |
C alt , |
financing anc { accounting. ‘i
e
Credit Cards Receivables
= a,
The Indian securitisation transaction rose 34% in Financial Year

SECURITISABLE ASSETS . 9017 to F 90,000 crore on the back of a strong growth in priority
| | sector qualifying assets, according to ratings firm ICRA.
——_
——
“ial ea, Pi e e Securitisation of loan assets by issuing pass through certificates
As per Securitisation Policy, 2012, all on-balance sheet Standay (PTCs) rose by 72% to % 43,000 crore in Financial Year 2017.
assets are eligible for securitisation, except: ° 3
e revolving credit facilities (e.g., credit card receivables); SE anne an org > = oe
e assets purchased from other entities;

_ BENEFITS OF SECURITISATION ©
e securitisation exposures (e.g., mortgage-backed / asset-backy Aa. Benefits to the Issuer
securities); and
i
eae
| 1. Off the balance sheet of the originator: For accounting
¢ loans with bullet repayment for both principal and interest purposes securitization is treated as a sale of assets and not as
Se
Any type of asset with a reasonably predictable stream of future BOANoINg, Thegetore me originator pace Bot TESery DAY
ne
cash flows can be securitised. transaction as a liability on its balance sheet. Such off balance
sheet raise funds without increasing the originator’s or debt
The following assets are easiest to securitise. equity ratio.
I. The assets that occur in large pool. 2. Efficient Financing: In securitization, it is possible to achieve
2. The assets for which past expe
much higher rating for instrument as compared to the
riience can | originator’s credit rating. Thus the borrower can obtain fund at
default rates. d ” RN pre lower interest rates applicable to highly rated instrument and
3. The assets for which documentation gain a pricing advantage.
is standardized.
i. The assets for which own
ow ershj iD ISj Lower capital requirement: Securitisation enables banks and
ha
P15 transfera
1
ble. () y capcapi
financial institutions to meet regulator itatal
l adeade
quaqua
cycy norms
rr ot mmm E:
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cats and th eir associated
|
dries Wii
a
pigoment arid Se Nrihisalion
102 fool
j= i Aa!
e isupport the assets is released and the bal A,
=o IN asst
by transfer ibility : An impo rtan t adva ntagge of secur itization is thethe
Flex ¥
7
sheet. yritization can
i
=
be Ee used
ite
for further Brows, -
t to meet the inves
flexibility to customise the instrumen
= The cap? -
fro m SE C a. risk and tenor appetite.

investment years.
+tid! dit¥ manageme
nt: Tenor mismatch due: to J, n - Durations can range from few months to many
4. Liqu
funded
S
by short term liabilities can be rectify.
eq s Repayment are usually made on monthly basis but can be
b
A itisation as long term assets are converted into Cash
- aes ion isa
securitiss : tool of asset liability management,
|
N structured on a quarterly or semi-annual basis.
on » Interest rate can be fixed or floating depending upon

5. Improvement in financial ratios: Since securitisati investor preferences.
er tra nsaction volumes with Ze the Same oP
undertaking larg
profitability and return on investment ratios INCrease Pity Benefits to the Economy
Poy C.
securitisation.
Connecting capital markets and financial markets: Financial
ng Profits Tk x
6. Profit on sale: Securitisation helps in up-fronti assets are created in the financial markets, e.g., banks or
would otherwise accrue over the tenor of the loans. Profits : mortgage financing companies. These assets are traditionally
from the spread is booked as profit leading to increased earning on on-balance sheet means of funding of the
refinanced
in the vear of securitisation, respective ba nks.
\ B. Benefits to the Investors Securitisation connects the capital markets and financial
markets by converting these financial assets into capital ma rket
1, Safety Features: Securitisation offers investors benefit commodities. Securitisation benefits the economy as a whole
diversification of risks, as they have an exposure to a
POO] by bringing financial markets and capital markets together.
assets. Most issuances are highly rated by independent Cred:
rating agency and have credit supp3 ort built . into the transac; I Market Efficiency: Through securitization process the
companies holding financial assets like loans have ready access
=)
Investors get the benefit of the payment structure Close,

