corporate fincial services

8/7/2019 corporate fincial services

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Financial services


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Financial servicesMeans

Mobilizing and allocating savingsAlso called financial intermediation

Mobilization of investments in to

savings


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Definition

activities, benefits and satisfactionconnected with the sale of money thatoffer to users and customers financialrelated value.


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Merchant banking Merchant banker Rule 2(e)of SEBI defines..

any person who is engaged in the businessof issue management either by makingarrangements regarding selling, buying orsubscribing, to securities as Manager,

Consultant, Advisor or rendering corporateadvisory services in relation to such issuemanagement.


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Merchant banking

includes wide range of activitiessuch as management of customers,portfolio management, underwriting,actins as a banker etc.

It is a service oriented function whichtransfers capital from those who owns itto those who can use it


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Merchant banking-functions Project planning and control

Issue management

Portfolio management -preparation of prospectus

obtaining approval from SEBI

marketing and underwriting

dealing with stock exchanges

press publicity

Counseling

Loan syndication


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Kinds of merchant banksMerchant banks

basis of operations basis of organisation

Category 1

Category 2

Category 3

Category 4

Commercial banks

Financial institutions

Foreign institutions


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Category 1

Manager

advisor

Consultant

Underwriter

Portfolio managerCategory 2

Advisor

Co-manager Underwriter

Portfolio manager

Consultant


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Category 3

UnderwriterAdvisor and

Consultant

Category 4Advisor or

Consultant


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Mutual funds

Are trusts of public members who wishto make investments in the financial

assets of the corporate sector for themutual benefit of members.

Mutual fund is governed by:-

The Co.Act

Indian Trust Act

SEBI


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Structure of mutual fundBoard of Trustees

custodianAMC


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Managing MFs in IndiaSponsorAny corporate body which initiates the

launching of a mutual fund The agency should have a sound track

record and experience in the financialservices for 5 yrs

Minimum contribution of 40 percent ofthe networth

Sponsor apppoints custodian, trustees

& AMC


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Trustees

Persons who hold the property of MF intrust for unit holders

Constituted under Indian trust Act

Under SEBI 75 %of trustees must be independent

of sponsors


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custodiansAgency that keeps custody of the

securities that are brought by the MFmanagers

Participation in clearing system onbehalf of the client

Collecting dividends

Arranging for registration of securities

Timely resolution of descrepancies


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AMC Manages the affairs of MF

Can act as the AMC of one mutual fund With SEBI permission it can act as an

underwriter also


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Classification of MFs

Mutual funds

Open ended Closed ended


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Open ended funds

Open ended funds do not have a maturity.

They can be purchased and sold on acontinuous basis at a NET ASSET VALUErelated price. Such funds provide substantial

liquidity. NAVper unit = (TMV CL)/SU

TMV =total mkt value of the investmentportfolio + written down value of fixed assets

+cost value of other current assetsCL = current liabilities

SU = no of outstanding units in that scheme


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2. Closed ended funds

Its duration are pre fixed. Once the subscription closed end

scheme is so called because its corpusis closed i.e... Corpus of the funds

reaches the predetermined level theentry of investors is closed.


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Sl o Feature Open ended Closed ended

1subsription

Open through outthe scheme

Open for a limited period

2 Corpus The fund raisedfrom public keepsvarying

Fixed

3 Exit Easy & convenient

exit at any time

No exit till closure of the

scheme

4 Liquidation Units can beliquidated anytime

Liquidated only at the end ofthe period

5 Maturity No maturity

period

Fixed MP

6 Listing No listing & not traded in stockexchange

Listed in stock exchange andtraded


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Types of MFs

Area fund

Income fund Lmoney market

Balanced fund

Growth fund

Mutual funs


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Income Fund

These type of funds are aimed atgenerating and distributing regularincome to thee members on a periodicalbasis.

