LOVISHBAJAJ 97

8/8/2019 LOVISHBAJAJ 97

1/80

1.Q: Explain the functions of Merchant Banking.

Functions

Merchant banking is a service oriented industry. Merchant banks all over

the world carry out the same set of services. Merchant banks in Indiacarry out the following functions and services specifically.

1. Corporate Counseling

2. Project counseling

3. Pre-investment Studies

4. Capital restructuring

5. Credit Syndication

6. Issue Management and underwriting

7. Portfolio Management

8. Working Capital Finance

9. Acceptance Credit and Bill discounting

10. Mergers, Amalgamations and Takeovers

11. Venture Capital

12. Lease Financing

13. Foreign Currency Finance

14. Fixed Deposit Broking

15. Mutual funds

16. Relief to Sick Industries

17. Project Appraisal

Each of these functions is detailed briefly below.

Corporate Counseling

The set of activities that is undertaken to ensure the efficient running of a

corporate enterprise is known as corporate counseling. It may include the

1


2/80

rejuvenating of old line companies and ailing units, and guiding the

existing units in identifying the areas or activities for growth and

diversification. The merchant banker guides the clients on various

aspects like Locational factors, organizational size, operational scale,

choice of product, market survey, cost analysis, cost reduction, allocation

of resources, investment decision, capital management and expenditure

contro, pricing, etc.

2


3/80

Following are the activities which form part of corporate counseling:

1. Providing guidance in areas of diversification based on the

Governments economic and licensing policies.

2. Undertaking appraisal of product lines, analyzing their growth and

profitability and forecasting future trends.

3. Rejuvenating old-line companies and ailing sick and units by appraising

their technology and process assessing their requirements and

restructuring their capital based.

4. Commissioning of diagnostic studies.

5. Assessment of the revival prospects and planning for rehabilitationthrough modernization and diversification and revamping of the

financial and organizational structure.

6. Arranging for the approval of the financial institutions/banks for

schemes of rehabilitation involves financial relief, etc.

7. Providing assistance in getting soft loans from financial institutions for

capital expenditure, and the requisite credit facilities from the bank.

8. Monitoring of rehabilitation schemes.

9. Exploring possibilities for takeover of sick units and providing

assistance in making consequential arrangements and negotiations

with financial institutions/banks and other interests/authorities

involved.

Project counseling

Project counseling relates to project counseling and is part of corporate

counseling. The study and analysis of the project viability and the steps

required for its effective and efficient implementation are broadly the subject

matter of project counseling.

Following are the activities forming part of the Project counseling:

1. Undertaking the general review of the project ideas/project profile.

2. Providing advice on procedural aspects of project implementation.

3


4/80

3. Conducting review of technical feasibility of the project on the basis of

the report prepared by own exerts or by outside consultants.

4. Assisting in the selection of a Technical consultancy Organization

(TCO) for preparing project reports and market surveys, or review of

the project report or market survey reports prepared by TCO.

5. Assisting in the preparation of project report from a financial angle,

and advising and acting on various procedural steps including

obtaining government consents for implementation of the project.

6. Assisting in obtaining approvals/licenses/permissions/grants, etc from

government agencies in the form of letter of intent, industrial license,

DGTD registration, and government approval for foreign collaboration.

7. Providing guidance to Indian entrepreneurs for making investment in

Indian project in India and in Indian joint ventures overseas.

8. Identification of potential investment avenues.

9. Carrying out precise capital structuring and shaping the pattern of

financing.

10. Arranging and negotiating foreign collaborations,

amalgamations, mergers, and takeovers.

Pre-Investment Studies

Pre-investment studies relate to the activities that are concerned with

making a detailed feasibility exploration to evaluate alternative avenues of

capital investment in terms of growth and profit prospects. Some of these

activities are as follows:

1. Carrying out an in-depth investigation of environment and regulator

factors, location of raw material supplies, demand projections and

financial requirements in order to assess the financial and economicviability of a given project.

2. Helping the client in identifying and short-listing those projects which

are built upon the clients inherent strength with a view to accentuate

corporate profitability and growth in the long run.

4


5/80

Capital Restructuring Services

Merchant bankers assist the corporate enterprise in structuring their capital

in such a way that it would minize the cost of capital and maximize its return

on capital invested.

Following are the services covered:

1. Examining the capital structure of the client company to determine the

extent of capitalization required.

2. Preparing a comprehensive memorandum for the controller of Capital

issues, and securing consent where the capitalization takes place

through issue of bonus shares.

3. Suggesting an alternative capital structure conforming to legal

requirements, viz., extent of capitalization on reserve and quantum ofdisinvestments by offer for sale and/or fresh issues of corporate

securities such as equity share, and preference share in the case of

FERA/FEMA companies.

4. Preparing a memorandum covering valuation of shares and justifying

the level of premium applied for.

Credit Syndication

Credit syndication relates to activities connected with credit procurement

and project financing, aimed at raising Indian and foreign currency loans

from banks and financial institutions, are collectively known as credit

syndication.

Activities covered under credit syndication are as follows:

1. Estimating the total cost of the project to be undertaken.

2. Drawing up a financing plan for the total project cost which conforms

to the requirements of the promoters and their collaborators, financial

institutions and banks, government agencies and underwriters.

3. Preparing loan application for financial assistance from term

lenders/financial institutions/banks, and monitoring their progress,

including pre-sanction negotiations.

4. Selecting institutions and banks for participation for financing.

5


6/80

Credit syndication services overlap with the act ivies of project counseling

and project finance. But the loan syndication also incluses the preparation of

applications for financial assistance from financial institutions/banks.

Issue Management and Underwriting

Issue management and underwriting concerns with the activities relating to

the management of the public issues of corporate securities, viz. equity

shares, preference shares, and debentures of bonds, and are aimed at

mobilization of money from the capital market.

Following are some of the popular services provided by merchant bankers in

this regard:

1. Preparation of an action plant.

2. Preparation of budget for the local expenses for the issues.

3. Preparation of CCI application and assisting in obtaining

consent/acknowledgement.

4. Drafting of prospectus

5. Selection of institutional and broker underwriters for

syndicating/underwriting arrangements.

6. Selection of issues Houses and advertising agencies for undertaking

pre and post-issue publicity.

7. Obtaining the approval of institutional underwriters and stock

exchanges for publication of the prospectus.

Portfolio management is making decisions for the investment of cash

resources of a corporate enterprise in marketable securities by deciding the

quantum, timing and the type of security to be bough.

The services covered are as follows:

1. Undertaking investment in securities.

2. Undertaking investment for non-resident Indians, on both repatriation

and non-repatriation basis.

3. Undertaking review of Provident fund investment, Trust investment,

etc.

6


7/80

4. Safe custody of securities in India and overseas.

5. Providing advice on selection of investments.

6. Carrying out a critical evaluation of investment portfolio.

7. Collecting and remitting interest and dividend on investment.

Working Capital Finance

The finance required for meeting the day-to-day expenses of an enterprise is

known as Working Capital finance.

1. Assessment of working capital requirements.

2. Preparing the necessary application to negotiations for the sanction of

appropriate credit facilities.

3. Assisting, co-coordinating and expediting documentation and other

formalities for disbursement.

4. Advising on the issue of debentures for augmenting long-term

requirements of working capital.

Acceptance Credit and Bill discounting

Acceptance credit and bill discounting connotes the activities relating to the

acceptance and the discounting of bills of exchange, besides the

advancement loans to business concerns on the strength of such

instruments, are collectively known as Acceptance Credit and Bill of

discounting.

In order that the bill accepting and discounting takes place on sound lines, it

is imperative that the firm involved command a good reputation and

financial standing.

7


8/80

Merger and Acquisition

This is a specialized service provided by the merchant banker who arranges

for negotiating acquisitions and mergers by offering expert valuationregarding the quantum and the nature of considerations, and other related

matters.

