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MBFS Financial System PPT

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Chapter 1 Chapter 1 INTRODUCTION TO INTRODUCTION TO FINANCIAL SYSTEM & FINANCIAL SYSTEM & FINANCIAL SERVICES FINANCIAL SERVICES MERCHANT BANKING AND MERCHANT BANKING AND FINANCIAL SERVICES FINANCIAL SERVICES
Transcript
Page 1: MBFS Financial System PPT

Chapter 1Chapter 1

INTRODUCTION TO INTRODUCTION TO FINANCIAL SYSTEM & FINANCIAL SYSTEM & FINANCIAL SERVICESFINANCIAL SERVICES

MERCHANT BANKING AND MERCHANT BANKING AND FINANCIAL SERVICESFINANCIAL SERVICES

Page 2: MBFS Financial System PPT

ChapterChapter OutlineOutline Understand the Meaning & Objectives of Understand the Meaning & Objectives of

Financial System.Financial System. Significance of Financial System.Significance of Financial System. Understanding the Components of Financial System.Understanding the Components of Financial System. Understand the Problems in Financial Services.Understand the Problems in Financial Services. Understand the term Merchant Banking & its origin.Understand the term Merchant Banking & its origin. Various services offered by merchant banking.Various services offered by merchant banking. Structure of Merchant BankingStructure of Merchant Banking

Page 3: MBFS Financial System PPT

Financial SystemFinancial System Financial system is a system to canalize the Financial system is a system to canalize the

funds from the surplus units to the deficit funds from the surplus units to the deficit Units.Units.

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Objectives of Financial SystemObjectives of Financial System1. Accelerating the growth of economic development.1. Accelerating the growth of economic development.2. Encouraging rapid industrialization2. Encouraging rapid industrialization3. Acting as an agent to various economic factors such 3. Acting as an agent to various economic factors such

as industry, agricultural sector, Government etc.as industry, agricultural sector, Government etc.4. Accelerating rural development4. Accelerating rural development5. Providing necessary financial support to industry5. Providing necessary financial support to industry6. Financing housing and small scale industries6. Financing housing and small scale industries

Page 5: MBFS Financial System PPT

Indian Financial SystemIndian Financial SystemIndian Financial system consists of four parts:Indian Financial system consists of four parts:1)1) Financial InstitutionsFinancial Institutions2)2) Financial marketsFinancial markets3)3) Financial InstrumentsFinancial Instruments4)4) Financial ServicesFinancial Services

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Financial Institutions

They are responsible for transferring funds from They are responsible for transferring funds from investors to companies in need of those funds. investors to companies in need of those funds. They are divided into regulatory, intermediaries, They are divided into regulatory, intermediaries, non- intermediaries and others. They deal only in non- intermediaries and others. They deal only in financial assets like deposits, securities, etc. They financial assets like deposits, securities, etc. They collect fund from those units having savings.collect fund from those units having savings.

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Financial MarketsFinancial Markets It It is a mechanism that allows people to buy and sell financial is a mechanism that allows people to buy and sell financial

securities (such as stocks and bonds), commodities (such as precious securities (such as stocks and bonds), commodities (such as precious metals, agricultural goods), and other  items of value at low transaction metals, agricultural goods), and other  items of value at low transaction costs and at prices that reflect the true prices.costs and at prices that reflect the true prices. There are two segments of There are two segments of financial market. They are money market and capital market. Money market is financial market. They are money market and capital market. Money market is concerned with short-term funds or claims. concerned with short-term funds or claims. Money market provides working Money market provides working capital capital

Capital market deals with those financial assets, which have maturity period of Capital market deals with those financial assets, which have maturity period of more than a year. more than a year. It is the market for long term funds It is the market for long term funds

Another classification could be primary and secondary markets. Another classification could be primary and secondary markets. Primary market deals with new issues. The secondary market deals with Primary market deals with new issues. The secondary market deals with outstanding securities.outstanding securities.

Primary markets by issuing new securities mobilise the savings directly. Primary markets by issuing new securities mobilise the savings directly. Secondary markets provide liquidity to the securities.Secondary markets provide liquidity to the securities.

Page 8: MBFS Financial System PPT

Financial InstrumentsFinancial Instruments The products, which are traded in a financial The products, which are traded in a financial

market, are called financial assets or financial market, are called financial assets or financial instruments. instruments.

