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Merchant Banking
and
Financial Services
Second Edition
About the Authors
Madhu Vij is Professor of Finance at the Faculty of Management Studies, University of Delhi, where
she has been teaching for over three decades. Her professional and teaching interests include the areas
of International Finance, Risk Management, Banking and Financial Services, Corporate Finance and
Accounting. She has received the Alumni Excellence Award from Shri Ram College of Commerce,
University of Delhi. Dr Vij has participated and attended the Global Colloquium on ‘Participant Centered
Learning’ at Harvard Business School, Boston, USA. She was on the Panel of Judges for the award of
PM’s trophy for selecting the best steel plant during 2011–2013 and has also been a member of Ad-hoc
Task Force, Results-Framework Document (2011–2013). Dr Vij has been an Independent Director of
MOIL Limited. Currently, she is an independent director for four private limited companies.
She has published several research papers in international and national journals of repute and has
by national bodies like UGC, RBI, ICSSR, SAIL and Delhi University. She serves on the editorial
board and is also a reviewer for several academic journals, national and international conferences.
Dr Vij is actively involved in research, consultancy and training for several leading public and private
Swati Dhawan is Assistant Professor at the Shri Ram College of Commerce, University of Delhi. She is
a graduate from Shri Ram College of Commerce, a postgraduate from Delhi School of Economics and
PhD from the Faculty of Management Studies, University of Delhi.
She has a rich teaching experience of more than 10 years in the areas of Accounting and Finance in
several colleges of University of Delhi and management institutes of repute like Faculty of Management
Studies, Institute of Management Technology, Lal Bahadur Shastri Institute of Management, etc. She
has several research papers to her credit and has presented papers in several national and international
conferences. Dr Dhawan has also been a resource faculty in management development programmes at
GAIL and Alchemist in the past. She has also worked as a research scholar in several ICSSR sanctioned
examination. In pursuit of her personal training and development, she has successfully completed
curriculum for Living program at Landmark Worldwide.
Merchant Banking
and
Financial Services
Second Edition
Madhu Vij
Professor of Finance
Faculty of Management Studies
University of Delhi
Swati Dhawan
Assistant Professor
Shri Ram College of Commerce
University of Delhi
McGraw Hill Education (India) Private Limited

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Contents
Preface to the Second Edition xix

Preface to the First Edition xxii
Acknowledgements xxv
Part I
1. Financial System, Markets and Services: An Overview 3

Learning Objectives 3
Financial System: An Introduction 4
Indian Financial Sector 5
An Overview of India’s Financial Services Sector 6
Merchant Banking 10
Future Challenges for Financial Services Industry 12
Summary 17
Key Terms 17
Objective Type Questions 17
Review Questions 18
Critical Thinking Exercise 19
Group Learning Exercise 19
Answers to Objective Type Questions 19
Case 20
2. Financial and Money Markets 21
Financial Market—Meaning and Functions 22
23
Types of Financial Assets 25
Developments in the Financial Market in India 34
Legislative Framework 35
Summary 38
Key Terms 38
Review Questions 40
Case 41
viii Contents
3. Merchant Banking 43
Merchant Banks 44
Registration of Merchant Bankers with SEBI 45
Merchant Banking and Investment Banking 45
Investment Banks 46
Merchant Banking in India 46
Qualities of Merchant Bankers 47
48
SEBI Regulations for Merchant Banking 49
Red Herring Prospectus (RHP) 53
Summary 56
Key Terms 56
Review Questions 57
Answers to Objective Questions 58
Case 59
Annexure 1 60
4. Issue Management 62
Issue Management—Meaning and Processes 63
Different Kinds of Issuses 63
Book Building 69
Eligibility for Registration 71
Types of Investors 72
Applications Supported by Blocked Amount (ASBA) 75
IPO Grading 76
Summary 77
Key Terms 77
Review Questions 78
Case 81
Annexure 1 81
Annexure 2 83
5. Depository System 84
Depository System—An Introduction 85
Contents ix
Bank and Depository—An Analogy 86

Types of Depository Accounts 87
Functions of Depository 88
Advantages of Depository System 89
Services Offered by Depository Participants 92
SDL 94
CDSL (Central Depository Services Limited) 97
SHCIL (Stock Holding Corporation of India Ltd.) 97
Legal Framework 98
Recent Developments 101
Summary 102
Key Terms 103
Review Questions 104
Case 106
6. Broking Services/Stock Exchange 107
Stock Exchanges 108
Stock Exchanges in India 108
Stock Broker 110
Sub-Brokers 111
Stock Trading System 111
Order Types and Conditions 113
Order Matching 115
Order Management 116
Trade Management 116
Clearing and Settlement 118
Settlement Agencies 119
T + 2 Rolling Settlement Cycle 121
Risks in Settlement 121
Measures for Risk Management and Containment 122
Legal Framework 122
De-Mutualization and Corporatization of Stock Exchanges 125
Insider Trading 127
Online Trading 130
AlgoTrading 132
High Frequency Trading (HFT) 133
Summary 133
Key Terms 134
x Contents

Case 138
Part II
7. Mutual Funds 141

Concept of Mutual Fund 142
Organization of Mutual Fund 142
Mutual Fund Schemes 144
150
Measuring Fund Returns 152
Performance Evaluation of Mutual Fund 153
Advantages and Disadvantages of Investing in Mutual Fund 158
History of the Indian Mutual Fund Industry and Recent Developments 159
Regulation of Mutual Funds in India 162
Summary 166
Key Terms 167
Review Problems 168
Case 170
Annexure 1 171
8. Insurance 174
Basics of Insurance 175
Key Concepts in Insurance 176
Insurance—Types and Products 177
181
Underwriting—The Backbone of Insurance 182
ALM in Insurance 185
Evolution and Development of Insurance in India 187
Recent Developments 192
Summary 199
Key Terms 199
Contents xi

Case 202
9. Private Equity and Hedge Funds 204
Concept of General Partners and Limited Partners 205
Who are General Partners (GPs)? 206
Private Equity Deals 208
Advantages of Private Equity 212
Returns Associated with a Private Equity Investment 213
Private Equity—Emerging Trends and Challenges 215
ICICI Venture 216
Hedge Funds 217
Global Private Equity Firms and Hedge Funds Investing in India 221
Concept of Exchange Traded Funds (ETFs) 222
Summary 223
Key Terms 224
Case 226
10. Securitization 228
What is Securitization? 229
Securitization Process 231
Structuring a Securitization Deal 232
236
Difference between Securitization and Factoring 237
Advantages of Securitization 237
Limitations of Securitization 239
Risks of Securitization 240
Legal Status of Securitization 241
Asset Liability Management and Securitization 242
Securitization and the Financial Crisis 244
Applications of Securitization 245
248
250
xii Contents
Summary 251
Key Terms 252
Research Project 255
Case 255
Annexure 1 256
Annexure 2 257
Annexure 3 259
11. Leasing and Hire Purchase 262
What is a Lease? 263
Elements of a Lease Transaction 265
Types of Lease 266
Lease Finance vs Term Loan 270
Hire Purchase 271
272
Limitations of Leasing 274
Evolution and Development of Leasing in India 275
Financial Evaluation of Lease Financing 277
Summary 286
Key Terms 286
Review Problems 288
Case 289
Annexure 1 290
12. Non-Banking Finance Companies 292
293
296
298
301
The Future: Challenges and Opportunities 303
Summary 304
Key Terms 305
Contents xiii

Case 309
Part III
13. Credit Rating 313

A Perspective of the Global Financial Crisis 314
Business of Credit Rating 315
What Is Credit Rating? 316
Credit Rating Agencies 316
Credit Analysis & Research Ltd. (CARE) 318
Investment Information and Credit Rating Agency of India Ltd. (ICRA) 319
Credit Rating Information Services of India Limited (CRISIL) 320
International Credit Rating Agencies 322
Importance of Credit Rating 322
The Credit Rating Process and Methodology 324
CRISIL—The Rating Process 324
CRISIL Rating Methodology 324
Moody’s Rating Methodology 326
Factors Contributing to the Success of the Rating System 326
327
333
Credit Rating Agencies and the Global Financial Crisis 333
Summary 335
Key Terms 335
Case 339
Annexure 1 341
Annexure 2 342
Annexure 3 344
Annexure 4 344
14. Consumer Finance 346
Consumer Finance—Meaning and Types 347
xiv Contents
347
Key Players Involved in Authorizing and Settling a Credit Card Transaction 349
Drivers of Growth 351
Concerns 353
Types of Credit Cards 353
Digitalization in India 359
Global Outlook 362
Summary 364
Key Terms 364
Case 367
Annexure 1 367
15. Venture Capital 370
Venture Capital 371
Venture Capital Financing—Key Advantages 371
Factors Affecting Venture Capital Investment 372
Key Aspects in a Venture Capital Investment 375
How Venture Capitalists Value Business? 380
What Industries do Venture Capitalists Favour? 383
Term Sheet 383
Alternative Investment Funds (AIFs)—SEBI (Alternative Investment Funds)
Regulations, 2012 390
History of Venture Capital Industry 391
Summary 396
Key Terms 396
Case 399
16. Factoring and Forfaiting 400
Factoring 401
Mechanism of Factoring 403
Types of Factoring 403
How can Factoring Help Companies to Succeed? 405
Contents xv
Bill Discounting and Factoring 405