The various functions that form part of this activity are as follows:

1. Undertaking management audit to identify areas of corporate strength

and weakness in order to help formulate guidelines and directions for

future growth.

2. Conducting exploratory studies on a global basis to locate overseas

markets, foreign collaborations and prospective joint ventureassociates.

3. Obtaining approvals from shareholders, depositors, creditors,

government, and other authorities.

4. Monitoring the implementation of merger and amalgamation schemes.

5. Identifying organizations with matching characteristics.

Merchant bankers provide advice on acquisition propositions after careful

examination of all aspects, viz, financial statements, articles of associations,provisions of companies act, rules and guidance of trade chambers, the

issuing house associations, etc.

There are many reasons for the recent trend towards mergers and

amalgamations, such as:

Existence of excess unused manufacturing capacity of the purchasing

company, which can be utilized efficiently by taking over other units.

Lack of manufacturing space with the purchase company. The best

solution may be to buy the controlling interest in another company

having excessive manufacturing space or capacity.

Venture Financing

Venture capital is the equity financing for high-risk and high-reward projects.

The concept of venture capital originated in the USA in the 1950s, when

8


9/80

business magnates like Rockefeller financed new technology companies.

The concept became more popular during the sixties and seventies, when

several private enterprises undertook the financing of high-risk and high

reward projects.

Lease Financing

Leasing is an important alternative source of financing a capital outlay. It

involves letting out assets on lease for use by the lessee for a particular

period of time.

Following are the important services provided in regard to leasing:

1. Providing advice on the viability of leasing as an alternative source for

financing capital investment projects.

2. Providing advice on the choice of a favorable rental structure.

In India, leasing is a non-banking financial activity. Commercial banks like

State Bank of India and Canara Bank also provide lease financing by forming

subsidiaries under the amended Banking Regulations Act of 1949.

Foreign Currency Financing

Foreign currency finance is the fund provided for foreign trade transactions.

It may take the form of export-import trade finance, euro currency loans.

Indian joint venture abroad or foreign collaborations. The main areas that

are covered in this type of merchant activity are as follows:

1. Providing assistance for carrying out the study of turnkey and

construction contract projects.

2. Providing assistance in applications to working groups, liaison with RBI,

ECGD and other institutions.

3. Providing assistance in opening and operating banks accounts abroad.

4. Providing assistance in obtaining export credit facilities from the EXIM

bank for export of capital goods, and arranging for the necessary

government approvals and clearance.

5. Providing guidance on forward cover for exchange risk.

6. Assisting in arranging foreign currency guarantees and performance

bonds for exporters.

9


10/80

Forms of Foreign Currency Loans

The various types of foreign currency loans are:

a) Euro-currency Loans

b) Financing Indian Joint Ventures abroad through:

1. Advice on the nature of clients investment.

2. Financial structuring of the project

3. Syndication of Euro loans

4. Bank guarantees

5. Procuring euro-currency facilities in the form of management and

syndication of Euro-currency loans, bonds, floating Rate Notes (FRNs),floating Rate Certificates of Deposits (FRCDs), US commercial papers,

with the assistance of International Treasury Management Limited

(ITM).

6. Providing advice on currency swaps and interest rate swaps.

7. Arranging deferred term export finance to Indian entrepreneurs by

maintaining a quick liaison with the export countrys Export Credit

Agencies who offer fixed rate finance at concessionary interest rates,

in particular export credit agencies in the UK (ECGD), USA (EXIM Bank),Japan, Italy, Norway, East Germany (HERMES), and who enjoy lines of

credit from France (COFACE), Korea, Spain, Austria, Canada, Denmark,

and India.

c) Providing assistance in foreign collaborations through:

1. Helping locate foreign collaboration and joint venture partners

abroad.

2. Providing advice on local laws, product risk, government regulations

regarding shareholdings, exchange restrictions, taxation, dividends,

incentives and subsidies, etc.

Brokering Fixed Deposits

Following are the services rendered by merchant bankers in this regard:

10


11/80

1. Computation of the amount that could be raised by a company in the

form of deposits from the public and loans from shareholders.

2. Drafting of advertisement for inviting deposits.

3. Filing a copy of advertisement with the Registrar of Companies forregistration.

4. Making arrangement for payment of interest amounts.

5. Providing advice to the company on the terms and conditions of fixed

deposits, and deciding on the appropriate rate of interest, keeping in

view the prevailing capital and money market conditions.

6. Helping the company of observe all the rules and regulation in the

connection.

Mutual Funds

Mutual funds are institutions that mobilize the savings of innumerable

investors for the purpose of channeling them into productive investments in

a wide variety of corporate and other securities.

Some of the services rendered by mutual funds are as follows:

1. Mopping up public savings.

2. Investing the funds in a diversified portfolio of shares and debentures

belonging to well managed and growing companies.

3. Earning investors a steady return on investments with an assurance of

capital appreciation.

Relief to Sick Industries

Merchant bankers extend the following services as part of providing relief to

sick industries:

1. Rejuvenating old-lines and ailing units by appraising their technology

and process, assessing their requirements and restructuring their

capital base.

2. Evolving rehabilitation packages which are acceptable to financial

institutions and banks.

11


12/80

3. Exploring the possibilities of mergers/amalgamations, wherever called

for.

Project Appraisal

The evaluation of industrial projects in terms of alternative variants intechnology, raw materials, production capacity and location of plant is known

as Project Appraisal.

Financial appraisal

Financial appraisal involves assessing the feasibility of a new proposal for

setting up a new project or the expansion of existing production facilities.

Financial appraisal is undertaken through an analysis which takes into

account the financial features of a project, including sources of financing.Financial analysis helps trace the smooth operation of the project over its

entire life cycle.

Technical Appraisal

Technical appraisal is primarily concerned with the project concept in terms

of technology, design, scope and content of the plant, as well as inputs are

infrastructure facilities envisaged for the project, Basically, the project

should be able to deliver a marketable product fro the resources deployed, a

t a cost which would leave a margin that would be adequate to service theinvestment, and also plough back a reasonable amount into the project to

enable the enterprise to consolidate its positions.

Economic Appraisal

Economic appraisal of a project deals with the impact of the project on

economic aggregates. These may be classified under two broad categories.

The first deals with the effect of the project on employment and foreign

exchange, and the second deals with the impact of the project on net social

benefits or welfare. *************

2.Q:Briefly explain the regulator framework on merchant banking

Introduction

According to the SEBI, merchant banker means any person who is engaged

in the business of issue management either by making arrangements

12


13/80

regarding selling, buying or subscribing to securities as manager, consultant

adviser or rendering corporate advisory service in relation to such issue

management.

The SEBI has brought about a number of regulative measures for the

purpose of disciplining the functioning of the merchant bankers in India. Theobjective is to usher in an era of regulated financial markets and thereby

pave way for the development of the capital market in India. The measures

were introduced by the SEBI in the year 1992 . The measures were revised

by SEBI in 1997. The salient features of the regulative framework of

merchant banking in India are described below:

SEBI Regulations

1. Registration of Merchant Bankers

The relevant guidelines with regard to the registration of merchant

bankers are as follows:

Application for Grant of Certificate

An application by a person for grant of a certificate shall be made to the

Board in Form A. The application shall be made for anyone of the

following categories of the merchant banker namely:

1. Category I, to carry on any activity of the issue management, whichwill inter-alia consist of prepared of prospectus and other information

relating to the issue, determining financial structure, tie-up of

financiers and final allotment and refund of the subscription; and to act

as adviser, consultant, manage underwriter, portfolio manager.

2. Category II, to act as adviser, consultant, co-manager, underwriter,

portfolio manager.

3. Category III, to act as underwriter, adviser, consultant to an issue.

4. Category Iv, to act only as adviser or consultant to an issue.

With effect from 9th December, 1997, an application can be made only for

carrying on the activities mentioned in category I. An applicant can carry on

the activity as underwriter only if he obtains separate certificate of

registration under the provisions of Securities and Exchange Board of India

(Underwriting Regulations, 1993), and as portfolio manager only if he obtains

13


14/80

separate certificate of registration under the provisions of Securities and

Exchange Board of India (portfolio Manager) Regulations, 1993.