monitored by an independent trustee which may not alway, to low cost sources of fund and can reduce their dependence
be in the case of traditional debt instruments, on financial intermediaries for their capital requirement. This
results into lower interest cost, the benefits of which are also
2, Performance track record: Securitisation instrumen passed to the consumers.
ts have
demonstrated consistently good performance wit
h low leve Specialization: The typical bank/ financial institution model
of defaults on Instruments in India due to
stringent RB of Origination-Funding-Credit administration of loans has
guidelines.
changed into an unbundling of roles and greater specialization
3. Alternate investment vehicle for invest
ors: Small investors are as different players can now concentrate on their core function,
abl
e to profit from such deals as under this
scheme as they can which can be origination, funding or credit administration.
Invest small amounts through SPV
and acquire beneficial Streamlined system and process: As per RBI guidelines on
interest in the securitised assets. It
provides alternate investment
vehicle to investors. securitisation, a high levels of data transparency and robust
system is required. This enhances the overall monitoring and
4. High return: The investor has control of asset portfolios.
. the advanta
return on risk adjusted basis. ge of earning high
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,
INES ON SECURITISATyor O S yl “hy,
A tnagenment and Securitisation
UAE
J 4s assets purc hased from other entities;
- 9972 the Keser’ Bank of India (K BI) issued {co al] . e securitisation exposures (e.g., mortgage-backed /asset-
: ett the Guidelines on the Transter of Asses, thr Mk, (ERC SCLC arte
its ts re revisions sand
** Direct
| Assignme
OG 2 nt of ‘Cc Cash Flows,
“lows On At. Ou.
a loans with bullet repayment for both principal and interest.
a similar set of guidelin
.csued (NBFCs),
ST ine Ute Bal panies es to all Non-banst can
Minimum holding period: Originating banks/ NBFCs
2012 revising the existing guide Kin,
. l i n e s Neg oy minimum
finance com
acti ons, as appl icab le to NBF Cs. cecuritise loans only after fulfilling the; prescribed .
12
: : =
aa
secu sé ation trans
ritirtis holding period requirement. The rationale for introducing a j
minimum holding period requirement is to: |
The new securitisation guidelines introduce key changes from
February 2006 guidelines, including: th, =a
ensure that the project implementation risk is not |
= : — e
F | ||
s introduang amimmum holding period and minimum reteny; transferred to investors; and
respect of loans befo;., ,,” . —_— |
req yirement that must be met in Ore the, e require banks to demonstrate a certain minimum recovery- he
J HH
ca n be securitised; ;
linked eas
performance before securitisation.
o specifying reguiations for the direct assignment of loans; The bank guidelines and NBFC guidelines each set out the By
1
minimum number of instalments that must have been received
e prohibiting any form of credit enhancement by Selling ba | |
inrespect of loans (categorised by maturity) before they can be
or NBFCs in connection with the direct assignment of lo
holding period is counted from the he
IM securitised. The minimum
| / NBFC or the i
me date of full disbursement of the loan by the bank
e prohibiting specific categories of securitisation transact; date of completion of a project, as the case may be. ta
including: me _— OM
Sea ation of assets, such as collateralised debs 3 Minimum retention requirement: The securitisation guidelines
- any re-securitis have introduced the concept of a minimum retention
obligations of asset-backed securities (e.g., those backed requirement in order to ensure that the originator bank/ NBFC
by residential mortgage-backed securities); and has a continued interest in the securitised assets. The minimum
| .
aki retention :
. requiremen intended to ijimprove the due > c diligence
t is inte 8
ET ;
= Beyer er STEEL secuniisation ‘Wansactions ang that is carried out on the securitised portfolio. The minimum
tes oa eel with revolving structures (e.g., credit card retention requirement is in the range of 5% to 10% of the book
rece , : ak
KEY FEATURES OF THE POLICY 4 Limit on total retained exposures. The exposure of banks /
NBFCs to loans securitised in the following forms should not

A. - itisati
$ oecurifisatio n of Standard Assets exceed 20% of the total securitised instruments issued:
l. Assets eligible for securitisation: All on-balance sheet standard e investments in equity, subordinate or senior trenches of
assets are eligible for securitisation, except: securities issued by the SPV, including through
revolving credit facilities (eg, credit ca underwriting commitments;
. rd receivabl es);
= =
=e
el
———
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106 Innocatine Financial Services (FYBAF 7 SEM-I1, TYR Ms &
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credit enhancements, including cash, and othe, for | oA frnuagenicne na SOC Fi Freation
107
by exe), By [x8
= || i i
3 collateral, inclu ding over- colla teral isati on 5 assets purchased

