1

Micro Finance

Meaning Microfinance refers to small scale financial services for both credits and deposits- that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas- Marguerite S. Robinson. According to International Labor Organization (ILO), Microfinance is an economic development approach that involves providing financial services through institutions to low income clients. In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. Functions of a Microfinance institution: Need India is said to be the home of one third of the worlds poor; official estimates range from 26 to 50 percent of the more than one billion population. About 87 percent of the poorest households do not have access to credit. Recruits and trains responsible, appropriate borrowers, each of whom establishes her small business Helps them form groups that are accountable for each other's loans Distributes funds for loans Meets with groups of borrowers to collect loan repayments and to guide their endeavor.

The demand for microcredit has been estimated at up to $30 billion the supply is less than $2.2 billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the worlds poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance industry has achieved significant growth in part due to the participation of 11commercial banks. Despite this growth, the poverty situation in India continues to be challenging. As we broaden the notion of the types of services micro finance encompasses, the potential market of micro finance clients also expands. It depends on local conditions and political climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more limited market scope than say a more diversified range of financial services, which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district and village level. Scope, Demand and Supply Microfinance Institutions (MFIs) are uniquely positioned to facilitate financial inclusion, and provide financial services to a clientele poorer and more vulnerable than the traditional bank clientele. There is no comprehensive regulatory framework for the microfinance sector in India: MFIs exist in many legal forms. Many mid-sized and large MFIs are, however, acquiring and floating new companies to get registered as non-banking financial institutions (NBFCs), which will help them achieve scale. Growth of micro finance

One of the Worlds Largest Microfinance Markets In 2009, the number of microfinance clients grew from 59 million to 76.6 million in midst of economic challenges Experts predict continued growth of up to 40% annually in coming years Growth concentration shows need for expanding to unserved regions 1. Three states account for half of MFI lending 2. Negative risks of high competition: mass defaults, over indebtedness Challenges and Opportunity of micro finance Microfinance is gathering momentum to become a significant force in India. The selfhelp group (SHG) model with bank lending to groups of (often) poor women without collateral has become an accepted part of rural finance. The paper discusses the state of SHG-based microfinance in India and the opportunity untapped because of the huge existing demand-supply gap. With traditionally loss-making rural banks shifting their portfolio away from the rural poor in the post-reform period, SHG-based microfinance, nurtured and aided by NGOs, have become an important alternative to traditional lending in terms of reaching the poor without incurring a fortune in operating and monitoring costs. The government and NABARD have recognized this and have emphasized the SHG approach and working along with NGOs in its initiatives. In spite of the impressive figures, the supply side of microfinance in India is still presently grossly inadequate to fill the gap between demand and supply but it holds the promise to act as a great opportunity for the financial sector and the economy as a whole. Benefits of Microfinance Customarily, one had to apply for a loan in order to start a business, but that proved to be an obstacle to people with poor credit. However, microfinance institutions now offer basic financial services like savings, insurance and loans to unprivileged people. Microfinance institutions provide such services to the less fortunate; it can be a commercial bank, credit union, credit cooperative, or a financial non-government organization. 1. Provide access to funding

Typically, the less privileged acquire financial services such as loans through an informal relationship, which might prove to be costly and unreliable. In addition, most banks do not view the unprivileged as viable clients due to employment history or unstable credit and lack of financial security. Microfinance institutions often dismiss such requirements by providing small loans at flexible rates. 2. Encourage self-sufficiency and entrepreneurship Unprivileged people might have profitable business plans, but they lack sufficient funds to meet the start-up costs. These loans give clients enough capital to get their plans off the ground and then begin turning revenue. They can pay off their loans in time then continue to gain revenue from the business indefinitely. 3. Manage risk Microfinance can give unprivileged people enough capital stability, which gives them financial security from sudden monetary problems. Also, savings allow for improved nutrition, reduced illness, better living conditions and educational investment. 4. Empower Women Microcredit also empowers women since they are the major beneficiaries. In the past, women were not able to participate in economic activities. Microfinance institutions now provide women with the capital they require to start business projects. This gives them more confidence and allows them to participate in decision making, thereby encouraging gender equality. The main shortcoming to microcredit is that default rates are often high especially when borrowers are not able to pay off their loans due to unexpected circumstances such as illness or death. Feature 1. It is a tool for empowerment of the poorest; the higher the income and better the asset position of the borrower, the lower the incremental benefit from further equal doses of micro-credit is likely to be. 2. Delivery is normally through Self Help Groups (SHGs).

3. It is essentially for promoting self-employment; the opportunities of wage employment are limited in developing countries - micro finance increases the productivity of selfemployment in the informal sector of the economy - generally used for (a) direct income generation (b) rearrangement of assets and liabilities for the household to participate in future opportunities and (c) consumption smoothing. 4. It is not just a financing system, but a tool for social change, specially for women - it does not spring from market forces alone - it is potentially welfare enhancing - there is a public interest in promoting the growth of micro finance - this is what makes it acceptable as a valid goal for public policy. 5. Because micro credit is aimed at the poorest, micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. It has to : a) provide for seasonality (b) allow repayment flexibility (c) eschew bureaucratic and legal formalities (d) fix a ceiling on loan sizes.

Law Applicable Not-For-Profit Entities are trusts, societies and section 25 companies. For-Profit enterprises are Non-Banking Financial Companies (NBFCs). The following legislations regulate the functioning of MFIs in India (i) Reserve Bank of India Act, 1934 The Reserve Bank of India Act 1934 establishes the central bank (Banking Regulatory Authority of India). It is of interest to the question of the regulation of micro-finance in that under a 1977 Amendment it contains provisions for the establishment and operations of non-bank finance companies (Chapter 3-B, Sections 45-I). The non-banking institutions can be a company, a corporation or a cooperative society. A non-bank financial company (NBFC) is a non-banking institution company and takes deposits. NBFCs are registered under this Act (Second Schedule). (ii) Banking Regulation Act 1949 The Banking Regulation Act 1949 covers banking companies. It does not apply to primary agriculture credit societies, cooperative land mortgage banks and any other cooperative society. It is not directly relevant to micro-finance, other than the fact that it coves local area banks and

commercial banks, which are involved in linkage operations. The Banking Regulation Act provides the basis for the licensing of local area banks and mutual benefit societies. (iii) Companies Act 1956 The companies Act 1952 provides the basis for the incorporation of Local Area Banks, NonBank Finance Companies, non-for-profit Section 25 Companies and Nidhis under Section 620. Certain revisions have been proposed in the Companies Act which would allow cooperatives in the form of companies and could offer micro-finance services Co-operative Societies Act of 1904; Mutually Aided Co-operative Societies Act in 1995 (Andhra Pradesh) Societies Registration Act of 1860 and Indian Trusts Act -1882. The term cooperative covers a range of institutions, both formal (stated-owned cooperatives banks) and semi-formal (cooperative societies), which are regulated and/or unregulated. Enterprises registered under the Societies registration or Indian Trusts Acts are semi-formal institutions engaged in micro-finance. The Acts do not provide a basis for any of regulation so far. There is a tax problem in that societies and trusts cannot engage in for-profit activities, including financial services. Co-operative Societies Act of 1904 covers cooperative, SEWA Bank is registered as a cooperative society, under this act but is regulated by the RBI from which it obtained a banking license. With the post liberalization era, market-oriented approach to rural finance advocated a new form of co-operative societies act. Andhra Pradesh enacted the mutually Aided Co-operative Societies Act in 1995, allowing the formation of cooperatives largely immune from government intervention. Three other States subsequently enacted similar legislation (Bihar, Madhya Pradesh and Jammu & Kashmir). The Multi-State Co-operatives Societies Bill Act 2002 is operative currently and it replaces the MCS Act, 1984.