Advantages and Disadvantages of Factoring 409
Forfaiting 409
Factoring in India 412
Factoring and the SME Sector 415
Case Studies on Factoring 416
Summary 417
Key Terms 418
Case 420
Part IV
17. Analysing Bank’s Financial Statements 425

Financial Statements 425
Shareholder’s Equity 428
Financial Statements of Banks—A Comparison 428
431
Summary 438
Key Terms 439
18. Bank Capital—Risk, Regulation and Capital Adequacy 443
Understand Basel Capital 443
Risk Management and Basel III 444
Key Elements of Basel III in Terms of Capital and Liquidity Standards* 446
Capital Adequacy Ratio: Risk-Weighted Assets and Tiers of Capital 448
Difference between Basel II and Basel III 451
Summary 455
Key Terms 455
xvi Contents

Annexure 1 458
19. Asset Liability Management in Banks and Financial Institutions 461
ALM Structure 463
Objectives of ALM 464
ALM Framework 465
ALM Policies 466
Ways to Make ALM More Effective 466
Reporting as Part of the ALM Process 467
Risk Relevant to Indian Banking 468
ALM Models 472
Summary 490
Key Terms 491
Review Problems 493
Case 495
Annexure 1 496
Annexure 2 496
Annexure 3 498
20. Risk Management in Banks 499
Risk Management in Banks 500
Operational Risk 503
Credit Risk 505
Securitization Act 508
Market Risk 509
Summary 509
Key Terms 510
Research Project 513
Case 514
Contents xvii
21. Mergers and Acquisitions 516

Meaning of Mergers and Acquisitions 517
Types of Mergers 518
Buy-out—Concept and Types 518
Motives behind Mergers and Acquisitions 520
Synergy Value 521
Mergers and Acquisitions Deals in India 522
Steps in M&A Process 523
Valuation in M&A 525
Regulation for Mergers and Acquisitions in India 528
Break-Ups 529
Restructuring Methods 530
Banking and Financial Services Industry (BFSI) Mergers 531
Summary 533
Key Terms 534
Review Problems 535
Case 537

540
542
544
Key Concerns 545
Financial Inclusion 546
Perspectives 549
Key Challenges 551
Summary 551
Key Terms 552
Critical Thinking Exercises 554
Case 555
Index 557
Preface to the Second Edition
Financial services have become increasingly internationalized over the years. The last 25 years have
witnessed in this sector. How these regulations along with the innovations will have an impact on
trends impacting and changing the nature of the services sector.
is a lesson that policy makers have learnt. Regulatory action has been taken to reduce the adverse
effects of the crisis with renewed focus on prudential regulation, accounting standards and transparency
issues with an aim to prevent another crisis in the future. Accordingly, the second edition represents a
Digitalization in India.
Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at different universities
and other professional institutes across India. It will be of immense use to the students pursuing
MBA, MCom, MBE, and other postgraduate courses. The book is also well suited for professional and
reference, supplementary reading and guide for practicing managers. For someone new to merchant
in the area.
Salient Features
This edition of the book takes the same innovative approach as taken in the previous edition and focuses
on three main blocks: Conceptual understanding, Critical thinking exercise, and Group learning exercise.
The main features of the text are as follows:
Learning Objectives at the start of each chapter

Critical Thinking Exercise and Group Learning Exercise at the end of each chapter to relate the
concept studied with the real world scenario
xx Preface to the Second Edition
Case Studies and Projects at the end of some chapters

Updated Review Questions to provide a complete testing of the concepts studied in the chapter
The objective is to build the analytical skills of the students and to teach them how to apply the
concepts studied to real life situations. The problems encourage students to develop decision-making
skills, critical thinking ability as well as provide students with a deeper learning opportunity. In addition,
students learn through interactive classroom activities by gathering and processing the information.
Organization of the Book

The book has been reorganized into four parts. Part I consists of six chapters and prepares the necessary
incorporated in light of changing contours of Indian banking. Chapter 2 has been rechristened as
segments. Also, latest developments in equity and bond markets have been included. Chapter 3 discusses
at length the importance and need for merchant banking with special emphasis on role of merchant
banker in primary market issue management. Chapter 4 has been updated and explains the nuances
of issue management with a focus on IPOs, Bonus and Rights. Chapter 5 discusses the functions of
the important dimensions of demutualization, insider trading, algo trading and high frequency trading in
this regard apart from taking stock of a regulatory perspective.
to the industry. It analyses the growth of mutual fund industry over years. A new case on direct plans
is also included. Chapter 8 on Insurance has been revised thoroughly to include a separate section on
Health Insurance. It presents the developments in the insurance sector and also discusses the concepts
been extensively revised to include different measures of hedge funds performance. Also, global private
explaining the concept of ETFs. Chapter 10 on Securitization has been updated and revised to include
Risks of Securitization, Limitations of Securitization, Advantages of Securitization – to the issuer,
included. Additional review questions and group learning exercise have also been included. Chapter 11
on Leasing has been thoroughly updated to include the difference between hire purchase and installment
credit and Lease Finance and Term Loans. It also includes Applications of Leasing in Industries, the
Chapter 12 is concerned with the
Part III of the book is devoted to the various details of advisory services in India (Chapters 13–
agencies – SMERA and Brickwork’s rating, discussion on international credit rating agencies with a
focus on Moody’s rating methodology. It discusses the main functions of credit rating agencies and the
Preface to the Second Edition xxi
rating process employed by them – CARE, ICRA and CRISIL. Also the challenges have been outlined
been revised extensively to include the key players involved in authorizing and settling a credit card
transaction, working of credit cards, digitalization in India, reasons for lack of awareness and consumer
Chapter 15 on Venture Capital includes a separate section on SEBI (Alternative Investment Funds)
How does bill discounting work, steps in the process,

difference between bill discounting and factoring,
and Basel accord with a view to gaining an understanding of risk, regulation and adequacy norms.
Risks relevant to Indian banking – Interest Rate Risk, Liquidity Risk, Funding Liquidity and Funding
Liquidity Risk have been discussed in detail. Chapter 20 focusses on Risk Management in Banks and
discusses the risk facing banks in India, namely Liquidity Risk, Interest rate risk, Operational risk and
Chapter 21 on Mergers and Acquisitions has been thoroughly revised to include a separate section
on Buyouts with a detailed discussion on LBOs taking the case of Tata and Tetley. Also, M&A deals
have been illustrated taking popular cases such as Vodafone –Hutchison Essar, Tata Steel – Corus,
Chapter 22 on Micro Finance has been revised to include discussion on Priority Sector Lending
MFIs have been included. A new critical thinking exercise has also been added.
Madhu Vij
Swati Dhawan
Publisher’s Note:
McGraw Hill Education (India) invites suggestions and comments, all of which can be sent to info.india@
mheducation.com (kindly mention the title and author name in the subject line).
Piracy-related issues may also be reported.
Preface to the First Edition
in a well-structured format. It elaborates the basic concepts, functions, regulatory issues and the
contemporary developments in the industry in an easy-to-understand manner. A complete and thorough
The book provides the students with a complete overview of the subject. It deals with all aspects
have become integrated in the last few years, both at the national and international level, even though
not only have to understand the markets but also have to be ahead of the learning curve. The role of
sector reforms as they provide specialist services to the corporate clients. In the last few years, they have
led to further growth of the market. They have emerged as the most critical link between a company
merchant bankers is by far the most diverse, which establishes their relevance in the present economic
stability of the economy.

The focus of this book is to help the students understand the importance of merchant banking and
has highlighted the importance of prudential regulation, accounting standards and transparency issues.
Intended Audience
This text is suitable as a core book for both undergraduate and postgraduate courses at universities and
other professional institutes. It will be of immense use to the students pursuing MBA, MCom, MBE
and other postgraduate courses. The book is also well suited to professionals and special programmes
range of activities and many new developments in the area.