Conformance to Requirements

Subject to the provisions of the regulations, any application, which is notcomplete in all respects and does not conform to the instructions specified in

the form, shall be rejected.

Furnishing of Information

The Board may require the applicant to furnish further information or

clarification regarding matters relevant to the activity of a merchant banker

for the purpose of disposal of the application.

Consideration of Application

The Board shall take into account for considering the grant of a certificate, all

maters, which are relevant to the activities relating to merchant banker and

in particular whether the applicant complied with the following requirement.

1. That the applicant shall be a body corporate other than a non-banking

financial company as defined under clause (f) of section 45-I of the

Reserve Bank of India Act, (2 of 1934) as amended from time to time;

2. That the merchant banker who has been granted registration by the

Reserve Bank of India to act as a primary or Satellite Dealer may carry

on such activity subject to the condition that it shall not accept or hold

public deposit;

3. That the applicant has the necessary infrastructure like adequate office

space, equipments, and manpower to effectively discharge his

activities;

4. That the applicant has in his employment minimum of two persons who

have the experience to conduct the business of the merchant banker;

5. That the applicant fulfils the capital adequacy requirement as specified

in the relevant;

6. That the applicant is a fit and proper person; and

14


15/80

7. That the grant of certificate to the applicant is in the interest of

investors.

Capital Adequacy Requirement

According to the regulations, the capital adequacy requirement shall not beless than the net worth of the person making the application for grant of

registration.

15


16/80

Procedure for Registration

The Board on being satisfied that the applicant is eligible shall grant a

certificate in Form B. On the grant of certificate the applicant shall be liableto pay the fees in accordance with Schedule II.

Renewal of Certificate

Three months before expiry of the period of certificate, the merchant banker,

may if he so desires, make an application for renewal in form A. The

application for renewal shall be dealt with in the same manner as if it were a

fresh application for grant of a certificate. On the grant of a certificate the

applicant shall be liable to pay the fees in accordance with Schedule II.

Procedure where registration is not granted

Where an application for grant of a certificate under regulation 3 or of

renewal under regulation 9, does not satisfy the criteria set out in regulation

6, the Board may reject the application after giving an opportunity being

heard. The refusal to grant registration shall be communicated by the Board

within thirty days of such refusal to the applicant stating therein the grounds

on which the application has been rejected.

************

16


17/80

3.Q:Explain the activities involved in Public Issue Management

Activities involved in Public Issue Management

There are several activities that have to be performed by the issue manager

in order to raise money from the capital market. Adequate planning needs

to be done while chalking out an appropriate marketing strategy. The

various activities involved in raising funds from the capital markets are

described below:

Pre-issue Activities

1. Signing of Memorandum of Understanding (MOU): Signing of

MOU between the client company and the merchant banker-issuemanagement activities, marks the award of the contract. The role and

responsibility of the merchant banker as against the issuing company

are clearly spelt out in the MOU.

2. Obtaining appraisal note: An appraisal note containing the details

of the proposed capital outlay of the project and the sources of

funding is either prepared in-house or is obtained from external

appraising agencies, viz, financial institutions/banks, etc.

3. Optimum capital structure: The level of capital that would maximizethe shareholders vale and minimize the overall cost of capital has to

be determined.

4. Convening Meeting: A meeting of the Board of Directors of the

issuing company is convened. This is followed by an EGM of its

members.

5. Appointment of financial intermediary: Financial intermediaries

such as Underwriters, registrars, etc have to be appointed. Necessary

contracts need to be made with the underwriter to ensure duesubscription to the offer. Similar contracts, when entered into with

the Registrars to an issued, will help in share allotment related work.

6. Preparing documents: As part of the issue management procedure,

the documents to be prepared are initial listing application for

submission to those stock exchanges where the issuing company

17


18/80

intends to get its securities listed, MoU with the registrar, with bankers

to the issue, with advisors to the issue and co-managers to the issue,

agreement for purchase or properties, etc.

7. Due diligence certificate: The lead manager issues a due diligence

certificate which certifies that the company has scrupulouslyfollowing all legal requirements, has exercised utmost care while

preparing the offer document and has made a true, fair and adequate

disclosure in the draft offer document.

8. Submission of offer document: The draft offer document along

with the due diligence certificate is filed with SEBI. The SEBI, in turn,

makes necessary corrections in the offer document and returns the

same with relevant observations, if any, within 21 days from the

receipt of the offer document.

9. Finalization of collection centers: In order to collect the issue

application forms from the prospective investors, the lead manager

finalizes the collection centers.

10.Filing with RoC: The offer document, completed in all respects after

incorporating SEBI observations, is filed with Registrar of Companies

(RoC) to obtain acknowledgement.

11.Launching the issue: The process of marketing the issue starts

once the legal formalities are completed and statutory permission forissue of capital is obtained. The lead manager has to arrange for the

distribution of public issue stationery to various collecting banks,

brokers, investors, etc. the issue is opened for public immediately

after obtaining the observation letter from SEBI, which is valid for a

period of 365 days from the date of issue.

12.Promoters contribution: a certificate to the effect that the

required contribution of the promoters has been raised before opening

of the issue, has to be obtained from a Chartered Accountant, and

duly filed with SEBI.

13.Issue closure: An announcement regarding the closure of the issue

should be made in the newspapers.

18


19/80

***************

19


20/80

4Q:Explain the different methods of marketing securities

Methods of Marketing Securities

Following are the various methods being adopted by corporate entities for

marketing the securities in the New Issue Market:

1. Pure Prospectus Method

2. Offer for Sale Method

3. Private Placement Method

4. Initial public Offers (IPOs) Method

5. Rights Issue Method

6. Bonus Issue Method

7. Book-building Method

8. Stock Option Method and

9. Bought-out Deals Method

Pure prospectus Method

Meaning

The method whereby a corporate enterprise mops up capital funds from the

general public by means of an issue of a prospectus, is called Pure

Prospectus Method. It is the most popular method of making public issue of

securities by corporate enterprises.

Features

Exclusive subscription: Under this method, the new issues of a company

are offered for exclusive subscription of the general public.

Issue Price: Direct officer is made by the issuing company to the general

public to subscribe to the securities as a stated price.

Underwriting: Public issue through the pure prospectus method is usually

underwritten. This is to safeguard the interest of the issuer in the event of

an unsatisfactory response from the public.

Prospectus: A document that contains information relating to the various

aspects of the issuing company, besides other details of the issue is called a

20


21/80

Prospectus. The document is circulated to the public. The general details

include the companys name and address of its registered office, the names

and addresses of the companys promoters, manager, managing director,

directors, company secretary, legal adviser, auditors, bankers, brokers, etc.

21


22/80

Advantages

The pure prospectus method offers the following advantages to the issuer

and the investors alike:

Benefits to investors: The pure prospectus method of marketing the

securities serves as an excellent mode of disclosure of all the information

pertaining to the issue. Besides, it also facilitates satisfactory compliance

with the legal requirements of transparency, etc.

Benefits to issuers: The pure prospectus method is the most popular

method among the larger issuers. In addition, it provides for wide diffusion

of ownership of securities contributing to reduction in the concentration of

economic and social power.

Drawbacks

The raising of capital through the pure prospectus method is fraught with a

number of drawbacks as specified below:

High issue costs: A major drawback of this method is that it is an

expensive mode of raising funds from the capital market. Costs of various

hues are incurred in mobilizing capital.

Time Consuming: The issue of securities through prospectus takes more

time, as its requires the due compliance with various formalities before an

issue could take place.

Offer for Sale Method

Meaning

Where the marketing of securities takes place through intermediaries, such

as issue houses, stockholders and others, it is a case of Offer for sale

Method.