Growth fundThey concentrate mainly on long term

gains. They do not offer regular income

but offer capital appreciation in the longrun


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Area funds/ sectoral fund

invested in various sectors

Gold, silver, real estate,oil & gasindustry

Balanced fund

It is a combination of both income andgrowth fund

Gilt funds

These funds seek to generate funds

Invested in state & central governmentsecurities


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Fund of fund schemes

Funds of one mutual funds are invested in

the units of other mutual fundsLeveraged fund scheme

Funds created out of investment not only

with the amount mobilised from small saversbut the fund managers who borrow moneyfrom capital market

Index funds

Linked to specific index of share pricesTax saving schemes

Certain MF offer rebate on investment made inequity shares


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CREDIT RATINGA specific evaluation about credit

quality of the issuer of securities and is

done for a particular instrument.According to Moodys , ratings are

designed exclusively for the purpose of

grading bonds according to theirinvestment qualities.


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Functions of Credit Ratings Superior information

Low cost information

Basis for a proper risk-return trade off

Healthy discipline on corporateborrowers

Formulation of public policy guidelineson institutional investment


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Benefits Low cost information

Quick investment decision

Independent investment decision

Investors protection


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Types of credit rating

equity

unsolicited

Sovereign

bond

Credit rating


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Bond rating

Rating of bonds or debt instrumentissued by a company, govt. or localbody

Equity rating

Rating of equity shares


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Sovereign rating

Rating a country a to its creditworthiness, political risk etc.

Unsolicited rating

When rating is mad by a credit ratingagency voluntarily and not as per therequest of the company, it is known asunsolicited rating.


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Benefits of CR To investors

1. Superior information at low cost

2. It enables the investors to take quickinvestment decision

3. Stimulates the investors to invest theirsavings in corporate debt instrument


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To corporate borrowers it facilitate company with good rating to raise

funds at a cheaper rate it can be used as a tool for marketing securities

it encourages financial discipline amongcompanies to improve their performance to get

better rating.


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RATING METHODOLOGY

Business analysis

Financial analysis


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CR process1. Submit proposal

2. Written agreement

3. Appoint a team4. Team analysis

5. Presenting the findings

6. Evaluation

7. Present to client

8. Accept or reject

9. If accept,go for notification

10. Periodic review


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CR agenciesCredit rating information services ofIndia limited (CRISIL)

This is the first credit rating agency inIndia and was floated on january1;1988.it was promoted jointly by ICICI

and UTI with an equity capital of Rs.4crores.


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CR agenciesInvestment Information and CreditRating Agency of India Ltd

It has been promoted by IndustrialFinance Corporation of India In 1991.

it is a public limited company with an

authorized capital of Rs.5 lakhs


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CR agenciesThe Credit Analysis and Research

Ltd.

It is promoted by Industrialdevelopment bank of India.

Its main object is credit rating security

analysis and information service


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Venture capital

A financing institution which joins anentrepreneur as a co-promoter in a

project and shares the risks and rewardof the entrepreneur


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Venture capital is usually in the form of

an equity participation. It may also takethe form of convertible debt or longterm loan.

Investment is made only in high risk buthigh growth potential projects.

Venture capital is available only for

commercialization of new ideas andtechnologies


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There is continuous involvement in thebusiness after making an investment bythe investor.

Once the venture has reached the fullpotential the venture capitalistdisinvests his holdings either to the

promotors or in the market ,with anobjective of capital appreciation.


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Disinvest MechanismThe disinvestment options available in

developed countries are:

1. Promoters buy back.

2. Public issue.

3. Sale to other venture capital funds.

4. Management buy outs


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In India, the most popular investmentroute is promoters buy back. this helps

the ownership and control of thepromoter in tact.

Public issue would be difficult &

expensive since first generationentrepreneurs are unknown in thecapital market.

Management buy outs and sale to otherventure capital funds are notconsidered appropriate in India.