Preface to the First Edition xxiii
Organization of the Book
of the subject and highlights the changing role and importance of the sector. Chapter 2 discusses the
detail. Chapter 4 provides an overview of the stock exchange in India. It also discusses the important
dimensions of insider trading and the SEBI regulations in this regard.
in India. Chapter 5 discusses the importance and growth of merchant banking and how since the last
management, which has become an important fee-based service with companies in recent years. Chapter
highly lucrative business with more and more banks offering them to their customers in the recent past.
Part III (Chapters 10 to 15) provides the students with a complete understanding of the various facets
expanding economy, especially after the liberalization of the banking and insurance sector over the past
decade. Chapter 10 is concerned with the growth, importance and challenges faced by non-banking
rapidly. Chapter 11 deals with the concept and growth of mutual fund industry in India. This sector has
traditionally been a key player both in collecting domestic savings and also in lending to companies.
micro-insurance, reinsurance and bancassurance. Chapter 13 discusses hedge funds and private equity.
Chapter 14 elaborates the process and structuring of a securitization deal. The recent crisis in the credit
markets has forced analysts and regulators to look into the desirability of certain aspects of securitization
activity. Chapter 15 covers the importance and developments of leasing and hire purchase.
factoring and forfaiting. Chapter 18 explains the concept of mergers and acquisitions and how mergers
are valued.
management models—gap, duration, simulation and value at risk. Chapter 20 explains the Basel 2
Accord and its impact on Indian banks. It discusses the Basel 1 and Basel 2 accords and also the Three
Pillars. Finally, Chapter 21 deals with risk management in banks.
Key Features
Throughout the text, special features have been integrated to encourage the students and help them
xxiv Preface to the First Edition
understand the concepts. A full line of teaching and learning resources developed at the end of
each chapter help the students apply the concepts to real-life situations. The book has the following
pedagogical features:
Each chapter includes Learning Objectives, Opening Case, Summary and Key Terms.
Besides Objective Type Questions and Review Questions, two activities—Group Learning Ex-
ercise and Critical Thinking Exercise have been added at the end of each chapter to promote dis-
cussion and develop critical thinking skills so as to prepare the students for real-world situations.
In the Group Learning Exercise, students are asked to attempt the problem in groups rather than
alone or in pairs. This helps them to foster comfort and familiarity in the group and also develop
a range of communication and learning styles. In Critical Thinking Exercise, the participants are
encouraged to think critically about their experiences, develop their understanding of the related
issues and create a dynamic and innovative learning environment. This helps them to improve
an exciting alternative to traditional classroom learning.

Cases with discussion questions are at the end of each chapter. Each Case Study is built on the
concepts introduced in the chapter and provides a framework for applying them to different
situations.
improvement in the book are welcome and will be incorporated in its future editions.
Madhu Vij
Swati Dhawan
Acknowledgements
This book has evolved over a number of years of teaching and doing research at different academic
who has made this book possible. During the writing of this book, we received support from many
friends and colleagues. I would like to express my gratitude to all of them. I am particularly indebted to
Prof Vivek Suneja, Prof Harsh Verma, Prof Pankaj Sinha, Prof Mala Sinha and Dr Anupama Vohra, from
the Faculty of Management Studies, Prof Suvera Gill, University Business School, Chandigarh, Prof P
K Jain and Prof S S Yadav from the Department of Management Studies, IIT Delhi and Prof A M Sherry,
in completing the book.

I have no words to express my deep sense of love and respect for my late father, Prof M C Kapoor,
works would have been complete without his constant encouragement and guidance. His beliefs will
always inspire me. My family has always been my inspiration and motivation for continuing to improve
my knowledge and move my career forward. I take this opportunity to convey my sincere thanks to my
husband, Anil Vij. I also thank my wonderful daughter, Anu Priy, her husband, Akshay, my son, Arjun,
his wife, Parul and the youngest addition in our family, Arav Purkayastha. Their continued love and
appreciation is what keeps me motivated.
Madhu Vij
I am indebted to the Almighty God with whose blessings I have been able to conquer another task
in my life. I pronounce with reverence, my deep sense of gratitude to Prof Madhu Vij, for her resolute
guidance and abiding interest throughout the work. A meticulous supervision by her has helped me
enough words that can express my feelings of respect and love for my late grandfather and parents who
left no stone unturned for giving me the best of everything in my life. I owe so immensely to them for
express my feelings for my in-laws for their sustained love, blessings and encouragement in completing
the book. Mere words will never match the quantum of love, affection, inspiration and moral support
that I receive from my daughter, Suhani, and my husband, Vikram who has always stood by me and
reassured my faith in my abilities that made me complete my task.
Swati Dhawan
xxvi Acknowledgements
We are thankful to numerous colleagues who helped us in writing this book. Of great help, were the
reviewers whose detailed comments and advice guided us in revising the text and coming out with the
second edition.
We express our sincere gratitude to all our colleagues from management schools, universities and
professional institutes across India for adopting the book and extending their support and encouragement.
The help and support from everyone at McGraw Hill Education is much appreciated. Special thanks
are due to Mr Piyaray Pandita and Ms Laxmi Singh, who have relentlessly worked to ensure a quality
Madhu Vij
Swati Dhawan
PA RT I
Chapter 1 Financial System, Markets and Services: An Overview
Chapter 2 Financial and Money Markets
Chapter 3 Merchant Banking
Chapter 4 Issue Management
Chapter 5 Depository System
Chapter 6 Broking Services/Stock Exchange
CHAPTER Financial System,
Markets and Services:
1 An Overview
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
LO 1 Know the model of a Financial System
LO 2 Understand the Indian Financial Sector
LO 3 Understand Nature of Financial Services
LO 4 Review the future challenges for the financial services industry
An excerpt from The Financial Stability Report (Dec. 2016) of RBI
G lobal recovery remains fragile amidst slowdown in trade, rising tendency towards protectionism and
slower growth in productivity. Global financial markets continue to face elevated levels of uncertainty,
notwithstanding the resilience exhibited in overcoming the outcomes of Brexit referendum and the US
presidential elections. While the unconventional monetary policy measures have so far fallen short of achieving
their intended objectives, the systemic central banks in advanced economies are unlikely to end them abruptly
because of the concerns on potential impact on financial stability and limited scope for alternative measures on
fiscal front. However, financial markets would continue to grapple with headwinds from uptick in the interest
rates. In India, domestic macroeconomic conditions remain stable with significant moderation in inflation.
Moreover, reduced policy uncertainty and legislative and tax reforms such as implementation of GST (goods
and services tax) and enactment of bankruptcy laws are expected to reinforce the benefits from the strong
macro fundamentals. The withdrawal of legal tender status of specified bank notes could potentially transform
the domestic economy. While the overall risks to the corporate sector moderated in 2016–17, concerns remain
over its recovery.
4 Merchant Banking and Financial Services
Financial System: An Introduction [LO1]
Surplus Deficit
spending Financial Intermediaries spending
units Banks units
Financial institutions
Stock brokers
Sub brokers
Stock exchange
Savers/ Investment banks Borrowers/
Investors/ Regulators Corporates
Households Credit rating agencies
Merchant bankers
FIGURE 1.1 Basic Model of the Financial System
`
` `
` `
`
`
Financial System, Markets and Services: An Overview 5
Invest in equity share
Mr. Issue equity share

Kishore
Have
surplus Financial Mint enterprises
funds market (Requires funds)
Ms.
Alka
Invest in form of a
bank recurring deposit
FIGURE 1.2 Graphical Presentation of an

Example of the Financial System
Indian Financial Sector [LO2]

Commercial banks
Banks Cooperative banks
Differentiated banks
(payment banks
and small banks)
Financial institutions Development banks
Insurance companies
Non-banks Mutual funds
Non banking finance

companies
Others
(pension funds,
primary dealers etc)
FIGURE 1.3 Institutions Characterizing the Indian Financial Sector
An Overview of India’s Financial Services Sector

Nature of Financial Services [LO3]

Lok
Adalats
Types of Financial Services

Merchant Banking
Nature of Merchant Banking
Functions of Merchant Bankers

Registration of Merchant Bankers
`
Future Challenges for Financial Services Industry [LO4]
Globalization
inter
alia
Beyond Basel 2 Norms

Asset Liability Management

Improving Risk Management Systems Relevant to Indian Banking
Liquidity Risk Management