Features

Under this method, the sale of securities takes place in two stages.

Accordingly, in the first stage, the issuer company makes an en-block sale of

securities to intermediaries such as the issue houses and share brokers of an

agreed price. Under the second stage, the securities are re-sold to ultimate

investors at a market-related price.

22


23/80

The issue is also underwritten to ensure total subscription of the issue. The

biggest advantage of this method is that it saves the issuing company the

hassles involved in selling the shares to the public directly through

prospectus.

23


24/80

Private Placement Method

Meaning

A method of marketing of securities whereby the issuer makes the offer of

sale of individuals and institutions privately without the issue of a prospectus

is known as Private Placement Method.

Features

Under this method, securities are offered directly to large buyers with the

help of share brokers. This method works in a manner similar to the Offer

for Sale Method whereby securities are first sold to intermediaries such as

issues houses, etc.

Advantages

Private placement of securities offers the following advantages:

1. Less expensive as various types of costs associated with the issue are

borne by the issue houses and other intermediaries.

2. Placement of securities suits the requirements of small companies.

3. The method is also resorted to when the stock market is dull and the

public response to the issue is doubtful.

Disadvantages

The major weaknesses of the private placement of securities are as follows:

1. Concentration of securities in a few hands.

2. Creating artificial scarcity for the securities thus jacking up the prices

temporarily and misleading general public.

3. Depriving the common investors of an opportunity to subscribe to the

issue, thus affecting their confidence levels.

Initial Public Offer (IPO) Method

The public issue made by a corporate entity for the first time in its life is

called Initial public Offer (IPO), Under this method of marketing, securities

24


25/80

are issue to successful applicants on the basis of the orders placed by them,

through their brokers.

When a company whose stock is not publicly traded wants to offer that stock

to the general public, it takes the form of Initial public offer. The job of

selling the stock is entrusted to a popular intermediary, the underwriter. Theunderwriters charge a fee for their services.

Stocks are issued to the underwriter after the issue of prospectus which

provides details of financial and business information as regards the issuer.

The issuer and the underwriting syndicate jointly determine the price of a

new issue. IPO stock at the release price is usually not available to most of

the public. Good relationship between, the broker and the investor is a pre-

requisite for the stock being acquired.

Full disclosure of all material information in connection with the offering of

new securities must be made as part of the new offerings. A statement and

preliminary prospectus (also known as a red herring) containing the following

information is to be filled with the Registrar of Companies:

1. A description of the issuers business.

2. The names and addresses of the Key company officers, with salary and

a 5 year business history on each.

3. The amount of ownership of the key officers

4. Any legal proceedings that the company is involved in

The essential steps involved in this method of marketing of securities are as

follows:

1. Order: Broker receives order from the client and places orders on

behalf of the client with the issuer.

2. Share Allocation: The issuer finalizes share allocation and informs

the broker regarding the same.

3. The Client: The broker advises the successful clients of the share

allocation. Clients then submit the application forms for shares and

make payment to the issuer through the broker.

4. Primary issue account: The issuer opens a separate escrow account

(primary issue account) for the primary market issue. The clearing

25


26/80

house of the exchange debits the primary issue account of the broker

and credits the issuers account.

5. Certificates: Certificates are then delivered to investors. Otherwise

depository account may be credited.

Rights issue Method

Where the shares of an existing company are offered to its existing

shareholders. It takes the form of rights issue. Under this method, the

existing company issues shares to its existing shareholder sin proportion in

the number of shares already held by them.

The relevant guidelines issued by the SEBI in this regard are as follows:

26


27/80

1. Shall be issued only by listed companies.

2. Announcement regarding rights issue once made, shall not be

withdrawn and where withdrawn, no security shall be eligible for listing

upto 12 months.

3. Underwriting as to rights issue is optional and appointment of Registrar

is compulsory.

4. Appointment of category I Merchant Bankers holding a certificate of

registration issued by SEBI shall be compulsory.

5. Rights share shall be issued only in respect of fully paid share.

6. Letter of Offer shall contain disclosures as per SEBI requirements.

7. Issue shall be kept open for a minimum period of 30 days and for a

maximum period of 60 days.

8. A No complaints Certificate is to be filed by the Legal Merchant

Banker with the SEBI after 21 days from the date of issue of the

document.

9. Obligatory for a company where increase in subscribed capital isnecessary after two years of its formation of after one year of its first

issue of shares, whichever is earlier (this requirement may be

dispensed with by a special resolution).

Advantages

Rights issue offers the following advantages

1. Economy: Rights issue constitutes the most economical method ofraising fresh capital, as it involves no underwriting and brokerage

costs.

2. Easy: The issue management procedures connected with the rights

issue are easier as only a limited number of applications are to be

handled.

27


28/80

3. Advantage to shareholders: Issue of rights shares does not involve

any dilution of ownership of existing shareholders.

Drawbacks

The method suffers from the following limitations:

1. Restrictive: The facility of rights issue is available only to existing

companies and not to new companies.

2. Against society: the issue of rights shares runs counter to the overall

societal consideration of diffusion of share ownership for promoting

dispersal of wealth and economic power.

28


29/80

Bonus Issues Method

Where the accumulated reserves and surplus of profits of a company are

converted into paid up capital, it takes the form of issue of bonus shares. Itmerely implied capitalization of existing reserves and surplus of a company.

Issue under Section 205 (3) of the companies Act, such shares is governed

by the guidelines issued by the SEBI (applicable of listed companies only) as

follows:

SEBI Guidelines

Following are the guidelines pertaining to the issue of bonus shares by a

listed corporate enterprise:

1. Reservation: In respect of FCDs and PCDs, bonus shares must be

reserved in proportion to such convertible part of FCDs and PCDs. The

shares so reserved may be issued at the time of conversion(s) of such

debentures on the same terms on which the bonus issues were made.

2. Reserves: the bonus issue shall be made out of free reserves built

out of the genuine profits or share premium collected in cash only.

3. Dividend mode: the declaration of bonus issue, in lieu of dividend, is

not made.

4. Fully paid: The bonus issue is not made unless the partly paid

shares, if any are made fully paid-up.

5. No default: The Company has not defaulted in payment of interest or

principal in respect of fixed deposits and interest on existing

debentures or principal on redemption thereof and has sufficient

reason to believe that it has not defaulted in respect of the payment of

statutory dues of the employees such as contribution to provident

fund, gratuity, bonus, etc.

6. Implementation: A company that announces its bonus issue after

the approval of the Board of Directors must implement the proposal

within a period of 6 months from the date of such approval and shall

not have the option of changing the decision.

29


30/80

7. The articles: The articles of Association of the company shall contain

a provision for capitalization of reserves, etc. if there is no such

provision in the articles, the company shall pass a resolution at is

general body meeting making provision in the Articles of Association

for capitalization.

8. Resolution: consequent to the issue of bonus shares if the subscribed

and paid-up capital exceeds the authorized share capital, the company

at its general body meeting for increasing the authorized capital shall

pass a resolution.

30


31/80

Book-building Method

A method of marketing the shares of a company whereby the quantum and

the price of the securities to be issued will be decided on the basis of thebids received from the prospective shareholders by the lead merchant

bankers is known as book-building method.

The option of book-building is available to all body corporate, which are

otherwise eligible to make an issue of capital of the public. The initial

minimum size of issue through book-building route was fixed at Rs.100

crores.

The book-building process involves the following steps:

1. Appointment of book-runners: the first step in the book-building isthe appointment by the issuer company, of the book-runner, chosen

from one of the lead merchant bankers. The book-runner in the forms

a syndicate for the book building. A syndicate member should be a

member of National Stock Exchange (NSE) or Over-the-Counter

Exchange of India (OTCEI). Offers of bids are to be made by

investors to the syndicate members, who register the demands of

investors.

