FINANCIAL MANAGEMENT SYSTEM:

CO2:

financial Service

Concept, Nature and scope of financial Services

Regulatory framework of financial sources

Growth of financial Services India

Merchant Banking

Meaning – Types

functions, Scope & Categories of Merchant Banking

Responsibilities of merchant Bankers

Role of merchant bankers in issue Management

Regulation of merchant banking in India

pre-issue management- activities of MB

Post issue management- activities of MB

over and under subscription

Venture Capital:

venture Capital and players

stages and funding

growth of venture Capital in India

financial pattern under venture Capital

•Debt securitization –

meaning & benefits

Concept & application

mechanism
FINANCIAL Services:

Concept:

Financial services are the economic services provided by the finance industry, which encompasses a
broad range of businesses that manage money, including credit unions, banks, credit-card companies,
insurance companies, accountancy companies, consumer-finance companies, stock brokerages,
investment funds, individual managers and some government-sponsored enterprises. Financial services
companies are present in all economically developed geographic locations and tend to cluster in local,
national, regional and international financial centers such as London, New York City, and Tokyo.

Financial Services offered by various financial institutions

 Factoring.

 Leasing.

 Forfaiting.

 Hire Purchase Finance.

 Credit card.

 Merchant Banking.

 Book Building.

 Asset Liability Management.

 Housing Finance.

 Portfolio Finance.

 Underwriting.

 Credit Rating.

 Interest & Credit Swap.

 Mutual Fund.

IMPORTANCE OF FINACIAL SERVICES:

 Promoting investment
 Promoting savings
 Minimizing the risks
 Maximizing the Returns
  Ensures greater Yield

 ECONOMIC GROWTH

 BENEFIT TO GOVERNMENT

 EXPANDS ACTIVITES OF FINANCIUAL INSTITUTIONS

 BALANCED REGIONAL DEVELOPMENT

 PROMOTION OF DOMESTIC AND FOREIGN TRADE

What is Financial Services?

Financial services are the services which are offered by the financial companies. The financial companies
comprise of both Asset Management Companies and Liability Management Companies. In Asset
Management Companies, there leasing are companies, mutual funds, merchant bankers and
issuer/protofolio managers while liability management companies has the bill discounting and
acceptance houses.

In other words, the financial service is referred to as the products and services which are offered

by the banks as they provide various kinds of facilities of financial transactions and other financial

activities loans, insurance, credit cards, investment opportunities and money management and

also give information on the stock market and other issues like market ups and downs. The basic

aim of this sector is to act as intermediary between individual and institutional investors which

will help in financial transactions.

Definition of Financial Services

The financial service industry is defined as, "The collection of organisations which

intermediate and facilitate financial transactions of individual and institutional investors from

their resource allocation activities through time".

Thus, the financial services comprise of various works related to change of savings into

Investment

The scope / functions of financial service is as follows :

1) Gross Domestic Product (GDP) :

The gross domestic product refers to the financial value of all the finished goods and services
manufactured inside the country in a specific time period. The financial service contributes to the

GDP of the country.

2) Employment:

The financial service requires various kinds of financial institutions which need different kinds of

skilled manpower which indirectly lead to increase in the employment of the country.

3) Foreign Direct Investment (FDI):

The financial service helps in increasing the foreign direct investment in the country which helps

in increasing the growth of the country.

4) Mobilizing of Funds:

The financial service helps in increasing the investment opportunity among the public leading to

mobilizing the funds of the public.

5) Long-Term Loan:

The long-term loan is basically required by the industries. The financial service helps in providing

cheap and long-term loan to industries.

6) Insurance:

There are various types of financial services. Among them the most important is insurance. The

insurance financial protection to the consumers

Nature of Financial Services

The nature of financial services is given below:

1) Intangibility:

The financial services are intangible in nature. The companies need to build goodwill and

confidence in the clients for producing better and efficient financial services. The quality and

innovations play an important role for building reliability among the customers.