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Scope of Venture Capital.Venture capital may take various forms at

different stages of a project. There are4 successive stages of development ofa project:

1. Development of a project idea.2. Implementation of the idea.

3. Commercial production and marketing.

4. Large scale investment to exploit theeconomies of scale and achievestability.


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Scope of venture capitalEstablis

hment

Additional

finance

Start up finance

Seed finance


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Seed finance

In the first stage of development ofthe project ideas, venture capitalistsprovide seed capital for translating anidea in to business propositions.

Start up finance

It is provided at the time when thecompany set up to manufacture a

product or service


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Additional finance

At this stage the company is

commercializing its products on a largescale. Venture capitalist providesadequate funds to develop marketinginfrastructure.

Establishment finance

This is given for the expansion anddiversification of the company.


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Methods of venture financing Equity participation

Venture capital firm participate in equitythrough direct purchase of share buttheir stake does not exceed 49%.

Conventional loan

Under this method, till the assisted unitsbecome commercially operational therate of interest charged shall be a lower

one.


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Conditional loan

Under this method, an interest free loanis provided during the implementationperiod, but it has to pay royalty onsales


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Income notes It is a combination of conventional

and conditional loans.

Both interest and royalty are payableat much lower rates than in case ofconditional loans


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Advantages to Promoters

The entrepreneur for the success ofpublic issue is required to convinceunderwriters, brokers and thousands ofinvestors, but to acquire venture capital

assistance, he just need to sell his idea. Public issue of equity shares has to be

preceeded by a lot of efforts which a

new entrepreneur finds difficult. This ismade easy by the venture fundassistance.


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General A developed venture capital institution set-up

reduces the time lag between a technological

innovation and its commercial exploitation. Venture capital acts as a cushion to support

business borrowings, as bankers andinvestors will not lend money with inadequatemargin of equity capital.

A venture capital firm serves as anintermediary between investors looking forhigh returns for their money andentrepreneurs in search of needed capital for

their start ups.

Origin


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Origin

Venture capital as a new phenomenonoriginated in USA and developedspectacularly world wide. In USA alonethere are 800 venture capital firms.

UKoccupies the second position afterUS in terms of investment in venturecapital.


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Initiative in India.Venture capital is a growing business of

recent origin in the area of industrial

financing in India.

It was started in India by the Tata Ironand Steels and Empress Mills.

The Tatas successfully promoted hi-techenterprises such as CEAT tyres,National Rayon. etc.


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FACTORING

Is an arrangement between a firm anda financial institution under which thelatter takes over the credit , collectionand recovery functions of the former.


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mechanism Negotiation b/w seller and buyer Seller tells to make the payment to the factor

on due date Agreement b/w seller and factor Seller sells without raising BOE Seller delivers invoice to factor Factor makes payment to seller Factor collects debts Makes payment of margin, after deducting

commission


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With recourse factoring

The factor has recourse to the clientfirm in the event of irrecoverable debts

Factor assumes no credit associated

with the receivables

If customer defaults , bad debt loss willbe met by the firm


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With out recourse factoring

No right with the factor to haverecourse to the client

Factor bears loss arising out ofirrecoverable receivables

Charges higher commission called delcredere commission as a compensationfor loss


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Advance & maturity factoring

Factor makes an advance payment inthe range of 70 to 80 %of thereceivables factored

Factor collects interest on the advancepayment from the client


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Collection/ maturing factoring No advance payment

Factor pays on guaranteed paymentdate or date of collection


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typesFull service Old line factoring

Factor has no recourse to the seller inthe event of failure of buyers to makeprompt payments

Occurs due to insolvency/ bankruptcy ofthe buyer

Combination of nonrecourse andadvance factoring


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Bank participation factoringVariation of advance factoring

Factor arranges advance to the clientthrough banker


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Factoring deed

The agreement containing terms andconditions of factoring. including:

Assignment of debt in favour of thefactor

Selling limits for the clientsdetails aboutfactoring fees


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leasing Is a contract where by the owner of an

asset (lessor) grants to another party

(lessee) an exclusive right to use theasset for an agreed period of time, inreturn for the payment of rent.