Ud; from other entities; and
the credit enhancing interest-only strip; and
loans with bullet repayment fie both principal snd interest.
e liquidity support.
_ =
Minimum holding and minimum retention requirements: The
A
Exposures beyond this limit will be nsk-weighted at 1117 minimum hold ing period requirements a pplicable to banks and
banks and 667% for NBFCs. % NBFCs for securitisation transactions will
ty also apply to any
direct assignment of loans. The minimum retention requirement
I. | banks/NBFe,
Booking of profit upfront: The originating
permitted
for both banks and NBFCs is as follows: |
to recognise higher cash profits on amortisat; a, , |
principal! and losses incurred as per new policy. On For assets with ori ginal maturi ty of 24 months or less, the |
il i 78 minimum retention requirement is 5% of the cash flows |
6. Treatment of non-compliant securitised assets: Originas: from the assets transferred on a pari passu basis
; and |
banks/NBFCs that do not comply with the new SeCUritis aj;
e For assets with original maturity of more than 24 months,
= ® n
guidelines in respect of securitised assets must maintain ¢, "Oh ||

:
Pity the minimum retention requirement

against such assets as if these were not securitised. is 10% of the cash
flows from the assets transferred ona pari passu basis.
i
1
The RBI has also prescribed certain standards of due dilig
—
that must be met by the purchasing bank/NBFC. liven

*
*
Credit enhancements: The securitisation guidelines restrict all
banks/NBFCs must also periodically stress test the; forms of credit enhancements by the transferring bank / NBFC
kT 7 ; in respect of a direct assignment of loans, on the ground that
Securitisation
,
investments and continuously MON ito,
F
investors are typically institutional investors that have the

performance information on the exposure underlying thei ability to conduct a sophisticated credit risk analysis of the assets
securitisation positions,
being acquired. However, this restriction is likely to affect the i,
B. Direct Assignment of Loans market tor direct assignments, as acquiring entities may be [8]
reluctant to absorb the entire risk linked to a loan portfolio post i
The RBI has introduced regulations for the direct assignment of loans assignmen t.
by banks/NBFCs. However, the securitisation guidelines do no;
The rules applicable to the direct assignment of loans in relation
apply to, among others: 1
to the booking of profit upfront, the treatment of non-compliant
e the transfer of loans by a bank/ NBFC to other banks, financial securitised assets and compliance requirements for purchasing a
institutions or NBFCs at the request of the borrower; banks/ NBFCs are broadly similar to those prescribed for the We
securitisation of assets (for banks or NBFCs, as the case may le
e trading in bonds; and be). ai
© consortium and syndication arrangements. True sale criteria: The securitisation guidelines lay down certain
x
‘true sale’ criteria that must be met in respect of direct
1. Assets eligible for transfer: All on-balance sheet standard assets
assignments. (These are broadly similar to the true sale criteria
are eligible for transfer by direct assignment, except:
prescribed by the RBI for securitisation transactions under the
—_—
=
id
=
zz
e revolving credit facilities (eg, credit card receivables); February 2006 guidelines.) The sale will quality as a true sale
=
4
only if:
EI
on
ee
ee
a
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Innovatrey
: financial Service's (FYBAF
e i
i SEM-II,
m m e d i a
TYR
t e le
Ms.
ga |
Sey
os Wy
YP Aanagerment md Securitisation 109
108 g n m e n t resu| lts in th [==
the assi
e
of the sel l i n g b a n k from the assets being sold:
_ REVIEW QUESTIONS |
«
an un fe tt er ed ri ght to transfer, leg nes
has
the buyer ys e of f th e as se ts ac quired; g6
r ot herwi
se di s p '%Y whatis the meaning of Merchant Bankers? Ex plain various categories
o
in Bi of Merchant Bankers.
no econom
ic interest 0
nk has Define Merchant Banker. What are the services provided by Merchant
the selling ba
Bankers ”
following 4 sale;
an
What are the obligations and responsibilities of Merchant Bankers as
the s P pure hasing bank has no recourse to the Selling bay op the SEBI? State 15 obligations.
ET,
& s or losses except those SPECI
for anv expense fic pefine Underwriters. Explain importance of underwriters.
Ulli
em
permitted; Explain meaning and classification of underwriters.

