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/ 39
Financial Services
FINANCI RVICES
21.1. Concept of Financial Services
Financial services are the services which are offered by the financial
companies. The financial companies comprise of both Asset Management
Companies and Liability Management Companies. In Asset
Management Companies, there are leasing companies, mutual funds,
merchant bankers and issue/portfolio managers while Liability
Management Companies has the bill discounting and acceptance houses
In other words, the financial service is referred to as the products and
services which are offered by the banks as they provide various kinds of
facilities of financial transactions and other financial activities like
loans, insurance, credit cards, investment opportunities and money
management and also give information on the stock market and other
issues like market ups and downs.
The basic aim of this sector is tovact as intermediary between individual
and institutional investors which will help in financial transactions. The
financial service industry is defined as, “The collection of organisations
which intermediate and facilitate financial transactions of individual and
snsututional investors resulting from their resource allocation activities
through time”. Thus, the financial services comprise of various works
related to change of savings into investment.
2.1.2. Nature of Financial Services
The nature of financial services are given below:
') Intangibility: The financial services are intangible in nature. The
companies need to build goodwill and confidence in the clients for
producing better and efficient financial services, The quality and
mnovations plays an important role for building reliability among
the customers
Customer Orientation: The financial institution selling financial
“srvices needs to study the demand of the customers. By the help of
‘sous studies, the financial institutions makes different strategies
‘clating to the costs, liquidity and maturity consideration of the
"nancial products, Hence, financial services are customer-oriented.
SS s MIA Thind Somester (Financial Markets and Services)
Inseparabitity: The financial institations and its customety Cain
te separated from each other while producing and suppt
Hmnamcial services as both the functions of financial service jg dog
at the same nme
4) Pevishabitity: Pinancial services cannot be stored as they need to
created and delivered to the target customers as per
Tequirements. So. it is important for financial institutions to 8860p,
thar there is match of demand and supply of financial services,
S) Dymamicm: The financial service should be dynamic so that
an be changed according to the socio-cconomics changes in the
coomomy bike disposable income, standard of living, level o
education, ote. The financial services should be efficient so that the
Sew Sereiees can be made by studying the future’ wants of gy
market
LJ} Derivatives and Catalysts: The financial services are derivatives of
Smancal market. So, they also act as a catalyst in the marke
operanon. Kt starts the market operations and help in increasing the
213. Scope of Financial Services
The scope of financial service is as follows:
1) Gross Domestic Product (GDP): The gross domestic product
refers to the financial value of all the finished goods and services
manufactured inside the country in a specific time period. Th?
financial service contributes to the GDP of the country, ar
1
pnstitert horns whieh need different kinds of skilled
hich indirec thy lead to increase in the employment of
Fs mptoyment The financial service requires various kindy of
2)
anni
power ©
many
arntry
the commer
4) Poreig” Direct
gncreasing the fe
jn increasing the
Mobilising of Funds:
investment opportunity
funds of the public
s) Long-Term Loan: The long-term loan is basically required by the
~ industries. The financial service helps in providing cheap and long-
term loan to industries.
6) Insurance: There are various types of financial services. Among
them the most important is insurance. The insui fi al
protection to the consumers.
Investment (FDE: The financial service helps in
sreign direct investment in the country which helps
growth of the country
The financial service helps in increasing the
» among the public leading to mobilising the
2.1.4. Objectives of Financial Services
The various objectives of financial services are as follows:
1) Fund Raising: The required funds can be raised by the help of
financial services from the host of investors, individuals, institutions
and corporate. There are various instruments of finance being used
for raising funds. These kinds of funds are required by the corporate
houses, individuals, etc.
2) Funds Deployment: There are various kinds of financial services
present in the financial markets which help the company in proper
deployment of funds. It also helps in decision-making of financial
mix. The financial service provides various types of services like
bill discounting, factoring of debtors, shifting of short-term funds in
the money market, credit rating, e-commerce and securitisation of
debts for effective funds management.
3) Specialized Services: The various specialised services are being
provided by financial service except banking and insurance like
credit rating, venture capital financing, lease financing, factoring,
mutual funds, merchant banking, stock lending, depositary, credit
cards, housing finance, book-building, ete. These services are
provided by various kinds of institutions and agencies like stock
exchanges, specialized and general financial institutions and non-
banking finance companies, subsidiaries of financial institutions,
banks and insurance companies, etc. 84 MBA Third Semester (Financial Markets and Services) |
There are various kinds of regulatory bodies Present
India like Securities and Exchange Board of India (SEBI), Resery,
Bank of India (RBD and the Department of Banking and Tnsurap, :
of the Government of India which have different types at
legislations and also help in providing various kinds of Functions og
financial services institutions.
4) Regulatio:
5) Economic Growth: The financial services help in increasj
economic growth and development of the country. It is done by th,
help of mobilising the sa ing of the public by investing jg
Productive investments.
