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DEC 2008: Role of investment banker in the primary market (IPO, FPO, RIGHT SHARE)

DEC 2008: ROLE OF SEBI as regulator in Financial Market.

DEC 2008: Methods of Corporate valuation: (Please write on valuation process studied in

merger and Acquisition)

DEC 2009: Explain P/E approach and Adjusted Book value Approach to Corporate Valuation

DEC 2008 DEC 2010: Various Financing options in respect of infrastructure projects/ Important

sources in which the company can obtained Long term Finance (FPO, IPO, Right issue,Debenture , Bond)

DEC 2008: Financial intermediaries include : Banks, Financial institution, Mutual fund,Merchant banker, underwriter, Registrar.

DEC 2009 :Soucrces of Foreign funds ADR, GDR and FCCBS

American depository Receipts

Depositary receipts

More generally,depositary receipts(DRs) are negotiable securities that represent the underlying

securities of foreign companies that trade in a domestic market. DRs enable domestic investorsto buy the securities of a foreign company without the accompanying risks or inconveniences of

cross-border and cross-currency transactions.

Each DR is issued by a domesticdepositary bankwhen the underlying shares are deposited in a

foreign custodian bank, usually by a broker who has purchased the shares in the open marketlocal to the foreign company. A DR can represent a fraction of a share, a single share, or multiple

shares of a foreign security. The holder of a DR has the right to obtain the underlying foreign

security that the DR represents, but investors usually find it more convenient to own the DR. Theprice of a DR generally tracks the price of the foreign security in its home market, adjusted for

the ratio of DRs to foreign company shares. In the case of companies domiciled in the United

Kingdom, creation of ADRs attracts a 1.5%stamp duty reserve tax (SDRT)charge by the UKgovernment. Depositary banks have various responsibilities to DR holders and to the issuingforeign company the DR represents.

An American depositary receipt(ADR) is a negotiable security that represents the underlyingsecurities of a non-U.S. company that trades in the US financial markets. Individual shares of the

securities of the foreign company represented by an ADR are called American depositaryshares(ADSs).

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The stock of many non-US companies trade on US stock exchanges through the use of ADRs.

ADRs are denominated, and pay dividends, in US dollars, and may be traded like shares of stock

of US-domiciled companies.

The first ADR was introduced byJ.P. Morganin 1927 for the British retailer Selfridges.There

are currently four majorcommercial banksthat provide depositary bank services: BNY Mellon,J.P. Morgan,Citi,andDeutsche Bank.

Unsponsored ADRs

Unsponsored shares trade on the over-the-counter (OTC) market. These shares are issued inaccordance with market demand, and the foreign company has no formal agreement with a

depositary bank. Unsponsored ADRs are often issued by more than one depositary bank. Each

depositary services only the ADRs it has issued.

Due to a recent SEC rule change making it easier to issue Level I depositary receipts, both

sponsored and unsponsored, hundreds of new ADRs have been issued since the rule came intoeffect in October 2008. The majority of these were unsponsored Level I ADRs, and nowapproximately half of all ADR programs in existence are unsponsored.

Sponsored Level I ADRs

Level 1 depositary receipts are the lowest level of sponsored ADRs that can be issued. When acompany issues sponsored ADRs, it has one designated depositary who also acts as its transferagent.

A majority of American depositary receipt programs currently trading are issued through a Level

1 program. This is the most convenient way for a foreign company to have its equity traded inthe United States.

Level 1 shares can only be traded on the OTC market and the company has minimal reporting

requirements with the U.S. Securities and Exchange Commission (SEC). The company is notrequired to issue quarterly or annual reports in compliance with U.S. GAAP. However, the

company must have a security listed on one or more stock exchange in a foreign jurisdiction and

must publish in English on its website its annual report in the form required by the laws of the

country of incorporation, organization or domicile.

Companies with shares trading under a Level 1 program may decide to upgrade their program to

a Level 2 or Level 3 program for better exposure in the United States markets.

Sponsored Level II ADRs ("Listing" facility)

Level 2 depositary receipt programs are more complicated for a foreign company. When a

foreign company wants to set up a Level 2 program, it must file a registration statement with theU.S. SEC and is under SEC regulation. In addition, the company is required to file a Form 20-F

annually. Form 20-F is the basic equivalent of an annual report (Form 10-K)for a U.S. company.

http://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/Selfridgeshttp://en.wikipedia.org/wiki/Selfridgeshttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/BNY_Mellonhttp://en.wikipedia.org/wiki/BNY_Mellonhttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Transfer_agenthttp://en.wikipedia.org/wiki/Transfer_agenthttp://en.wikipedia.org/wiki/Transfer_agenthttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/SEC_filingshttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Transfer_agenthttp://en.wikipedia.org/wiki/Transfer_agenthttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Citibankhttp://en.wikipedia.org/wiki/BNY_Mellonhttp://en.wikipedia.org/wiki/Commercial_bankhttp://en.wikipedia.org/wiki/Selfridgeshttp://en.wikipedia.org/wiki/JPMorgan

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In their filings, the company is required to follow U.S. GAAP standards or IFRS as published by

the IASB.

The advantage that the company has by upgrading their program to Level 2 is that the shares can

be listed on a U.S. stock exchange. These exchanges include the New York Stock Exchange

(NYSE),NASDAQ,and theAmerican Stock Exchange(AMEX).

While listed on these exchanges, the company must meet the exchangeslisting requirements.If

it fails to do so, it may be delisted and forced to downgrade its ADR program.

Sponsored Level III ADRs ("offering" facility)

A Level 3 American Depositary Receipt program is the highest level a foreign company can

sponsor. Because of this distinction, the company is required to adhere to stricter rules that are

similar to those followed by U.S. companies.

Setting up a Level 3 program means that the foreign company is not only taking steps to permitshares from its home market to be deposited into an ADR program and traded in the U.S.; it isactually issuing shares to raise capital. In accordance with this offering, the company is required

to file aForm F-1,which is the format for anOffering Prospectusfor the shares. They also must

file aForm 20-Fannually and must adhere to U.S. GAAP standards or IFRS as published by theIASB. In addition, any material information given to shareholders in the home market, must be

filed with the SEC throughForm 6K.

Foreign companies with Level 3 programs will often issue materials that are more informative

and are more accommodating to their U.S. shareholders because they rely on them for capital.

Overall, foreign companies with a Level 3 program set up are the easiest on which to find

information. Examples include the British telecommunications company Vodafone (VOD), theBrazilian oil companyPetrobras(PBR), and the Chinese technology company China Information

Technology, Inc. (CNIT).

Restricted Programs

Foreign companies that want their stock to be limited to being traded by only certain individuals

may set up a restricted program. There are two SEC rules that allow this type of issuance of

shares in the U.S.: Rule 144-A and Regulation S. ADR programs operating under one of these 2rules make up approximately 30% of all issued ADRs.

Foreign Currency Convertible Bonds

Foreign Currency Convertible Bonds commonly referred to as FCCB's are a special category of

bonds.FCCB's are issued in currencies different from the issuing company's domestic currency.Corporates issue FCCB's to raise money in foreign currencies. These bonds retain all features of

aconvertible bondmaking them very attractive to both the investors and the issuers.

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These bonds assume great importance formulti-nationalsand in the current business scenario of

globalisationwhere companies are constantly dealing in foreign currencies.