2) Customer Orientation:

The financial institution selling financial services needs to study the demand of the customers. By

the help of various studies, the financial institutions makes different strategies relating to the

costs, liquidity and maturity consideration of the financial products. Hence, financial services are

customer-oriented.
3) Inseparability:

The financial institutions and its customers cannot be separated from each other while producing

and supplying of financial services as both the functions of financial service is done at the same

time.

4) Perishability

Financial services cannot be stored as they need to be created and delivered to the target

customers as per their requirements. So, it is important for financial institutions to assure that there is
match of demand and supply of financial services

5) Dynamism

The financial service should be dynamic so that they can be changed according to the socio-

economics changes in the economy like disposable income, standard of living, level of education,

etc. The financial services should be efficient so that the new services can be made by studying the

future wants of the marker.

6) Derivatives and Catalysts:

The financial services are derivatives of financial market. So, they also act as a catalyst in the

market operation. It starts the market operations and help in increasing the investment by

increasing the saving for a high rate of capital formation. They help in various financial products

which are derived from various financial transactions.

7) Act as Link:

The financial services bridge the gap between investors and borrowers. They give profit bearing

investment to the investors by which they can also minimize the risk. The investors have the

options of high risk and high profits, low risk and low profit or get a regular income on acceptable

risk. The borrowers are also given many financial services for fulfilling the financial needs by

lowering the cost of funds and also making the repayments according to the income pattern.

8) Distribution of Risks:

The financial services distribute the funds in the profitable manner so that the investors can

diversify their risk in different financial services for getting maximum rate of return. The various

experts in the market help the investors for proper selection of the portfolio for getting maximum

return
Types of Financial Services

The financial services are divided into wholesale financial service and retail financial services

according to the profile of users.

The wholesale financial services are the services which are used for converting into final retail

products. It is used by industry and business people. The retail financial services are given to the

individual for direct consumption. The Classification of Financial Services are as follows :

Traditional Activities

The financial intermediaries from the past are providing various services including the money

and capital market activity. The traditional activities are classified into fund based activities and

non-fund based activities. These are also known as assets based financial services and fee based

financial services respectively

fund based/asset based financial services:

In this, the financial services are used for making assets or are backed by assets in which the funds

are changed to assets which are known as asset based financial services. It consists of the following

1) Lease Financing :

A lease is known as the agreement between two parties known as lessor and lessee. The lessor is

the owner of the asset and lessee is the user of the asset. In this agreement, there is transfer of
asset from lessor to lesser for certain time period, in return the lessor receives the regular rent. As

the lease period gets over, the asset is returned back to lessor until there is renewal of the contract.

2) Hire Purchase :

The hire purchase refers to the hiring of an asset for certain time period and when the time period

gets over, there is purchase of same asset. At the time of sharing of asset, the person hiring the

asset gets the ownership and is allowed in use it. It is being used for financing of capital goods

like industrial finance, financing of consumer goods and for selling consumer good on hire

purchase as it is a legal advice.

3) Factoring :

Factoring is done when the company requires immediate money. It is done by selling the account

receivable like invoices to a third party known as factor at certain discount for immediate cash.

This cash is required for continuous working of the business.

4) Forfeiting :

Forfeiting is the way of financing of receivable related to international trade. It represents to the

purchase done by bank and financial institutions of trade bills/promissory notes instead of

recourse to the seller. The purchase is done by discounting the documents including the overall

risk of non-payment in collection. The various problems related to collection are accountability of

the purchaser who pays cash to seller after discounting the bills and notes.

5) Mutual Fund :

Mutual fund is the type of investment in which the pool of funds is sourced from various investors

for investing in various securities like stocks, bonds, money market instruments and similar

assets. It is managed by the money managers who invest the fund capital and tries to get capital

gains and income for the investors of the fund. The portfolio of mutual fund is organised and is

according to the investment objective given in the prospectus.