Due to this reason, the various developed and developing Countries
which are engaged in the effective financial market has increaseg
the savings and investments.
2.1.5. Classification of Financial Services
The financial services are divided into wholesale financial service and
retail financial services according to the profile of users.
The wholesale financial services are the se:
converting into final retail products. It is use
people.
The retail financial services are
consumptions.
Traditional Activities
Fund/Asset Based Financial
Services
tvices which are used for
d by industry and business
¥
given to the individuals for direct
Fee-Based/Non-Fund Based
Financial Services
Venture Capital Merchant Banking
Factoring Securitization
Forfeiting Credit Rating
Mutual Fund Stock Broking
Lease Financing Letters of Credit (LC)
Hire Purchase Bank Guarantees
Exchange Traded Funds (ETFs)
Consumer Credit / Consumer
Finance
Bill Discounting
Housing Finance soi secvices (UNI 2) a5
il rraditional Activities
Dobe cial inte rmediaries from the past are providing various services
The finan ne C apital and money market activity. The traditional
including ae classified into fund based activities and non-fund based
activin These are also known as assets based financial services and
a ad finane jal services respectively
fee base
1.5.2. nd/Asset Based Financial Services
2.1,~ the financial services are used for making assets or are backed
in this, n which the funds are changed to assets which are known as
Sel financial services, It consists of the following:
+) Lease Financing: A lease is known as the agreement between two
parties known as lessor and lessee. The lessor is the owner of the
asset and lessee is the user of the asset. In this agreement, there is
transfer of asset from lessor to lessee for certain time period; in
return the lessor receives the regular rent. As the lease period gets
over, the asset is returned back to lessor until there is renewal of the
contract.
Hire Purchase: The hire purchase refers to the hiring of an asset for
certain time period and when the time period gets over, there is
purchase of same asset. At the time of sharing of asset, the person
hiring the asset gets the ownership and is allowed to use it. It is
being used for financing of capital goods like industrial finance,
financing of consumer goods and for selling consumer good on hire
purchase as it is a legal advice.
Factoring: Factoring is done when the company requires immediate
money. It is done by selling the account receivable like invoices to a
third party known as factor at certain discount for immediate cash.
This cash is required for continuous working of the business.
Forfeiting: Forfeiting is the way of financing of receivable related
to international trade. It represents to the purchase done by bank and
financial institutions of trade bills/promissory notes instead of
recourse to the seller, The purchase is done by discounting the
documents including the overall risk of non-payment in collection.
The various problems related to collection are accountability of the
purchaser who pays cash to seller after discounting the bills and
notes.
Mutual Fund: Mutual fund is the type of investment in which the
pool of funds is sourced from various investors for investing in
various securities like stocks, bonds, money market instruments and
similar assets. It is managed by the money managers who invest the 86 MBA Third Semester (Financial Markets and Services)
fund capital and tries to get capital gains and income tk
investors of the fund. The portfolio of mutual fund is Organise, te
according to the investment objective given in the Prospectys any
6) Exchange Traded Funds (ETFs): It is traded same like Stocks j
stock exchange. It has the following assets like stocks, commoditi
bonds. They trade near to the net asset value according to the we <0
of the trading day. The ETFs also has a role to monitor varioug i."
like stock index or bond index. ETF is useful for investments ah
are low costs, tax efficiency and stock-like features, The
Y are Very
famous among exchange-traded product.
7) Consumer Credit/Consumer Finance: The term Consumer cre.
means the activities related to giving credit to the cConsumerg fu
empowering them to acquire their own goods required for daily Use
Tt is also known as credit merchandising, deferred paym
installment buying, hire purchase, pay-out-of income scheme, pay.
as-you cam scheme, easy payment, credit buying, installment Credit
plan, etc.
ents,
8) Bill Discounting: The bill discounting or a bill of exchange jg
known as the short-term, negotiable and can easily liquidates Money
market instrument. It is used for financing a transaction in BO0ds
which is trade related instrument.
9) Housing Finance: The housing finance refers to the collection of
all the financial arrangements which are offered by the Housing
Finance Companies (HFCs) for fulfilling the need of housing.
10) Venture Capital: Venture capital includes two words i.e. venture
and capital. Venture refers to the way of doing something whose
Tesult is not known as it is Present with various kinds of loss while
capital refers to human and non-human resources required for
starting the business.
2.1.5.3. Fee/Non-Fund Based Financial Services
The fee based financial does not Provide instant fund but instead it
allows for the creation of funds by the fee charged service. It consists of
the following:
1) Merchant Banking:
The merchant banker can be individual of
institutions like an ui
inderwriter or agent for the companies and
ng securities. They are also involved in broker
or dealer functions, maintain the market for previously issued
securities and also gives suggestion to the investors on the advisory
services. It plays important part in Mergers and acquisitions, private
equity placements and corporate restructuring, jai serview® (Unit 2) 87
credit Rating: The credit rating is the process in which the symbol is
the instrument for some special work which is referred to as
k of present knowledge on related capacity on the issuer to
fe its debt obligation on particular time. The symbols used in
i. jit rang are basically alphabetical or alphanumeric. The
Cree arison of different instruments is easy by the help of credit rating.