2 Mutual Funds

The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most Glamorous in that it is a young industry where there are changes in the rules of the game every day, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is Achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged Regulatory effort in the history of the country.

WHAT IS MUTUAL FUND?

A Mutual fund is a collective investment vehicle formed with the specific objective of raising money from a large number of individuals and investing it according to a pre-specified objective, with the benefits accrued to be shared among the investor on a pro-rata basis in proportion to the investment.

Mutual Fund Operation Flow Chart

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND

Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice.

Scope of Mutual Funds has grown enormously over the years. In the first age of mutual funds, when the investment management companies started to offer mutual funds, choices were few. Even though people invested their money in mutual funds as these funds offered them diversified investment option for the first time. By investing in these funds they were able to diversify their investment in common stocks, preferred stocks, bonds and other financial securities. At the same time they also enjoyed the advantage of liquidity. With Mutual Funds, they got the scope of easy access to their invested funds on requirement.

But, in todays world, Scope of Mutual Funds has become so wide, that people sometimes take long time to decide the mutual fund type, they are going to invest in. Several Investment Management Companies have emerged over the years who offer various types of Mutual Funds, each type carrying unique characteristics and different beneficial features.

The Indian Mutual Fund has passed through three phases. The first phase was between 1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of Rs. 6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 Funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to 61,028 crores at the end of 1994.

The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund.

As at the end of financial year 2000(31st march) 32 Funds were functioning with Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.

The securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time. Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then.

Currently there are 34 Mutual Fund organizations in India managing 1,02,000 crores.

LEGAL AND REGULATORY FRAMEWORK

The primary authority for regulating Mutual Funds in India is SEBI. SEBI requires all Mutual Funds to be registered with it. The SEBI (Mutual Funds) Regulations, 1996 outlined the broad framework of authorization process and selection criteria. Accordingly, the authorization for the mutual fund will be granted in two steps. The first step will involve approval and eligibility of each of the constituents of the mutual fund viz. sponsors, trustees, asset management company (AMC) and custodian. For this purpose the interested parties would be required to submit necessary information only in on prescribed formats). The second stage will involve formal authorization of the mutual funds for business. For this purpose the sponsor or the AMC would be required to apply to SEBI in an application form for authorization along with an application fee to be specified later. The authorization shall be granted subject to conditions as may be considered necessary by SEBI and payment of auth9risation fee as may be specified. It shall be SEBI's endeavor to

advise an applicant within 10 to 15 working days of receipt of his letter / application form regarding status of his application. The eligibility of the sponsor will be examined with respect to the following: Sponsor could be a registered company, scheduled bank or all India or State level financial institution;More than one registered company can also act as sponsor for a mutual fund; Joint sponsorship with any of the entities in (a) above will also be eligible, and Sponsoring registered companies could be private or public limited companies either listed or unlisted. Sponsor and where there is more than one sponsor, each of the sponsoring entities, must have a sound track record as evidenced by Audited balance sheet and profit and loss .account for last five years; a positive net worth and consistent record of profitability and a good financial standing during the last five years; Good credit record with banks and financial institutions and General reputation in the market; Organization and management, and Fairness in business transactions. BENE FITS O F IN VESTING IN MUTUAL FUNDS

Professional Management: -Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that anal yses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

Diversification: -Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. We achieve this di versification through a Mutual Fund with far less money than we can do on our own.

Convenient Administration: -Investing in a Mutual Fund reduces paperwork and helps us to avoid many problems such as bad deliveries, delayed payments and follow up with brok ers and companies. Mutual Funds save our valuable time and make investing easy and convenient.

Return Potential:-Over a medium to long -term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected secu rities.

Low Costs:-Mutual Funds are a relativel y less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

Liquidity:-In open-end schemes, the investor gets the money back promptl y at net asset value related prices from the Mutual Fund. In closed -end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facilit y of direct repurchase at NAV related prices by the Mutual Fund.

Transparency:-We get regular information on the value of our investment in addition to disclosure on the specific investments made in our scheme, the proportion invested in each class of asse ts and the fund manager's investment strategy and outlook.

Flexibility:-Through

features

such

as

regular

investment

plans,

regular

withdrawal plans and dividend reinvestment plans, we can systematicall y invest or withdraw funds according to our needs and convenience. Affordability:-Investors individuall y may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Well Regulated: -All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularl y monitored by SEBI.

DISADVANTAGES OF MUTUAL FUND

Mutual funds have their drawbacks:

No Guarantees :-No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money. Fees and commissions:-All funds charge administrative fees to cover their day to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund. Taxes:-During a typical year, mo st activel y managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. Management risk :-When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of c ourse, if you invest in Index Funds, you forego management risk, because the se funds do not employ managers. GROWTH AND DEVELOPMENT The Indian Mutual Fund has passed through three phases. The first phase was between 1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of Rs.

6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 Funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to 61,028 crores at the end of 1994 and the number of schemes was 167.

The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund.

As at the end of financial year 2000(31st march) 32 Funds were functioning with Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.

The securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies first share of for the

time. Several private sectors Mutual Funds were launched in 1993 and 1994. The the private players has risen rapidly since then.

Currently there are 34 Mutual Fund organizations in India managing 1,02,000 crores. Latest developments

The Indian mutual funds retail market, growing at a CAGR of about 30%, is

forecasted to reach US$ 300 Billion by 2015.

Income and growth schemes made up for majority of Assets under Management

(AUM) in the country. At about 84% (as on March 31, 2008), private sector Asset Management Companies account for majority of mutual fund sales in India.

Individual investors make up for 96.86% of the total number of investor accounts

and contribute 36.9% of the net assets under management.

The Rs.7.2 trillion Indian Mutual Fund Industry is revisiting its business model to

be in sync with the new norms put in place by the capital market regulator, the Securities and Exchange Board of India, or Sebi.

India has 36 asset management companies (AMCs) and at least some of them are

planning to start their own distribution business instead of selling funds through thirdparty distributors. Among other things, they plan to cut distributors commission by 25-

30 basis points (bps) and shift their focus from frequent churning of funds to managing money for the longer term. One basis point is one-hundredth of a percentage point.