FCCB's are quasi-debt instruments and tradable on thestock exchange.Investors arehedge-fund

arbitrators or foreign nationals.

FCCB's appear on the liabilities side of the issuing company'sbalance-sheet

Under IFRS provisions, a company mustmark-to-marketthe amount of its outstanding bonds

The relevant provisions for FCCB accounting areInternational Accounting Standards:IAS 39,IAS 32 and IFRS 7

Foreign Currency Convertible Bonds (FCCB)Foreign currency convertible bond (FCCB) is a convertible bond issued by a country in a

currency different than the its own currency. This is the powerful instrument by which the

country raises the money in the form of a foreign currency. The bond acts like both a debt andequity instrument. Like bonds it makes regular coupon and principal payments, but these bondsalso give the bondholder the option to convert the bond into stock.

Foreign Currency Convertible Bond Policy in IndiaMinistry of Finance government of India defines FCCB. According to it:

"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and

subscribed by a non- resident in foreign currency and convertible into ordinary shares of theissuing company in any manner, either in whole, or in part, on the basis of any equity related

warrants attached to debt instruments; "

What is the criteria for issuing FCCBs? Any company who wish to raise the foreign funds by issuing FCCB, require prior permission

of the Department of Economic Affairs, Ministry of Finance, Government of India.

The company issuing the FCCB should have the consistent track record for a minimum periodof three years

The Foreign Currency Convertible Bonds shall be denominated in any freely convertible

foreign currency and the ordinary shares of an issuing company shall be denominated in Indianrupees

The issuingcompany should deliver the ordinary shares or bonds to a Domestic Custodian

Bank as per regulation. The custodian bank on the other hand instructs the Overseas Depositary

Bank to issue Global Depositary Receipt or Certificate to non-resident investors against theshares or bonds held by the Domestic Custodian Bank.

DEC 2008, 2009 Explain the procedure IPO

Entry Norms

There any entry requirements for an issuer to make an issue / offer to public.

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SEBI has laid down entry norms for entities making a public issue/ offer. The same are detailed

below:

Entry Norms: Entry norms are different routes available to an issuer for accessing the capital

market.

(i) An unlisted issuer making a public issue i.e. (making an IPO) is required to satisfy the

following provisions:

Entry Norm I (commonly known as Profitability Route)

The Issuer Company shall meet the following requirements:

(a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years.

(b) Distributable profits in atleast three of the immediately preceding five years.

(c) Net worth of at least Rs. 1 crore in each of the preceding three full years.

(d) If the company has changed its name within the last one year, atleast 50% revenue for the

preceding 1 year should be from the activity suggested by the new name.

(e) The issue size does not exceed 5 times the pre issue net worth as per the audited balance

sheet of the last financial year

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on

account of rigidity of the parameters, SEBI has provided two other alternative routes to the

companies not satisfying any of the above conditions, for accessing the primary Market, as

under:

Entry Norm II(Commonly known as QIB Route)

(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the

Qualified Institutional Buyers (QIBs).

(b) The minimum postissue face value capital shall be Rs. 10 crores or there shall be a

compulsory marketmaking for at least 2 years

Entry Norm III(commonly known as Appraisal Route)

(a) The project is appraised and participated to the extent of 15% by Financial

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Institutions / Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).

(b) The minimum postissue face value capital shall be Rs. 10 crores or there shall be a

compulsory marketmaking for at least 2 years.

In addition to satisfying the aforesaid entry norms, the Issuer Company shall also satisfy the

criteria of having at least 1000 prospective allotees in its issue. (ii) A listed issuer making a

public issue (FPO) is required to satisfy the following requirements:

(a) If the company has changed its name within the last one year, atleast 50% revenue for the

preceding 1 year should be from the activity suggested by the new name.

(b) The issue size does not exceed 5 times the pre issue net worth as per the audited balance

sheet of the last financial year

THE BOOK BUILDING MECHANISM OF IPO

Pricing of an Issue

Indian primary market ushered in an era of free pricing in 1992. SEBI does not play any role in

price fixation. The issuer in consultation with the merchant banker on the basis of market

demand decides the price. The offer document contains full disclosures of the parameters which

are taken in to account by merchant Banker and the issuer for deciding the price. The Parameters

include EPS, PE multiple, return on net worth and comparison of these parameters with peer

group companies.

On the basis of Pricing, an issue can be further classified into Fixed Price issue or Book Built

issue.

Fixed Price Issue: When the issuer at the outset decides the issue price and mentions it in the

Offer Document, it is commonly known as Fixed price issue.

Book built Issue: When the price of an issue is discovered on the basis of demand received from

the prospective investors at various price levels, it is called Book Built issue.

DEC 2009.WHY BOOK BUILDING?

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The abolition of the Capital Issue Control Act, 1947 has brought a new era in the primary capital

markets in India. Controls over the pricing of the issues, designing and tenure of the capital

issues were abolished.

The issuers, at present, are free to make the price of the issues. Before establishment of SEBI in1992, the quality of disclosures in the offer documents was very poor. SEBI has also formulated

and prescribed stringent disclosure norms in conformity to global standards. The main drawback

of free pricing was the process of pricing of issues. The issue price was determined around 60-70

days before the opening of the issue and the issuer had no clear idea about the market perception

of the price determined. The traditional fixed price method of tapping individual investors

suffered from two defects: (a) delays in the IPO process and (b) under-pricing of issue. In

fixed price method, public offers do not have any flexibility in terms of price as well as number

of issues. From experience it can be stated that a majority of the public issues coming throughthe fixed price method are either under-priced or over-priced. Individual investors (i.e. retail

investors), as such, are unable to distinguish good issues from bad one. This is because the issuer

Company and the merchant banker as lead manager do not have the exact idea on the fixed

pricing of public issues. Thus it is required to find out a new mechanism for fair price discovery

and to help the least informed investors. Thats why, Book Building mechanism, a new process

of price discovery, has been introduced to overcome this limitation and determine issue price

effectively.

Book building is a process of price discovery. The issuer discloses a price band in the Red

Herring Prospectus. On the basis of the demands received at various price levels within the price

band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with

the issuer arrives at a price at which the security offered by the issuer, can be issued.

How is book built in India?

The main parties who are directly associated with book building process are the issuer company,

the Book Runner Lead Manager (BRLM) and the syndicate members. The Book Runner Lead

Manager (i.e. merchant banker) and the syndicate members who are the intermediaries are both

eligible to act as underwriters. The steps which are usually followed in the book building process

can be summarised below:

(1) The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

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(2) Initially, the issuer company consults with the BRLM in drawing up a draft prospectus (i.e.

offer document) which does not mention the price of the issues, but includes other details about

the size of the issue, past history of the company, and a price band. The securities available to the

public are separately identified as net offer to the public.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness campaigns like

advertisement, road shows etc.

(5)The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite the

issues to the extent of net offer to the public.

(6) The BRLM is entitled to remuneration for conducting the Book Building process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the institutional investors

as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number of shares and the

offer price.

(9) The BRLM receives the feedback about the investors bids through syndicate members.

(10) The prospective investors may revise their bids at any time during the bid period.

(11) The BRLM on receipts of the feedback from the syndicate members about the bid price and

the quantity of shares applied has to build up an order book showing the demand for the shares of

the company at various prices. The syndicate members must also maintain a record book for

orders received from institutional investors for subscribing to the issue out of the placement

portion.