The baste objective of credit rating is to inform the investors about the
ive ranking of the default-loss probability for required fixed
avestment in comparison to other rated instruments.
compart
relative
income I
Stock Broking: The stock broking refers to the method of bringing
z buyers and sellers of stock at the stock exchange. It is
of financial service intermediary. It is done by brokers,
kers and sub-brokers who are allowed by the SEBI.
+ can be individual broker, a firm of brokers or a
3)
together the
the function ©
both main bro
The stock broke
corporatised broker.
4) Securitisation: The change of present or future cash inflow of an
individual into tradable security which can be sold in the market is
known as securitisation. These cash inflows can be from financial
assets like mortgage loans, automobile loans, trade receivables, credit
card receivables, fare collections will be security according to esitiel?
borrowing can be raised. Though an individual can take the assistance
of securitisation instruments for efficient economic growth.
5) Letters of Credit (LC): A letter of credit is issued by the bank of
the buyer to the seller which has a written undertaking for repaying
the cost of goods and services given by the seller to the buyer in
place of producing documents required within the precise time,
place and to prescribed bank as stated in the documents which is |
submitted according to the terms and conditions of the LC.
6) Bank Guarantees: The guarantee is the contract between the
issuing bank and the client in which the bank attempt to take the
claims presented by the client on the customer on behalf of which
the bank had guarantee. The payment of default can be taken from
the bank by the client in case the customers do not fill the
obligation. The bank is only liable for the amount declared in the
contract if the amount of default is more than the bank will have to
give the whole amount.
:
2.1.5.4. Modern Activities
The financial intermediaries also have other services besides the
traditional services. These are of non-fund based activity. These are
classified under “New financial products and services’.
a | The different services are as follows
1) 1 provides various project advisory ri
yn of the project report until raising of funds along wi ‘
various government approvals
2 sine » the process involved in for
) The planning and implementing
nd acquisition
services starting fj
preparatic
It assists the corporate customers 1 ¢ apital restructuring
4) Wacts as the trustees to the debenture holders
5) [Tt helps in achieving the better outcome by giving required Change,
in the management structure and management style,
6) I helps in finding the better joint venture partners and also Making
the joint venture agreements which directly help in structuring iy,
financial collaborations and joint ventures,
) I also helps the sick companies by rehabilitating and restructuring
the proper plans in the execution of the scheme.
8) It helps in reducing risk by the help of exchange rate risk, interes
rate risk, economic risk and political risk by using swaps and othe,
derivative products.
we 9) helps in controlling the portfolio of large public sector company,
10) It is involved in risk management service like insurance services,
} buy-back options, etc. '
ee 11) It also gives suggestions to clients on the way of choosing the better
i ‘ source of funds by taking up the various funds, cost, lending time, ete.
12) kt also helps the client in lowering the debt cost and also for
selecting the better optimum debt equity ratio, :
13) It takes the various services associated to the capital market like
i) Clearing services,
ii) Registration and transfers,
iti) Safe custody of securities,
Collection of income on securities,
also helps the companies which are related in credit rating and
‘ant to go public by the issue of debt instruments.
2.1.6. Importance of Financial Services .
The importance of financial services are as follows:
1) Economic Growth and Development: The financial service is ve!
important for economic growth and development. The banking.
saving and investment, insurance and debt and equity provides belP
bep in avg mony, gating ps a rh Bvt en
» getting protection agai
while helps the business in their formation, iecencueiee efficient?
a — ——_ a
Financial services (Unit 2) "9 |
and also for expanding the business both nationally and
internationally. It also helps the poor section of societies as these
services helps in lowering the vulnerability and helping people to
control the availability of assets for making the income and options
which leads to poverty in the society.
2) Contribution in GDP: The financial service sector has the largest
earning which consists of various type of business like merchant
banks, credit card companies, stock brokerages and insurance
companies. It is largest in the world. The financial services
contribute a larger part of GDP.
3) Promotion of Liquidity: The basic feature of the financial service is to
use the money and monetary assets: for producing the goods and
services so for this process there the requirement of regular flow of
money. The money and monetary assets are referred to as the liquidity
in finance. While liquidity can also be known as the money and other
assets which can be changed into cash and reduce the risk of loss.
4) Generate Employment: The financial service also helps in
generating employment in the country as it is in the growth stage. It
is helpful for the developing country like India. It also helps in
expanding the financial market. It helps in increasing the FDI flow
in the country which is required for the growth of the country.