Out of the 32 crore employed Indians, only 2.5% are investors. Many investors,

particularly youth mostly having the dispensable income opt for mutual funds to enter into the securities market indirectly. Hence, potential investors in mutual funds need evaluation not only by financial institutions but also by academicians so that they can make a right choice in their investment decisions. 3 MERGERS IN BANKING INDUSTRY OF INDIA The history of Indian Banking shows that seeds of banking in India were sown back in the 18th century when efforts were made to establish the General Bank of India and Bank of Hindustan in 1786 and 1790 respectively. Later some more banks like Bank of Bengal, Bank of Bombay and the Bank of Madras were established under the charter of British East India Company. These three banks were merged in 1921 and it formed the Imperial Bank of India, which later became the State Bank of India. The period between 1906 and 1911 witnessed the establishment of banks such as Bank of India, Bank of Baroda, Canara Bank, Corporation Bank, Indian Bank and Central Bank of India; these banks have survived to the present. The banking sector in India can be divided into two era i.e. pre-liberalization era and post liberalization era since 1991. The impact of globalization on Indian Banking has caused many changes in terms of regulations and structural. With the changing environment, many different strategies have been adopted by this sector to remain efficient and to surge at the forefront in the global arena. One such strategy is in the course of consolidation is merger and acquisition.

NEED OF MERGERS AND ACQUISITIONS IN BANKING INDUSTRY OF INDIA It is observed in literature that most of the work done on mergers and acquisition is based on financial & accounting aspect like performance of banking institutions based on. We can identify following motives and rationale for mergers. 1. Market Leadership

The merger can enhance value for shareholders of both companies through the amalgamated entitys access to greater number of market resources. With addition to market share a company can afford to control the price in better manner with a consequent increase in profitability. 2. Growth and Diversification Companies that desire rapid growth in size or market share or diversification in the range of their products may find that a merger can be used to fulfill the objective instead of going through the volume consuming process of internal growth or diversification. The firm may achieve the same objective in a short period by merging with an existing firm. In addition, such a strategy is often less costly than the alternative of developing the necessary production capability and capacity

3. Synergy Implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. 4. Risk Managing Bankruptcy and organizational risks, recent studies have established that if merger and acquisitions in banks if allowed in a controlled manner would significantly reduce the bankruptcy risk of the merged entity. Obviously, mergers would also provide these benefits to banks in India reducing their bankruptcy concerns. 5. Economies of Scale With the help of mergers and acquisitions in the banking sector, the banks can achieve significant growth in their operations and minimize their expenses to a considerable extent. Another important advantage behind this kind of merger is that in this process, competition is reduced because merger eliminates competitors from the banking industry. 6. Economies of Scope An ability to grow products and segments and an opportunity to cross sell would enhance revenue. This could also result in more geographic growth. 7. Strategic Integration Considering the complementary nature of the businesses of the concerned companies, in terms of their commercial strengths, geographic profiles and site integration, the amalgamated entity may be able to conduct operations in the most cost efficient manner. The merger an also enable

maximum utilization of various infrastructural and manufacturing assets, including utilities and other site facilities. BENEFITS OF MERGER TO INDIAN BANKS After clearly understanding the motives and rationale for merger, we studied the mergers of 17 banks in India. Following are benefits of mergers to the all participants. Sick banks survived after merger. Enhanced branch network geographically. Larger customer base (rural reach). Increased market share. Attainment of infrastructure.

Laws Regulating Merger (I) The Companies Act , 1956 Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved. Though, section 391 deals with the issue of compromise or arrangement which is different from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure under section 391 etc., all the section are to be seen together while understanding the procedure of getting the scheme of amalgamation approved. Again, it is true that while the procedure to be followed in case of amalgamation of two companies is wider than the scheme of compromise or arrangement though there exist substantial overlapping. (II) The Competition Act ,2002 Following provisions of the Competition Act, 2002 deals with mergers of the company:(1) Section 5 of the Competition Act, 2002 deals with Combinations which defines combination by reference to assets and turnover (a) exclusively in India and (b) in India and outside India. (III) Foreign Exchange Management Act,1999 The foreign exchange laws relating to issuance and allotment of shares to foreign entities are

contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide Foreign Direct Investment Scheme contained in Schedule 1 of said regulation. (IV) SEBI Take over Code 1994 SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations. Similarly the acquirer who has already acquired control of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the same company. (V) The Indian Income Tax Act (ITA), 1961 Merger has not been defined under the ITA but has been covered under the term 'amalgamation' as defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has been given a special treatment in the Income-tax Act since the beginning. The Finance Act, 1999 clarified many issues relating to Business Reorganizations thereby facilitating and making business restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalization. (VI) Mandatory permission by the courts Any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that the high court of the respective states where the transferor and the transferee companies have their respective registered offices have the necessary jurisdiction to direct the winding up or regulate the merger of the companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the arrangements after having sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter the courts would issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger if they are convinced that the impending merger is fair and reasonable. The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially evolved from their own rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise final, conclusive and binding as per the section 391 of the Company act.
(VII) Stamp duty Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in respect of amalgamation; by which property is transferred to or vested in any other person. As per this Act, rate of stamp duty is 10 per cent. 4 Leasing Finance

Meaning of leasing A 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 a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage. Lease financing is based on the observation made by Donald B. Grant: Why own a cow when the milk is so cheap? All you really need is milk and not the cow.

IMPORTANCE 0F LEASE FINANCING Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee. The lessee does not have to pay the cost of asset at the time of signing the contract of leases. Leasing contracts are more flexible so lessees can structure the leasing contracts according to their needs for finance. The lessee can also pass on the risk of obsolescence to the lesser by acquiring those 229 appliances, which have high technological obsolescence. Today, most of us are familiar with leases of houses, apartments, offices, etc.

TYPES OF LEASE AGREEMENTS

Lease Agreements

Capital Lease/Financial Lease

Operation Lease

Sales and Lease Back

Leverage Lease

Direct Lease

FINANCIAL LEASE Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease. Under this lease the lesser recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the

lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also known as capital lease. In India, financial leases are very popular with high-cost and high technology equipment.

ADVANTAGES OF LEASING There are several extolled advantages of acquiring capital assets on lease: (1) SAVING OF CAPITAL Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin Manufacturer Lessor Lessee Lender money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories. (2) FLEXIBILITY AND CONVENIENCE The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. (3) PLANNING CASH FLOWS Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets. (4) IMPROVEMENT IN LIQUADITY Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.