Therefore, there is a variety of securities in the Therefore, there is a variety of securities in the financial markets. Financial assets represent a financial markets. Financial assets represent a claim on the repayment of principal at a future claim on the repayment of principal at a future date.date.

Page 9: MBFS Financial System PPT

Financial ServicesFinancial Services

Financial services include the services offered by both types Financial services include the services offered by both types of companies- Asset Management Companies and Liability of companies- Asset Management Companies and Liability Management Companies.Management Companies.

It refers to the services provided by the finance industry It refers to the services provided by the finance industry It refers to providing services through various credit It refers to providing services through various credit

instruments, financial products and services.instruments, financial products and services.

Page 10: MBFS Financial System PPT

FUNCTIONS OF FINANCIAL SERVICESFUNCTIONS OF FINANCIAL SERVICESFinancial services firms not only help to raise the required funds but also Financial services firms not only help to raise the required funds but also assure the efficient deployment of funds.assure the efficient deployment of funds.

They assist in deciding the financing mix.They assist in deciding the financing mix.

They extend their service up to the stage of servicing of lenders.They extend their service up to the stage of servicing of lenders.

They provide services like bill discounting, factoring of debtors, parking of They provide services like bill discounting, factoring of debtors, parking of short-term funds in the money market, e-commerce, Securitisation of debts, short-term funds in the money market, e-commerce, Securitisation of debts, etc. in order to ensure anetc. in order to ensure anefficient management of funds.efficient management of funds.

Financial services firms provide some specialised services like credit rating, Financial services firms provide some specialised services like credit rating, venture capital financing, lease financing, factoring, mutual funds, venture capital financing, lease financing, factoring, mutual funds, merchant bankingmerchant banking, stock lending, depository, credit cards, housing , stock lending, depository, credit cards, housing finance, book building, etc.finance, book building, etc.

Page 11: MBFS Financial System PPT

FEATURES OF FINANCIAL SERVICESFEATURES OF FINANCIAL SERVICES

It is a customer-intensive industry.It is a customer-intensive industry. Financial services are intangible in nature.Financial services are intangible in nature. Production and supply of financial services must be performed Production and supply of financial services must be performed

simultaneously.simultaneously. Marketing of financial service is people intensive.Marketing of financial service is people intensive. Financial services firms should always be proactive in Financial services firms should always be proactive in

visualizing in advance what the market wants, or reactive to visualizing in advance what the market wants, or reactive to the needs and wants of customers.the needs and wants of customers.

They must always be changing to the tune of the market.They must always be changing to the tune of the market.

Page 12: MBFS Financial System PPT

Merchant bankingMerchant banking Merchant banking may be defined as an Merchant banking may be defined as an

‘institution’ which covers a wide range of ‘institution’ which covers a wide range of activities such as underwriting of shares, activities such as underwriting of shares, portfolio management, project counseling, portfolio management, project counseling, insurance etc…They render all these services insurance etc…They render all these services for a feefor a fee

Page 13: MBFS Financial System PPT

Origin Of Merchant Banking Origin Of Merchant Banking The term merchant banking originated from the The term merchant banking originated from the

London who started financing foreign trade through London who started financing foreign trade through acceptance of billsacceptance of bills

Later they helped government of under developed Later they helped government of under developed countries to raise long term fundscountries to raise long term funds

Later these merchants formed an association which is Later these merchants formed an association which is now called ”Merchant Banking and Securities House now called ”Merchant Banking and Securities House Association”Association”

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DifferenceDifference

Commercial BanksCommercial Banks They deal in Debt & Debt They deal in Debt & Debt

related Financerelated Finance They deal in Debt MarketThey deal in Debt Market They are asset oriented i.e They are asset oriented i.e

they extend loans based on they extend loans based on value of security given value of security given against loansagainst loans

They are Risk AverseThey are Risk Averse Activities are limitedActivities are limited

Merchant BanksMerchant Banks They deal in Equity & They deal in Equity &

equity related financeequity related finance They deal in Money Market They deal in Money Market

& Capital Market& Capital Market They are Management They are Management

oriented.oriented. They are Risk TakersThey are Risk Takers Activities are diverseActivities are diverse

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SERVICES OF MERCHANT SERVICES OF MERCHANT BANKERSBANKERS

PROJECT COUNSELLING :PROJECT COUNSELLING :It includes It includes preparation of project reports, deciding upon preparation of project reports, deciding upon the financing pattern, appraising the project the financing pattern, appraising the project relating to its technical, commercial and relating to its technical, commercial and financial viability. It includes filling up of financial viability. It includes filling up of application forms for obtaining funds from application forms for obtaining funds from financial institutions.financial institutions.