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MECHANISM OF LEASING

Lessee selects the equipment

lessee enters in to a lease contract withthe lessor

lessor makes the payments to the

equipment deal and lessee takes thepossession of the asset

the lessee continues to discharge his

obligation under the lease agreement


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types

leasing

Financial leasing Operational leasing


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Types of leasingFinancial lease

Here the lessee selects and specifies the equipment and thelessor purchases it and amortizes the capital cost over the leaseperiod.

Lessee uses and maintains the equipment The risk of obscelence is assumed by the lessee It can be with a purchase option

Operating lease Under this lease in addition to providing and financing the

equipment often undertaken to provide services which areoffset against the operation of the equipment.

It is a rental agreement Lessor gives maintenance expenses

Risk of obsolescence lies with the lessor


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Leverage Lease used for financing those assets which require huge capital

outlay , varying from 50 lakhs to 2 crore

Leverage lease agreement involves 3 parties-- lessee, lessor and the lender Lessor acquires the assets as per the norms of the lease

agreement but finances only 20 to 50 % Balance is given by the lender as loansale and lease back

In this type of leasing a firm which has an asset sells it toanother firm which is a leasing company,Which in turn lease itback to the former

The firm receives the sales price in cash and gets the right touse the asset during the lease period

Cross Border lease

Transaction between lessor and lessee in 2 different countries

Leasing Hire purchasing


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Leasing

Legal ownershipwith lessor

Lease rentals are taxdeductable

Cannot be claimedby the lessee

Hire purchasing

Legal ownership istransferred to hireron payment of lastinstallment

Only the interest partof installment isdeductable

Can be

ADVANTAGES


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ADVANTAGES

1. Permit alternative allocation of funds

2. Faster and cheaper credit

3. Flexibility

4. Facilitates additional borrowings

5. Protection against obsolescence

6. Hundred percent financing

7. Boon to small firms


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Advantages to Lessor

Stable business

Tax benefit

Sale of supplies

Second-hand market


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Advantages to Lessee

Efficient use of funds

Cheaper source

Flexible source

Favourable terms


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Disadvantages of Lessee

Higher cost.

Loss of moratorium period.

Risk of being deprived of the use ofasset.

No alterations or change in the asset


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Disadvantages of Lessor

High risk of obsolescence.

Competitive market.

Price level changes.

Management of cash flows.


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Value of lease = Financing provided by

the lease Value of equivalent loan

It represents the NPV

If NPV is negative it is better to buy


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FORFAITINGis a technique by which a financial agency

called forfaiter who discount and export

bill and pay ready cash to the exporterwho can concentrate on the exporttrade without bothering about the

collection of export bill


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STEPS The exporter enters in to negotiation

with a potential buyer of importing

country for delivery of goods Exporter approaches the forfaiter

Forfaiter makes enquiries

Depending upon the nature oftransaction forfaiter gives consent


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Subsequently on delivery of BOE,payment tothe full extent of face value less discount

charge is made by the forfaiter to the bankgiving the guarantee.

On maturity BOE is presented to the bank byforfaiter.

The bank ,whether receiving the payment ornot from the importer ,reimburse the the billamount to the forfaiter.


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SECURITISAT

ION

Securitisation of debt or asset refers tothe process of liquidating the liquid and

long term assets like loans andreceivables of financial institutions likebanks by issuing marketable securities

against them.

C CS O


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MECHANICSOF

SECURITISAT

ION

The Originator

A Special Purpose Vehicle or Trust

A Merchant or Investment BankerA Credit Rating Agency

A servicing Agent-Receiving and Paying

agent. The original borrowers

The Prospective investors

THE SECURITISATION


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THESECURITISATION

PRO

CESS Identification stage

Transfer stage

Issue stage

Redemption Stage

Credit rating stage


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Thankyou

Documents

corporate fincial services