(12) On receipts of the above information, the BRLM and the issuer company determine the

issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and determine the

issue size of (a) placement portion and (b) public offer portion.

(14) Once the final price is determined, the allocation of securities should be made by the BRLM

based on prior commitment, investors quality, price aggression, earliness of bids etc. The bid of

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an institutional bidder, even if he has paid full amount may be rejected without being assigned

any reason as the Book Building portion of institutional investors is left entirely at the discretion

of the issuer company and the BRLM.

PRIVATE PLACEMENT (QIB and Preferential allotment)

QUALIFIED INSTITUTIONAL PLACEMENT

A QIB means (1) a public financial institution (PFI) in terms of Section 4-A of the

Companies Act, (2) banks, (3) mutual funds, (4) foreign institutional investors (FIIs) registered

with the SEBI, (5) multilateral and bilateral development finance institutions, (6) venture capital

funds (VCFs) registered with SEBI, (7) state industrial development corporations (SIDCs), (8)

insurance companies registered with Insurance Regulatory and Development Authority (IRDA),

(9) provident funds with minimum corpus of Rs 25 crore and (10) pension funds with

minimum corpus of Rs 25 crore.

Market regulator Securities and Exchange Board of India (SEBI) introduced the QIP processin 2006, to prevent listed companies in India from developing an excessive dependence on

foreign capital.

The QIBs should neither be promoters, nor should they be related to promoters of the issuerdirectly or indirectly.. The private placement should comply with the requirements ofSection 67(3)(a) of the Companies Act. A Minimum of 10 per cent of the securities in eachplacement should be allotted to mutual funds For each allotment, the would be at least twoallottees for an issue size upto Rs 250 crores and five allottees in excess of Rs 250 crores. Amaximum of 50 per cent of the issue size can be allotted to one sing

le allottee. The QIBs

belonging to the same group/under common control would constitute a single allottee. Investorscannot withdraw their bids/applications after closure of the issue.

The aggregate funds that can be raised through QIP in a financial year cannot exceed fivetimes of the net worthof the issuer at the end of the previous financial year.

The shareholders resolution approving QIP would be valid for 12 months. There should be a

gap of at least 6 monthsbetween each placement in case of multiple placements.

The specified securities would be issued on the basis of a placement document containing all material information including the information specified in the Annexure below. The

placement document should be provided to select investors and placed on the website of the

stock exchange/issuer together with a disclaimer that no offer is made to the public/any other

category of investors. A copy should also be filed with the SEBI within 30 days of allotment of

specified securities.

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The QIP would be managed by SEBI-registered merchant bankers who should exercise due

diligence and furnish a due diligence certificate to the stock exchange stating that the issue

complies with all the relevant requirements along with the application for seeking in-principle

approval and final permission for listing of the specified securities.

The pricing is the average of high or low the last two weeks.

The issuer should furnish to the concerned stock exchange (i) a copy of the placement document,

(ii) a certificate that all requirements have been complied with along with application for in-

principle approval for listing, and (ii) the documents /undertakings specified in the listing

agreement for in-principle approval and final permission for listing from the stock exchange

PREFERENTIAL ALLOTMNET

Every firm needs capital for investment. They need capital to meet expenditure like expansion,

diversification, modernization, M&A, etc., from time to time. When a listed company doesn'twant to go for further public issue and the objective is t raise huge capital by issuing bulk of

shares to selected group of people, preferential allotment is a good option. A private placement is

an issue of shares or of convertible securities by a company to a select group of persons underSection 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue. This is

a faster way for a company to raise equity capital.

Advantages

One advantage of raising money via a preferential issue is that it helps save costs and time

involved in a public issue. More important, if the concerned company is not doing too well atthat point in time but requires capital, then retail investors may not want to participate in an

issue.

In fact, promoters need such investors in times when the market sentiment is weak and a public

issue could fail. Moreover, if promoter is being allotted preferential issue and they acquire more

shares in the company, it is a good sign because it shows that the corporate ship is not sinking

and they have abiding interest in the company.

There is no requirement of filing any offer document / notice to SEBI in case of the preferentialallotment and even no eligibility norm for the company for the preferential allotment.

In current scenario, where there is lots of takeover in preferential issues, the shares are issued tofriendly investors like promoters to ward-off the risk of take over. If shares are issued to public,

there is a chance that later they can sell it to a firm which has an intension of take over.

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Pitfalls

The preferential allotment is often misused by the promoters as they could secure it because ofmajority holding by them and they consolidate their hold on the company without paying a fair

price for it.As per Section 81 (1A) of the Companies Act, it is merely a formality though special

resolution need to be passed but only members present in person and through proxy are counted.

There is a possibility of insider trading. It was a case with Hindustan Lever (HLL)'s purchase of

eight lakh shares in Brooke Bond Lipton India Ltd. (BBLIL) before the public announcement ofthe merger between HLL and BBLIL in 1998. Because of the fact that HLL as a subsidiary of

Unilever knew about merger; they had information and they acquired shares at considerably

lower price before announcement of merger.

Regulations for Preferential Allotment as per Chapter XIII OF SEBI DIP (Disclosure &

Investor Protection) Guidelines, 2000

1.No preferential allotment should me made along with the rights issue.

2. A special resolution needs to be passed, but if just an ordinary resolution is passed,

preferential issue of shares may be done provided sanction of the Central Government is

obtained.

3.Pricing - In case of a preferential allotment, the price at which the preferential allotment has tobe done is the average of six months or two weeks, whichever is higher

Relevant date means the date 30 days prior to the date on which general meeting of the

shareholders is held.

4. Instruments issued on preferential basis to the promoters are subject to a lock-in of 3 yearsfrom the date of allotment, and for other groups, lock-in is 1 year.

5. In case, promoter(s) of a company sells his shares during last six months from the relevantdate, he will not be eligible to acquire shares through preferential allotment.

CREDIT RATING

DEC 2008 DEC 2009: Dec 2010 :RATING METHODOLOGY

A large number of variables affect the quality of rating of a debt instrument of an

organization. The rating methodology should include these variables. The variables are:

history, quality of management, business fundamentals, accounting quality, liquidity

management, quality of the assets, profitability, return on equity and investment,

capital structure, past performance, effect of normal business cycle, and interest and debt

coverage ratios. This section discusses these variables briefly.

1. History: The rat ing agency must unders tand the ownership, s ize,

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geographical spread, product spread, and the organizational structure of the issuer.

The size of the issuer can have some access to some sources of funds and to some

market segments, and thus impact credit quality. The history of the issuer could

establish its export in certain product market and thus have a bearing in credit

quality.

2. Accounting quality: The accounting policies followed should strictly adhereto the concepts, principles, and conventions of accounting so as to ascertain a

true and fair view of the financial state of affairs of the company. Neither

should the accounting methods be manipulated nor there do any chance of doing so

in the accounting practices followed by the issuer company. No controversial

accounting practices should be followed by it just to portray a good balance

sheet. There are certain areas where the issuer has the freedom to adopt different

financial policies but such a policy should not be oriented to distort the financial

state of affairs of a company with a motive of influencing the quality of rating.