LEASING IN INDIA Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly 1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan. The prospects of leasing in India are good due to growing investment needs and scarcity of funds with public financial institutions. This type of lease finances is particularly suitable in India where a large number of small companies have emerged more recently. Leasing in the sphere of land and building has been in existence in India for a long time, while equipment leasing has become very common in the recent times. LEASING SECTOR IN INDIA

Leasing of equipments and real assets is a prominent source of private capital formation and contributor to GDP in many developed and developing economies across the world with equipment Leasing (excluding real estate and consumer asset financing) as a % of private capital formation estimated at 16.4% for US, 16.2% for Germany, 23.8% for Brazil, 20.6% for UK and 2.2% for China in 2008. In contrast, leasing penetration in India is abysmally low and is estimated at 1.5% of private capital formation in FY10 which roughly translates into Rs 20,000 crore of annual leasing volumes. EVOLUTION AND GROWTH DRIVERS Leasing in India registered unprecedented growth in the late 80s and early 90s as a widely used financial services product by non banking finance companies (NBFCs) as a means to claim the benefits of depreciation and consequent tax benefits. The performance of the sector was adversely affected by changes in the accounting requirements and regulatory changes such as linking the extent of deposits to credit rating, in late 90s, as a result of which the leasing transactions came under stringent regulatory scrutiny of the underlying intent (financing vs. true lease) and became subject of taxation and legal uncertainties. Further the deterioration in the credit quality during that period also impacted the NBFCs. These uncertainties drove the leasing sector to a period of relative inactivity which lasted over the period 1997-2004. The sector has again shown signs of revival since 2005, this time around fuelled by strong economic growth with the following characteristics A high capital investment in several industries An increase in the presence of MNCs which operate on an asset light business model An increasing usage of big ticket plant & equipment that come with high technological obsolescence Emergence of professional lease providers with specialized expertise in asset management and residual value risk management. At present, the Indian leasing sector is witnessing a transition from being a nascent market dominated by simple finance lease structure to an evolving market, marked by emergence a strong market for operating leases.

5 Venture Capital

Definition of 'Venture Capital' Money provided by investors to startup firms and small businesses with perceived longterm growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. Venture Capital Finance It generally involves start up financing to help technically sound, globally competitive and potential projects to compete in the international markets with the high quality and reasonable cost aspects. The growth of South East Asian economies especially Hong Kong, Singapore, South Korea, Malaysia along with India has been due to the large pool of Venture Capital funds from domestic / offshore arenas. Venture Capitalists draw their investment funds from a pool of money raised from public and private investors. These funds are deployed generally as equity capital (ordinary and preference shares) and sometimes as subordinated debt which is a semi secured investment in the company (through debenture) ranking below the secured lenders that often requires periodic repayment. Today, a VC deal can involve common equity, convertible preferred equity and subordinated debt in different proportions. The Venture Capital funding varies across the different stages of growth of a firm. The various stages are I. Pre seed Stage: Here, a relatively small amount of capital is provided to an entrepreneur to conceive and market a potential idea having good future prospects. The funded work also involves product development to some extent II. Seed Stage: Financing is provided to complete product development and commence initial marketing formalities. III. Early Stage / First Stage: Finance is provided to companies to initiate commercial manufacturing and sales. IV. Second Stage: In the Second Stage of Financing working capital is provided for the expansion of the company in terms of growing accounts receivable and inventory. V. Third Stage: Funds provided for major expansion of a company having increasing sales volume. This stage is met when the firm crosses the breakeven point.

VI.

Bridge / Mezzanine finance or Later Stage Financing: Bridge / Mezzanine Financing or Later Stage Financing is financing a company just before its IPO (Initial Public Offer). Often, bridge finance is structured so that it can be repaid, from the proceeds of a public offering.

Benefit of venture capital Private equity funding or venture capital adds lot of value to the investees company. 1. Management experience predominant small and medium scale companies lack experience in expanding / managing on challenging times. 2. Brand value Companies require brand when they expand out of their territory which they lack. The investor brings in international brand which will even to tap the overseas market. For e.g Blackstone invested in Gokaldas which helped in tapping overseas clients. Industry experience Board members of the funds come with rich experience in the respective field and from different geographies. This will help companies in making strategic decisions. 3. Tapping financial market PE / VC funds are well connected to the financial market. They will help in companies to tap the financial market as well as increase their valuation. There are no tax benefits for in getting investment from venture capital. Why do I need venture capital (VC) in spite of the availability of aids from banking sector? As banks and financial institutions enquire for corresponding collaterals and securities for the loan amount raised, it becomes impossible for some of the most deserving companies despite having a brilliant concept of a business model to meet to the requirements. So it is the venture capitals that come to rescue and add value to such business models without demanding any collateral however it takes stake in the equity of the company.

Prospects of Venture Capital Financing: With the advent of liberalization, India has been showing remarkable growth in the economy in the past 10 - 12 years. The government is promoting growth in capacity utilization of available and acquired resources and hence entrepreneurship development capital. While only

eight domestic venture capital funds were registered with SEBI during 1996-1998, 14 funds have already been registered in 1999-2000. Institutional interest is growing and foreign venture investments are also on the rise. Many state governments have also set up venture capital funds for the IT sector in partnership with the local state financial institutions and SIDBI. These include Andhra Pradesh, Karnataka, Delhi, Kerala and Tamil Nadu. The other states are to follow soon. In the year 2000, the finance ministry announced the liberalization of tax treatment for venture capital funds to promote them & to increase job creation. This is expected to give a strong boost to the non resident Indians located in the Silicon Valley and elsewhere to invest some of their capital, knowledge and enterprise in these ventures. A Bangalore based media company, Gray cell Ltd., has recently obtained VC investment totaling about $ 1.7 mn. The company would be creating and marketing branded web based consumer products in the near future. The following points can be conidered as the harbingers of VC financing in India:-

(i) Existence of a globally competitive high technology. (ii) Globally competitive human resource capital. (iii) Second Largest English speaking, scientific & technical manpower in the world. (iv) Vast pool of existing and ongoing scientific and technical research carried by large number of research laboratories. (v) Initiatives taken by the Government in formulating policies to encourage investors and entrepreneurs. (vi) Initiatives of the SEBI to develop a strong and vibrant capital market giving the adequate liquidity and flexibility for investors for entry and exit. In a recent survey it has been shown that the VC investments in India's I.T. - Software and services sector (including dot com companies) - have grown from US $ 150 million in 1998 to over US $ 1200 million in 2002. The credit can be given to setting up of a National Venture Capital Fund for the Software and I.T. Industry (NFSIT) in association with various financial institutions of Small Industries and Development Bank of India (SIDBI). The facts reveal that VC disbursements as on September 30, 2002 made by NFSIT totalled Rs 254.36 mn. Whopping investments of over USD 8.5 billion is expected in Indian from Venture Capitalists (VCs) and Private Equities (PEs) in next five years in at least five identified areas such as Biotechnology and Life Sciences, Logistics, Clean technology, Film Production and Education, Quoting the findings of the ASSOCHAM & Deloitte paper, president ASSOCHAM, Sajjan Jindal said that India has large opportunities in Biotechnology and Life Sciences on lines of retail and Real Estate. The Life Sciences sector in India has been attracting specialists Venture Capitalists from global and local funds. According to information received by the ASSOCHAM, US based Life Sciences Fund has recently invested approximately USD 20 million in a Hyderabad based pharmaceutical company. Devices and diagnostics are other areas where investors are active. It is anticipated that the Biotechnology and Life Sciences will alone attract about USD 1.5 billion investments from VCs and PEs by 2012.