6) Exchange Traded Funds (ETFs) :

It is traded same like stocks in the stock exchange. It has the following assets like stocks,

commodities or bonds. They trade near to the net asset value according to the working of the

trading day. The ETFs also has a role to monitor various index like stock index or bond

index. Exchange traded funds is useful for investments as there are low costs, tax efficiency and
stock-like features. They are very famous among exchange-traded product.

7) Consumer Credit/Consumer Finance :

The term consumer credit means the activities related to giving credit to the consumers for

empowering them to acquire their own goods required for daily use. It is also known as credit

merchandising, deferred payments, installment buying, hire purchase, pay-out of income scheme,

pay-as-you earn scheme, easy payment, credit buying, installment credit plan, etc.

8) Bill Discounting :

The bill discounting or a bill of exchange is known as the short-term, negotiable and can easily

liquidates money market instrument. It is used for financing a transaction in goods which is trade

related instrument

9) Housing Finance :

The housing finance refers to the collection of all the financial arrangements which are offered by

the Housing Finance Companies (HFCs) for fulfilling the need of housing.

10) Venture Capital :

Venture capital includes two words i.e. venture and capital Venture refers to the way of doing

something whose result is not known as it is present with various kinds of loss while capital refers

to human and non-human resources required for starting the business.

Fee/Non-Fund Based Financial Services

The fee based financial does not provide instant fund but instead it allows for the creation of funds

by the fee charged service. It consists of the following:

1) Merchant Banking:

The merchant banker can be individual or institutions like an underwriter or agent for the

companies and municipalities allocating securities. They are also involved in broker or dealer

functions, maintain the market for previously issued securities and also gives suggestion to the

investors on the advisory services. It plays important part in mergers and acquisitions, private

equity placements and corporate restructuring.

2) Credit Rating:
The credit rating is the process in which the symbol is assigned to the instrument for some special

work which is referred to as benchmark of present knowledge on related capacity on the issuer to

service its debt obligation on particular time. The symbols used in credit rating are basically

alphabetical or alphanumeric. The comparison of different instruments is easy by the help of

credit rating. The basic objective of credit rating is to inform the investors about the relative

ranking of the default-loss probability for required fixed income investment in comparison to

other rated instruments.

3) Stock Broking :

The stock broking refers to the method of bringing together the buyers and sellers of stock at the

stock exchange. It is the function of financial service intermediary. It is done by brokers, both

main brokers and sub brokers who are allowed by the SEBI. The stock broker can be individual

broker, a firm of brokers or a corporatized broker.

4) Securitization :

The change of present or future cash inflow of an individual into trad-able security which can be

sold in the market is known as securitization. These cash inflows can be from financial assets like

mortgage loans, automobile loans, trade receivables, credit card receivables, fare collections will

be security according to which borrowing can be raised. Though an individual can take the

assistance of securitization instruments for efficient economic growth.

5) Letters of Credit (LC) :

A letter of credit is issued by the bank of the buyer to the seller which has a written undertaking for

repaying the cost of goods and services given by the seller to the buyer in place of producing

documents required within the precise time, place and to prescribed bank as stated in the

documents which is submitted according to the terms and conditions of the LC.

6) Bank Guarantees:

The guarantee is the contract between the issuing bank and the client in which the bank attempt to

take the claims presented by the client on the customer on behalf of which the bank had guarantee.

REGULATORY FRAMEWORK OF FINANCIAL SERVICES

Usually, the regulatory framework has the objective of establishing the efficient and effective
financial institutions and also assists in maintaining the stability of the transmission method and

also safeguarding the consumers of the financial services. The regulatory framework of financial

services in India is shown below :

1) Framework for Banking and Financing Services :

The banks handle two functions which also determine their growth. These functions are savings

and investments. The working of the banking and financial institutions is controlled by Central

Government and RBI. The central government and RBI help in maintaining the growth of

economy according to the requirement. The RBI by the help of RBI Act and Banking Regulation