OF
a representatig, Explain general obligations and responsibilities of underwriters.

on acc oun t of bre ach of
& other than
OI
9, f
warranty, the seller has no obligation to repurchase
Define Bankers to an issue. Explain registration requirements.
by Explain code of conduct for bankers to an issue.
the assets sold; and
=
Explain Broker to an Issue,

tion, |
et
there are no ‘clean-up calls’ or other similar obliga

=
Define ‘stock broker.

=
Explain conditions of registration of a stock

» 0
ass ets .
=
pec t of the tra nsf err ed broker.

I
the seller in res

What is the meaning of stock broker? Explain code of conduct of a
11,
The RBI has tightened the norms on Securitisation transaction, stock broker.
What are the duties of stock brokers to the investors?
and the new securitisation guidelines have been drafted With, i
clear intention of aligning the interests of originators an; Define sub-broker, What are the criteria for registration eligibility of
investors. The minimum holding and minimum retentig an applicant?
requirements are central to this theme. However, the thresho What is the meaning of stock trading? Explain the steps in stock
trading.
requirements prescribed do not appear onerous and should ny
act as a disincentive to securitisation transactions. What do you mean ‘Derivative’? What is the use of derivatives?
Distinguish between Securitisation and Factoring.
The prohibition on any form of credit enhancement for dirg Define Securitisation, Explain its features.
assignment of loans is a stringent restriction and may affect, Describe securitisation mechanism.
volumes of direct assignment transactions. Explain benefits of securitisation.
Explain in brief new guidelines on securitisation.
While listing the elements ofa true sale for direct assignmey Write short notes on:
transactions, the RBI has prohibited any form of clean-up cq (i) Role of Merchant Bankers
by the selling bank/ NBFC. The need to ensure a complete leg
ee
(it) Underwriters
r
separation of the seller from the assets being sold is an importan
2 =
(iii) Bankers to an issue
a?
one, but clean-up calls are sometimes required as a practic:
sil
-
(iv) Brokers to anissue
ee
matter and such a blanket restriction may not be the mo
(v) Categories of merchant bankers
commercially sound approach. t—
(vi) Scope of Merchant Banking =
(vii) Any seven codes of conduct ofa Merchant Banker

(vill) Importance of underwriters
(ix) Classification of underwriters
7
a
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iS rrices(FYBAF: SEMI TYBMS. gp | i
110 Innovati. a / imanctal

ss
uct for bankers to an issue
\de of cond 4 <ub-broker
4 jit
_Afan
*
agenen t and Securitizat ton
(x) Explain
f proker an
(xi) Meamung © 4 clearing mem ber carn financial assets into marketable securities.
j Tracing an contracts (a) POT (b) illiquid
Types of derivative ic) fixe
Ee
e Market (d) current
iv) t Praiwhne
in D e r i v a t i v
(1) - (a), (2) - (a), (3) = (b), (4) - (4), (5) - (a), (6) = (c), (7)
a
(sts
fsecurmhsa
tion 4 FI - (b)
Features © Fill in the blanks :
T h r o u s h C e r titic|ates
(5xsvi ; Pass Vehicle are in charge of the issue Process,
3] Purpose
(xvii) Specie”
=
i=able Assets ——_— also responsible for Preparing the prospectus and marketing
xviii) Securtt the issue.
1
OB JE CT
OBJECTIV IV E
E QU
QU ES
ES TI ON S H R P , | 3 — make a commitment to get the issue subscribed either by others
or by themselves.
4 _— means an offer for sale of securities by any body corporate to
e the fo llowing se, how public through a merchant banker. —_
at e op ti on s an d re wr it
A. Selectthe ap propri The ——— re exposed to the risk of under su bsc
an d Ex ch an ge Bo ar d of In di a (S EB I ) was constitu ription
1 TheSecurit es - BS : _— ny Person not being a member of stock exchange
1. +
in ._—_— who acts on Sehall of a stock broker as an agent or otherwise for