2. Drafting prospectus: The draft prospectus containing all the

information except the information regarding the price at which thesecurities are offered is to be filed with SEBI as per the prevailing SEBI

guidelines. The offer of securities through this process must

separately be disclosed in the prospectus, under the caption

placement portion category.

3. Circulating draft prospectus: A copy of the draft prospectus filed

with SEBI is to be circulated by the book-runner to the prospective

institutional buyers who are eligible for firm allotment and also to the

intermediaries who are eligible to act as underwriters.

4. Maintain offer records: The book-runner maintain a record to the

offers received. Details such as the name and the number of

securities ordered together with the price at which each institutional

buyer or underwriter is willing to subscribed to securities under the

placement portion must find place in the record. SEBI has the right to

inspect such records.

31


32/80

5. Intimation about aggregate orders: The underwriters and the

institutional investors shall give intimation on the aggregate of the

offers received to the book-runner.

6. Bid analysis: The bid analysis is carried out by the book-runner

immediately after the closure of the bid offer date. An appropriatefinal price is arrived at after a careful evaluation of demands at

various prices and the quantity.

7. Mandatory underwriting: Where it has been decided to make offers

of shares to public under the category of Net offer of the Public, it is

incumbent that the entire portion offered to the public is fully

underwritten.

8. Filling with ROC: A copy of the prospectus as certified by the SEBI

shall be filed with the Registrar of Companies within two days of thereceipt of the acknowledgement card from the SEBI.

9. Bank accounts: The issuer company has to open two separate

accounts for collection of application money, one for the private

placement portion and the other for the public subscription.

10.Collection of completed applications: The book-runner collects

from the institutional buyers and the underwriters the application

forms along with the application money to the extent of the securities

proposed to be allotted to them or subscribed by them.

11.Allotment of securities: Allotment for the private placement

portion may be made on the second day from the closure of the issue.

The issuer company, however, has the option to choose one date for

both the placement portion and the public portion.

12.Payment schedule and listing: The book-runner may require the

underwriters to the net offer to the public to pay in advance all

moneys required to be paid in respect of their underwriting

commitment by the eleventh day of the closure of the issue.

13.Under-subscription: In the case of under-subscription in the net

offer to the public category, any spillover to the extent of under

subscription is to be permitted from the placement portion category

subject to the condition that preference is given to the individual

investors.

32


33/80

Advantages of book-building

Book building process is of immense use in the following ways:

1. Reduction in the duration between allotment and listing

2. Reliable allotment procedure

3. Quick listing in stock exchanges possible

4. No price manipulation as the price is determined on the basis of the

bids received.

Stock Option or employees Stock Option Scheme (ESOP)

A method of marketing the securities of a company whereby its employees

are encouraged to take up shares and subscribe to it is know as stock

option. It is a voluntary scheme on the part of the company to encourage

employees participation in the company. The scheme also offers an

incentive to the employees to stay in the company.

33


34/80

SEBI Guidelines

Company whose securities are listed on any stock exchange can introduce

the scheme of employees stock option. The offer can be made subject to theconditions specified below:

1. Issue at discount: Issue of stock options at a discount to the market

price would be regarded as another form of employee compensation

and would be treated as such in the financial statements of the

company regardless the quantum of discount on the exercise price of

the option.

2. Approval: The issue of ESOPs is subject to the approval by the

shareholders through a special resolution.

3. Maximum limit: There would be no restriction on the maximum

number of shares to be issued to a single employee.

4. Minimum period: A minimum period of one year between grant of

options and its vesting has been prescribed. After one year, the

company would determine the period during which the option can be

exercised.

5. Superintendence: The operation of the ESOP Scheme would have to

be under the superintendence and direction of a CompensationCommittee of the Board of Directors in which there would be a majority

of independent directors.

6. Eligibility: ESOP scheme is open to all permanent employees and to

the directors of the company but not to promoters and large

shareholders.

7. Directors report: The Directors report shall make a disclosure of

the following:

a. Total number of shares as approved the shareholders

b. The pricing formula adopted

c. Details as to options grated, options vested, options exercised and

options forfeited, extinguishments or modification of options, money

34


35/80

realized by exercise of options, total number of options in force,

employee-wise details of options granted to senior managerial

personnel and to any other employee who received a grant in

anyone year of options amounting to 5 percent or more of options

granted during that year.

d. Fully diluted EPS computed in accordance with the IAS

8. IPO: SEBIs stipulations prohibiting initial public offerings by

companies having outstanding options should not apply to ESOP.

Stock Option Norms for Software Companies

The relevant guidelines issued by the SEBI as regards employees stock

option for software companies are as follows:

1. Minimum issue: A minimum issue of 10 percent of its paid-up capitalcan be made by a software company which has already floated

American Depository Receipts (ADRs) and Global Depository Receipts

(GDRs) or a company which is proposing to float these is entitled to

issue ADR/GDR linked stock options to its employees.

2. Mode of Issue: Listed stock options can be issued in foreign currency

convertible bonds and ordinary shares (through depository receipt

mechanism) to the employees of subsidiaries of Info Tech Companies.

3. Permanent employees: Indian IT companies can issue ADR/GDRlinked stock options to permanent employees, including Indian and

overseas directors, of their subsidiary companies incorporated in India

or outside.

4. Pricing: The pricing provisions of SEBIs preferential allotment

guidelines would not cover the scheme. The purpose is to be enable

the companies to issue stock options to its employees at a discount to

the market price which serves as another form of compensation.

5. Approval: Shareholders approval through a special resolution is

necessary for issuing the ESOPs. A minimum period of one year

between grant of option and its vesting has been prescribed. After one

year, the company would determine the period in which option can be

exercised.

Bought-out Deals

35


36/80

Meaning

A method for marketing of securities of a body corporate whereby the

promoters of an unlisted company make an outright sale of a chunk of equity

shares to a single sponsor or the lead sponsor is known as bought-out

deals.

Features

1. Parties: There are three parties involved in the bought-out deals.

They are promoters of the company sponsors and co-sponsors who are

generally merchant bankers and investors.

2. Outright Sale: Under this arrangement, there is an outright sale of a

chunk of equity shares to a single sponsor or the lead sponsor.

3. Syndicate: Sponsor forms a syndicate with other merchant bankersfor meeting the resource requirements and for distributing the risk.

4. Sale price: The sale price is finalized through negotiations between

the issuing company and the purchaser, the sale being influenced by

such factors as project evaluation, promoters image and reputation,

current market sentiments, prospects of off-loading these shares at a

future date, etc.

5. Listing: The investor-sponsor make a profit, when at a future date,

the shares get listed and higher prices prevail. Listing generally takesplace at a time when the company is performing well in terms of higher

profits and larger cash generations from projects.

6. OTCEI: Sale of these share at Over-the-Counter Exchange of India

(OTCEI) or at a recognized stock exchanges, the time of listing these

securities and off-loading them simultaneously are being generally

decided in advance.

***********

36


37/80

5.Q:Explain briefly the mechanism of underwriting

Benefits/Functions

The financial service of underwriting is found advantageous for the issuers

and the public alike. The function and the role of underwriting firms is givenbelow:

Adequate Funds

Underwriting being a kind of a guarantee for subscription of a public issue of

securities enables a company to raise the necessary capital funds. By

undertaking to take up the whole issue, or the remaining shares not

subscribed by the public, it helps a company to undertake project

investments with the assurance of adequate capital funds. Underwriting

agreement assures the company of the required funds within a reasonable or

agreed time.

Expert Advice

Underwriters of repute often help the company by providing advice on

matter pertaining to the soundness of the proposed plan etc. thus enabling

the company in avoid certain pitfalls. It is therefore, possible for an issuing

company to obtain the benefit of expert advice through underwriting before

entering into a n agreement.

Enhanced Goodwill

The fact that the issues of securities of a firm are underwritten would help

the firm achieve a successful subscription of securities by the public. This is

because, intermediaries, of financial integrity and established reputation

usually do they. Such an activity, therefore, helps enhance the goodwill of

the issuing company.