Jindal said that logistics is another area in which VCs are expected to invest in excess of USD 2 billion in Indias maritime infrastructure and logistics as it strengthens cargo handling facilities to meet rising demand for exports and imports. The paper mentions that National Maritime Development Programme envisages huge investment to upgrade Indias maritime sector of which 64% is expected to come from VCs and PEs firms. These funds are also looking at possibilities in ancillary business that supports maritime trade such as warehousing and container freight stations. Clean technology is still another area where VCs and PEs would grow more and more active. In 2007, investors committed USD 290 million in 11 cleantech investment deals compared to USD 140 million in 9 deals in 2006. The momentum is expected to continue over the coming years given the government initiatives and policy focus on cleantech. It is expected that PEs and VCs would be able to jointly garner an investment of USD 3.5 billion in cleantech areas in next few years, pointed out Jindal. The other prospective areas in which VCs and PEs would make huge investments include Indian film production and education. The Indian film industry currently is worth 1.8 billion and is expected to grow @of over 25% and would reach a level of USD over 5 billion by 2011. With the newly accorded status of industry and professionalism on film industry, it will emerge as new venue for VCs. The ASSOCHAM expects USD 0.25 billion VCs investments in this industry in next five years. With a booming economy and concurrent talent shortage, denying for services from the domestic education sector is slated to create a lucrative opportunities for VCs. A global private equity firm with USD 36 billion in assets is planning approximately USD 200 million investments in the Indian education sector by taking up strategic positions in companies offering e-learning, distant learning, vocational training and the like. The paper further points out that venture capital investment is undergoing some interesting transitions. Developing economies like India and China continue to attract investments; early stage finance is becoming increasingly globalized. Investors are backing consumer and retail firms that benefit from the rise of the Indian middle class, as well as business services that cater to the nations growing economic sector. The other transition is that the capital flowing to India is designed to expand existing companies. By contrast, venture capital in the United States, Europe and Israel is usually dedicated to backing new technologies or services.

In Asia, venture capitalists are still in the process of developing common evaluation criteria for investment, unlike in mature markets, where a common criterion is the level of attention paid to the entrepreneurs personality and experience. In Asia, different classes of stocks with different voting rights are relatively uncommon. Asian investors thus have to rely mostly on common stocks and other means to manage their portfolio risk. Traditional venture capitalists are expected to actively assist their portfolio companies in what are termed valueadded activities. Most of the Asian venture capitalists assistance remains restricted to providing advice on financial matters. The dynamics in emerging venture capital markets differ from those in developed venture capital markets. The emerging private equity markets focus primarily on growth capital investments through minority equity participation. Emerging venture capital markets, although not without challenges, present a host of opportunities. Scope of Venture Capital India being an emerging economy reflects a huge scope for the small and medium scale entrepreneurs. There are around 40 actively participating venture capitalists funding for various sectors thus boosting the growth of small and medium scale enterprises. For instance the country's largest private sector lender, ICICI Bank, is evaluating its options to launch a $100 million (about Rs 460 crore) dedicated venture capital fund for small and medium enterprises (SMEs) and mid-market companies. The "Emerging India Fund" is an ICICI group initiative to provide growth capital to Indian companies in the SME and mid-market segment. The Emerging India Fund, which is expecting its first close in the next few weeks at $50 million, has already received firm commitments from several reputed institutions.

It is believed that private equity funds are in the midst of raising a $48 billion for the Indian market by 2010.
Law Applicable

Consistent with the expansion of the venture capital industry in India, the regulatory regime has been formulated with a view to foster such growth. While the domestic venture capital industry is governed by the SEBI (Venture Capital Funds) Regulations, 1996. On the face of it, the regimes appear similar to both types of venture capital investors.

Capital markets regulator Securities and Exchange Board of India (Sebi) is the regulator for venture capital investors but it typically routes applications from foreign funds through RBI and clears them only after the central bank gives its nod. RBI gets involved because capital flows across national borders are involved. There is a need for greater transparency on the part of RBI in handling such applications. When there is already a detailed set of regulations, there ought to be very little scope for interpretation or for discretion to authorities to decide on individual applications. Moreover, there is no room for ambivalence in policy stances. The policy ought to be clearly stated in no uncertain terms so that market players are reasonably certain as to the outcome of their applications. 6 MERCHANT BANKING

DEFINITION: In banking, a merchant bank is a financial institution primarily engaged in offering

financial services and advice to corporations and wealthy individuals on how to use their money. The term can also be used to describe the private equity activities of banking. The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management.

In short, merchant bankers assist in raising capital and advice on related issues.

A merchant bank deals with the commercial banking needs of international finance, long term company loans, and stock underwriting. A merchant bank does not have retail offices where

one can go and open a savings or checking account. A merchant bank is sometimes said to be a wholesale bank, or in the business of wholesale banking. This is because merchant banks tend to deal primarily with other merchant banks and other large financial institutions.

Importance and Need of merchant banking

Important reason for the growth of merchant banking has been developmental activity throughout the country, exerting excess demand on the sources of funds for ever expanding industry and trade, thus, leaving a widening gap under bridged between the supply and demand of inventible funds.

Merchant banks have been procuring impressive support from capital market for the corporate sector for financing their projects.

Role of Merchant Banker The role of merchant banker is dynamic in the wake of diverse nature of merchant banking services. Merchant bankers dynamism lies in promptly attending to the corporate problems and suggest ways and means to solve it. The nature of merchant banking services is development oriented and promotional to help the industry and trade to grow and survive. Merchant banker is, therefore, dedicated to achieve this objective through his dynamism. He is always awake to renew his skills, develop expertise in new areas so as to equip himself with the knowledge and techniques to deal with emerging new problems of corporate business world. He has to keep pace with the changing environment where government rules, regulations and politics affecting business conditions frequently change; where science and technology create new innovations in production processes of industries envisaging immediate renovations, diversifications,

modernizations or replacements of existing plant and machinery or other equipments putting new demands for finances and necessitating overhauling

of the capital structure of the firms. Merchant banker has to think and devise new instruments of financing industrial projects.

Future Perspectives In the days ahead, merchant bankers have very significant role to play tuning their activities to the requirements of the growth pattern of the corporate sector, the industry and the economy as a whole which is, in it, a challenging task and to meet these challenges merchant bankers will have to be more vigorous and strategic in playing their role. They will have also to adopt new ways and means in discharging their role.