3. Business fundamentals: Under this category the issuer company isassessed in the area of i ts competi t ive posit ion as compared to the

competitors operating in the similar line. Its strategies, policies, strengths, and

weaknesses and goals have to be analyzed as they have some sort of bearings

in measuring the ratings of the organizations. Its diversification activities

having a sound track record of profitability in the industry and future

projections of demand for output can have an important bearing in rating the

debt instruments issued. If the product is export-oriented or import-substituted, the debt issued for the purpose should obviously influence the

rating decision of the rating agency.

4. Liquidity management: The issuer 's sources and uses of funds in terms of cost

and availability have to be studied in relation to debt issue. Volatility trends of theseparameters are also studied. The issuer's innovativeness and competitive ability to attract

cheaper funds is also analyzed. Foreign exchange and interest rate risks associated with

each source and management of such risk are scrutinized to estimate the probable impact of

credit quality. To understand the liquidity of the issuer, the maturing match between

sources and deployment of funds is studied. The rating agency must understand the

quantity and quality of liquid assets, past trends, unutilized refinance limit available, andissuer's standing in the financial market to raise resources quickly. A careful study of the

liquidity position of the firm in terms of its current ratio and acid test ratio , the debtorsturnover and stock turnover has also some bearing on the rating of the debt instruments.

Projected income and expenses statement as well as balance sheet and cash flow statements

can be computed to have an idea about the liquidity position of the company which has abearing on credit quality.

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5. Quality of management: This is judged by the team of executives, human resourcepolicies, organizational structure, and the extent of delegation of authority and

responsibility. The support of group companies could also be important in determining theirsuccess. The management's attitude towards risk is measured as revealed by the track record

in the choice of segments, dividend policy, accounting practices, and funding policies.

Systems also play an important role in determining the credit quality of the issuer. Thestatutory audit report can be studied to detect any systematic deficiencies. The status ofreconciliation of subsidiary books and inter-bank accounts is analyzed to determine the

efficiency of the system.

6. Quality of assets: Rating agency should analyze the issuer's segment of operation, itscompetitive environment, and market share in each segment vis-a-vis the risk profile of eachsegment. The issuer's prudential norms for credit concentration are studied in relation to the

past performance to understand their effectiveness. Such credit concentration norms could be

fixed for each borrower, each industry, or each geographic area. The extent of non-performing

assets in the portfolio and the provisions available to meet any losses from such assets areconsidered as important indicators of the quality of the asset.

The quality of the assets in investments is judged by analyzing the type of investment, the

internal system for management of investments, policies in respect of disinvestment, and

charging depreciation in the value of the investments. In this connection, fixed assets turnover

and fixed assets to net worth ratio and the rate of return on performing assets must be

computed to study the fixed assets components as a portion of net worth or to study the

earning power of fixed assets of the firm. The more the earning powers of the fixed assets, the

more will be the source of funds generated to the company and more will be the positive

impacts felt in assessing the quality of the debt instruments.

7. Profitability:Since non-fund based income plays an important role in boosting theearnings of the issuer, the rating agency should determine the probability of continuance ofsuch income in relation to sales, component-wise expenses ratios, operating expenses ratio,

and operating net profit ratios determined in the past and budgeted figures in the future

would also affect the quality of rating.

8. Return on equity and on investment: Return on equity measures the profitability of equityfunds invested in the firm after payment of taxes whereas the return on total investmentmeasures the percentage of earnings remaining after payment of taxes. The total investment

comprises creditor's and shareholders' fund, and is a product of net profit ratio and investment

turnover ratio. This aspect has an important bearing on credit quality of the company. As a

matter of rule of thumb, operating profit as a percentage of total funds employed should notbe less than the lending rate of a commercial bank.

9. Capital structure: The most important indicator in analyzing the capital structure is thecapital adequacy ratio. To warrant adequate safety the borrowing of the company as a rule ofthumb should not exceed two times its shareholders' funds. This is also an important indicator

that determines the quality of rating of debt issues. A lower debt equity ratio indicates a

higher degree of protection enjoyed by the creditors and the less is the likelihood of

insolvency in future which favourably influence the rating of the debt instruments and vice

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versa. Then shareholders' equity to fixed assets ratio for the company is analyzed. If assets

are more than the shareholders, equity, it means that a part of the assets has been financed by

the borrowed capital and hence, would deteriorate the quality of ratings of debt issues.

10.Past performance: The increasing trend of revenues, profit after taxes, net worth, and netasset value of the firm, keeping the total investments, constant indicates the financial

strength of the firm. These variables are also useful in judging the assignment of ratings tothe issuance of debt instrument. These variables linked with cash flow statements will have a

favourable bearing on the ratings of the debt instruments. Therefore a rating agencyshould carefully analyze these indicators prior to assigning any rating to the instruments

issued by a company.

11.Effect of normal business cycle: The business activities of the firm can be categorized as

normal, recovery, boom, recession, and slump. So the rating agency has to consider the state

of economic activity facing the company at the time of assigning rating to the debt instruments.This is one of the important factors which the rating agency cannot ignore prior to deciding the

worth of the debt instrument. However, once the company decides to use the rating, the rating

agency is obliged to monitor the rating over the life of the debt instrument. A rating, unlesschanged, is valid for the life time of the debt instrument being rated. If the rated non-convertibledebenture is redeemed in the 7th, 8th, and 9th years from the date of its issue, the rating wouldcontinue till the end of the 9th year

DEC 2008,2009, 2010: CREDIT RATING AGENCIES IN INDIA

CRISIL

The Credit Rating Information Services of India Limited (CRISIL) was promoted in 1987 by the

ICICI and UTI. Other shareholders include Asian Development Bank, Life InsuranceCorporation of India, State Bank of India, Housing Development Finance Corporation Limited,

General Insurance Corporation of India, and its subsidiaries, Standard Chartered Bank, Banque

Indosuez, Sakura Bank, Bank of Tokyo, Hong Kong and Shanghai Banking Corporation,Citibank, Grindlays Bank, Bank of India, Bank of Baroda, UCO Bank, Allahabad Bank, Canara

Bank, Central Bank of India, Indian Overseas Bank and Bank of Madura Ltd. Its principal objective

is to rate debt obligation of Indian companies. Its rating provides guide to the investors asto the degree of certainty of timely payment of interest and principal on a particular debt

instrument. CRISIL rates debentures, fixed deposit programmes, and short-term instruments like

commercial paper, structural obligations, and formance preference shares. CRISIL is the

market leader in India and works as a `full service' rating agency. It has the most

comprehensive range of rating services. Combining its understanding of risk and the science ofbuilding risk frameworks with its strong contextual understanding of business, CRISIL ratings

provide the most reliable opinions on risk.

The strategic alliance with Standard and Poor's, the world's leading rating agency helpsanticipate new market challenges, besides introducing value-added rating methodologies. The

Rating Criteria & Product Development Centre, responsible for policy research, new

product development, and ratings quality assurance has created new rating methodologies for debt

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instruments and innovative structures across sectors.