Assurance to investors

Under writers, before underwriting the issue, satisfy themselves with the

financial integrity of the Issuer Company and viability of the plan. Theunderwriting firms assure this way, the soundness of the company the

investors are, therefore, assured of having low risk when they buy shares or

debentures which have been underwritten by them. There firm commitment

towards fulfilling their underwriting obligations helps creates confidence in

the minds of the investing public about the company.

37


38/80

Better Marketing

Underwriters ensure efficient and successful marketing of the securities of

the firm through their network arrangements with other underwriters andbrokers at national and global level.

Benefits to Buyers

Underwriters are very useful to the buyers of securities due to their ability to

give expert regarding the safety of the investment and the soundness of

companies. The information and the expert opinion published by them in

various newspapers and journals are also helpful.

Price Stability

Underwriters provide stability to the price of securities by purchasing and

selling various securities. This ultimately benefits the stock market.

Indian Scenario

Underwriting, as an important type of financial service, became popular in

the Indian capital market only recently. It made its beginning in 1912 when

M/s. Batliwala and Karni underwrote the shares of the Central India Spinning

and Weaving Co. Ltd. Underwriting, on a substantial scale, started in the

Indian Capital market only after World War I. The Tatas started the first

underwriting business in India in 1937, with the setting up of the Investment

Corporation of India ltd.

Underwriting gained momentum and popularity after January 1955, with the

setting up of he Industrial Credit and Investment Corporation of India (ICICI).

Later, other development financial institutions such as Life Insurance

Corporation of India, Industrial Development Bank of India (IDBI) and Unit

Trust of India (UTI) started taking an active part in the underwriting of new

issues, with IDBI being one of the largest.

********

38


39/80

6.Q:Explain the different types of capital market instruments

Introduction

Indian capital market has been experiencing metamorphic changes in the

last decade, thanks to a host of measures of liberalization, globalization, and

privatization that have been initiated by the Government. Pronounced

changes have occurred in the realm of industrial policy, licensing policy,

financial services industry, interest rates, etc. As a result of these changes,

the financial services industry has come to introduce a number of

instruments with a view to facilitate borrowing and lending of money of

money in the capital market by the participants.

Types

Financial instruments that are used for raising capital resources in the capital

market are know as Capital Market Instruments,

The various capital market instruments used by corporate entities for raising

resources are as follows:

1. Preference shares

2. Equity shares

3. Non-voting equity shares

4. Cumulative convertible preference shares

5. Company fixed deposits

6. Warrants

7. Debentures and Bonds

Preference Shares

Meaning

Shares that carry preferential rights in comparison with ordinary shares are

called Preference Shares. The preferential rights are the rights regarding

39


40/80

payment of dividend and the distribution of the assets of he company in the

event of its winding up, in preference to equity shares.

Types

1. Cumulative preference share where the arrears of dividends in times ofno and/or lean profits can accumulated and paid in the year in which

the company earns good profits.

2. Non cumulative preference shares Shares where the carry forward of

the arrears of dividends is not possible.

3. Participating preference shares Shares that enjoy the right to

participate in surplus profits or surplus assets on the liquidation of a

company or in the both, if the Articles of Association provides for its.

4. Redeemable preference shares Shares that are to be repaid at the endof the term of issue. The maximum period of a redemption being 20

years with effect from 1.3.1997 under the Companies Amendment Act,

1996.

5. Preference shares with warrants attached The attached warrants

entitle the holder to apply for equity shares for cash, at a premium, at

any time, in one or more stages between the third and fifth year from

the date of allotment.

Equity Shares

Meaning

Equity shares, also known as ordinary shares are the shares held by the

owners of a corporate entity.

Features

Since equity shareholders face greater risks and have no specific preferential

rights, they are given larger share in profits through higher dividends than

those given to preference shareholders, provided the company performanceis excellent.

A strikingly noteworthy feature of equity shares is that holders of these

shares enjoy substantial rights in the corporate democracy, namely the

rights to approve the companys annual accounts, declaration of dividend

enhancement of managerial remuneration in excess of specified limits and

40


41/80

fixing the terms of appointment and election of directors, appointment of

auditors and fixing of their remuneration.

Equity shares in the hands of shareholders are mainly reckoned for

determining the managements control over the company. Where

shareholders are widely disbursed, it is possible for the management toretain the control, as it is not possible for all the shareholders to attend the

companys meeting in full strength.

Equity shareholders represent proportionate ownership in a company. They

have residual claims on the assets and profits of the company. They have

unlimited potential for dividend payments and price appreciation in

comparison to the owners of debentures and preference shares who enjoy

just a fixed assured return in the form of interest and dividend.

Voting rights are granted under the Companies Act (Sections 87 to 89)wherein each shareholder is eligible for votes proportionate to the number of

shares held or the amount of stock owned.

Capital

Equity shares are of different types. The maximum values of shares as

specified in the Memorandum of Association of the company is called the

authorized or registered or nominal capital. Issued capital is the nominal

value of shares offered for public subscription.

Par Value and Book Value

The face value of a share is called its Par value. Although shares can be sold

below the par value, it is possible that shares can be issued below the par

value. The financial institutions that convert their unpaid principal and

interest into equity in sick companies are compelled to do it at a minimum of

Rs.10 because of the par value concept even though the market price might

be much less than Rs.10.

Par value is of use to the regulatory agency and the stock exchange. It can

be used to control the number of shares that can be issued by the company.The par value of Rs.10 per shares serves as a floor price for issue of shares.

Cash Dividends

These are dividends paid in cash; a stable payment of cash dividend is the

hallmark of stability of shares prices.

41


42/80

Stock dividends

These are the dividends distributed as shares and issued by capitalizing

shares reserves. While net worth remains the same in the balance sheet, its

distribution between shares and surplus is altered.

Non Voting Equity Shares

Consequent to the recommendations of the Abid Hussain Committee and

subsequent to the amendment to the Companies Act, corporate

managements are permitted to mobilize additional capital without diluting

the interest of existing shareholders with the help of a new instrument called

non-voting equity shares. Such shares will be entitled to all the benefits

except the right to vote in general meetings. Such non-voting equity share

is being considered as a possible addition to the two classes of share capital

currently in vogue. This class of shares has been included to an amendmentto the Companies Act as a third category of shares Corporate will be

permitted to issue such shares upto a certain percentage of the total Non-

voting equity shares will be entitled to rights and bonus issued and

preferential offer of shares on the same lines as that of ordinary shares.

Convertible Cumulative Preference Shares (CCPS)

These are the shares that have the twin advantage of accumulation of

arrears of dividends and the conversion into equity shares. Such shares

would have to be of the face value of Rs.100 each. The shares have to be

listed on one or more stock exchanges in the country. The object of the

issue of CCP shares is to allow for the setting up of new projects, expansion

or diversification of existing projects, normal capital expenditure for

modernization and of meeting working capital requirements.

Following are some of the terms and conditions of the issue of CCP shares:

1. Debt-equity ratio: For the purpose of calculation of debt-equity ratio

as may be applicable CCPS are be deemed to be an equity issue.

2. Compulsory conversion: The conversion into equity shares must befor the entire of issue of CCP shares and shall be done between the

period at the end of three years and five years as may be decide by

the company.

3. Fresh Issue: The conversion of CCP shares into equity would be

deemed as being one resulting from the process of redemption of the

42


43/80

preference shares out of the proceeds of a fresh issue of shares made

for the purposes of redemption.

4. Preference dividend: The rate of preference dividend payable on

CCP shares would be 10 percent.

5. Guideline ratio: The guidelines ratio of 1:3 as between preference

shares and equity shares would not be applicable to these shares.

6. Arrears of dividend: The right to receive arrears of dividend up to

the date of conversion, if any, shall devolve on the holder of the equity

shares on such conversion.

7. Voting right: CCPS would have voting rights as applicable to

preference shares under the companies Act, 1956.