(a) 1988 (b) 1990 assisting the investors in buying, selling or dealing in sec
urities
(c) 1992 (d) 1987 through such stock brokers.
age within od
2 The issuing company is expected to pay broker 7 A is a contract between two parties which derives its value/
months from the date of allotment. price from an underlying asset.
(a) two (b) four are contracts that represent an agreement to buy or sell a set
of
(c) one (d) three - assets at a specified time in the future for a specified amount,
3. The also offer certain other specialized services suchas ad Visop a The settlement systems is adopted in stock exchanges.
services on matters such as mergers and amalgamations. iQ. ——— 1s the process of turning assets into securities.
(a) Underwriters (b) Merchant Bankers i. —— is anentity which would buy the assets to be securitized from
(c) Brokers (d) Bankers the originator.
4. A banker to an issue is required to maintain books of accounts for: Ans (1) Merchant bankers (2) Merchant bankers (3) Underwriters (4) Issue
minimum period of vears. (5) underwriters (6) sub-broker (7) derivative (8) Futures (9) roll ing
(a) two (b) four (10) Securitisation (11) Special Purpose Vehicle
(c) one (d) three C. Match the following:
5. Where inan order, the client places a limit on the price of the security Column B
Column A
it isa case of
(a) ‘Limit Order’ 1. Factoring (a) Derivative contract
(b) ‘Best Rate Order” 2. Securitisation (b) Vehicle loan
(c) ‘Immediate or Cancel Order’ 3. Securitisable assets (c) Registered with SEBI
(d) “Stop Loss Order’ 4 Futures and forwards (d) Purchases the book debts
A banker to an issue is required to maintain books of accounts fori 5. Sub-broker of a company
minimum period of three vears. (e) Converting assets into
securities
(a) two (b) four bs
(c) three (d) five Ans.: (1) - (d), (2) - (e), (3) - (b), (4) - (a), (5) - (eo)
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, T Y B M s .

Financial services refer to services provided by the finance

Fig. 1 : Financial Services

(ii) credit card services

(vi) advisory and other auxiliary financial services including

(a) Fund Based Services tn

Merchant ban King

9, Merger and acquisition

10. Capital restructuring

11. Debenture trusteeship

12. Custodian services

13. Stock broking

Asset/Fund Based Services

Hire purchase and consumer credit:| Hire purchase is an

Innovative Frnanctal S¢ pices

10) hanover we loan *; SE)

industry Pr industries: [he objective of financial services is to provide

to provide timely and accurate advisory services to facilitate

ee és 4 Dominance of human element: Financial services are

elo pme nt and gro wth of any eco no h

Fig. 4 : Financial Service Ma

GROWTH OF FINANCIAL SERVICES Jy | 1

a fast pace. Further, India’s leading bourse Bombay Stock Exchange

ative rina mou! Services (FYBA F : SEM- [I TYRA; I

ro l ov er di sc BANK ING AND NON- BANK ING COMPANIES

serv icg ris a financial institution which is a company;

decisions * a non-banking institution which is a company and which has

the RBI, they cannot issue cheques on its name.

Innovative Financial Services (FYBAF: SEM-II, T YBMs SE

Drs Wat ters

im po rt an t fo rm s of fa ct or in g ar e &x Plain ‘fac Introduefion to Traditional Financial Services

The factor pays on guaranteed payment date or on the date of

Cross-border Factoring is similar to domestic factoring except that

importer. 1. The Buyer: The buyer negotiates terms of purchase. He receives

No funding for capital expenditure: Another disadva, (ii) assignment of receivables

= FACTORING IN INDIA } (v) offences and penalties.

ri sk m a n a g e ment and Introduction to Traditional Financial Services

| - AF ORING v/s FORFAITING

10, Dealing with Negotiable

t is an arrangement that converts PO Type of Goods

There is no letter of credit involved fo orfaitin

The importer places an order with the exporter to import goods

© The biggest advantage for the exporter is that he Zets by 7.

Yo, to Traditional Financial Services 39

[[lustration T : Cost of Bank Advance:

Debtors are allowed one month

l Set sel iEeit | SBE ck eb

| Introoadi duction to tO Trad itio

ASE CUR Ps lakh x 50 77D Amount @ lakh)

~~ Cost (of non-recourse factoring alternative) 49.86

Ree ae eee Recommendation: New Delhi Manufacturers Ltd. should not go

=5 + 25 = 30 days i.e. 1 month sm | | | |

Cost of owned funds = (€ 75 lakh x 1/3 x 28%) =T 7 lakh | | ia INTRODUCTION

E actoring obs are technically known as a ‘bill of exchange’.

Drawer discounts bil]

S BI L MARKET SCHEMES 4 Int roduction to Traditional Financial Services 51

— | (vii) According to the modification of the scheme in 1971, the bills

52 Jymnnonative. Emanctal vefeer: (FYBAF . SEM-i1, YB,

ithou scrutin RY —_— act