5) Link between Savers and Investors: The financial service helps in
bridging the gap between the depositors and investors which hetps
in increasing the savings and investments. It helps in doing proper
allocation of resources which help in mobilizing the saving of the
public. It also contributes in the continuous upgradation of the
technology. These all factors have increased the growth of the
country on the sustainable basis.
6) Reduce Cost of Transaction and Borrowing: The financial
services has helped in making such financial structure which has the
lower cost of transactions. It has increased the profit on the return to
the savers and it also lowers the cost of borrowing which increases
the rate of saving among the people. The financial services also help
in providing the cheap and long-term loans to different industries.
7) Minimizes Situations of Asymmetric Information: The various
financial services like insurance, pension and portfolio adjustment
helps in providing the financial protection and reducing the
conditions in which the information is not regular and may also
affects the performance of the operators or when one party has the
details while the other does not have. oe MBA Third Semester (Financial Markets and Services)
8) Financial Deepening and Broadening: The financial
helps in developing the Process of financial deepening
broadening, Financial deepening means increasing the fines
assets according to the percentage of Gross Domestic Prod
(GDP). Financial broadening means in increasing the Tumbey
financial assets and also the variety of participants and instrumen”
°) Helps in Projects Selection: The financial services also help;
improving the performance of the investment. It also helps a
Providing the way for exchanging the goods and Services and ie
transferring the economic resources by time and also Seograph,
region and industries.
10) Allocation of Risk: The financial service works in doing opti
allocation of risk bearing. It reduces, merges and trade various 4
of risks which is used in mobilizing the saving and assigning the
credit. The financial services work to make the tisk within the limits
and also reduces the gathering cost and examining the information
to help the operators in decision making.
2.1.7. Challenges Facing Financial Services
The growth rate of financial service is very fast but they also face some
issues and problems. These financial services face Various challenges
for accomplishing the financial demand of the economy. The various
challenges of financial services are as follows: x {
1) Lack of Qualified Personnel: The financial services sector Tequires
the financial creativity. There is lack of qualified and trained
employees to do so. It also reduces the growth of the economy.
2) Lack of Investor Awareness: The investors do not have knowledge
about the new financial Products and instruments which makes it of
no use and the investors also does not get the advantages of
innovative products and instruments,
3) Lack of Transparency: As the financial system is expanding in
various forms both national and international wise but do you the
lack of transparency in keeping the accounts the growth of financial
system is very slow.
_| 4) Lack of Specialization: There is lack of specialization in India &
i each financial intermediary trade in different financial service
without having knowledge in one or two area. While in other
countries the financial intermediaries work only in those area i?
which they are specialized.
a joes (Unit 2)
1 Servi’ on
of Recent Data: The financial intermediaries are not involved
so they do not get any updated information which
pack
earch work
in
ortant for doing any new innovation in the financial service
Fir’
§)
¢ Efficient Risk Management System: Due to globalization
omy the ‘ous multinational companies are entering the
Indian market and importance 18 given to the foreign portfolio
flow of various kinds of currencies which increase
flows There is
various kind of risk like exchange rate risk, interest rate risk,
nomic and political risk.
Regulatory Framework of Financial Services
1.8.
= the regulatory framework has the objective of establishing the
efficient and effective financial institutions and aso assists im
maintaining the stability of the transmission method ee sigs
safeguarding the consumers of the financial services.
tack o
of the econe
the
ecor
‘The reasons for the regulation of financial services are as follows:
1) The market efficiency can be improved.
2) Ithelps in removing the illegal trade practices. |
3) It helps in maintaining the transparency in the operation and
avoiding the case of manipulation. |
4) Ithelps in increasing equality and correctness.
5) It also helps in safeguarding the small investors, depositors,
insurance policy holders and securities investors.
6) Ithelps in avoiding the misconduct in the market.
7) Ithelps in maintaining the stability of the financial system.
8) It helps in taking decisions regarding the plans and policy of
financial system.
9) It helps in representing the international platform which helps in
increasing the coordination with the international financial
administration policy.
10) It checks that the working is done ace
with the financial markets.
11) It manages the financial regulation by issuing orders of cancellation
or termination of licenses, forcing disciplinary sanctions, instructing
corrective methods, etc.
12) Establishing the capability of financial service providers.
13) It helps in providing confidence in the financial system.