8. Quantum: The amount of the issue of CCP shares would be to theextent the company would be offering equity shares to the public for

subscription.

Company Fixed Deposits

Fixed deposits are the attractive source of short-term both for the companies

and investors as well. Corporates favor fixed deposits as n ideal form of

working capital mobilization without going through the process of

mortgaging assets and the associated rigmaroles of documentation, etc.

investors find fixed deposits a simple avenue for investment in popularcompanies at attractively reasonable and safe intrest rates.

Regulations

Since these instruments are unsecured, there is a lot of uncertainty about

the repayment of deposits and regular payment of interest. The issue of

fixed deposits is subject to the provisions of the Companies Act and he

companies (Acceptance of Deposits) Rules introduced in February 1975,

some of the important regulations in this regard as follows:

1. Advertisement: Issue of an advertisement (with the prescribedinformation) as approved by the Board of Directors in dailies circulating

in the state of incorporation.

2. Liquid assets: Maintenance of liquid assets equal to 15 percent

(substituted for 10% by Amendment Rules, 1992) of deposits

(maturing during the year ending March 31) in the form of bank

43


44/80

deposits, unencumbered securities of State and Central Governments

or unencumbered approved securities.

3. Disclosure: Disclosure in the newspaper advertisement the quantum

of deposits remaining unpaid after maturity. This would help highlight

the defaults, if any, by the company and caution the depositors.

4. Deemed public Company: Private company would become a

deemed public company where such a private company, after inviting

public deposits through a statutory advertisement, accepts or renews

deposits from the public other than the members, directors or their

relatives.

5. Default: Penalty under the law for default by companies in repaying

deposits as and when they mature for payment where deposits were

accepted in accordance with the Reserve Bank directions.

6. CLB: Empowerment to the Company Law Board to direct companies

to repay deposits, which have not been repaid as per the terms and

conditions governing such deposits, with a time frame and according to

the terms and conditions of the order.

Warrants

An option issued by a company whereby the buyer is granted the right to

purchase a number of shares (usually one) of its equity share capital at a

given exercise price during a given period is called a warrant. Althoughtrading in warrants are in vogue in the U.S.Stock markets for more than 6 to

7 decades, they are being issued to meet a range of financial requirements

by the Indian corporate.

Both warrants and rights entitle a buyer to acquire equity shares of the

issuing company. However, they are different in the sense that warrants

have a life span of three of five years whereas, rights have a life span of only

four to twelve weeks (duration between the opening and closing date of

subscription list). Moreover rights are normally issued to effect current

financing, and warrants are sold to facilitate future financing. Similarly, the

share, is usually above the market price of the share so as to encourage

existing shareholders to purchase it. On the other hand, one warrant buys

one equity share generally, whereas more than one rights may be needed to

buy one share. The detachable warrant attached to each share provides a

right to the warrant holder to apply for additional equity share against each

warrant.

44


45/80

Debentures and Bonds

A document that either creates a debt or acknowledges it is known as a

debenture. Accordingly, any document that fulfills either of these conditions

is a debenture, issued under the common seal of a company, usually takes

the form of a certificate that acknowledges indebtedness of the company.

Features

Following are the features of a debenture:

1. Issue: In India, debentures of various kinds are issued by the

corporate bodies, Government, and others as per the provision of e

Companies Act, 1956 and under the regulations of the SEBI. Section

117 of the Companies Act prohibits issue of debentures with voting

rights. Generally, they are issued against a charge or the assets of he

company but at times may be issued without any such charge also.

Debentures can be issued at a discount in which case, the relevant

particulars are to be filed with the Registrar of Companies.

2. Negotiability: In the case of bearer debentures the terminal value is

payable to its bearer. Such instruments are negotiable and are

transferable by delivery. Registered debentures are payable to the

registered holders whose name appears both on the debenture and in

the register of debenture holders maintained by the company.

Further, transfer of such debentures should be registered. They are

not negotiable instruments and contain a commitment to pay the

principal and interest.

3. Security: Secured debentures create a charge on the assets of the

company. Such a charge may be either fixed or floating. Debentures

that are issued without any charge on assets of the company are called

unsecured or naked debentures.

4. Duration: Debentures, which could be redeemed after a certain

period of time are called Redeemable Debentures. There are

debentures that are not to be returned except at the time of winding

up of the company. Such debentures are called Irredeemable

Debentures.

5. Convertibility: Where the debenture issue gives the option of

conversion into equity shares after the expiry of a certain period of

time, such debentures are called Convertible Debentures.

45


46/80

6. Return: Debenture have a great advantage in them, in that they

carry a regular and reasonable income for the holders. There is a legal

obligation for the company to make payment of interest on debentures

whether or not any profits are earned by it.

7. Claims: Debentures holders command a preferential treatment in the

matters of distribution of he final proceeds of he company at the time

of its winding up . There claim of preference and equity shareholders.

Kinds

Innovative debt instruments that are issued by the public limited companies

in India are described below:

1. Participating debentures

2. Convertible debentures

3. Debut-Equity swaps

4. Zero-coupon convertible notes

5. Secured Premium Notes (SPN) with detachable warrants

6. Non-Convertible Debenture (NCDs) with detachable equity warrants

7. Zero-interest Fully Convertible Debentures (FCDs)

8. Secured Zero-interest Partly Convertible Debentures (PCDs) with

detachable and separately tradable warrants.

9. Fully Convertible Debentures (FCDs) with interest (optional).

10. Floating Rate Bonds (FRB)

1. Participating debentures: Debentures that are issued by a bodycorporate which entitle the holders to participate in its profits are

called Participating Debentures. These are the unsecured corporate

debt securities. They are popular among existing dividend paying

corporate.

2. Convertible debentures

46


47/80

a) Convertible debentures with options. Are a derivative of convertible

debentures that give an option to both the issuer, as well as

investor, to exist from the terms of the issue.

b)Third party convertible debentures are debts with a warrant that

allow the investor to subscribe to the equity of a third firm at apreferential price viz-a-vis market price, the interest rate on the

third party convertible debentures being lower than pure debt on

account of the conversion option.

47


48/80

3. Debt-equity swaps: They are offered from a n issuer of debt to swap

it for equity. The instrument is quite risky for the investor because the

anticipated capital appreciation may not materialize.

4. Zero-coupon convertible note: These are debentures that can be

converted into shares and on its conversion the investor forgoes all

accrued and unpaid interest. The Zero-coupon convertible notes are

quite sensitive to changes in the interest rates.

5. SPN with detachable warrants: These are the Secured Premium

Notes (SPN) with detachable warrants. These are the redeemable

debentures that are issued along with a detachable warrant. The

warrant entitles the holder to apply and get equity shares allotted,

provided the SPN is fully paid. The warrants attached it assured theholder such a right. No interest will be paid during the lock-in period

for SPN.

6. NCDs with detachable equity warrants: These are Non-

Convertible Debentures (NCDs) with detachable equity warrants.

These entitle the holder to buy a specific number of shares from the

company at a predetermined price within a definite time frame.

7. Zero interest FCDs: These are Zero-interest Fully Convertible

Debentures on which no interest will be paid by the issuer during the

lock-in-period. However, there is a notified period after which fully

paid FDCs will be automatically and compulsorily converted into

shares.

8. Secured Zero interest PDCs with detachable and separately tradable

warrants. These are Secured Zero interest Partly Convertible

Debentures with detachable and separately tradable warrants.

9. Fully convertible debentures (FCDs) with interest (Optional):

These are the debentures that will not yield any interest for an initial

short period after which the holder is given an option to apply for

equities at a premium.

10.Floating Rate Bonds (FRBs):These are the bonds where the yield is

linked to a benchmark interest rate like the prime rate in USA or LIBOR

in the Euro currency market. For instance, the State Bank of Indias

floating rate bond, issue was lined to the maximum interest on term

48


49/80

deposits that was 10 percent at the time. The floating rate is quoted in

terms of a margin above or below the benchmark rate. Interest rates

linked to the benchmark ensure that neither the borrower nor the

lender suffer from the change sin interest rates. Where interest rates

are fixed, they are likely to be inequitable to the borrower when

interest rates fall and inequitable to he lender when interest rates rise

subsequently.