Interest Rate Risk
Corporate Governance
S
UMMARY
Globalization of the Indian economy has transformed the merchant banking and financial services
sectors in the last decade. In addition, IT has enabled these sectors to attain global standards and
benchmarking to cope with the emerging demands. Merchant bankers have now become the backbone of
modern banking practices because of their vast experience. To sustain any country’s growth, there is need
for skilled professionals who are involved with the activity of transferring funds to those borrowers who are
interested in borrowing. Started in India in 1969, merchant banking in India has gradually helped corporate
bodies, in both private and public sectors to raise significant amount of funds from the capital market for
various purposes. Merchant bankers with their latest skills, updated information, and vast knowledge assist the
companies in raising funds from the market by acting as intermediaries between the issuers of capital and the
ultimate investors who purchase these securities. They promise their clients good return on their investments.
India’s financial services sector is entering a new world and exciting developments are changing the face of
the sector. More than a decade of financial sector reforms has led to a transformation of the sector. The industry
was at a high at the turn of the millennium and all the major financial service providers, like banks and insurance
companies, were showing good performance. With greater liberalization, the financial system had come to play
a much greater role in the allocation of resources than in the past. Just when it was thought that everything
was well, the bubble burst and with it came crashing the hopes of the financial services industry. Added to this
were the various scandals and the sub-prime crisis, and the companies associated with the stock markets were
spurred. In the coming years, financial services will have to prepare themselves to face several challenges and
increase their efficiency, productivity, and competitiveness. Some of the challenges facing the financial sector
are: Globalization, Basel II norms, Asset Liability Management, Risk Management, and Corporate Governance.
KEY TERMS
Merchant Banking Basel Accord

Financial Services Interest Rate Risk
Banking Liquidity Risk
Asset Liability Management Corporate Governance
Risk Management
OBJECTIVE TYPE QUESTIONS
A. Fill in the blanks:

1. The _________ has seen a smooth transition from a highly regulated regime to a market economy.
2. The financial reforms in the banking sector were a unique experiment undertaken by the ____________.
3. The last few years have been very ________ for the financial services sector.
4. The financial services comprise three sectors _______________, _______, and ______________.
5. Basel I came into effect in December _________ while Basel II was released in June ______.
6. ________________ can be defined as managing both assets and liabilities simultaneously for the purpose
of mitigating interest rate risk.
7. _______________ is the risk that some loans and investments may not be repaid.
8. ________________ refers to the ability of a bank to continue its operations when it faces huge amount
of losses.
9. The immediate impact of changes in interest rates is on the _________________.
10. ________________ channelize and mobilize savings from the public into productive investment avenues.
B. State whether the following statements are true or false:

1. The broad objectives of the financial reforms were to enhance efficiency and productivity in a gradual
and phased manner.
2. A good corporate governance system is not required for a sound financial system.
3. The global financial crisis that had been brewing for a while, started to show its effects in the middle of
2007 and into 2008.
4. After the financial sector reforms, banks have stopped concentrating on better corporate governance.
5. Basel II is all about 2 pillars of risk management.
6. An ALM process helps the banks only to remain financially viable as economic conditions change.
7. Credit risk management lies at the heart of confidence in the banking system.
8. Corporate governance is about commitment to values and ethical business conduct.
9. In the coming years, financial services will not have to face several challenges and they can become
complacent.
10. Merchant bankers with their vast knowledge assist the companies in raising funds from the market by
acting as intermediaries.
REVIEW QUESTIONS
1. ‘The recent global crisis has shown that the health of a country’s financial sector has far reaching
implications for its economy as well as for other economies.’ Elucidate.
2. Do you think the financial services industry is more volatile than other sectors? Comment.
3. ‘The evolution of regulatory framework for financial sector entities has been intrinsically derived from the
objective of financial stability which has always been an objective for the RBI.’ Comment in the context of
the recent financial sector reforms.
4. Discuss the norms an applicant needs to comply with to be eligible to act as a merchant banker.
5. Define a merchant banker. Why do merchant bankers have a crucial role to play in India? Discuss.
6. Do you think the most important factor shaping the financial services sector, both nationally and
internationally, has been globalization? Comment.
7. ‘The general principles of sound corporate governance should not be applied to all banks, without taking
into account their unique ownership structures.’ Comment in the context of India.
8. Discuss the future challenges faced by the financial services industry in India.
9. Merchant banking is a skill based activity that involves serving the financial need of all clients. Comment.
10. “India’s financial services sector has enjoyed a very strong growth driven mainly by financial sector
liberalization, corporate restructuring, rising personal incomes, and growth of a more consumer-oriented
economy.” Elucidate with examples.
11. Corporate governance is the foundation for effective risk management in banks and, thus, the foundation
for a sound financial system. Discuss.
12. What role do you envisage for the financial services in the coming years?
13. Discuss the emerging scenario of Indian Banking in light of the current challenges and the opportunities
that lie ahead.
CRITICAL THINKING EXERCISE
Given the dominance of US financial markets in other developed and developing economies, the sub-prime
mortgage market crisis affected markets and institutions all over the globe. On 27 July 2007, worries about the
sub-prime crisis hit global stock markets and the main Dow Jones stock index lost 4.2% in five sessions—its
worst weekly decline in five years. The fall continued in August.
On 3 August 2007, the Dow Jones Index ended the session almost 2.1% lower. The same day, London’s
main FTSE 100 stock index closed down by 1.2% with French and German markets also declining. On 9 August,
French bank, BNP Paribas, suspended three investment funds worth €2 billion citing problems in the US sub-
prime mortgage sector.
1. Discuss the impact of the US sub-prime crisis on India and China.
2. What has the US sub-prime market crisis got to do with stock markets going haywire in India?
3. What do you think are the lessons for the Indian investor?
GROUP LEARNING EXERCISE
Since the start of the financial sector reforms in the 90s, Indian banks have adapted to international practices
and benchmarks. The banking sector has become increasingly susceptible to the vicissitudes of the global
operating environment. With the gradual convergence of domestic markets in India with global ones, the
issue of risk and its management remains an important one. Banks need to critically evaluate their existing risk
management systems and identify the shortcomings so as to devise appropriate strategies to deal with and
manage the risk. Also, banking is, in the ultimate analysis, an exercise in risk management and to the extent
that risks are adequately addressed, the task of proactive management of bank operations can be greatly
enhanced.
Divide the class into groups and discuss the following:
1. How should the financial sector adopt better standards to evaluate the credit-worthiness of potential
borrowers? Suggest various alternatives.
2. Do you think that the risk management strategies adopted by the financial sector is appropriate.
Answers to Objective Type Questions

A. Fill in the blanks
1. Financial sector 2. RBI
3. Challenging 4. Banking, Insurance and Real Estate
5. 1992, 2004 6. Asset Liability Management
7. Credit risk 8. Capital risk
9. Net Interest Income (NII) 10. Merchant Bankers
B. True or false
1. True 2. False 3. True 4. False 5. False 6. False 7. False 8. True
9. False 10. True
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It is in the same latitude as southern Canada and the northern
portion of the United States. Its northern limits are about the same as
the northern limits of Quebec. Its southern limits are about the same
as the southern limits of Maryland. It is bounded on the north by the
richest portions of Siberia, which not many years ago was itself a
part of the dominion of the Manchus; for several hundred miles on
the east by the grain-fields of the Ussuri district of Russian Siberia,
also until recently a part of the Chinese Empire; on the east and
south by Korea, over which the world’s next great war will probably
be fought, and soon; on the west by Mongolia, and on the south by
Korea, China, and the gulfs and extensions of the Yellow Sea, which
touches or commands much of that empire. On these gulfs are two
of the finest military and commercial ports of Asia, or the world—Port
Arthur and Talienwan, or, as the Russians call it, Dalny.”
Russian designs upon Manchuria first became prominent after the
Chino-Japanese war when Russia objected to Japan’s acquiring any
territory in that quarter. During the Boxer uprising in 1900 Russian
troops overran Manchuria and in a convention concluded between
Russia and China at the end of the movement, the civil and military
administration of the province was placed practically under the
control of Russia. Owing to objections on the part of the other
powers, however, Russia withdrew this convention and another was
signed in place of it on April 8th, 1902. According to this Manchuria
was to remain “an integral portion of the Chinese Empire”; China
pledged herself to protect the railway and all Russian subjects and
their enterprises in Manchuria, while Russia for her part agreed to
withdraw her troops gradually. This agreement on the part of Russia
remained a promise only. In the meanwhile Manchuria was rapidly
becoming russianised. The important cities along the railway such as
New-Chwang, Mukden, Liauyang and Kirin became centres of
Russian forces. Russian immigrants built and inhabited whole towns
laid out like European cities with all modern improvements. Harbin,
which in 1897 was a collection of mud huts, became a Russian city
and a centre of Manchurian trade.
THE WAR WITH JAPAN