Since its inception till March 31, 1994, CRISIL has rated in all 926 debt instruments issuedby 668 companies. It has introduced CRISIL card, CRISIL view, CRISIL ban card, and CRISIL

rating digest service. CRISIL has published CRISIL bond yield tables to provide handy reference

to investors for determining yield-to-maturity on a debenture, given the price of debenture, its

coupon rate, and its maturity period. CRISIL has also published CRISIL RATING Scancontaining rating reports on companies whose instruments have been rated by CRISIL during the

quarter. CRISIL ratings continue to play a stellar role in the development of the debt markets inIndia. Till March 31, 2003 it has rated more than 4,438 debt instruments worth over Rs. 4,46,329

crores, for more than 2,000 companies. Table 9.1 illustrates the rating symbols for CRISIL.

CRISIL may apply + (plus) or(minus) signs for ratings from pl to p3 to reflectcomparatively higher standing within the category. The contexts within parentheses are guides

to the pronunciation of the rating symbols.

The sign (+) or () may be used after the rat ing symbol to indicate the

comparative position of the company within the group covered by symbol. A letter 'p' inparentheses after the rating symbol would indicate that the debt instrument is being

issued to raise resources by a new company for financing a new project and the ratingassumes successful completion of the project.

ICRA:

Th is Ra ting A genc ies of Indi a is sponsored by IFCI jointly with the other leading

financial institutions and banks and has become operational in September 1991 with the

objective of providing guidance to the investors or creditors in determining the credit

risk associated with a debt instrument or credit obligation. The ICAR rated debentures,

bonds preference shares, fixed deposits , and short-term instruments like commercial

paper, etc. of several companies. Since its time of inception till March 1995, ICRA

rated 485 debt instruments involving Rs. 17,638 crores. In addition, ICRA provides

"general assessment report on different aspects of the company's operations

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management". ICRA is an independent and professional company providing investment

information and credit rating services. As the growth and globalization of Indian

Capital Markets have led to an exponential surge in demand for professional credit

risk analysis, ICRA has actively responded to this need by executing assignments

including credit ratings, equity grading, and mandated studies spanning diverse

industrial sectors. ICRA presently offers its services under three banners, namely, (a)

rating services, (b) information services, and (c) advisory services. The following

depicts various rating symbols of ICRA.

CARE

Credit Analysis and Research Limited (CARE) sponsored by the Industr ial

Development Bank of India jointly with Canara Bank, UTI, private sector banks, and

financial service companies to offer credit rating information and equity research

services to Indian industry and institutions. CARE was incorporated on April 21,

1993, and commenced its operations in October, 1993. It undertakes rating of all types

of debt instruments like commercial paper, fixed deposits, bonds, debentures, and

structural obligations, involving an independent and professional assessment of debt

servicing capabilities of companies. Since its inception till the end of March 1995,

CARE has rated 249 debt instruments covering a total debt volume of Rs. 9,729 crores.

ONICRA

A private company, Onida Individual Credit Rating Agency (ONICRA) has been set upby Onida Finance. It undertakes rating for credit cards, leasing, hire/purchase

transactions, housing finance, and bank finance. The main objective of these agencies is

primarily to restore the confidence in the capital market and to provide unbiased

assessment of the credit worthiness of the companies issuing debt instruments. It alsoprovides information about the credit worthiness of corporates to the investors at low

cost. In addition to this, it provides a sound basis for proper risk return structure. It

also assists the institutional investment regarding framing of public policy guidelines.

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However ONICRA has been abolished in latter part.

DPCR

Duff Phelps Credit Rating (DPCR) India Pvt. Ltd. is another private sector credit rating agency

set up in 1996. It has already rated a number of companies. But SERI has started giving

guidelines to them with a view to regulate them as one of the capital market institutions

Fitch Ratings

Fitch Ratings India Ltd. is the latest agency to do credit rating from the foreign sector. It is a

100% subsidiary of its parent company abroad, operating in India

DEC 2010 DERIVATIVES

A derivativeinstrument is a contract between two parties that specifies conditionsin

particular, dates and the resulting values of the underlying variablesunder which payments, or

payoffs, are to be made between the parties.[1][2]

The term "Derivative" indicates that it has noindependent value, i.e. its value is entirely "derived" from the value of the underlying asset. The

underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In

other words, Derivative means aforward,future,option or any other hybrid contract of pre

determined fixed duration, linked for the purpose of contract fulfillment to the value of aspecified real or financial asset or to an index of securities.

A Forward Contractis a way for a buyer or a seller to lock in a purchasing or selling price foranasset,with the transaction set to occur in the future. In essence, it is a financial contract

obligating the buyer to buy, and the seller to sell a given asset at a predetermined price and date

in the future. No cash or assets are exchanged until expiry, or the delivery date of the contract.On the delivery date, forward contracts can be settled by physical delivery of the asset orcash

settlement

Infinance,a futures contractis a standardizedcontractbetween two parties to exchange a

specified asset of standardized quantity and quality for a price agreed today (thefutures priceor

thestrike price)with delivery occurring at a specified future date, the delivery date. The

contracts are traded on afutures exchange.The party agreeing to buy the underlying asset in the

future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset inthe future, the "seller" of the contract, is said to be "short". The terminology reflects the

expectations of the parties -- the buyer hopes or expects that the asset price is going to increase,while the seller hopes or expects that it will decrease. Note that the contract itself costs nothing

to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is

taking (long or short).

http://en.wikipedia.org/wiki/Derivative_(finance)#cite_note-0http://en.wikipedia.org/wiki/Derivative_(finance)#cite_note-0http://en.wikipedia.org/wiki/Derivative_(finance)#cite_note-0http://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://www.wikinvest.com/wiki/Assetshttp://www.wikinvest.com/wiki/Assetshttp://www.wikinvest.com/wiki/Assetshttp://www.wikinvest.com/wiki/Cash_settlementhttp://www.wikinvest.com/wiki/Cash_settlementhttp://www.wikinvest.com/wiki/Cash_settlementhttp://www.wikinvest.com/wiki/Cash_settlementhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Strike_pricehttp://en.wikipedia.org/wiki/Strike_pricehttp://en.wikipedia.org/wiki/Strike_pricehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Strike_pricehttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Financehttp://www.wikinvest.com/wiki/Cash_settlementhttp://www.wikinvest.com/wiki/Cash_settlementhttp://www.wikinvest.com/wiki/Assetshttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Derivative_(finance)#cite_note-0http://en.wikipedia.org/wiki/Derivative_(finance)#cite_note-0

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A financial derivative that represents a contract sold by one party (option writer) to another party

(option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell

(put) a security or other financial asset at an agreed-upon price (the strike price) during a certain

period of time or on a specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go up.

Put options give the option to sell at a certain price, so the buyer would want the stock to go

down.

Options are extremely versatile securities that can be used in many different ways. Traders use

options to speculate, which is a relatively risky practice, while hedgers use options to reduce therisk of holding an asset.

In terms of speculation, option buyers and writers have conflicting views regarding the outlook

on the performance of an underlying security.

For example, because the option writer will need to provide the underlying shares in the event

that the stock's market price will exceed the strike, an option writer that sells a call option

believes that the underlying stock's price will drop relative to the option's strike price during the

life of the option, as that is how he or she will reap maximum profit.

This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying

stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower

price and then sell it for a profit

CAPITAL STRUCTURE:

Capital structure is concerned in what proportion own funds and debt funds would be raised.

Capital structure consists of:

Owned Funds: Owned funds include share capital, reserves and surplus

Borrowed Funds: Borrowed funds are represented by debentures, bonds and long term loans

provided by banks and term lending institutions.