Main Objectives of Merchant Bankers

Merchant bankers render their specialized assistance in achieving the main objectives which are presented below: To carry on the business of merchant banking, assist in the capital formation, manage advice, underwrite, provide standby assistance, securities and all kinds of investments issued, to be issued or guaranteed by any company, corporation, society, firm, trust person, government, municipality, civil body, public authority established in India. The main objective is to create secondary market for bills and discount or re-discount bills and acts as an acceptance house. The objective is to set up and provide services for the venture capital technology funds. They also provide services to the finance housing schemes for the construction of houses and buying of land. They render the services like foreign exchange dealer, money exchange, and authorized dealer and to buy and sell foreign exchange in all lawful ways in compliance with the relevant laws of India. They will invest in buying and selling of transfers, hypothecate and deal with dispose of shares, stocks, debentures, securities and properties of any other company.

Obligations and Responsibilities

Merchant bankers have the following obligations and responsibilities. Merchant banker should maintain proper books of accounts, records and submit half yearly/annual financial statements to the SEBI within stipulated period of time. No merchant banker should associate with another merchant banker who is not registered in SEBI. Merchant bankers should not enter into any transactions on the basis of unpublished information available to them in the course of their professional assignment. Every merchant banker must submit himself to the inspection by SEBI when required for and submit all the records. Every merchant banker must disclose information to the SEBI when it requires any information from them. All merchant bankers must abide by the code of conduct prescribed for them. Every merchant banker who acts as lead manager must enter into an agreement with the issuer setting out mutual rights, liabilities, obligations, relating to such issues with particular reference to disclosures allotment, refund etc. Law Applicable Regulatory framework The merchant banking activity in India is governed by SEBI (Merchant Bankers) Regulations, 1992. Registration with SEBI is mandatory to carry out the business of merchant banking in India. An applicant should comply with the following norms: The applicant should be a corporate body. The applicant should not carry on any business other than those connected with the securities market. The applicant should have necessary infrastructure like office space, equipment, manpower, etc. The applicant must have at least two employees with prior experience in merchant banking. Any associate company, group company, subsidiary or interconnected company of the applicant should not have been a registered merchant banker. The applicant should not have been involved in any securities scam or proved guilt for any offence.

The applicant should have a minimum net worth Rs50 million.

Scope of merchant banking in India: Merchant banking activities help in channelizing the financial surplus of the general public into productive investment avenues. They help to coordinate the activities of various intermediaries to the share issue such as the registrar, bankers, advertising agency, printers, underwriters, brokers, etc. and to ensure the compliance with rules and regulations governing the securities market. This being the era where mergers and acquisitions are hot, the scope of merchant banking has grown to a large extent.
7 Kisan Vikas Patra

Then Kisan Vikas Patra can be an instrument where you can invest.

While

the name suggests that only a farmer can invest money in Kisan Vikas Patra it is not the case. Anyone wishing to invest money at safe places can go for Kisan Vikas Patra. Kisan Vikas Patra (KVP) is a saving instrument that provides interest income similar to bonds. The KVP is a safe investment tool, as it is backed by the Government of India. The principal is assured and hence it is a safe avenue for investing your money. With low interest rate regime, such saving instruments are in limelight again. Kisan Vikas Patras (KVPs) is available at all Head Post Offices and authorized post offices throughout India. The KVPs are measured as the most safe investment tool, as it has the backing of the Government of India. The principal is assured (guaranteed) and it is deemed to be a safe avenue for investing your money.

KVP is suitable for an increase in investment as it accumulates money at a fixed rate, and money doubles at the end of the specified period. It is for those looking for guaranteed returns.

Who Can Purchase

KVP can be purchased by an adult who is a resident in India. It can also be bought jointly or by an adult on behalf of a minor There is No investment limit on investment. Certificates are available in denominations of Rs. 100/-, Rs. 500/-, Rs. 1000/-, Rs. 5000/-, Rs. 10,000/-, in all Post Offices and Rs. 50,000/- in all Head Post Offices. Money doubles in 8 years 7 months. 8.40 per cent per annum compounded yearly. Nomination facility is available. The nomination can be made or changed any time during the investment tenure. The certificates are transferable to any post office in India as well as can transfer one person to another but before maturity. KVPs can be encashed at the Post Office of its issue. These can also be encashed at any other Post Office if the Officer-in-Charge of that Post Office is satisfied with the production of Identity Slip or on verification from the Post Office of issue that the person presenting the certificate for encashment, is entitled thereto. A Certificate can be encashed after two years and six months and the interest paid will be as the rules announced by the Govt. Of India from time to time Facility for premature encashment as per the table given below (for the KVP purchased on or after 1st March 2003).

Investment Amount

Maturity period Interest Rate Nomination facility

Transferability

Encashment

Premature Encashment

Deduction u/s 80C Interest Taxability

No Income Tax Exemption under section 80 C is available for KVP. Interest accrued on yearly basis will be taken as income for Income Tax purposes, but no TDS will be deductible.

Other features

Deposits are exempt from Wealth tax. KVP can be pledged as security against a loan to Banks/Govt. Institutions. KVPs can be purchased in Demat Form from select Post Offices. On written request duplicate certificate can be issued in case of lost, stolen, destroyed, Mutilated or defaced certificate. KVP can be purchased or reimbursed through power of attorney also. The Govt. of Maharashtra has declared the KVP as a Public Security under the provision of Mumbai Public Trust Act. 1950.

Kisan Vikas Patra could be a better option in a low interest rate regime as it's safe and offers high returns with liquidity. But it's meant for only those who are not looking for regular income and are done away with their tax planning for the current year so far.

Feature and Benefits One can start a saving habit by buying KVP of the lowest value i.e. Rs. 100. KVP can be bought from Rs. 100 to Rs. 50000 face value (Rs.100, Rs.500, Rs.1000 Rs.5000, Rs.10000 and Rs.50000. The value that the holder will receive on completion of eight years and seven months is declared on the KVP itself. There is no upper-limit for buying or owning these KVPs. The most important of the many Kissan Vikas Patra benefits is that, being a Government scheme that encourages small savings, it is completely secure. Small investors who want security for their investment find the KVP ideal. The fixed rate of interest that assures doubling of the principal amount in eight years and seven months is secured as it is a government bond. However, the inflation would erode the value and that cannot be controlled. Many finance companies and banks accept Kisan Vikas Patra as collateral against loan for housing etc.

Kissan Vikas Patra benefits can be availed only by the holder of the KVP since KVP is issued in the name of the holder and cannot be transferred without completing due formalities. To get the KVP transferred on any other name the permission of the Post Master is required.

The value of the Kisan Vikas Patra is the value at issuance and those that are encashed prematurely get the amount invested with some interest if they are encashed after a lockin period of two and half years.

Kissan Vikas Patra benefits do not include being traded in the secondary-market. Kissan Vikas Patra benefits include the simplicity of use of these certificates. KVPs are physical instruments that are held as printed certificates. There are no demat forms of these certificates.