Russia’s policy in the Far East was the cause
[1903-1904 a.d.] of friction with England and the United States,
and especially with Japan; relations with the
latter becoming more and more strained until they finally led to a war
which broke out in February, 1904. In April of the preceding year
Russia’s representative at Peking presented certain demands to the
Chinese government which virtually excluded all foreigners—except
Russians—from Manchuria, and were a plain violation of the
principle of the “open door” which Russia had pledged herself to
maintain in that province. Owing to the opposition of the United
States and Japan, however, most of these demands were withdrawn
and permission was granted to open two Manchurian ports, although
this was not carried out. In Korea also Russia opposed Japan,
refusing to allow her to open the port of Wi-ju to foreign trade, and
objecting to a Japanese telegraph from Seul to Fusan, although
Russia herself laid a telegraph line on Korean territory.
In August, 1903, Russia took the important step of establishing a
special vice-royalty in the Amur provinces which had been leased to
her in the Liao-tung peninsula. Vice-admiral Alexiev was appointed
as first Russian viceroy of the Far East, and was invested with civil
and military authority which made him to a great extent independent
of St. Petersburg.
In September the Russian ambassador at Peking had announced
that New-Chwang and Mukden would be evacuated on October 8th,
but that date passed and Russian troops were still there, while
Russia continued to strengthen her army and navy in the Far East.
Japan demanded that Russia should evacuate Manchuria in
agreement with her promises and that she should discontinue her
aggressive attitude in Korea.
Russia’s answers to Japan’s repeated demands were evasive, and
on January 8th, 1904, Japan sent a final note to Russia and,
receiving no reply, withdrew her minister and legation from St.
Petersburg on February 6th, 1904. On February 7th both
governments issued statements announcing the severance of
diplomatic relations. On February 8th the main Japanese fleet, under
Vice-admiral Togo, opened the war by surprising the Russian fleet at
Port Arthur in a state of unpreparedness, and inflicting much
damage.
The attack was repeated on the following day with a repetition of
the result of the first day’s assault. On the same day Admiral Uriu
and a small Japanese squadron attacked and destroyed two
Russian cruisers in the harbour of Chemulpo. Thus at the very outset
the Japanese had secured a decided advantage over their
opponents on the sea. At once the cry arose in Russia that Japan,
by not giving official notice of the proposed attack had violated
international law, but neutral nations generally saw in Russia’s
complaint only an attempt to excuse her defeats, and held that the
severing of diplomatic relations was warning enough. Still that the
Russians were not entirely crippled was shown by the fact that within
a fortnight their squadron of four cruisers at Vladivostok cut its way
out of the ice, which was supposed to hold it captive, and harried the
Japanese coast. But this danger did not hinder the transportation of
Japanese troops to Korea, which began on February 18th. The
following month saw a continuation of Japanese successes and of
Russian losses. Several times Admiral Togo attacked Port Arthur, at
one time or another almost all of the Russian ships of war sustaining
more or less serious damage. Vladivostok was bombarded, and a
succession of minor engagements took place between the outposts
of the two opposing armies advancing toward one another from
opposite sides of the Yalu river. On February 24th Admiral Togo
made an unsuccessful attempt to “bottle up” the Russian fleet in the
harbour of Port Arthur by sinking five old steam-ships in the channel.
Early in March, General Kuropatkin, the Russian minister of war, was
appointed by the czar to the supreme command of the Russian
armies in Manchuria to succeed Viceroy Alexiev and Admiral
Makarov was at the same time appointed to the command of the
fleet. By the end of the month the Japanese had, on the Manchurian
border, in Korea, with which country they had concluded a close
alliance, a force estimated at eighty thousand, with a base at Ping
Yang. This was faced by a Russian force, slightly smaller, but
increased daily by reinforcements which kept arriving in a continuous
stream over the Trans-Siberian and Manchurian railways. The
Japanese successes appeared well nigh to stupefy Russia, and the
demoralisation of the czar’s official advisers seemed complete.
Beside the loss of General Kuropatkin, who was succeeded as
minister of war by General Sakarov, both Count Lamsdorf, minister
of foreign affairs, and M. Witte, the finance minister, retired from the
cabinet. On April 13th, the Russian battle-ship Petropavlovsk struck
a mine or floating torpedo near the entrance to Port Arthur harbour
and sank with all on board, including Admiral Makarov and the war
artist Vereshchagin.
During the succeeding month war operations of importance or
interest were confined to the land. By the first of May the principal
points in the Japanese military programme had unfolded themselves.
The absolute command of the sea and coast, thus assuring ease
and safety in the transportation of troops and munitions of war, had
been secured, and an efficient and formidable army had been landed
on the Asiatic mainland. Korea too had been thoroughly occupied.
The Japanese army, in the last days of April, began its forward
movement under General Kuroki, the purpose being to cross the
Yalu at several points and drive the Russians back into Manchuria.
On May 1st, after a six days fight on the Yalu near Wi-ju, the
Japanese won their first land victory, and secured a firm footing on
the Manchurian side of the Yalu. During the month of May Kuroki
continued his advance into the interior, but his progress was slow
owing to the difficulty in maintaining communication with the coast
and constant skirmishing with the Cossacks who opposed his
advance guard. Kuropatkin meanwhile proceeded to concentrate his
forces at Liauyang on the Manchurian Railway south of Harbin, with
the apparent intention of leaving Port Arthur to its fate.
It was about the latter place that the activity now centred and
against it a second Japanese army under General Oku advanced.
On May 25th Oku landed a force of some forty thousand men near
Kin-chau on the narrowest point of the Liao-tung peninsula. At this
point the Nan-shan hills extending from Kin-chau, on the western
side of the isthmus toward Dalny on the east afforded the Russians
an excellent opportunity for defence and here they had constructed a
strong line of fortifications, mounted a large number of guns and
manned them with the flower of the Port Arthur army. After a series
of tentative attacks, Oku made a grand assault under cover of fire
from warships in the harbour of Kin-chau. In the charge up the
heights he lost over 4,000 men, but drove out the Russians, who lost
2,000 men and 78 cannon. Two days later the Japanese occupied
Russia’s great commercial port, Dalny, finding the docks, piers, and
railway yards uninjured. It was thenceforward the Japanese base.
Port Arthur was now left to its fate, save for
[1904-1905 a.d.] the single effort of General Stakelberg who was
detached with 40,000 men to make a dash
southward, but was defeated by Oku at Telissu (Vofangow), eighty
miles north of Port Arthur (June 14-16), and by Kuroki. He made his
escape, having lost some 10,000 men on his vain foray.
Kuropatkin’s tactics were Fabian and his eventual reliance was the
reinforcements which the Siberian railway poured in as fast as
possible. The Japanese forced the attack. Marshal Oyama was in
charge of the armies opposed to Kuropatkin, his subordinates being
Nodzu and the brilliant Kuroki. General Oku also joined Oyama, the
Port Arthur siege being placed in the command of General Nogi.
June 26-27 the Japanese took the well-nigh impregnable position at
Fen-shiu-ling pass. Shortly after Kuroki took the important pass of
Motien-ling. On July 17 General Count Keller made a desperate
effort to recapture it, but was repulsed with heavy loss. July 24 Oku
took Tashichiao and forced the Russians back to the walled city of
Hai-cheng. July 29 Kuroki took the Yangtse pass, in whose defence
General Keller was killed. Oku having turned his right flank,
Kuropatkin was forced to evacuate Hai-cheng and retreat to his base
at Liauyang. He was also compelled to give up the important city of
New-Chwang.
The capture of Liauyang was a great problem. The Japanese were
not ready to open battle till August 24, when they began a twelve
days’ combat which takes a permanent place as one of the largest
and fiercest battles in history. The Russians were estimated at
200,000; the Japanese at 240,000. The Japanese confessed a loss
of 25,000; the Russian loss was perhaps still greater, as they were
defeated and escaped capture or annihilation only by Kuropatkin’s
ingenuity in retreat.
The Russians retired to Mukden. October 2nd Kuropatkin felt
strong enough to take the offensive, and assailed Oyama on the
river Shakhe or the Sha-ho. A series of battles followed, lasting till
October 18, when the Russians fell back again to Mukden, after a
loss of 45,000 men killed and wounded, according to a Russian staff
report. Oyama claimed to have found 13,300 Russians dead on the
field, and admitted a loss of 15,800 on his own side.
Meanwhile Port Arthur was undergoing one of the most important
sieges in history. The siege began on May 26th, when Nan-shan hill
was taken and Dalny occupied, though on August 12th the last of the
outlying defences was taken and the Japanese sat down before the
permanent works. They combined a patient and scientific process of
sapping, trenching and tunnelling, with a series of six grand assaults.
The collaboration of such skill with such reckless heroism had its
inevitable result. The garrison under General Stoessel held out with
splendid courage against an army totalling perhaps 100,000, but the
gradual exhaustion of ammunition, food, and strength, together with
the appearance of scurvy, compelled a surrender. January 3rd, 1905,
the Japanese took possession, finding 878 officers, 23,491 men,
besides several thousand non-combatants.
The fleet which had made several efforts to escape had been
reduced by loss after loss, and finally, on the capture of 203 Metre
Hill, had been subjected to the fire of the land artillery and
completely destroyed.
During the leaguer of Port Arthur and the gradual beating back of
Kuropatkin, other Russian activities kept diplomacy busy. The
seizure of neutral ships in the Red Sea by two vessels that passed
the Dardanelles as merchantmen and then equipped as cruisers,
provoked such indignation in England and Germany that the
seizures were discontinued. The Vladivostok squadron made daring
raids upon Japanese and neutral vessels, but after a long pursuit
was caught by Admiral Kamimura, who sank the Ruric and crippled
the other two cruisers.
Much talk was made of sending the powerful Baltic fleet to the aid
of Port Arthur under the command of Admiral Rojestvensky. It set
forth in October after infinite delays. On the night of the 21st, while in
the North Sea, off the Dogger Bank, it met a fleet of British fishing
smacks and fired on it, sinking one boat and killing two fishermen.
The indignation of the English people was intense, an inquiry was
demanded, during the progress of which the Baltic fleet continued on
its long voyage.
The internal condition of Russia was rendered critical by the war,
and by profound commercial distress. June 15th the Governor-
General over Finland, Bobrikov, was assassinated by an opponent of
the russification policy. On July 29th the Czar’s minister of the
interior, Von Plehve, was slain by a bomb thrown at his carriage.
Rightly or wrongly, Von Plehve was considered the special author
and adviser of the increasing vigour and tyranny of the czar’s
internal administration. Jews abhorred him as the man responsible
for the Kishinev massacres, and the Finns looked upon him as the
destroyer of their national institutions. He was succeeded by Prince
Peter Sviatopolk-Mirsky, a man of comparatively liberal and
progressive views.
This gave some encouragement to the zemstvos, the farthest step
toward representative government yet taken in Russia. They date
only from the czar’s ukase of January, 1864. Each of the districts in
which Russia is divided is represented by an assembly, elected by
the three estates, communes, municipalities, and landowners. Each
district assembly in a province sends delegates to a general
provincial assembly or zemstvo, which body controls the roads,
primary schools, etc. Alexander II meant that these zemstvos should
acquire large power, but after his death they fell under the sway of
provincial governors. November 21st, 1904, the zemstvos lifted their
heads again, and their presidents met in a congress which, by a
majority of 105 to 3, voted to beg the czar to grant Russia a
constitution and a genuine representative government.
The czar, with some asperity of tone, refused a constitution, and
while promising certain reforms, rebuked the zemstvos and forbade
their further discussion of such unsettling topics. Prince Sviatopolk-
Mirsky now resigned, declaring that Russia was on the brink of a
great revolution, and that the bureaucracy must be supplanted by
“the freely elected representatives of the people.” In January, 1905,
Sergius de Witte succeeded to the office of minister of the interior.
One of the most prominent European statesmen, a liberal, and an
enemy of Von Plehve, his first statements were nevertheless
disappointing to the believers that radical reforms alone can save
Russia.
APPENDIX. DOCUMENTS RELATING TO
RUSSIAN HISTORY
I
TREATY OF PARIS
GENERAL TREATY BETWEEN THE QUEEN OF THE UNITED