'The main objectives to be considered while designing a capital structure is that

the cost and the risk both should be minimum. The optimum capital structure is

obtained when the market value of equity share is the maximum. While designing the

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capital structure the finance manager has to keep in mind that an ideal capital

structure should minimise the cost of capital and maximise the value of company's

shares.

DEC 2008: Factors to be taken into account with determining the capital structure:

1. Profitability aspect: The primary objective of financial management is to maximize themarket value of the firm. Any source of finance should be selected which maximses theEPS and MPS.

2. ControlAnother consideration in planning the types of funds to use is the attitude of themanagement towards control. Lenders have no direct voice in the management of a

company. They may, of course, place certain restrictions in the loan agreement on themanagements activities. So long as there is no default in the payment of interest or therepayment of the principal, there is little that they can do legally against the company.

Likewise, preference shareholders do not have voting rights except for those matters

which affect their interest. The power to choose the management in most cases rests withthe equity-holders. Accordingly, if the main object of the management is to maintain

control, they will like to have a greater weightage for debt and preference shares than

equity shares.

3. Leverage ratios for other firms in the industry: Yet another approach to the capitalstructure decisions is to make a comparison with the debt-equity ratios of companies

belonging to the same industry, having a similar business risk.

4. Nature OF Business: Those Business which are assured of stability and growth, may gofor borrowed funds as they can withstand the pressure of payment and interest and

redemption of securities. If the business is cyclical in nature as in case of capital goods

industry, then such companies find it difficult to service debts during recession. Suchcompanies find if difficult to service debt during recession such companies may go formore equity and debt financing

5. Consultation with investment bankers and lenders: Another useful approach indeciding the proportion of various securities in a firm's structure is to seek the opinion ofinvestment analysts, institutional investors, investment bankers and lenders. The analysts,having been in business for a considerable period of time, acquire expertise and have

access to information regarding securities of a large number of companies and know how

the market evaluates them.

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6. Timing of the issue:Public offering should be made at a time when the state of economyas well as capital market is ideal to provide to funds. The monetary policy and fiscal

policy that are pursued by the govt are also important in this regard. During recession theinvestors are not inclined towards equity and prefer bonds and debt instrument

7. Charactertics of the company: Small companies must rely, to a considerable degree,upon the owner's funds for their financing; they find it very difficult to obtain long-term

debts. In the minds of investors, generally, small firms are considered to be more riskythan large firms. In contrast, very large companies are compelled to make use of differentsources of raising funds as no single source can cater to their total requirements of funds.

Firms enjoying a high credit standing among investors/lenders in the capital market are ina better position to get funds from the sources of their choice. If the credit standing is

poor, the firm's choice of obtaining funds is rather limited.

8. Tax planning: Finally, tax planning is likely to have a significant bearing on capitalstructure decisions. Under the Income Tax Act, 1961, while interest on borrowed funds isallowed as a deduction under Section 36(1) (iii), dividend on shares is not deductible

from the operating profits of a company. Sec 115 O the company has to pay dividend

distribution tax at 15%.

9. Flexibility:Refers to the ability of a firm to raise capital from any source it wishes to tap.If the firm has an ability to raise capital from any source, then it would advisable to go

for borrowed funds rather than equity capital. This will not result in dilution of equity.

However the firm must able to bear the pressure of payment of interest and installment.

10.Period of finance: If the funds are required for short period then company should go forpublic deposits, term loan, debenture but if the funds are required for longer purpose than

the money should be raised through equity.

11.Cost of financing:The Company must collect the funds at lowest possible cost to thecompany. Generally cost of raising money with help of debenture and bond is less as

compared the money with help of equity, the cost of raising money with help equity is

generally 7% of the issue size.

FACTORS AFFECTING DIVIDENED POLICY OF THE COMAPNY

Profitability of the company: For instance a high profitable company raises less amount of

money with help of borrowed funds since most of the funds can be done through internal

accruals

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Stability of Earnings. The nature of business has an important bearing on the dividend policy.Industrial units having stability of earnings may formulate a more consistent dividend policy

than those having an uneven flow of incomes because they can predict easily their savings andearnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than

those dealing in luxuries or fancy goods.

2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. Anewly established company may require much of its earnings for expansion and plant

improvement and may adopt a rigid dividend policy while, on the other hand, an older company

can formulate a clear cut and more consistent policy regarding dividend.

3. Liquidity of Funds. Availability of cash and sound financial position is also an important

factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the

liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends verymuch on the investment and financial decisions of the firm which in turn determines the rate of

expansion and the manner of financing. If cash position is weak, stock dividend will be

distributed and if cash position is good, company can distribute the cash dividend.

4. Extent of share Distribution.Nature of ownership also affects the dividend decisions. A

closely held company is likely to get the assent of the shareholders for the suspension of

dividend or for following a conservative dividend policy. On the other hand, a company having agood number of shareholders widely distributed and forming low or medium income group,

would face a great difficulty in securing such assent because they will emphasise to distribute

higher dividend.

5. Needs for Additional Capital. Companiesretain a part of their profits for strengthening their

financial position. The income may be conserved for meeting the increased requirements of

working capital or of future expansion. Small companies usually find difficulties in raisingfinance for their needs of increased working capital for expansion programmes. They having no

other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at

low rates and retain a big part of profits.

6. Trade Cycles.Business cycles also exercise influence upon dividend Policy. Dividend policy

is adjusted according to the business oscillations. During the boom, prudent management createsfood reserves for contingencies which follow the inflationary period. Higher rates of dividend

can be used as a tool for marketing the securities in an otherwise depressed market. The financial

solvency can be proved and maintained by the companies in dull years if the adequate reserves

have been built up.

7. Government Policies. The earnings capacity of the enterprise is widely affected by thechange in fiscal, industrial, labour, control and other government policies. Sometimesgovernment restricts the distribution of dividend beyond a certain percentage in a particular

industry or in all spheres of business activity as was done in emergency. The dividend policy has

to be modified or formulated accordingly in those enterprises.

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8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the

rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of

dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond10 % of paid-up capital are subject to dividend tax at 7.5 %.

9. Legal Requirements. In deciding on the dividend, the directors take the legal requirementstoo into consideration. In order to protect the interests of creditors an outsiders, the companiesAct 1956 prescribes certain guidelines in respect of the distribution and payment of dividend.

Moreover, a company is required to provide for depreciation on its fixed and tangible assets

before declaring dividend on shares. It proposes that Dividend should not be distributed out ofcapita, in any case. Likewise, contractual obligation should also be fulfilled, for example,

payment of dividend on preference shares in priority over ordinary dividend.

10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep inmind the dividend paid in past years. The current rate should be around the average past rat. If it

has been abnormally increased the shares will be subjected to speculation. In a new concern, the

company should consider the dividend policy of the rival organisation.

11. Ability to Borrow. Well established and large firms have better access to the capital marketthan the new Companies and may borrow funds from the external sources if there arises anyneed. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to

depend on their internal sources and therefore they will have to built up good reserves by

reducing the dividend pay out ratio for meeting any obligation requiring heavy funds.

12. Policy of Control. Policy of control is another determining factor is so far as dividends are

concerned. If the directors want to have control on company, they would not like to add new

shareholders and therefore, declare a dividend at low rate. Because by adding new shareholdersthey fear dilution of control and diversion of policies and programmes of the existing

management. So they prefer to meet the needs through retained earing. If the directors do not

bother about the control of affairs they will follow a liberal dividend policy. Thus control is an

influencing factor in framing the dividend policy.