************

49


50/80

SET 2

1. Explain the different types of merger.

Merger Types

Mergers are of different types as discussed below:

1. Horizontal merger: Where two or more companies that complete in

the same industry amalgamate, it is a case of horizontal merger. The

objective of horizontal merger is to expand the firms operations in the

same industry through the substantial economies of scale and through

the elimination of competition. The merger of Tata oil Mills Ltd. With

the Hindustan Level ltd. Is an example of a horizontal merger. Under

horizontal merger combination of two or more firms that are engaged

in similar type of production, distribution or area of business takes

place. For instance where two or more cement manufacturing

companies are combined, it makes the form of horizontal merger.

2. Vertical merger: A company is said to be adopting a vertical

integration strategy where it seeks to participate in other links in the

value chain by remaining in the same industry by acquiring suppliers

or production technology, or acquiring sales or distribution capacity.

Where two or more companies that operate in the same industry but at

different stages of production or distribution system amalgamate, it is

a case of vertical merger. Vertical merger happens by means of

combination of two or more firms that are engaged in different stages

of operation, production or distribution. For instance, where a

company that manufactures laptops combines with a company that

markets laptops, it is a case of a vertical merger.

Vertical merger may take the form of either a forward merger or a

backward merger. A backward merger happens where a

manufacturing company joins with a company that supplier raw

material. On the other hand, a forward merger happens where a

company that supplies raw material joints hands with a company themanufacturers.

3. Diagonal Merger: A company is said to be adopting a diagonal

integration strategy where it pursues an acquisition that involves both

horizontal and vertical elements. Under this merger strategy, content

and intellectual property ownership is combined with distribution

50


51/80

technology and infrastructure, resulting in so entirely new media

industry.

4. Forward merger: In a forward merger, the shareholders of the target

company exchange their shares for the shares of the acquiring

company and all of the assets and liabilities of the target company areautomatically transferred to the acquire.

51


52/80

5. Reverse merger: In a reverse merger, the shareholders of the

acquiring company exchange their shares for shares of the targetcompany. It is a case of the acquiring company merging into the

target company. Where a prosperous and profit making company

acquires a loss-making sick company with substantial erosion in its net

worth, it is a case of reverse merger.

6. Forward triangular merger: In a forward triangular merger, a

subsidiary company is formed by the parent company for the purpose

of engaging in the merger deal. A parent company funds a subsidiary

formed for this purpose. The stock of the parent company is

transferred to the target company by the subsidiary.

7. Reverse triangular merger: In a reverse triangular merger, the

parent company funds a subsidiary company with stock of the parent.

The shareholders of the target company exchange their stock for the

stock of the parent company, which is held by the subsidiary company.

8. Conglomerate merger: A company is said to be adopting a

conglomerate merger strategy where it makes acquisitions across

different industries. Where several firms engaged in unrelated lines of

business activity combine together to for a new company, it takes the

form of conglomerate merger.

A conglomerate takeover or merger involves the coming together of

two companies in different industries i.e. the businesses of the two

companies are into related to each other horizontally (in the sense of

producing the same or competing products), or vertically (in the sense

of standing towards each other in the relationship of supplier and

buyer, or potential supplier and buyer).

A co generic merger is said to take place where the companies that are

getting merged are engaged in complementary activities and not in

direct competitive activities, amalgamate to form a new company. The

coming together of a car manufacturer with a scooter manufacturer is

an example of a co generic merger.

Conglomerate takeovers or mergers may in turn be classified

according to the purpose of the dominant party. The dominant party

52


53/80

may itself be a fully-fledged conglomerate company, i.e. a holding

company staffed by professional managers exercising management

control over a substantial number of subsidiaries in a wide range of

industries.

To dominant party may be a financial conglomerate, i.e. the groupmay have been put together largely on the basis of financial

engineering by the holding company, usually be exchanging its highly

priced quoted securities (frequently in the form of convertible

securities) for shares of companies in a wide range of industries.

9. Negotiated merger: Where merger of two or more companies takes

place after protracted negotiations, it is a case of negotiated merger.

Under this type of merger, the acquiring firm negotiates directly with

the management of the target firm. The merging companies willingly

reach an agreement for the merger proposal. Accordingly, of theparties to the agreement fall to reach an agreement, the merger

proposal will be terminated and dropped out. The merger of ITC

Classic Ltd., with ICICI Ltd., is an example of a negotiated merger.

10.Arranged merger: Where merger of a financially sick company takes

place with another sound company as part of package of financial

rehabilitation under the initiative of a financial body, it is a case of an

arranged merger. Merger schemes are crafted in consultation with

the lead bank, the target firm and the acquiring firm. These are

motivated mergers and the led bank takes the initiative and decides

the terms and conditions of merger.

11.Agreed merger: Where the directors of target firm agree to the

takeover or merger, accept the offer in respect of their own

shareholdings (which might range from nil or negligible to controlling

shareholdings) and recommend other shareholders to accept the offer,

it is a case of agreed takeover or merger. The directors may agree

right from the start or after early negotiations or even after public

opposition to the bid (which may or may not have resulted in an

improvement in the terms of the proposed offer).

12.Unopposed merger: Where the directors of the target firm, while

making a deal with the acquiring firm, do not oppose the offer or

recommend rejection, it is a case of unopposed merger.

53


54/80

13.Defended merger: Where the directors of a target firm decide to

oppose the bid, recommending shareholders to reject the offer and

perhaps taking further defensive action, it takes the form of a

defending merger. The decision to defend may be with the intention

of stopping the take over (which in turn may be prompted either by the

genuine belief of the directors that it is in the interests of the company

to remain independent or by a desire of the directors to protect their

own personal positions) or persuading the bidder to improve its terms.

14.Competitive merger: Where a second bidder (and perhaps even a

third bidder) comes into the scene with a rival bid, it is a case of a

competitive merger. This may be an independent action on the part

of the rival bidder or it may be at the invitation of the directors of the

target firm, who deciding that a takeover is inevitable, feel that the

company comes under the control of a bidder selected by them rather

than the original bidder.

54


55/80

15.Tender offer: Where a bid is made by an acquiring firm to acquire

controlling interest in a target firm by purchasing the shares of thetarget firm at a fixed price. It is a case of tender offer. Under this

type of merger, the acquiring firm directly approaches the

shareholders of the target firm and makes them sell their

shareholdings at a fixed price. The offer prices is generally fixed at a

level higher than the current market price in order to induce the

shareholders to divest their holding in favor of the acquiring firm.

16.Diversification: Diversification is a case of conglomerate merger.

Diversification consists of a company, deriving all or the greater part of

its revenue from the particular industry, acquiring subsidiariesoperating in other industries for one or more of the following reasons.

17. To obtain greater stability of earnings through spreading

activities in different industries with different business cycles or to

diversify out of a static or dying industry.

18. To employ spare resources, whether or capital or management

19. To obtain benefit of economies of scale, particularly in regard to

staff functions (such as personnel, advertising, accounting and

financial) where there are some common factors.

20. To make the company too large to be likely to be the object of a

takeover or perhaps to make it a less attractive object in the case of

defensive diversification.

21. To provide an outlet for the ambitions of management, here

antimonopoly laws make further acquisitions (or perhaps even growth)

in the companys own field impracticable.

Conglomerate takeovers and mergers do not usually raise anti-monopoly

questions, but may do so where it is feared that the firm may abuse its

market power, such as by exerting pressure on firms from which some

companies in the group purchase supplies to place business

Date post:	09-Apr-2018
Category:	Documents
Upload:	mohan-kumar
View:	214 times
Download:	0 times

LOVISHBAJAJ 97

Documents