KINGDOM OF GREAT BRITAIN AND IRELAND, THE
EMPEROR OF AUSTRIA, THE EMPEROR OF THE FRENCH,
THE KING OF PRUSSIA, THE EMPEROR OF RUSSIA, THE
KING OF SARDINIA, AND THE SULTAN
Signed at Paris, March 30th, 1856. Ratifications exchanged at Paris,
April 27th
Art. 1. From the day of the exchange of the ratifications of the
present treaty there shall be peace and friendship between her
majesty the Queen of the United Kingdom of Great Britain and
Ireland, his majesty the Emperor of the French, his majesty the King
of Sardinia, his imperial majesty the Sultan, on the one part, and his
majesty the Emperor of all the Russias, on the other part, as well as
between their heirs and successors, their respective dominions and
subjects in perpetuity.
Art. 2. Peace being happily re-established between their said
majesties, the territories conquered or occupied by their armies
during the war shall be reciprocally evacuated.
Special arrangements shall regulate the mode of the evacuation,
which shall be as prompt as possible.
Art. 3. His majesty the Emperor of all the Russias engages to
restore to his majesty the Sultan the town and citadel of Kars, as well
as the other parts of the Ottoman territory of which the Russian
troops are in possession.
Art. 4. Their majesties the Queen of the United Kingdom of Great
Britain and Ireland, the Emperor of the French, the King of Sardinia,
and the Sultan, engage to restore to his majesty the Emperor of all
the Russias the towns and ports of Sebastopol, Balaklava,
Kamiesch, Eupatoria, Kertch, Yenikale, Kinburn, as well as all other
territories occupied by the allied troops.
Art. 5. Their majesties the Queen of the United Kingdom of Great
Britain and Ireland, the Emperor of the French, the Emperor of all the
Russias, the King of Sardinia, and the Sultan, grant a full and entire
amnesty to those of their subjects who may have been compromised
by any participation whatsoever in the events of the war in favour of
the cause of the enemy.
It is expressly understood that such amnesty shall extend to the
subjects of each of the belligerent parties who may have continued
during the war to be employed in the service of one of the other
belligerents.
Art. 6. Prisoners of war shall be immediately given up on either
side.
Art. 7. Her majesty the Queen of the United Kingdom of Great
Britain and Ireland, his majesty the Emperor of Austria, his majesty
the Emperor of the French, his majesty the King of Prussia, his
majesty the Emperor of all the Russias, and his majesty the King of
Sardinia, declare the Sublime Porte admitted to participate in the
advantages of the public law and system (concert) of Europe. Their
majesties engage, each on his part, to respect the independence
and the territorial integrity of the Ottoman empire; guarantee in
common the strict observance of that engagement; and will, in
consequence, consider any act tending to its violation as a question
of general interest.
Art. 8. If there should arise between the Sublime Porte and one or
more of the other signing powers any misunderstanding which might
endanger the maintenance of their relations, the Sublime Porte and
each of such powers, before having recourse to the use of force,
shall afford the other contracting parties the opportunity of preventing
such an extremity by means of their mediation.
Art. 9. His imperial majesty the Sultan having, in his constant
solicitude for the welfare of his subjects, issued a firman which, while
ameliorating their condition without distinction of religion or of race,
records his generous intentions towards the Christian population of
his empire, and wishing to give a further proof of his sentiments in
that respect, has resolved to communicate to the contracting parties
the said firman, emanating spontaneously from his sovereign will.
The contracting powers recognise the high value of this
communication. It is clearly understood that it cannot, in any case,
give to the said powers the right to interfere, either collectively or
separately, in the relations of his majesty the Sultan with his
subjects, nor in the internal administration of his empire.
Art. 10. The convention of the 13th of July, 1841, which maintains
the ancient rule of the Ottoman empire relative to the closing of the
straits of the Bosporus and of the Dardanelles, has been revised by
common consent.
The act concluded for that purpose, and in conformity with that
principle, between the high contracting parties, is and remains
annexed to the present treaty, and shall have the same force and
validity as if it formed an integral part thereof.
Art. 11. The Black Sea is neutralised; its waters and its ports,
thrown open to the mercantile marine of every nation, are formally
and in perpetuity interdicted to the flag of war, either of the powers
possessing its coasts or of any other power, with the exceptions
mentioned in Articles 14 and 19 of the present treaty.
Art. 12. Free from any impediment, the commerce in the ports and
waters of the Black Sea shall be subject only to regulations of health,
customs, and police, framed in a spirit favourable to the development
of commercial transactions.
In order to afford to the commercial and maritime interests of every
nation the security which is desired, Russia and the Sublime Porte
will admit consuls into their ports situated upon the coast of the Black
Sea, in conformity with the principles of international law.
Art. 13. The Black Sea being neutralised according to the terms of
Art. 11, the maintenance or establishment upon its coast of military-
maritime arsenals becomes alike unnecessary and purposeless; in
consequence, his majesty the Emperor of all the Russias and his
imperial majesty the Sultan engage not to establish or to maintain
upon that coast any military-maritime arsenal.
Art. 14. Their majesties the Emperor of all the Russias and the
Sultan having concluded a convention for the purpose of settling the
force and the number of light vessels necessary for the service of
their coasts, which they reserve to themselves to maintain in the
Black Sea, that convention is annexed to the present treaty, and
shall have the same force and validity, as if it formed an integral part
thereof. It cannot be either annulled or modified without the assent of
the powers signing the present treaty.
Art. 15. The act of the Congress of Vienna having established the
principles intended to regulate the navigation of rivers which
separate or traverse different states, the contracting powers stipulate
among themselves that those principles shall in future be equally
applied to the Danube and its mouths. They declare that this
arrangement henceforth forms a part of the public law of Europe,
and take it under their guarantee.
The navigation of the Danube cannot be subjected to any
impediment or charge not expressly provided for by the stipulations
contained in the following articles; in consequence, there shall not be
levied any toll founded solely upon the fact of the navigation of the
river, nor any duty upon the goods which may be on board of
vessels. The regulations of police and of quarantine to be
established for the safety of the states separated or traversed by that
river shall be so framed as to facilitate, as much as possible, the
passage of vessels. With the exception of such regulations, no
obstacle whatever shall be opposed to free navigation.
Art. 16. Establishing a temporary international commission for the
control of navigation on the Danube.
Arts. 17-19. Establishing a permanent commission for the
improvement and control of navigation on the Danube.
Art. 20. In exchange for the towns, ports, and territories
enumerated in Art. 4 of the present treaty, and in order more fully to
secure the freedom of the navigation of the Danube, his majesty the
Emperor of all the Russias consents to the rectification of his frontier
in Bessarabia.
Art. 21. The territory ceded by Russia shall be annexed to the
principality of Moldavia under the suzerainty of the Sublime Porte.
The inhabitants of that territory shall enjoy the rights and privileges
secured to the principalities; and during the space of three years
they shall be permitted to transfer their domicile elsewhere,
disposing freely of their property.
Art. 22. The principalities of Wallachia and Moldavia shall continue
to enjoy, under the suzerainty of the Porte and under the guarantee
of the contracting powers, the privileges and immunities of which
they are in possession. No exclusive protection shall be exercised
over them by any of the guaranteeing powers. There shall be no
separate right of interference in their internal affairs.
Arts. 23-27. Concerning the government, administration,
preservation of order in, and defence of the principalities of
Wallachia and Moldavia.
Art. 28. The principality of Servia shall continue to hold the
Sublime Porte, in conformity with the imperial hats which fix and
determine its rights and immunities, placed henceforward under the
collective guarantee of the contracting powers. In consequence the
said principality shall preserve its independent and national
administration, as well as full liberty of worship, of legislation, of
commerce, and of navigation.
Art. 29. The right of garrison of the Sublime Porte, as stipulated by
anterior regulations, is maintained. No armed intervention can take
place in Servia without previous agreement between the high
contracting powers.
Art. 30. His majesty the Emperor of all the Russias and his
majesty the Sultan maintain in its integrity the state of their
possessions in Asia, such as it legally existed before the rupture. A
mixed commission for the verification or rectification of the frontiers
is provided for.
Art. 31. The territories occupied during the war by the troops of
their majesties the Queen of the United Kingdom of Great Britain and
Ireland, the Emperor of Austria, the Emperor of the French, and the
King of Sardinia, according to the terms of the conventions signed at
Constantinople on the 12th of March, 1854, between Great Britain,
France, and the Sublime Porte; on the 14th of June, of the same
year, between Austria and the Sublime Porte; and on the 15th of
March, 1855, between Sardinia and the Sublime Porte, shall be
evacuated as soon as possible after the exchange of the ratifications
of the present treaty. The periods and the means of execution shall
form the object of an arrangement between the Sublime Porte and
the powers whose troops have occupied its territory.
Art. 32. Until the treaties or conventions which existed before the
war between the belligerent powers have been either renewed or
replaced by new acts, commerce of importation or of exportation
shall take place reciprocally on the footing of the regulations in force
before the war; and in all other matters their subjects shall be
respectively treated upon the footing of the most favoured nation.
Art. 33. The convention concluded this day between their
majesties the Queen of the United Kingdom of Great Britain and
Ireland, the Emperor of the French, on the one part, and his majesty
the Emperor of all the Russias on the other part respecting the Åland
Islands, is and remains annexed to the present treaty, and shall have
the same force and validity as if it formed a part thereof.
CONVENTIONS ANNEXED TO THE PRECEDING TREATY
1. Convention between the Queen of the United Kingdom of Great