Act controls all the financial institutions which are related to saving and capital formation. There

are various other laws for institution which are involved in raising and lending the capital. The

various regulations for banking institutions are as follows :

i) New Branch : It gives permissions for establishing new bank or new branch.

ii) Capital : It suggests the minimum capital, reserves and need of profit and reserves, dispersion of
dividends, the amount requirement for minimum cash reserve and other liquid assets.

iii) Inspection : The proper monitoring and maintenance on the functioning of the banks.

iv) Appointment : The various appointments of Chairman and Chief Executive Officer of private banks
and nominating members to the Board of Directors done.

v) Monetary Policy :The planning and implementation of monetary and credit policy for effective
regulation of credit flows. Maintenance of certain amount by t deciding Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR). The various treasury operations are done by the regular issue of bonds
and repos.
vi) Credit Control : The various qualitative and quantitative credit control method are used for managing
credit flow to different industries.

vii) Other Services : The various other services like regulating, factoring, bill discounting and credit card
services are offered by the bank

2) Framework for Insurance Services :

The Insurance Act, 1938 was made for managing the insurers prior to the nationalization of life

and general insurance. The LIC formed in 1956 and GIC was formed in 1973 are the big

institutions in insurance service. The nationalization of the insurance companies has changed the

working of the Act. The regulatory functions came along with LIC and GIC.

The RBI appointed the Malhotra Committee in 1993 for providing ways to enhance the functioning

of various insurance services present in India so the Insurance Regulatory Authority (IRA) was

framed in 1996. The IRA performs the following works for both public and private

insurance company :

i) Orderly Growth :

The regulation and promotion of the insurance business leads to the orderly growth.

ii) Exercise of Powers :

The various powers and functions of the controller of Insurance under the Insurance Act, 1938,

LIC Act, 1956 and the General Insurance Business (Nationalization) Act, 1972 or any other law

relating to insurance in force at the time it is exercised and performed.

iii) Protecting Policy-Holders :

The various interest of policy-holders like assigning of policy nomination by policy-holders,

insurable interest, settlement of insurance claims, surrender value of policy and other terms and

conditions of contract insurance, besides controlling and regulating the rates. advantageous terms

and conditions that are offered should be protected by the insurer.

iv) Professionalization :

The professional organization related to the insurance business should be controlled and

promoted.

v) Information :
The various information of the inspection, inquiries and investigation including audit of the

insurers, insurance intermediaries and other organizations related to the insurance business can

be called by the governing body.

vi) Books Maintenance :

The way of maintaining the books of accounts with all the statements of accounts is prescribed to

the insurers and other insurance intermediaries.

3) Framework for Investment Services :

The various fund-based activities like mutual funds and venture capital is related to the

investment services. In the same way, the stock exchange and stock broking institution is also

related with the investment activities. The regulations followed by them can be discussed with

other investment activities. The Securities Contracts (Regulations) Act (SCRA), 1956. SEBI

Regulations and Reserve Bank of India comprises of the regulatory is defined.

4) Framework for Merchant Banking and Other Services :

The working of different types of intermediaries related to the management of public and right

issue of capital, like merchant bankers, underwriters, brokers, market-makers, registrars, advisors,

collection bankers, advertisement consultant, debenture trustees, credit rating agencies etc., are

controlled by various guidelines of SEBI which are explained as follows :

SEBI (Merchant Banker) Regulation, 1992

SEBI Rules for Underwriters

SEBI (Brokers and Sub-brokers) Regulation, 1992

SEBI Rules for Registrars to an Issue and Share Transfer Agents, 1993

SEBI (Bankers to an Issue) Regulations, 199

Growth of Financial Services in India

The various stages of growth/Evolution of financial services in India are as follows :

 1)Merchant Banking Era :

The merchant banking era consisted of the period between 1960 and 1980. In this period, there

was growth in various kinds financial services like merchant banking, insurance and leasing
services. The functions of merchant banking are as follows :

The project should be identified, the feasibility reports should be prepared and the detail

project reports should be prepared.

