Investment Banking, Credit

Rating, Leasing
Pradeep Kumar Mishra

RFIS – MBA-RM-2019-2`-Term II, 22.10.19

Investment Banking

Investment Banking
 Investment banks
• Financial Intermediaries in the business of
providing investment and financial advisory
services to companies, governments and
institutional investors
 Functions of Investment Banks
• Help in issuing securities in the Primary
Market
• Provide guarantee by standby underwriting
• Advise on M&As and financial advice to
investors
 Types of Investment Banks
• Full service global
• Regional Investment
• Boutique firms
 Investment Banking Services
• Fund raising
• Advisory
• Export and Credit Finance
• M&A
• Promoter and acquisition financing
• Private equity advisory
• Infrastructure advisory
• Strategic advisory
• Debt syndication and structured finance
• Financial restructuring
• Private client services
• Sales and Trading
• Equity Research and Broking
 Merchant Banking Services
• Pre-issue obligations:
• Submitting offer document
• Submitting and undertaking
• Submitting list of Promoters group
• Appointment of intermediaries
• Appointment of Underwriters
• Making offer document public
• Filing a no-complaint certificate
• Appointing authorized collection centers
• Entering into an agreement with depositories
 Post- Issue obligations
• Submitting post-issue monitoring reports
• Redressal of investor grievance
• Maintaining a close coordination with
intermediaries
• Ensuring full subscription of issue
• Verifying post-issue advertisement details
• Finalizing basis of allotment
Credit Rating
 Credit rating
Meaning: Assessment of borrower’s credit quality
: Current opinion of the borrower’s debt service
obligations
Importance : Helps in development of financial markets
:Helps investor and lending agencies in their decision
making process
: A marketing tool for the issuer
: Affects the quantum of fund flows to a
country
Prominent Credit Rating Agencies in India

: CRISIL- Credit Rating Information Services of

India Limited
: ICRA – Investment Information and Credit
Rating agency
: CARE – Credit Analysis and Research Limited
: Fitch- Fitch India
 Rating Methodology
: Based on objective and subjective analysis
Business analysis : Industry risk
: Market position
: Operating efficiency
: Legal position
Financial Analysis: Accounting quality
: Earnings potential
: Adequacy of cash flows
: Financial flexibility
Management Evaluation : Track record, goals, philosophies and strategies of
management
Fundamental Analysis : Liquidity management
: Asset quality
: Profitability
: Interest and tax sensitivity
 Rating Symbols
AAA, AA, BBB, B, C, D
Symbols convey safety grade to the investor
Three Grades
- High investment grades
- Investment grades
- Speculative grades
 CRISIL
- First credit rating agency in India set up in January 1988
- Prominent provider of rating and advisory services : Market leader
- Strategic tie up with Standard and Poor’s USA
- Publicly listed company
Crisil’s subsidiaries : CRIS Infac
: Crisil.com
: Crisil Marketwire
: Global Data service of India Ltd
: The EconoMatters Group of Companies
: Crisil’s Centre for Economic Research
: Crisil’s Investment and Risk Management Services
: India Index Services and Products Limited
 ICRA
• Incorporated on January 16, 1991
• Launched two services in 1992
– Credit Assessment
– General Asessment
• Tied up with Moody Investor Services
• Earnings Prospects and Risk Analysis (EPRA) Group offers two
services:
– Equity Assessment
– Equity Grading
• Launched Corporate Governance Rating Services
 CARE
: Launched in Nov. 1993
: Main Services
- Credit rating of debt instruments
- Information services
- Equity research
- Tied up with Fitch Ratings
 Other CRAs
• Brickwork Ratings
– It is the fifth agency in the ratings business which commenced its
activities from September 24, 2008. It rates IPOs, perpetual bonds of
banks, non-convertible debenture issues, and certificate of deposits.

• Rating Agencies for SMEs

– The rating agencies approved for rating small and medium enterprises
(SMEs) are SMERA, ONICRA, ICRA, CRISIL, CARE, and Fitch
Limitations of Credit rating in India
- Credibility of rating questionable
- Frequent revision of grading
- Competition leading to relaxation of
standards
- Rating process compromised
- Biased rating
- Timely warnings not issued to investors
Leasing and Hire Purchase
 Lease Financing
• Contract between owner of an asset(lessor)
and the user of the asset(lessee) under which
the lessor gives the right to the lessee to use
the asset or equipment for agreed period of
time and consideration called lease rental
 Leasing and Economic Growth
• Complementary tool to bank loan
• Promotes investment in capital equipments
• Leaves line of credit free for working capital
requirements
• Helps startups and small businesses to grow
• Contributes to country’s infrastructure growth
 Types of Leases
• Mainly there are two types of leases
– Financial Lease/Capital Lease
– Operating Lease
• Within the above categories it can also be
– Sale and Leaseback
– Leverage leasing
– Close and open-ended lease
– Upfront and backend lease
– Percentage lease
– 3N lease
– Crossborder lease
 Hire Purchase
• A contract whereby the owner of the goods
lets them on hire to hire purchaser on
payment of rent, tobe paid in instalments and
the title in goods will pass to the hirer on the
payment of last instalment
Difference between Lease and Hire Purchase
• Lease transaction is a commercial arrangement, whereby an equipment
owner or manufacturer conveys to the equipment user the right to use
the equipment in return for rental.
• Hire purchase is a type of installment credit under which the hire
purchaser agrees to take the goods on hire at a stated rental, which is
inclusive of the repayment of principal as well as interest, with an option
to purchase.
• Option to user
• Except the Finance lease. no option is provided to the lessee (user) to
purchase the goods.
• The person becomes owner of the asset after paying the last installment
Nature of expenditure
• Lease rentals paid by the lessee are entirely revenue expenditure of the
lessee.
• Only interest element included in the Hire Purchase installments is
revenue expenditure in nature.
• Components:
– Lease rentals comprise of two elements
• finance charge and
• capital recovery.
– Hire Purchase installments comprise of three elements
• normal trading profit
• finance charge and
• recovery of cost of goods/assets.
• Depreciation: Lessor can claim for the depreciation Hire purchaser
can claim for the depreciation
• Tax Benefit:
• In lease agreement, Lessor can claim depreciation and the lessee
can claim the maintenance and rentals from taxable income.
• Hire purchaser can claim for depreciation and interest payment
from the taxable income where as the seller can claim for the
interest on borrowed fund for purchasing assets.