Britain and Ireland, the Emperor of Austria, the Emperor of the
French, the King of Prussia, the Emperor of Russia, and the
King of Sardinia, on the one part, and the Sultan on the other
part, respecting the Straits of the Dardanelles and of the
Bosporus.
Art. 1. His majesty the Sultan, on the one part, declares that he is
firmly resolved to maintain for the future the principle invariably
established as the ancient rule of his empire, and in virtue of which it
has at all times been prohibited for the ships of war of foreign powers
to enter the Straits of the Dardanelles and of the Bosporus, and that,
so long as the Porte is at peace, his majesty will admit no foreign
ship of war into the said Straits.
And their majesties the Queen of the United Kingdom of Great
Britain and Ireland, the Emperor of Austria, the Emperor of the
French, the King of Prussia, the Emperor of all the Russias, and the
King of Sardinia, on the other part, engage to respect this
determination of the Sultan’s, and to conform themselves to the
principle above declared.
Art. 2. The Sultan reserves to himself, as in past times, to deliver
firmans of passage for light vessels under flag of war, which shall be
employed, as is usual, in the service of the missions of foreign
powers.
Art. 3. The same exception applies to the light vessels under flag
of war, which each of the contracting powers is authorised to station
at the mouths of the Danube, in order to secure the execution of the
regulations relative to the liberty of that river, and the number of
which is not to exceed two for each power.
2. Convention between the Emperor of Russia and the Sultan,
limiting their naval force in the Black Sea.
Art. 1. The high contracting parties mutually engage not to have in
the Black Sea any other vessels of war than those of which the
number, the force, and the dimensions are hereinafter stipulated.
Art. 2. The high contracting parties reserve to themselves each to
maintain in that sea six steam-vessels of fifty metres in length at the
line of floatation, of a tonnage of 800 tons at the maximum, and four
light steam or sailing vessels, of a tonnage which shall not exceed
200 tons each.
3. Convention between her Majesty the Queen of the United
Kingdom of Great Britain and Ireland, the Emperor of the
French, and the Emperor of Russia, respecting the Åland
Islands.
Art. 1. His majesty the Emperor of all the Russias, in order to
respond to the desire which has been expressed to him by their
majesties the Queen of the United Kingdom of Great Britain and
Ireland and the Emperor of the French, declares that the Åland
Islands shall not be fortified, and that no military or naval
establishment shall be maintained or created there.
Declaration respecting maritime law, signed by the plenipotentiaries
of Great Britain, Austria, France, Prussia, Russia, Sardinia, and
Turkey, assembled in congress at Paris, April 16th, 1856.
The plenipotentiaries who signed the treaty of Paris, of the 30th of
March, 1856, being duly authorised, and having come to an
agreement, have adopted the following solemn declaration:—
1. Privateering is, and remains, abolished.
2. The neutral flag covers enemy’s goods, with the exception of
contraband of war.
3. Neutral goods, with the exception of contraband of war, are not
liable to capture under enemy’s flag.
4. Blockades, in order to be binding, must be effective—that is to
say maintained by force sufficient really to prevent access to the
coast of the enemy.
The governments of the undersigned plenipotentiaries engage to
bring the present declaration to the knowledge of the states which
have taken part in the congress of Paris, and to invite them to
accede to it.
Convinced that the maxims which they now proclaim cannot but
be received with gratitude by the whole world, the undersigned
plenipotentiaries doubt not that the efforts of their governments to
obtain the general adoption thereof will be crowned with full success.
The present declaration is not and shall not be binding, except
between those powers who have acceded, or shall accede, to it.
Done at Paris, the 16th of April, 1856.
[Here follow the names of the plenipotentiaries of the signatory
powers.]
II
TREATY OF BERLIN, 1878
Her Majesty the Queen of the United Kingdom of Great Britain and
Ireland, Empress of India, His Majesty the Emperor of Germany,
King of Prussia, His Majesty the Emperor of Austria, King of
Bohemia, etc., and King Apostolic of Hungary, the President of the
French Republic, His Majesty the King of Italy, His Majesty the
Emperor of All the Russias and His Majesty the Emperor of the
Ottomans, being desirous to regulate with a view to European order,
conformably to the stipulations of the Treaty of Paris of 30th March,
1856, the questions raised in the East by the events of late years
and by the war terminated by the Preliminary Treaty of San Stefano,
have been unanimously of opinion that the meeting of a Congress
would offer the best means of facilitating an understanding.
[Here follow the names of the ambassadors.]
Who, in accordance with the proposal of the Court of Austria-
Hungary, and on the invitation of the Court of Germany, have met at
Berlin furnished with full powers, which have been found in good and
due form.
An understanding having been happily established between them,
they have agreed to the following stipulations:
Art. 1. Bulgaria is constituted an autonomous and tributary
Principality under the suzerainty of His Imperial Majesty the Sultan; it
will have a Christian government and a national militia.
Art. 2. The Principality of Bulgaria will include the following
territories:
[Here follows a detailed account of boundaries. These having
mainly a technical interest are omitted here and in other articles of
the treaty of the same nature. Those articles likewise whose
importance is purely local are given in abbreviated form.]
This delimitation shall be fixed on the spot by the European
Commission, on which the Signatory Powers shall be represented. It
is understood: 1. That this Commission will take into consideration
the necessity for His Imperial Majesty the Sultan to be able to defend
the Balkan frontier of Eastern Rumelia. 2. That no fortifications may
be erected within a radius of 10 kilometres from Samakov.
Art. 3. The Prince of Bulgaria shall be freely elected by the
population and confirmed by the Sublime Porte, with the assent of
the Powers. No member of the Reigning Dynasties of the Great
European Powers may be elected Prince of Bulgaria. In case of a
vacancy in the princely dignity the election of a new Prince shall take
place under the same conditions and with the same forms.
Art. 4. An Assembly of Notables of Bulgaria convoked at Tirnovo,
shall, before the election of the Prince, draw up the Organic Law of
the Principality. In the districts where Bulgarians are intermixed with
Turkish, Rumanian, Greek or other populations, the rights and
intents of these populations shall be taken into consideration as
regards the elections and the drawing up of the Organic Law.
Art. 5. Differences of religious creed not to be a bar to office
holding in Bulgaria. Complete freedom of worship assured.
Art. 6. The provisional administration of Bulgaria.
Art. 7. The provisional régime shall not be prolonged beyond a
period of nine months from the exchange of the ratifications of the
present Treaty. When the Organic Law is completed the election of
the Prince of Bulgaria shall be proceeded with immediately. As soon
as the Prince shall have been installed, the new organisation shall
be put into force, and the Principality shall enter into the full
enjoyment of its autonomy.
Art. 8. The treaties of commerce and navigation as well as all
conventions and arrangements concluded between Foreign Powers
and the Porte, and now in force are maintained in the Principality of
Bulgaria, and no change shall be made in them with regard to any
Power without its previous consent. No transit duties shall be levied
in Bulgaria on goods passing through that principality. The subjects
and citizens of commerce of all the powers shall be treated in the
principality on a footing of strict equality. The immunities and
privileges of foreigners, as well as the rights of consular jurisdiction
and protection as established by the capitulations and usages, shall
remain in full force so long as they shall not have been modified with
the consent of the parties concerned.
Art. 9. Tribute to be paid by Bulgaria to suzerain court, etc.
Art. 10. Railway questions in Bulgaria.
Art. 11. Evacuation and demolition of Bulgarian fortresses.
Art. 12. Land rights of non-resident Moslems and others.
Commission to settle questions of state property. Bulgarians
travelling in Turkey subject to Ottoman laws.
Art. 13. A province is formed south of the Balkans which will take
the name of “Eastern Rumelia,” and will remain under the direct
political and military authority of His Imperial Majesty, the Sultan,
under conditions of administrative autonomy. It shall have a Christian
Governor-General.
Art. 14. Boundaries of Eastern Rumelia.
Art. 15. His Majesty, the Sultan, shall have the right of providing for
the defence of the land and sea frontiers of the province by erecting
fortifications on those frontiers and maintaining troops there. Internal
order is maintained in Eastern Rumelia by a native gendarmerie
assisted by a local militia. In forming these corps, the officers of
which are nominated by the Sultan, regard shall be paid in the
different localities to the religion of the inhabitants.
His Imperial Majesty, the Sultan, undertakes not to employ
irregular troops, such as Bashi-Bazouks and Circassians, in the
garrisons of the frontiers. The regular troops detailed for this service
must not in any case be billeted on the inhabitants. When they pass
through the province they shall not make a stay there.
Art. 16. The governor-general shall have the right of summoning
the Ottoman troops in the event of the internal or external security of
the province being threatened. In such an eventuality the Sublime
Porte shall inform the representatives of the Powers at
Constantinople of such a decision, as well as of the exigencies which
justify it.
Art. 17. The governor-general of Eastern Rumelia shall be
nominated by the Sublime Porte, with the assent of the Powers for a
term of five years.
Arts. 18 and 19. Creating a European commission for the
organisation of Eastern Rumelia.
Arts. 20 and 21. Concerning foreign relations, religious liberty and
railway administration of Eastern Rumelia.
Art. 22. Regulations concerning Russian occupation of Bulgaria
and Eastern Rumelia. Evacuation of Rumania.
Art. 23. The Sublime Porte undertakes scrupulously to apply, in
the Island of Crete the Organic Law of 1868 with such modifications
as may be considered equitable. Similar laws adapted to local
requirements, excepting as regards the exemption from taxation
granted to Crete shall also be introduced into the other parts of
Turkey in Europe, for which no such organisation has been provided
by the present Treaty. The Sublime Porte shall depute special
Commissions, in which the native element shall be largely
represented, to settle the details of the new laws in each province.
The schemes of organisation resulting from these labours shall be
submitted for examination to the Sublime Porte, which, before
promulgating the Acts for putting them into force, shall consult the
European Commission instituted for Eastern Rumelia.