13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of

retention earnings, unless one other arrangements are made for the redemption of debt onmaturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly

institutional lenders) put restrictions on the dividend distribution still such time their loan is

outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency

to be maintained. Management is bound to hour such restrictions and to limit the rate of dividendpayout.

14. Time for Payment of Dividend. When should the dividend be paid is another consideration.Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a

time when is least needed by the company because there are peak times as well as lean periods of

expenditure. Wise management should plan the payment of dividend in such a manner that thereis no cash outflow at a time when the undertaking is already in need of urgent finances.

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15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because

each investor is interested in the regular payment of dividend. The management should, inspite

of regular payment of dividend, consider that the rate of dividend should be all the most constant.For this purpose sometimes companies maintain dividend equalization Fund

DEC 2008 2009:Functions of Investment banker:

1. Corporate Counselling: Corporate counselling covers the entire field of merchantbanking activities for better corporate performance, terms of image building among

investors, steady growth through good working, and appreciation in market value ofequity shares. The scope of corporate counselling is wide enough to include all activitiessuch as project counselling, capital restructuring, portfolio management, and full range of

financial services including venture capital, public issue management, loan syndication,

working capital, fixed deposit, lease finacing etc. However, the counselling is limited to

only opinion and suggestions and any detailed analysis would form part of a specific

group.

2. Project Counselling: Project counselling includes preparation of project reports,deciding upon the finacing of the project and appraising project report with the financial

institutions or banks. Project reports are prepared to obtain government approval, getfinancial assistance from institutions and plan for public issue.

3. Issue Management:The procedure of managing a public issue by merchant bankers canbe divided into 2 phases: (A) Pre-issue management (B) Post issue management.

(A) Pre-issue management:

Steps required to be taken to manage pre-issue activity is as follows:

1. Obtaining stock exchange approvals to memorandum and articles of association.2. Taking action as per SEBI guidelines.3. Finalising the appointments of the following agencies:

a. Co-managers/ Advisers to the issue.b. Underwriters to the issue.c. Brokers to the issue.d. Bankers to the issuee. Advertising agencyf. Registrar of the issue.

4. Advise the company to appoint auditors, legal advisers and broad base boardof directors.

5. Drafting the prospectus.6. Obtaining the approval of Draft prospectus.

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7. Obtaining approvals of draft prospectus from the companys legal advisers,underwriting financial institution / banks.

8. Obtaining consent from the parties and agencies acting for the issue to beenclosed with prospectus.

9. Approval of prospectus from SEBI10.

Filing of the Prospectus with ROC.11.Making an application for enlistment with stock exchange along with copy ofprospectus.

12.Publicity of the issue with advertisement and conferences.13.Open subscription list.(B) Post-issue management:

Steps involved in post-issue management are:

1. To verify and confirm that issue is subscribed to the extent of 90% includingdevolvement from underwriters in case of under subscription.

2. To supervise and co-ordinate the allotment procedure of registrar to the issue asper prescribed stock exchanges.

3. To ensure issue of refund order, allotment letters, certificate within the prescribedtime limit of 10 weeks after the closure of subscription list.

4. To report periodically to SEBI about the progress in the matters related toallotment and refunds.

5. To ensure the listing of securities at stock exchanges.6. To attend the investors grievances regarding the public issue.

4. Underwriting of Public issue: Underwriting is a guarantee given by the underwriter thatin the event of under subscription the amount underwritten would be subscribed by him.As per sec 76 of companies Act , UW commission should not be more than 2.5 % in case

of debenture and 5 % incase of shares subject to provision in the articles of association.

As per SEBI guidelines should have a networth of Rs 20 Lacs and his total obligationshould not exceed 20 times its net worth.

5. Portfolio Management: Portfolio refers to investment in different kind of securities suchas shares, debentures or bonds issued by different companies and securities issued by

government. Portfolio management refers to maintaining proper combinations of

securities in amanner that they give maximum return with minimum risk.

6. Merger and Acquisitions: For merchant bankers merger and acquisition is a promisingnew business. ICICI-Securities, Kotak Mahindra, J.M. Financial are actively involved in

bringing together buyers and sellers. They have already set up separate teams ofprofessional for this purpose. They are all in process of building a database where by they

will constantly monitoring the companies deal for takeovers.

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7. Equipment Leasing and Hire purchase: The financial services of equipment and hirepurchase are offered by most of the merchant bankers. Leasing and hire purchase

constitute a major portion of total income generation at present day merchant bankingorganisations. The lease rental/ installments provide a return of about 20% and in

addition provide tax shield.

8. Off shore finance: The merchant bankers help their clients in following area of foreigncurrency.

(a)Long term foreign currency loans.(b)Joint venture abroad.(c)Financing exports and imports.(d)Foreign collaboration arrangements.

9. Non-resident: The services of merchant bankers include investment advisory services toNRI in terms of identification of suitable investment opportunities. selection of securities

investment management etc They also take care of the operational details like purchaseand sale of securities securing necessary clearance from RBI for repatriation of interest

and dividend.

10.Loan syndication; Loan syndication refers to assistance rendered by merchant bank to get

mainly term loans for projects . Such loans may be obtained from a single financial institution or

a syndicate or consortium. Merchant bankers help corporate clients to raise syndicated loans

from commercial banks. Merchant bankers help corporate clients to raise syndicated loans from

commercial banks. Merchant banks help clients approach financial institutions for term loans

DEC 2008: Due Diligence

The basic function of due diligence is to assess the benefits and the costs of a proposed

acquisition by inquiring into all relevant aspects of the past, present and the predictable future of

a business to be purchased. Due diligence is of vital importance to prevent unpleasant surprises

after completing the acquisition. The due diligence should be thorough and extensive. Both the

parties to the transaction should conduct their own due diligence to get the accurate assessment

of potential risks and rewards. Generally, it is a process of enquiry and investigation about

proposed merger deal. It is a judgment process of the deal. The due diligence consists of five

strands, viz.,

The verification of assets and liabilities. The identification and quantification of risks. The protection needed against such risks which will in turn feed into the negotiations. The identification of synergy benefits.

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Post-acquisition planning.Due Diligence Topics and-their Focus on Enquiry

Due Diligence

Topics

Focus of Enquiries Expected Results

Financial Historical records, review of

management and systems.

Confirms underlying profits.

Provides basis for valuation.

Legal Various contractual Acts in the

country.

Warranties and indemnities,

validation of all existing contracts,

sale and purchase agreement.

Commercial Market conditions, competitive

position and targets commercial

prospects.

Sustainability of future profits,

planning, decision on strategy to be

adopted for the combined business.

Tax Existing tax levels, liabilities and

arrangements.

Avoid any unforeseen tax

liabilities, opportunities to optimize

position of combined business.

Management Management quality,

organizational structure

Identification of key integration

issues, outline of new structure for

the combined business.

Loan syndication - the sources of funds

Loan syndication in the case of domestic borrowings is undertaken with the institutional lenders

and the banks. Amongst institutional lenders , the following institutions are the main suppliers of

long and medium term funds with which the merchant bankers contact liaison and arrange loans ,

working for and on behalf of the clients.