14) It reduces the breaching of laws.
ording to the rules concerned :
92 MBA Third Semester (Financial Markets and Services) INN,
The regulatory framework present in India is shown below:
Regulatory Framework of
Financial Services
Banking and
Financing Services Insurance Services
Tavestment Services Merchant Banking and
Other Services
1) Banking and Financing Services: The banks handle two
functions which also determine their growth. These functions are
Savings and investments. The working of the banking and financia)
institutions is controlled by Central Government and RBI. The
central government and RBI help in maintaining the growth of
economy according to the requirement. The RBI by the help of
RBI Act and Banking Regulation Act.controls all the financial
institutions which are related to saying and capital formation,
There are various other laws for institution which are involved in
raising and lending the capital. °
The various regulations for banking institutions are as follows:
i) New Branch: It gives permissions for establishing new bank or
new branch. 2 oe)
ii) Capital: It suggests the minimum capital, reserves and need of
profit and reserves, dispersion of dividends, the. amount
requirement for minimum cash reserve and other liquid assets.
iii) Inspection: The proper monitoring and maintenance on the
functioning of the banks.
iv) Appointment: The various appointments of Chairman and
Chief Executive Officer of Private banks and nominating
members to the Board of Directors done.
v) Monetary Policy: The planning and implementation of
monetary and credit policy for effective regulation of credit
flows. Maintenance of certain amount by deciding Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR). The various
{reasury operations are done by the regular issue of bonds and
repos.
vi) Credit Control: The various qualitative and quantitative credit
control method are used for managing credit flow to different
industries. — - ieee isa
Pinar jai Services (Unit 2) ‘
na
vii) Other Services: The various other services like regulating
factoring, bill discounting and credit card services are offered
py the banks
Services: The Insurance Act, 1938 was made for
managing the insurers prior to the nationalisation of life and general
insurance. The LIC formed in 1956 and GIC was formed in 1973
are the big institutions in insurance service. The nationalisation of
the insurance companies has changed the working of the Act. The
atory functions came along with LIC and GIC.
>) Insurance
regul
The RBI appointed the Malhotra Committee in 1993 for providing
ways to enhance the functioning of various insurance services
present in India so the Insurance Regulatory Authority (IRA) was
framed in 1996.
The IRA performs the following works for both public and private
insurance company:
i) Orderly Growth: The regulation and promotion of the
insurance business leads to the orderly growth.
ii) Exercise of Powers: The various powers and functions of the
controiler of Insurance under the Insurance Act, 1938, LIC Act,
1956 and the General Insurance Business (Nationalization) Act,
1972 or any other law relating to insurance in force at the time it
is exercised and performed.
iii) Protecting Policy-Holders: The various interest of policy-
holders like assigning of policy nomination by policy-holders,
insurable interest, settlement of insurance claims, surrender
value of policy and other terms and conditions of contract
insurance, besides controlling and regulating the rates,
advantageous terms and conditions that are offered should be
protected by the insurer. |
iv) Professionalization: The professional organisation related to
the insurance business should be controlled and promoted.
vy) Information: The various information of the inspection, —
enquiries and investigation including audit of the insurers,
insurance intermediaries and other organizations related to the
insurance business can be called by the governing body.
accounts with all the statements of accounts is prescribed to the
vi) Books Maintenance: The way of maintaining the books of |
insurers and other insurance intermediaries. 1
MBA Third Semester (Financial Markets ani Serviceyy
Investment Services: The various fund-based ac “Vite
| funds and venture capital is related to the in &
vices. In the same way, the stock exchange and stock
' ion is also related with the investment activiiet
regulations followed by them can be discussed with n
investment activities. The Securities Contracts (Regulationy)
SCRA), 1956, SEBI Regulations and Reserve Bank Of hg
comprises of the regulatory is defined.
4) Merchant Banking and Other Services: The working OF iffy
types of intermediaries related to the management of Public
night issue of capital like merchant bankers, underwriters ty
market-makers, registrars, —_ advisors, collection
advertisement consultant, debenture trustees, credit ratin;
et, are controlled by various guidelines of SEBI
explained as follows:
i) SEBI (Merchant Banker) Regulation, 1992;
ti) SEBI Rules for Underwriters;
ii) SEBI (Brokers and Sub-brokers) Regulation, 1992;
iv) SEBI Rules for Registrars to an Issue and Share
Agents, 1993; and “
¥) SEBI (Bankers to an Issue) Regulations, 1994.
Uge
The regulations for merchant bankers and other intermediaries ae
as follows: tine
1) The business should be registered with SEBI prior to the
commencement of business according to the related rules and
regulations. a aah
ui) The various rules and certification relating to the net-worth,
capital adequacy and code of conduct should be followed.
iii) The proper monitoring of the books and records should be done
and also various investigations should be done on the working
of intermediaries. The accurate measure should be suggested
wherever required. ri
iv) All the guidelines of SEBI should be followed and the ‘due
diligence certificate’ should also be issued.