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SERVICES OF MERCHANT SERVICES OF MERCHANT BANKERSBANKERS

Corporate Counselling : It involves giving Corporate Counselling : It involves giving suggestions, opinions, advising the corporate suggestions, opinions, advising the corporate and help them take actions to solve their and help them take actions to solve their problems.problems.

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LOAN SYNDICATIONLOAN SYNDICATION

Assistance is rendered to raise loans for Assistance is rendered to raise loans for projects after determining promoter’s projects after determining promoter’s contribution. These loans can be obtained from contribution. These loans can be obtained from a single institution or a consortium.a single institution or a consortium.

Page 18: MBFS Financial System PPT

ISSUE MANAGEMENTISSUE MANAGEMENT Management of issues involves marketing of Management of issues involves marketing of

corporate securities ie…equity shares, corporate securities ie…equity shares, preference shares and debentures by offering preference shares and debentures by offering them to public.them to public.

Issue Management is divided into twoIssue Management is divided into two 1) Pre Issue Management1) Pre Issue Management 2) Post Issue Management2) Post Issue Management

Page 19: MBFS Financial System PPT

Pre Issue ManagementPre Issue Management Draft and Issue of ProspectusDraft and Issue of Prospectus MarketingMarketing Pricing of IssuesPricing of Issues

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Post Issue ManagementPost Issue Management Collection of Application FormsCollection of Application Forms Screening of ApplicationsScreening of Applications Deciding on AllotmentDeciding on Allotment Mailing of Allotment LettersMailing of Allotment Letters Share certificatesShare certificates Refund of MoneyRefund of Money

Page 21: MBFS Financial System PPT

UNDERWRITING OF PUBLIC UNDERWRITING OF PUBLIC ISSUESISSUES

Underwriting is an insurance to the company Underwriting is an insurance to the company which makes public issues. Raising of external which makes public issues. Raising of external resources is easy for the issues backed by well resources is easy for the issues backed by well known underwriters.known underwriters.

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MANAGERS,CONSULTANTS MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUEOR ADVISERS TO THE ISSUE

The Managers to the issue assist in drafting of The Managers to the issue assist in drafting of prospectus, application forms and completion prospectus, application forms and completion of formalities under companies act , transfer of formalities under companies act , transfer and listing of shares of the companyand listing of shares of the company

Page 23: MBFS Financial System PPT

PORTFOLIO MANAGEMENTPORTFOLIO MANAGEMENT Portfolio refers to investment in different kinds Portfolio refers to investment in different kinds

of securities such as shares , debenture issued of securities such as shares , debenture issued by different companies . It is a combination of by different companies . It is a combination of assets but a carefully blended asset assets but a carefully blended asset combination.combination.

Portfolio management refers to maintaining Portfolio management refers to maintaining proper combination of securities in a manner proper combination of securities in a manner that they give maximum returnthat they give maximum return

Page 24: MBFS Financial System PPT

NRI INVESTMENTNRI INVESTMENT NRIs has to follow lots of complicated rules NRIs has to follow lots of complicated rules

for investing in the shares in India. Merchant for investing in the shares in India. Merchant bankers help them in choosing the shares and bankers help them in choosing the shares and offer expert advice fulfilling government offer expert advice fulfilling government regulations thus mobilising more resources for regulations thus mobilising more resources for corporate sector.corporate sector.

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ADVISORY SERVICE RELATING ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERSTO MERGERS AND TAKEOVERS

Merger is a combination of two or more Merger is a combination of two or more companies into a singe company where one companies into a singe company where one survives and other loses its existence . Ex survives and other loses its existence . Ex Reliance Industries Ltd merging with Reliance Reliance Industries Ltd merging with Reliance Petroleum (RPL)Petroleum (RPL)

Takeover is the purchase by one company Takeover is the purchase by one company acquiring controlling interest in the share capital acquiring controlling interest in the share capital of another company . Ex of another company . Ex Vodafone took over  took over Hutchison-Essar in IndiaHutchison-Essar in India