There are no direct KVP tax benefits since interest accrued on Kisan Vikas Patra is taxable. The only KVP Tax benefit is that there is no Wealth Tax liable on Kisan Vikas Patra. KVP has complete exemption from Wealth-Tax. The another benefit from the KVP tax benefits available (if it can be called a benefit) is that at the time of disbursal or encashment of the KVP, tax is not deducted at source (TDS) but is paid in full to the holder. It is the responsibility of the holder of KVP to pay the taxes on the interest accrued.

Premature withdrawal of the KVP is also allowed and the full invested amount and same interest is paid to the holder after two and a half years of issue of the certificates.

8 Permanent Account Number

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department, to any person who applies for it or to whom the department allots the number without an application. PAN enables the department to link all transactions of the person with the department. These transactions include tax payments, TDS/TCS credits, returns of income/wealth/gift/FBT, specified transactions, correspondence, and so on. PAN, thus, acts as an identifier for the person with the tax department. PAN was introduced to facilitates linking of various documents, including payment of taxes, assessment, tax demand, tax arrears etc. relating to an assessed, to facilitate easy retrieval of information and to facilitate matching of information relating to investment, raising of loans and other business activities of taxpayers collected through various sources, both internal as well as external, for detecting and combating tax evasion and widening of tax base. A typical PAN is AFZPK7190K. First three characters i.e. AFZ in the above PAN are alphabetic series running from AAA to ZZZ Fourth character of PAN i.e. P in the above PAN represents the status of the PAN holder. P stands for Individual, F stands for Firm, C stands for Company, H stands for HUF, A stands for AOP, T stands for TRUST etc. Fifth character i.e. K in the above PAN represents first character of the PAN holders last name/surname. Next four characters i.e. 7190 in the above PAN are sequential number running from 0001 to 9999. Last character i.e. K in the above PAN is an alphabetic check digit. WHY IS IT NECESSARY TO HAVE PERMENTANT ACCOUNT NUMBER? It is mandatory to quote PAN on return of income, all correspondence with any income tax authority. From 1 January 2005 it will be mandatory to quote PAN on challans for any payments due to Income Tax Department. It is also compulsory to quote PAN in all documents pertaining to the following financial transactions: Sale or purchase of any immovable property valued at five lakh rupees or more

Sale or purchase of a motor vehicle or vehicle, [the sale or purchase of a motor vehicle or vehicle does not include two wheeled vehicles, inclusive of any detachable side-car having an extra wheel, attached to the motor vehicle]

A time deposit, exceeding fifty thousand rupees, with a banking company A deposit, exceeding fifty thousand rupees, in any account with Post Office Savings Bank A contract of a value exceeding one lakh rupees for sale or purchase of securities Opening a bank account Making an application for installation of a telephone connection (including a cellular telephone connection) Payment to hotels and restaurants against their bills for an amount exceeding twenty-five thousand rupees at any one time Payment in cash for purchase of bank drafts or pay orders or bankers cheques for an amount aggregating fifty thousand rupees or more during any one day Deposit in cash aggregating fifty thousand rupees or more with a bank during any one day Payment in cash in connection with travel to any foreign country of an amount exceeding twenty-five thousand rupees at any one time.

PAN LEGAL FRAMEWORK The legal authority for allotment and use of the new series of PAN is derived from PAN, e.g, who is required to apply for PAN, who else can apply for PAN, who will allot PAN, transactions where PAN is required to be quoted, use of PAN in TDS certificates and TDS returns, that one person can have only one PAN and the manner of applying for PAN. 1962. This rule, amended in 2003, also specifies the copies of documents required to be submitted along with the PAN application as proof of identity and address of the PAN applicant entering into specified transactions/activities. Persons who do not have PAN are the persons to whom section 139A does not apply. These are persons who have Govt./State Govt. and Consular offices, where they are payers. provisions of section 139A. Section 139A of the Income-tax Act, 1961.

This section lays down the framework for the manner of applying for PAN is laid down in Rule 114 of the Income-tax Rules, Rule 114B lists down the documents in which PAN is required to be quoted while exempted from quoting PAN on furnishing a declaration in Form 60. Rule 114C lists agricultural income by furnishing declaration in Form 61, non-residents, and Central Penalty of Rs.10, 000/- is imposable u/s 272B for failure to comply with the provision of section 139A.

Salient features of PAN (Permanent Account Number) It is also known as national identity number. It is permanent & no need to be renewed. It certifies the citizenship of its nationals. It can be use for the opening of Bank Accounts. It cannot be invalid if holder changes the address even if he is migrating to another state.
9 Traveler Cheque

Definition Check issued by a financial institution which functions as cash but is

protected against loss or theft. Traveler's checks are useful when traveling, especially in case of overseas travel when not all credit and debit cards carried by a person will be accepted. A charge or commission is usually incurred when a person exchanges cash for traveler's checks, though some issuers provide them free of charge. Traveler Cheque HDFC Bank offers American Express Travellers Cheques which are widely accepted at Merchant Establishments and Financial Institutions across more than 200 countries. American Express Travellers Cheque is a very safe and convenient way to carry money abroad. You can encash them only when you need to, and only against your signature, unlike cash which can be stolen and misused by anybody, immediately. Loss of Travellers Cheque can be reported

anywhere in the world by making a single phone and the pre-fixed amount on the cheques are made refundable. Travellers Cheques are offered in 6 major currencies like USD, GBP, EURO, CAD, AUD and JPY. These are available in various denominations to suit your needs.

International transfers Don't run out of money in India unless you have a credit card against which you can draw traveller's Cheques or cash. You can also use HDFC ATM facility to withdraw money from your overseas account, but there is a limit of Rs 15,000 in a day. Having money transferred through the banking system can be time consuming. It's usually straightforward if you use a foreign/private bank elsewhere it may take a fortnight and will be a hassle.

You can also use Western Union for money transfer and they are having agents in Rajasthan.

The

Financial

Year

in

India

is

from

1st

April

to

31st

March.

Exchange Rate 1 USD 1 Euro 1 GBP 1 Yen 55.88381 70.84931 87.89112 0.70817

Source: Reserve Bank of India (as on June, 2012) Cost of travelling Cost of travelling depends how you spend money, your budget and the comfort level you are looking for. We divide in three categories:

10-12 USD: The cheapest, you stay in dormitories or in cheap hotel, travel by ordinary bus, eat regular Indian food like dhal (curried lentils), roti and rice. 30-40 USD (Budget Travel): Most of the travelers come in this category. You travel in luxury bus; take auto rickshaws for local transport, stay in reasonable hotel (sometime even in AC rooms, and off beaten heritage hotels) and good food.

70-75 USD: You stay in AC rooms, travel in taxi, travel by AC coaches, eat at good restaurants.