¥) The SEBI guidelines for Disclosure and Investor Protection
1992 related to the issue of capital and SEBI (Substantial
Acquisition of Shares and Takeover) Regulations, 1994
to the method to be followed by the acquirer and the merchat!
banker for such acquisition of shares should be followed. services (Unit 2) 95
ancial SE 5 . .
fo Growth of Financial Services in India
2. rious stages of growth of financial services in India are as
eva
follows:
Merchant Banking Era
Investment Companies Era
Depositary Era
Modem Services Era
Legislative Era
anking Era: The merchant banking era consisted of
the period between 1960 and 1980. In this period, there was growth
in various kinds of financial services like merchant banking,
insurance and leasing services. The functions of merchant banking
are as follows:
i) The project should be identified, the feasibility reports should
be prepared and the detail project reports should be prepared.
ii) The various tarketing, managerial, financial and technical
analysis should be done on behalf of the customers.
The accurate capital structure can be made by the help of
merchant banking.
It acts as the link between the capital market and the fund-
seeing institutions.
v) Ithelps in underwriting.
vi) It helps the companies in listing the issues on the stock
exchange.
vii) It also suggests various ways of doing mergers and
acquisitions. :
viii)It helps in giving technical suggestions on leveraged buyouts
and takeovers.
ix) It helps in providing syndication ability by providing project
finance.
x) It helps in providing working capital loans.
1) Merchant Bi
iii)
iv)
2) Investment Companies Era: In this era, there was introduction of
various investment institutions and banks. These investment
institutions comprise of the Unit Trust of India (UTD, Life
Insurance Corporation of India (LIC) and the General Insurance
Corporations (GIC). The UTI is the largest public sector mutual
— ree, | eens uaa
6 MBA Third Semester (Financial Markets and Services) y
fund in the world. The LIC is related with the life insur
business. It is a public monopoly, The various Private insur,
companies was nationalised in 1970. After the nationalisation,
insurance company was made as the holding company which
four subsidiaries for managing the general insurance business jn
public sector. At the end of 1970, the leasing business has come
Earlier these companies were working on the ae
financing but now the leasing of various operations like financigy
Operating and wet leasing was done.
3) Modern Services Era: During 1980s, there was the introduction of
financial products and services. The financial Service Consists of
over-the-counter services, share transfers, pledging of shares,
mutual funds, factoring, discounting, venture capital and credit
rating. The mutual fund industries for increasing ‘the savings habit
among the people introduced various innovative schemes for
mobilisation of savings. The mutual funds have the transparent asset
and liability management which help the investors in gett
increased and constant return on the investment done by them.
The credit rating was the important financial service introduced by
Indian financial sector. The introduction of the credit rating system
was done for increasing the confidence of ifivestors and also for
increasing the participation in the capital market operations and also
encouraging the better and effective financial discipline in the
system. Another important advancement took place by preparing the
structure of venture capital funds. The short-term financing for
domestic and international trade was factoring. The introduction of
commercial banks in financial service leads to the change in the
financial system in India.
_ 4) Depositary Era: There was the introduction of depositories in this
era for combining the Indian financial sector industry with the
global financial service industry and for encouraging the paperless
trading by the help of dematerialisation of shares and bonds. The
trading in “Gilts” was permitted by Central Government in 1997-98
by introducing the Stock-Lending Scheme. It prepared individual
department to deal with the trading of Gilts. Another method for
establishing effective financial service sector in India is the
introduction of book-building with the help of both the investors
and fund users. The various online trading platforms were brought
up by Bombay Stock Exchange, the Delhi Stock Exchange and the
computerization of the National Stock Exchange. It will help in
building the better financial service market in India. ah SySTRL gS CRUE MQ asx
: Z ices uot?) FEB JX Bg CLAN 9
spancil S° ive Bra: There were various legislations framed in this era
5) Lents ing the financial service sector. The FEMA was replaced
™ for deve A. The change was done by introducing the separate
py FER a for internet trading. There were amendments done in
regis panies Act, Income Tax Act, etc., for increasing safe and
en “ding and clearing of transactions.
“ ; Era: The government introduced economic reform which is
6) Ng important for the various participants. The disinvestment
very
slines are given by SEBI in which the Foreign Institutional
Cae (Ells)-are allowed to work in the Indian capital market. It
or giving entry to the foreign investors in the Indian capital
nd enchasing the growth and development.
guid
‘ket a
MERCHANT
NKING
22.1. Meaning & Definition of Merchant Banking
A merchant bank may be defined as a financial institution, which
extends financial support to business organisations in the form of share
ownership, in lieu of loans. It also offers advisory services to such
organisations on corporat matters, in which it has an expertise. There is
another class of banks known as investment banks, which specialise in
the creation of capital for others, such as companies, Governments and
other entities. The activities of investment banks include underwriting in
respect of new debts/equities for their clients, providing support in sale
of securities, facilitating mergers and acquisitions, reorganisations, and
broker trades for investors (institutions as well as individuals). They
also provide guidance to issuers regarding the issue of stocks.
There is a striking similarity between the activities undertaken by the
merchant banks and investment banks. In fact in some countries, they
are referred to as synonyms engaged in the same kind of activities.
Nonetheless, there are some minor differences between the above two.