The various marketing, managerial, financial and technical analysis should be done on behalf of

the customers.

The accurate capital structure can be made by the help of merchant banking.

It acts as the link between the capital market and the fund-seeing institutions.

It helps in underwriting.

It helps the companies in listing the issues on the stock exchange.

It also suggests various ways of doing mergers and and acquisitions.

It helps in giving technical suggestions on leveraged buyouts and takeovers.

It helps in providing syndication ability by providing project finance.

It helps in providing working capital loans.

 2) Investment Companies Era :

In this era, there was introduction of various investment institutions and banks. These investment

institutions comprise of the Unit Trust of India (UTI). Life Insurance Corporation of India (LIC)

and the General Insurance Corporations. (GIC). The UTI is the largest public sector mutual fund

in the world. The LIC is related with the life insurance business. It is a public monopoly. The

various private insurance companies was nationalized in 1970. After the nationalization, the

insurance company was made as the holding company which had four subsidiaries for managing

the general insurance business in the public sector. At the end of 1970, the leasing business has

come up. Earlier these companies were working on the equipment lease financing but now the

leasing of various operations like financial, operating and wet leasing was done

 3) Modern Services Era :

During 1980, there was the introduction of financial products and services. The financial service

consists of over the-counter services, share transfers, pledging of shares, mutual funds, factoring,

discounting. venture capital and credit rating. The mutual fund industries for increasing the

savings habit among the people introduced various innovative schemes for mobilization of
savings. The mutual funds have the transparent asset and liability. management which help the

investors in getting increased and constant return on the investment done by them.

The credit rating was the important financial service introduced by Indian financial sector. The

introduction of the credit rating system was done for increasing the confidence of investors and

also for increasing the participation in the capital market operations and also encouraging the

better and effective financial discipline in the system. Another important advancement took place

by preparing the structure of venture capital funds. The short-term financing for domestic and

international trade was factoring. The introduction of commercial banks in financial service leads

to the change in the financial system in India.

 4) Depository Era :

There was the introduction' of depositories in this era for combining the Indian financial sector

industry with the global financial service industry and for encouraging the paperless trading by the

help of dematerialisation of shares and bonds. The trading in "Gilts" was permitted by Central

Government in 1997-98 by introducing the Stock-Lending Scheme. It prepared individual

department to deal with the trading of Gilts. Another method for establishing effective financial

service sector in India is the introduction of book-building with the help of both the investors and

fund users. The various online trading platforms were brought up by Bombay Stock Exchange, the

Delhi Stock Exchange and the computerization of the National Stock Exchange. It will help in

building the better financial service market in India.

 5) Legislative Era :

There were various legislation's framed in this era for developing the financial service sector. The

FEMA was replaced by FERA. The change was done by introducing the separate legislation for

internet trading. There were amendments done in Indian Companies Act, Income Tax Act, etc., for

increasing safe and better trading and clearing of transactions.

6) Foreign Institutional Investors Era :

The government introduced economic reform which is very important for the various participants.

The disinvestment guidelines are given by SEBI in which the Foreign Institutional Investors (FIIs)

are allowed to work in the Indian capital market. It is done for giving entry to the foreign investors

in the Indian capital market and en-chasing the growth and development
MERCHANT BANKING

MEANING

Merchant Banking refers to a combination of banking and consultancy services that facilitate financial,
investment, and advisory services to individuals, corporations, and governments. Unlike traditional
banking that primarily deals with deposit-taking and loan issuance, merchant banks provide specialized
services like underwriting, fundraising, mergers & acquisitions, and portfolio management.

Meaning of Merchant Banking

Merchant banks are financial institutions that primarily focus on providing advisory and financial services
related to capital markets to businesses, rather than catering to retail customers. They offer guidance on
corporate matters such as equity financing, business restructuring, and large-scale investments.
Merchant banking services are typically aimed at medium to large enterprises that require more
sophisticated financial expertise.