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Merchant Banking And Financial

Services 2nd Edition Madhu Vij And

(eTextbook PDF) for Money Banking and the Financial

Financial Inclusion and the Role of Banking System

Money, Banking and Financial Markets, 6e ISE 6th

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Swiss Finance: Banking, Finance, and Digitalization 2nd

Accounting: Texts And Cases (edn 13) By David

Financial Services in the Twenty-First Century: The

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Merchant Banking and Financial Services, 2e

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Preface to the Second Edition xix

1. Financial System, Markets and Services: An Overview 3

Bank and Depository—An Analogy 86

Objective Type Questions 135

7. Mutual Funds 141

Objective Type Questions 199

Review Questions 306

13. Credit Rating 313

Bill Discounting and Factoring 405

17. Analysing Bank’s Financial Statements 425

Answers to Objective Questions 458

21. Mergers and Acquisitions 516

Learning Objectives 539

trends impacting and changing the nature of the services sector.

Learning Objectives at the start of each chapter

Case Studies and Projects at the end of some chapters

Organization of the Book

How does bill discounting work, steps in the process,

stability of the economy.

range of activities and many new developments in the area.

Organization of the Book

an exciting alternative to traditional classroom learning.

in completing the book.

An excerpt from The Financial Stability Report (Dec. 2016) of RBI

Financial System: An Introduction [LO1]

FIGURE 1.1 Basic Model of the Financial System

Invest in equity share

Mr. Issue equity share

FIGURE 1.2 Graphical Presentation of an

Indian Financial Sector [LO2]

Banks Cooperative banks

Financial institutions Development banks

Non-banks Mutual funds

Non banking finance

FIGURE 1.3 Institutions Characterizing the Indian Financial Sector

An Overview of India’s Financial Services Sector

Nature of Financial Services [LO3]

Types of Financial Services

Nature of Merchant Banking

Functions of Merchant Bankers

Registration of Merchant Bankers

Future Challenges for Financial Services Industry [LO4]

Beyond Basel 2 Norms

Asset Liability Management

Improving Risk Management Systems Relevant to Indian Banking

Liquidity Risk Management