While the activities of a merchant bank are exclusively fee-based, the
activities of an investment bank may be fee-based as well as fund-based.
Further, the investment banks commit their own funds. However, any
distinction between the two is mostly theoretical, and in practice there is
hardly any difference in their activities.
Traditionally, merchant banks frequently venture into the area of
ae underwriting, whereas a number of merchant banks undertake
activities of trade financing.
i oS MBA Third Semester (Financial Markets and Services)
)
\ merchant bank is different from a traditional bank in as mu my
definition of banking does not apply to them. They do not 4,
deposits for their safekeeping, and inte thereon. Their Actiy
are altogether different from the ivities undertaken by g
banking company, as defined under the Section 5 of the Be
Regulation Act, 1949, which states “Banking” means accepting
the purpose of lending or investment, of deposits of money from
hen
ay
GRE.
public, repayable on demand or otherwise, and withdrawal by oj
draft, order or otherwis “Banking Company” Means
company which transacts the business of banking [in India]”,
Merchant banks constitute highly specialised and Profession
managed financial institutions, which have expertise in tendering aig
to their clients with regard to wealth creation, after undertaking
appropriate risk-analysis exercise in respect of monies Teceived
them. Such expert advice may relate to the securities underwriting,
and bond trading, mergers and acquisitions, private equity: pl;
Corporate restructuring, syndication of loans, pricing of securities, eto,
Rule 2(e) of SEBI (merchant bankers) Rules 1992, defines who a
merchant banker is, “Merchant banker means any person Who js
engaged in the business of issue management either by making
arrangements regarding selling, buying or, subscribing to. Urities ag
manager-consultant, advisor or réndering cétporate adviso “service it
relation to such issue management”. 4 a) i. ’
According to M.J. Rosenberg, merchant bank as,..“An organisatin
that underwrites securities for corporations, advices. such, clients on
mergers, and is involved in the ownership of commercial ventures”,
According to D.Cox, “Merchant banks are the financial institutions
providing specialist services which generally include the acceptance of
bills of exchange, corporate finance, Portfolio management and. other
banking services”.
2.2.2. Scope of Merchant Banking
The various scope of merchant banking are as follows:
1) Growth of New Issues Market: As the Indian market is among the
largest growing market so the various domestic and foreig?
investors are entering the market for doing business. The varios
types of public and private problems are also arising.
2) Entry of Foreign Institutional Investment: There is globalisatio®
in the Indian capital market. There is permission given (0 a
foreign institutional to invest in India as they require the sugges" tM
< (Unit 2)
jal Service ‘
Financ’! n
from merchant banks for the business in India. The var! number
of joint yenture also need different types of services of Merchant
Banks
Changing Policy of Foreign Investments: There is liberalisation in
the policy making. The foreign investments need the services of
Merchant Banks for project appraisal, financial management,
financial re-structuring, etc,
Development of Debt Market: The debt instrument helps in raising
Jarge amount of capital for the business. The making of debt market
js also done by merchant banks.
Innovations in Financial Instruments: The innovative financial
instrument has increased. The merchant banks are the origin of these
innovative type of financial instruments.
Corporate Re-Structuring: The liberalisation and globalisation are
the reason for the capital structuring. The presence of competition in
the corporate sector is the reason for corporate re-structuring. The
companies also adopt corporate re-structuring if they want to change
their strategies, structure and working.
2.2.3. Objectives of Merchant Banking
Merchant bankers play an important role in Indian financial sector as
they facilitate in achieving following objectives:
1)
2)
3)
4)
5)
6)
7)
8)
9)
They help in creation of capital;
Merchant banking activities are the forces behind the formation of a
secondary market, which encourages the industrial activities in our
country;
Merchant banks facilitate and boost economic entrepreneurship;
They undertake various jobs pertaining to the preparation of project
reports, conduct of market research and pre-investment surveys;
Appropriate financial support is extended by the merchant bankers
to venture capitalists;
A data bank is constructed as human resources by them;
They are also the providers of housing finance;
Merchant bankers are an important source of seed capital for start-
Up organisations;
The area of issue management is one of the core activities of the
merchant bankers;
10) Underwriting is another area in which the merchant bankers have an
expertise;
MO Aa clan a ae name caey
ow — ——— 100 MBA Third Semester (Financial Markets and Sery
11) They identify new projects on behalf of their clients,
provide assistance in obtaining various approvals from dit,
Government departments; i
12) They extend services regarding provision of financial cle,
13) Mobilisation of public funds is facilitated by the merchant beg
14) National savings are channelised towards productive areag ty
merchant bankers; j
15) For the larger interests of all the concerned, investors’ conf
are arranged by them from time to time;
16) For the purpose of ‘listing’, they seek the necessary Petsson,
behalf of their clients, from that stock exchanges,
17) As part of their role as ‘issue managers’, they are responce;
getting the data in respect of the application money collect,
various branches of banks on a day-to-day basis;
18) Appointment of bankers, brokers, underwriters, etc. are done by
merchant bankers;
19) In the cases of ventures undertaken by NRIs, merchant bankers
the responsibility of supervising the process on behalf of
clients; and
20) In the area of fund-based activities also, merchant bankers
2.2.4. Types of Merchant Banks ~ ras
Merchant banks may be classified in the following three categories:
1) Full-Service Global Merchant Banks: This category of mercha!