Page 26: MBFS Financial System PPT

OFF SHORE FINANCEOFF SHORE FINANCE

Merchant bankers help their clients in :Merchant bankers help their clients in : Long term foreign currency loanLong term foreign currency loan Financing exports and importsFinancing exports and imports Foreign collaboration arrangementForeign collaboration arrangement

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BANKS PROVIDING BANKS PROVIDING MERCHANT BANKING MERCHANT BANKING

SERVICES IN INDIASERVICES IN INDIA Commercial banksCommercial banks Foreign banks like National Grindlays Bank, Foreign banks like National Grindlays Bank,

Citibank, HSBC bank etc..Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc..Development banks like ICICI,IFCI,IDBI etc.. Private firms like JM Financial and Investment Private firms like JM Financial and Investment

service , DSP Financial Consultants, Ceat service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Financial Services, Kotak Mahindra, VMC Project Technologies , Morgan Stanley.Project Technologies , Morgan Stanley.

Page 28: MBFS Financial System PPT

SEBI REGULATIONSSEBI REGULATIONS Certificate from SEBI is a must.Certificate from SEBI is a must. It is mandatory for them to be registered with It is mandatory for them to be registered with

SEBISEBI Need an Authorisation from SEBI to carry out Need an Authorisation from SEBI to carry out

the businessthe business

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Criteria of AuthorizationsCriteria of Authorizations Professional qualification in Finance, law or Professional qualification in Finance, law or

Business ManagementBusiness Management Proper infrastructure like adequate office, Proper infrastructure like adequate office,

equipments and manpowerequipments and manpower Employment of 2 persons who have experience to Employment of 2 persons who have experience to

conduct business of merchant bankers.conduct business of merchant bankers. Past track record, experience, reputation & fairness Past track record, experience, reputation & fairness

in all transactionsin all transactions Capital AdequacyCapital Adequacy

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SEBI REGULATIONSSEBI REGULATIONS Category I Merchant bankers : Can act as Issue Category I Merchant bankers : Can act as Issue

managers(Prospectus,Allotment,Refund,Financial managers(Prospectus,Allotment,Refund,Financial structure)structure)

Category II Merchant bankers : Can act only as Category II Merchant bankers : Can act only as comanagers(Advisor,Consultant,Underwriter, comanagers(Advisor,Consultant,Underwriter, portfolio manager)portfolio manager)

Category III Merchant bankers : Can act as co-Category III Merchant bankers : Can act as co-managers but cannot undertake portfolio managers but cannot undertake portfolio managementmanagement

Category IV Merchant bankers: They can merely Category IV Merchant bankers: They can merely act as consultant or advisor to issue of capital act as consultant or advisor to issue of capital

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CAPITAL ADEQUACY NORMSCAPITAL ADEQUACY NORMS Category I : Rs. 5 croresCategory I : Rs. 5 crores Category II : Rs.50 lakhsCategory II : Rs.50 lakhs Category III : Rs.20 lakhsCategory III : Rs.20 lakhs Category IV : NilCategory IV : Nil

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Merchant Bankers as Lead Merchant Bankers as Lead ManagersManagers

S.No Size of the Issue Maximum Number of Lead Managers

1 Less than Rs 50 Crores 2

2 Rs 50 Crores-Rs 100 Crores

3

3 Rs 100 Crores-Rs 200 Crores

4

4 Rs 200 Crores-Rs 400 Crores

5

5 Above Rs 400 Crores 5 or more as prescribed by SEBI

Page 33: MBFS Financial System PPT

Duties of Lead ManagersDuties of Lead Managers Lead Manager has to enter into agreement with the Lead Manager has to enter into agreement with the

company regarding their company regarding their responsibilities,liabilities,functionsresponsibilities,liabilities,functions

Lead Manager cannot be associated with another Lead Manager cannot be associated with another lead manager who is not registered with SEBIlead manager who is not registered with SEBI

He cannot take Issue management if the issuing He cannot take Issue management if the issuing company is its associate.company is its associate.

He has to verify the prospectus of the issueHe has to verify the prospectus of the issue He has to submit Due Diligence certificateHe has to submit Due Diligence certificate

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Duties of Lead ManagersDuties of Lead Managers The lead manager has to ensure the collection The lead manager has to ensure the collection

of specified amount from the underwriters.of specified amount from the underwriters. He is responsible for timely refund of money He is responsible for timely refund of money

to investors who have not been allotted the to investors who have not been allotted the securities.securities.