Types of Merchant Banking Services/FUNCTIONS

1. Issue Management: Merchant banks help companies raise capital by underwriting new
securities, facilitating public offerings, or arranging private placements.

2. Corporate Counseling: They provide advisory services on mergers and acquisitions,

restructuring, and financial planning. This service helps businesses optimize their capital
structure and navigate through strategic decisions.

3. Portfolio Management: Merchant banks manage large portfolios of high-net-worth individuals

and institutions by advising on or managing their investments in stocks, bonds, or other financial
instruments.

4. Project Financing: Merchant banks assist clients in raising funds for specific projects, often large-
scale initiatives like infrastructure development. This includes advising on project structuring,
risk analysis, and funding options.

5. Loan Syndication: They help arrange loans for large-scale borrowers by coordinating with a
group of lenders (typically banks) to provide the necessary capital for projects or other business
needs.

6. Underwriting: Merchant banks act as underwriters, especially in the case of equity issues,
guaranteeing the sale of new shares by purchasing them themselves if the market does not
absorb them.

7. Mergers and Acquisitions (M&A): These banks provide advisory services for companies during
mergers, acquisitions, and joint ventures, assisting in due diligence, valuation, negotiation, and
transaction structuring.
 8. Leasing Services: Some merchant banks also engage in lease financing by providing funding
options for capital assets such as machinery, equipment, or real estate.

9. Advisory Services: These include tax planning, risk management, and general corporate
governance advice for large-scale businesses.

Scope of Merchant Banking

The scope of merchant banking is extensive, covering various aspects of financial advisory, investment
management, and capital raising for corporate clients. Some of the major areas include:

1. Capital Market Operations: Merchant banks play a key role in primary market operations like
underwriting, issue management, and the facilitation of capital market instruments such as
shares, bonds, and debentures.

2. Mergers & Acquisitions: They have significant scope in advising companies on domestic and
cross-border mergers, acquisitions, and joint ventures, including due diligence and regulatory
compliance.

3. Corporate Finance: Merchant banks advise companies on financing strategies, including capital
structure optimization, debt financing, and raising funds through equity and debt offerings.

4. International Financing: Merchant banks have a global scope and offer advisory services for
businesses expanding internationally, helping them with international capital raising, foreign
currency transactions, and cross-border deals.

5. Risk Management: They offer services to help companies hedge against various financial risks
such as currency exchange risks, interest rate risks, and commodity price fluctuations.

6. Wealth Management: Merchant banks provide portfolio and wealth management services for
institutional investors, family offices, and HNWIs, focusing on maximizing returns while
managing risks.

7. Project Advisory Services: The scope extends to advisory services for large-scale projects,
helping companies assess project feasibility, structure financing, and secure the necessary funds.

8. Regulatory Compliance: Merchant banks assist clients in meeting legal and regulatory
requirements, especially related to securities markets, mergers and acquisitions, and financial
reporting.

9. Private Equity and Venture Capital: Merchant banks also provide expertise in venture capital
funding, helping startups and growing companies access capital for expansion.

Classification of Merchant Bankers

For the purpose of registration, SEBI has classified merchant bankers under four categories.
a) Category I: Category 1 Merchant Bankers can act as issue managers, advisers, consultants,
underwriters and portfolio managers. The minimum net worth prescribed for this category is Rs.
5 crores. In other words, the paid-up capital and reserves of the category I merchant banker
should be Rs. 5 crores at the time of applying for registration.

b) Category II

The second Category can act as advisers, consultants, underwriters and portfolio managers an
issue manager, but as co They cannot act as issue managers The minimum net worth prescribed
for this category is Rs. 50 lakhs

c) Category III

Category III Merchant bankers are authoring or consultants to to act as underwriters, advisers of
con an issue Their minimum net worth is Rs. 20 lakhs

4) Category IV

The fourth category can act only as advisers of consultants to an issue. Net worth is not
prescribed for this category.

The above classification was valid p December 1997 only. Now, only Category & Merchant
Honkers are working in India.