banks are characterised by their world-wide presence and offering:
complete range of services. They are generally large financd)
entities, the services of which are availed by big companic:
generally global giants. Some examples of the full-service glotd
merchant banks are Jefferies, Goldman Sachs, JP Morgan Chase &
Co., Kotak Investment Banking, etc. x a
my Regional Investment Banks: Regional investment banks, 2
___ feferred to as ‘speciality investment banks’, basically cater to
needs of the clients from a particular region. They possess
specialised acquaintance of the market of that geographical a
and as such are in a position to offer the services according to
demands of their clients. Some examples of this catego! ©
merchant banks are SBI Capital Markets, Nomura Holdings,
Maple Capital Advisors, ABN Amro, BNP Paribas, Piper Jafis!
Commerz Bank, Duff & Phelps, etc.
3) Boutique Investment Firms: Investment banks of small -
operational at a local level covering a limited geographical ate® «(unit 2) 101
— al poutique Firms. They offer services in respect of specific
geet Or products, in which they haye an expertise. Their
jndust in the area of advisory services, like merger and
aroricien makes them muc h in demand for specific deals. The
a offered by them are more in the nature of personalized
and at Himes they try to serve as a partner of their clients
1 of being impersonal advisors, Some of the boutique
instead snt firms oper ational in India are as under:
ostine
inve
= Functions of Merchant Banks
2.5- «activities undertaken by merchant banks and’ various
portat .
Tre co aged by them are as follows:
gorviees
Functions of Merchant Banks
Portfolio Manager
1) Underwriter: Underwriters may be defined as a group of financial
institutions/entities, which give an assurance not only for getting an
issue fully subscribed, but also to absorb the balance securities, in
case of failure of the issue to get fully subscribed by the public.
Underwriters are duly paid for the services rendered by them in the
form of commission as agreed upon between the security issuer and
_ the underwriter, which are subject to various terms and conditions
stipulated under the Companies Act. Underwriting services are
provided by the commercial banks, term lending institutions,
investment companies, brokers, etc.
In the overall development of the primary market, the role played by
underwriters is very crucial, although underwriting per-se is not
mandatory for an issuer. Before coming out with the issue, the
issuer appoints underwriter/s, with due discussion with the merchant
banker/lead manager. The details with regard to underwriters are
mentioned in the prospectus issued by the company.
2) Banker: Bankers are yet another constituent of the primary market,
who perform an important role in the market function and its
development. ‘Bankers to an issue’ are the bankers, who are
Tesponsible for the acceptance of application money, from the 4)
ests BO INTL,
yeame nities, THEY also take the
: 2 y
s, for te is of 00 ried oy 10. those
he refune Q j
é ould be 4 of ae
jmar P,
ries who are prima’ ne
are individualsfentie 1 ah iesue DY approaching
; rpg them guitably- Appointiment
‘der the existing
and
ind Semester (Pinan jal M
Broker: Brok
in the business ol
tive investors ©
¢ pros ective inves! :
es issuing compat
c
n)
to do 0° Bro!
yy way of
with the prospectus, to
ppointed by the
broker, if they a
are required 10 ¢ their will eet, sa
copy/copies ‘of which need iy be fi a og vi appointed
i Se : a es the preliminal distribution of
ure as much
the Regis p
er of the issue, ™ F eee
i ner. They attemp' :
ted ide range of potentia
su di
tof the listed companies, ' iv: i
o05% As far as the promoters’ quota is, co cerned (including, the,
their friends and employees,
ue taken by/renoun' the
wed to be paid.
to be paid in respect of the
ts iss
), no brokerage is allo
Similarly, nO brokerage is permitted
following cases: p
i) Ifthe applications are made by the institutioris/banks as part of
their underwriting obligations; and
ii) If, as a result of under-subscription 0!
devolved on the underwriters.
Registrar: The registrar to an issue is essentially an intermediary in
panes marly who undertakes the following activities:
‘ollection of applications alon with the icati
from the investors; 8 ARE aed
ii) Maintenance of a proper
record icati i
received from the ee ons speller
iii) Maintenance of a pro i i
Ne, proper record of monies paid to the seller of
iv) Advising the issuers in taki
lnetdecial z é
of allotment of securities a Sea Ne roeani.to thee
oe ets; consultation with the stock
respect 0!
shareholders,
f the issue, amounts are — £& ; —