To mail the share certificate immediately to To mail the share certificate immediately to investors on allotment.investors on allotment.

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GUIDELINES FOR GUIDELINES FOR MERCHANT BANKERSMERCHANT BANKERS

An initial authorization fee and renewal fee can An initial authorization fee and renewal fee can be collected by SEBIbe collected by SEBI

All issues should be managed by at least 1 Lead All issues should be managed by at least 1 Lead ManagerManager

Merchant banker has to submit to SEBI half Merchant banker has to submit to SEBI half yearly unaudited financial results to monitor the yearly unaudited financial results to monitor the capital adequacy.capital adequacy.

Each merchant banker should follow the code of Each merchant banker should follow the code of conduct prescribed by SEBIconduct prescribed by SEBI

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GUIDELINES FOR GUIDELINES FOR MERCHANT BANKERSMERCHANT BANKERS

Every merchant banker should maintain copies Every merchant banker should maintain copies of balance sheet, Profit and loss of balance sheet, Profit and loss account,statement of financial positionaccount,statement of financial position

Half-yearly unaudited result should be Half-yearly unaudited result should be submitted to SEBIsubmitted to SEBI

Merchant bankers are prohibited from buying Merchant bankers are prohibited from buying securities based on the unpublished price securities based on the unpublished price sensitive information of their clientssensitive information of their clients

Page 37: MBFS Financial System PPT

SEBI AUTHORITYSEBI AUTHORITY SEBI has been vested with the power to suspend or SEBI has been vested with the power to suspend or

cancel the authorisation in case of violation of the cancel the authorisation in case of violation of the guidelinesguidelines

Every merchant banker shall appoint a ‘Compliance Every merchant banker shall appoint a ‘Compliance Officer‘ to monitor compliance of the ActOfficer‘ to monitor compliance of the Act

SEBI has the right to send inspecting authority to inspect SEBI has the right to send inspecting authority to inspect books of accounts, records etc… of merchant bankersbooks of accounts, records etc… of merchant bankers

Inspections will be conducted by SEBI to ensure that Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly compliedprovisions of the regulations are properly complied

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CODE OF CONDUCTCODE OF CONDUCT Should make all efforts to protect the interest of investorsShould make all efforts to protect the interest of investors Should maintain high standards of integrity,dignity and fairness Should maintain high standards of integrity,dignity and fairness

in conduct of businessin conduct of business Should fulfill all obligations in a professional and ethical mannerShould fulfill all obligations in a professional and ethical manner Should not discriminate among the clientsShould not discriminate among the clients Should ensure that prospectus, letter of offer etc.. is available to Should ensure that prospectus, letter of offer etc.. is available to

investors at the time of issueinvestors at the time of issue Should render best possible advice to its clientsShould render best possible advice to its clients Any penal action taken by SEBI should be informed to its clientsAny penal action taken by SEBI should be informed to its clients

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CODE OF CONDUCTCODE OF CONDUCT Should inform the board about any legal proceedings initiated Should inform the board about any legal proceedings initiated

against itagainst it Should abide by the rules of ‘‘Securities and Exchange Board of Should abide by the rules of ‘‘Securities and Exchange Board of

India Regulations,2003 “India Regulations,2003 “ Shall develop its own internal code of conduct for governing its Shall develop its own internal code of conduct for governing its

internal operationsinternal operations Should ensure that any person it employs should have the Should ensure that any person it employs should have the

capacity to be a merchant bankercapacity to be a merchant banker It is responsible for the act of its employees and agentsIt is responsible for the act of its employees and agents Should not create false marketShould not create false market

Page 40: MBFS Financial System PPT

PROBLEMS OF MERCHANT PROBLEMS OF MERCHANT BANKERSBANKERS

SEBI stipulates high capital adequacy norms for authorisation SEBI stipulates high capital adequacy norms for authorisation which prevents young,specialised professionals into merchant which prevents young,specialised professionals into merchant banking businessbanking business

Non co-operation of the issuing companies in timely allotment Non co-operation of the issuing companies in timely allotment of securities and refund of application of money etc.. is of securities and refund of application of money etc.. is another problemanother problem

Yet merchant banking is vast but should develop adequate Yet merchant banking is vast but should develop adequate expertise to provide a full range of merchant banking servicesexpertise to provide a full range of merchant banking services


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