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Responsibilities of Merchant Banks

1. Risk Management: Merchant banks are responsible for evaluating and managing the risks
associated with financing, mergers, and other financial transactions for their clients.

2. Compliance and Regulation: Ensuring that all advisory and financial services comply with local
laws, stock exchange requirements, and international financial regulations.

3. Due Diligence: Merchant banks perform thorough due diligence on the companies they work
with, particularly during M&A and project financing, to ensure accuracy in the financials and
valuation.

4. Advising on Market Trends: Merchant banks help their clients stay informed about the latest
market trends, helping them make sound business decisions.

5. Capital Raising: Merchant banks are involved in planning, structuring, and executing capital-
raising initiatives through various instruments such as debt, equity, or hybrid offerings.

6. Client Confidentiality: Merchant banks are responsible for maintaining the confidentiality of
their clients' financial and business strategies, especially during sensitive deals like M&A.

Merchant banking plays a critical role in facilitating major corporate and government financial initiatives,
offering a wide range of sophisticated services beyond those of traditional banks.
Issue Management is one of the core services provided by merchant banks, focusing on helping
companies raise capital from the public or private investors by issuing securities like equity shares,
bonds, or debentures. This process involves extensive planning, compliance with regulatory
requirements, and the actual execution of the issuance to ensure its success.

Meaning of Issue Management

Issue management refers to the process by which a company, through a merchant bank or an investment
banker, raises funds from the market by issuing securities. The company could be raising funds for
various purposes like expansion, working capital, or to pay off existing debts. The merchant bank helps
manage the entire process of the issue, including regulatory compliance, marketing the issue to potential
investors, and managing the distribution of securities.

Types of Issues in Issue Management

1. Public Issue: In a public issue, a company raises capital by selling its securities (such as shares or
debentures) to the general public. Public issues can be further divided into:

o Initial Public Offering (IPO): The first time a company offers its shares to the public.

o Follow-on Public Offering (FPO): When an already listed company issues additional
shares to the public.

2. Private Placement: In this case, the company offers its securities to a select group of investors,
usually institutional investors, high-net-worth individuals (HNIs), or venture capital firms,
without making it available to the general public.

3. Rights Issue: A company offers additional shares to its existing shareholders at a discounted rate,
allowing them to maintain their ownership stake in the company.

4. Offer for Sale (OFS): In this type of issue, existing shareholders, usually promoters or large
investors, sell their holdings to the public, and the company does not receive any proceeds from
this sale.

5. Qualified Institutional Placement (QIP): This is a way for listed companies to raise capital by
selling shares exclusively to qualified institutional buyers (QIBs).

6. Preferential Allotment: Securities are issued to a select group of investors, usually at a

discounted price, often for strategic reasons like bringing in a partner or financing a specific
project.

Steps in Issue Management

1. Pre-Issue Planning:

2. Drafting Offer Documents:

3. Marketing the Issue:

4. Underwriting the Issue:

5. Post-Issue Activities:.
Significance of Issue Management

 Raising Capital: It enables companies to access funds for business expansion, debt repayment,
or other corporate purposes.

 Investor Protection: Through stringent regulatory compliance and full disclosure, issue
management ensures that investors are fully informed and protected.

 Market Liquidity: By facilitating the issuance of new securities, issue management contributes to
the liquidity and overall functioning of the capital market.

Role of Merchant Banking in Issue Management

Merchant banks play a critical role in the entire process of issue management, from the pre-issue phase
to post-issue activities, ensuring that companies raise capital efficiently while complying with all
regulatory norms. Their role includes:

 Advisory Services: Merchant banks advise companies on the best methods to raise funds,
whether through equity or debt, and help determine the timing, pricing, and structure of the
issue.

 Due Diligence: They conduct a thorough analysis of the company's financials, legal obligations,
and compliance with regulatory standards to ensure the issue is free from risks.