Special benefits from Centurion Bank of Punjab When you purchase American Express Travellers Cheques from Centurion Bank of Punjab, you get exclusive and exciting gifts. You can avail upto 3.5% discount on American Express Travellers Cheques selling card rate, inclusive of a 1% commission waiver on TCs issued. Additional advantages Nationwide exclusive Forex cells for student 1. Commission free locations for student 2. Best deals 3. No need to open an account with thee bank 4. Conditions apply

Benefits of traveler cheque Great deal on Mobile connections for students going to Australia, UK and USA. Now you can carry a mobile connection for UK, US and Australia from right here in India. Matrix offers post paid mobile connections for these countries making it extremely convenient for you to stay connected. You get a pre activated mobile number, lower call rates, flexibility of paying in Indian Rupees and an access to a 24 hour customer helpline. That's not all! As a customer of American Express Travellers Cheques you can call India absolutely free for up to 20 minutes from UK and 30 minutes from Australia or USA. Advantages of Using Travellers Cheque 1. Cheaper Option

The biggest benefit offered by the use of a travellers cheque is that they are inexpensive options when compared to credit/debit cards. The commission charges are as low as 1% of the total amount bought. Moreover, it does not involve the hassles of repayment. 2. Safe They are safer to carry and fear of misuse is lesser. A travellers cheque can be used only when signed. And the signatory has to produce a proof of identity, failing which the transaction is invalid. 3. Easy to Use A travellers cheque can be replaced almost everywhere in the world. The replacement takes an utmost of 24 hours after the notification time.

4. Worldwide Acceptance Being available in several currencies like the UK sterling, Australian dollar, Canadian dollar, euro, US dollar and Japanese yen; a travellers cheque is accepted worldwide. It can be used in banks, hotels, travel service providers, foreign exchange bureau, etc. 5. Do Not Expire There are no expiration dates for the use of a travelers cheque. Hence you can use the unutilized travelers cheque for your next trip as well. despite the increasing demand of credit cards, travelers cheque is still in use owing to the low transaction charges involved. The most popular brands issuing a travelers cheque are American Express and Thomas Cook Group. Travelers Cheques offer the following features: Accepted at numerous merchants for shopping Signature-based security Replacement of TCs within 24 hours across the world Easier for you to budget, track and control your travel expenses

4. Call Money Market

The call money is the money lent for one day. Deals with overnight borrowing and lending The funds located through the money market can be utilized To provide financing for the purchase of securities that can be added to the portfolio of the investment firm As a resource that will cover the margin accounts of the firms clients.

Why call market in India Helps Bank to manage short-term deficit or surplus of money Provides funds that can be used to conduct transactions between banks, or with other money market dealers The call money loan essentially works in the same manner as a day to day loan Crosses international lines, with funding Opportunities located around the world

Market Size Market for very short term funds, known as money on call The rate at which funds are borrowed in this market is called `Call Money rate' The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million Of which public sector banks account for 80% of borrowings Foreign banks/private sector banks account for the balance 20%.

The money market is a market for short-term financial assets that are close substitutes of money It is liquid and can be turned over quickly at low cost. Provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis

Feature of call money market Affected by liquidity in the market One of the segments of the money market No physical address Interest rates undergo a change on a day to day basis RBI has prescribed prudential limits for banks Transactions not secured by any collateral Those who can both borrow and lend in the market RBI (through LAF), banks and primary dealers

Call Money Participant

Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders side These were phased out and call money market is now a pure inter-bank market.

Risk for Participant From May 1, 1989, the interest rates in the call and the notice money market have been market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon.

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Inter Bank Market. Banks borrow in this money market for the following purpose: To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows.

Thus call money usually serves the role of equilibrating the short-term liquidity position of banks Call Money Market Participants: Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.

10 COMMERCIAL PAPER IN INDIA: INTRODUCTION: It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

ISSUER OF COMMERCIAL PAPER: Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. ELIGIBILITY CRITERIA FOR ISSUING COMMERCIAL PAPER: A corporate would be eligible to issue CP provided 1. The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore 2. Company has been sanctioned working capital limit by banks or all-India financial institutions 3. The borrowable account of the company is classified as a Standard Asset by the financing banks/ institutions. To summaries the above discussion on commercial paper

CPs is issued by companies in the form of since promissory note, redeemable at par to the holder on maturity.

The tangible net worth of the issuing company should be not less than Rs.4 crores. Working capital (fund based) limit of the company should not be less than Rs.4 crores. Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than 2 months old on the date of issue of CP.

Corporate are allowed to issue CP up to 100% of their fund based working capital limits.

It is issued at a discount to face value. CP attracts stamp duty. CP can be issued for maturities between 15 days and less than one year from the date of issue.

CP may be issued in the multiples of Rs.5 lakh. No prior approval of RBI is needed to issue CP and underwriting the issue is not mandatory. All expenses (such as dealers fees, rating agency fee and charges for provision of standby facilities) for issue of CP are to be borne by the issuing company

Time Period CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. CP can be issued in denominations of Rs.5 lakh or multiples thereof. The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. Who can invest? Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, amount invested by single investor should not be less than Rs.5 lakh (face value). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI. Role and Responsibility Issuer Every issuer must appoint an IPA for issuance of CP.

The issuer should disclose to the potential investors its financial position as per the standard market practice. After the exchange of deal confirmation between the investor and the issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CP to the investor's account with a depository.

Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order (Schedule III).

Issuing and Paying Agent IPA would ensure that issuer has the minimum credit rating as stipulated by the RBI and amount mobilized through issuance of CP is within the quantum indicated by CRA for the specified rating. IPA has to verify all the documents submitted by the issuer viz., copy of board resolution, signatures of authorized executants (when CP in physical form) and issue a certificate that documents are in order. It should also certify that it has a valid agreement with the issuer (Schedule III). Certified copies of original documents verified by the IPA should be held in the custody of IPA. Credit Rating Agency Code of Conduct prescribed by the SEBI for CRAs for undertaking rating of capital market instruments shall be applicable to them (CRAs) for rating CP. Further, the credit rating agency have the discretion to determine the validity period of the rating depending upon its perception about the strength of the issuer. Accordingly, CRA shall at the time of rating, clearly indicate the date when the rating is due for review. While the CRAs can decide the validity period of credit rating, CRAs would have to closely monitor the rating assigned to issuers vis-a-vis their track record at regular intervals and would be required to make its revision in the ratings public through its publications and website Advantage of commercial paper:

High credit ratings fetch a lower cost of capital.

Wide range of maturity provides more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies. Issuances of Commercial Paper bring down the bank credit limits. A high degree of control is exercised on issue of Commercial Paper. Stand-by credit may become necessary

Law Applicable In the commercial paper the law will be applicable is negotiable instrument act will be applicable. Commercial Paper Market Average Maturity of Commercial Paper = 30-35 Days Small Secondary Market Most Issuers (At Their Discretion) Continuously Roll Over Debt Sold in Large Denominations Commercial Paper Rates Issuer Finance Companies GMAC GE Capital 1% to 3% Below the Prime Rate 1/8% to % Above the T-Bill Rate

Ford Motor Credit Merrill Lynch JP Morgan PepsiCo

Short-Term Needs and a Very High Credit Rating