A.Some of the All India Financial Institutions include:

i) Industrial Finance Corporation of India (IFCI)

ii) Industrial Development Bank of India (IDBI)

iii) Industrial Credit and Investment Corp. of India (ICICI)

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iv) Industrial Reconstruction Bank of India (IRBI)

B.State financial institutions like :

i) state financial Corporations(SFCs)

ii) State industrial development corporations(SIDCs)

iii) State Industrial and Investment Corp. (SIICs)

are also approached by the merchant bankers

C.All India level investment institutions also help in the process . They include ;

i) Life Insurance Corp. of India

ii) Unit Trust of India

iii) General Insurance Corp. of India an its subsidiaries.

D.Commercial Banks

Commercial banks join consortium financing with All India financial institutions to provide

medium term loans to industrial projects , otherwise they cater to the needs of working capital

requirements .

Loan Syndication - the process

Project details and estimated capital requirements

The service of loan syndication fixes up the responsibility upon the merchant bankers to help thecompany in availing the credit finance. Hence the merchant bankers should have correct

assessment of the projects , products, promoters, project cost and profitability projections based

on sales forecasts. In this direction the merchant baker has to take the following steps :

a) Initial discussions with promoters

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The initial discussion should be devoted to know the following aspects :-

background of the promoters in detail

promoters contribution to the project

details about the project report and

progress of the project.

b) assessment of project

An estimate of the capital cost of the project should be worked out to find out its long term

feasibility and whether the merchant bankers should actually go in for the project.

Locating sources of funds

The choice for sources of funds will depend upon the following :-

i) nature of the project

ii) quantum of the project costs

Sources of funds can be divide into three categories :

i) short term finance where the funds are required upto a period of 1 year. Such finance is

require dot meet the working capital requirements or special seasonal needs. These are

available from commercial banks , trade credit , public deposits , business finance companies

and also from customers.

ii) medium term finance where the funds are needed for a period of 1-5 years. Such finance is

needed to provide funds for permanent working capital , expansion or replacement of assets

etc. These are available from SFCs , commercial banks and All India Financial Institutions

through special schemes.

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iii) long term finance where the funds are needed for a period of more than 5 years. One term

funds could be borrowed from international institutions where merchant bankers an play a

constructive role through loan syndication services.

Preliminary discussions with the lenders

During the preliminary discussions , the merchant bankers should have clarifications from

lenders on the following questions whether the particular industry is in a priority framework of

the development finance institutions. Concessional finance and benefits available :

The acceptable Debt-Equity ratio

Promoters contribution and background

Project particulars.

Preparation of the loan application and follow-up

Before filing the loan application the merchant bankers must ensure that the client company has

complied with the following formalities so that appraisal of the application is not delayed. In the

case of consortium approach or joint financing of the project , the application will be filed with

one development finance institution and the company or the merchant banker will deal with only

one institution termed as lead institution . The project will be appraised and sanctioned under

single window concept method of dispension of credit.

Rendering assistance in project appraisal

The project is appraise from different angles viz. technical, financial, managerial , economical

and social.

Obtaining letter of intent from the lending institution or bank

The merchant bankers has to follow up closely the sanction of the loan amount by the lender .

The appraising institution takes the matter to its board of directors or the appraising office may

put up the proposal with full appraisal note before the sanctioning authority for according

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necessary sanction. Then the financial institution informs the applicant borrower of such sanction

along with the detailed terms and conditional and arrangements of any with other lending FI s in

case of consortium financing. The sanction letter mainly covers the following :

amount of loan

interest

commitment charge

security for the loan

conversion option

repayment of loan

Loan Syndication - the instruments

There are several main groups of instruments on offer in the syndicated loan market :

Term loan : This type of loan is fully drawn and is either repaid in full at maturity (bullet

payment) or repayments may start before the final maturity (staged repayment). The borrowerhas a right to call all or part of the loan at any time without paying penalty, but it cannot redraw

any part it has canceled.

Revolving credit facility : A revolving credit facility gives the borrower more flexibility about

how much principal can be outstanding during the loans life.

Evergreen facility : A loan that can be extended after pre-set periods. For example, a five year

evergreen loan could be extendible every year for another five years.

Back-stop facility : A back-stop facility protects a company against liquidity crunch; it is a loan

designed to be drawn only as the last resort. Many borrowers regard back-stop as an insurance

policy in case they suffer temporary shortfalls in funds or a failure of one of their normal funding

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sources. Most back-stops also include a swingline facility, which gives the borrowers the "same

day money".

. DEC 2008: FIPB and Joint venture:

Joint Venture companies are the most preferred form of corporate entities for Doing Business in

India.There are no separate laws for joint ventures in India. The companies incorporated in

India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint

Venture may be any of the business entities available in India. Click here for Types ofcompanies and corporations in India.

A typical Joint Venture is where:

1. Two parties, (individuals or companies), incorporate a company in India. Business of oneparty is transferred to the company and as consideration for such transfer, shares are

issued by the company and subscribed by that party. The other party subscribes for theshares in cash.

2. The above two parties subscribe to the shares of the joint venture company in agreedproportion, in cash, and start a new business.

3. Promoter shareholder of an existing Indian company and a third party, who/which may beindividual/company, one of them non-resident or both residents, collaborate to jointly

carry on the business of that company and its shares are taken by the said third partythrough payment in cash.

Some practical aspects of formation of joint venture companies in India and the prerequisiteswhich the parties should take into account are enumerated herein after.

Foreign companies are also free to open branch offices in India. However, a branch of a foreign

company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability

of the parent company is also greater in case of a branch office.

Government Approvals for Joint Ventures...

All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or

PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a

joint venture is covered under automatic route, then the approval of Reserve bank of India is

required. In other special cases, not covered under the automatic route, a special approval of

FIPB is required.

The Government has outlined 37 high priority areas covering most of the industrial sectors.

Investment proposals involving up to 74% foreign equity in these areas receive automatic

approval within two weeks. An application to the Reserve Bank of India is required. Please see

Foreign Investment in India - Sector wise Guidefor sectorwise guidelines under automatic route.Besides the 37 high priority areas, automatic approval is available for 74% foreign equity

holdings setting up international trading companies engaged primarily in export activities.

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Approval of foreign equity is not limited to 74% and to high priority industries. Greater than

74% of equity and areas outside the high priority list are open to investment, but government

approval is required. For these greater equity investments or for areas of investment outside ofhigh priority an application in the form FC (SIA) has to be filed with the Secretariat for

Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity)

is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU)or a unit in one of the Export Processing Zones ("EPZ's").

For major investment proposals or for those that do not fit within the existing policy parameters,there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in

the office of the Prime Minister and can provide single-window clearance to proposals in their

totality without being restricted by any predetermined parameters.

Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal

washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including

exploration, producing, refining and marketing of petroleum products has now been opened to

foreign participation. The Government had recently allowed foreign investment up to 51% inmining for commercial purposes and up to 49% in telecommunication sector. The government is

also examining a proposal to do away with the stipulation that foreign equity should cover theforeign exchange needs for import of capital goods. In view of the country's improved balance of

payments position, this requirement may be eliminated.

How to Enter into a Joint Venture Agreement?

Selection of a good local partner is the key to the success of any joint venture. Once a partner is

selected generally a