 Underwriting: Merchant banks often underwrite the issue, meaning they take on the
responsibility to buy any unsold shares, guaranteeing that the company raises the required
capital.

 Drafting Offer Documents: Merchant banks prepare crucial documents like the draft prospectus,
which outlines the company's business, financials, risks, and the purpose of raising funds.

 Marketing and Promotion: They organize roadshows, presentations, and advertising campaigns
to generate interest from institutional and retail investors.

 Coordination with Regulatory Authorities: Merchant banks liaise with regulatory bodies like
SEBI (in India) to ensure that the issue complies with all legal requirements, including obtaining
necessary approvals.

 Allotment and Listing: They handle the process of allotting securities to investors and listing the
securities on stock exchanges.

Regulation of Merchant Banking in India

Merchant banking activities in India are regulated by the Securities and Exchange Board of India (SEBI).
The SEBI (Merchant Bankers) Regulations, 1992, lay down specific rules and guidelines for merchant
bankers to follow. The key aspects of regulation include:
  Registration: Any entity that wants to offer merchant banking services must be registered with
SEBI. Without SEBI registration, no entity can act as a merchant banker.

 Capital Adequacy: SEBI mandates that merchant bankers maintain a minimum capital adequacy
to ensure they can take on underwriting risk and other financial responsibilities.

 Code of Conduct: SEBI requires merchant bankers to follow a strict code of conduct, ensuring
ethical practices, transparency, and investor protection.

 Disclosure Requirements: Merchant bankers must ensure that all documents filed with SEBI,
including the prospectus and offer documents, disclose accurate and complete information to
protect investors.

 Liability: Merchant banks are held accountable for any false or misleading statements in the
issue documents, making them liable for investor losses.

 Periodic Reporting: Merchant bankers must submit regular reports to SEBI regarding their
activities, ensuring continued compliance.

Pre-Issue and Post-Issue Management Activities of Merchant Banking

Pre-Issue Management Activities:

1. Due Diligence: Merchant bankers conduct due diligence on the company’s financials, legal
standing, and compliance to identify potential risks.

2. Preparation of Offer Documents: Drafting the prospectus or offer document, which contains the
financials, business details, risks, and the purpose of the issue, and submitting it to regulatory
authorities for approval.

3. Obtaining Approvals: Coordinating with SEBI, stock exchanges, and other regulatory bodies to
get the necessary approvals for launching the issue.

4. Pricing and Structuring: Assisting in determining the price of the issue (either through book
building or fixed-price methods) and advising on the capital structure.

5. Marketing and Promotion: Organizing roadshows, press conferences, and media campaigns to
create awareness and interest in the issue.

6. Underwriting: Providing underwriting services or arranging for other institutions to underwrite

the issue to ensure that all the securities are sold.

Post-Issue Management Activities:

1. Allotment of Securities: After the issue closes, merchant bankers oversee the allotment of
securities to investors, ensuring that the process is transparent and fair.

2. Refund Process: In cases where the issue is oversubscribed, merchant bankers manage the
refund process for investors who did not receive shares.
 3. Listing of Securities: Coordinating with stock exchanges to list the securities for trading, ensuring
all regulatory norms are followed.

4. Investor Communication: Addressing any queries or concerns from investors post-issue,

especially regarding refunds or allotments.

5. Compliance Reporting: Submitting post-issue reports to regulatory authorities to confirm that

the issue has been completed in compliance with regulations.

Over and Under Subscription

Over Subscription:

 Meaning: Over-subscription occurs when the demand for a company’s shares exceeds the
number of shares offered in an issue. For example, if a company issues 10 million shares but
receives applications for 20 million shares, the issue is considered oversubscribed.

 Handling Over Subscription:

o The company may allocate shares on a pro-rata basis, where investors receive a fraction
of the shares they applied for.

o Excess funds collected from investors who did not receive shares are refunded.

o The company and the merchant bank may also use discretion to allot shares to certain
categories of investors, such as institutional investors or high-net-worth individuals.

Under Subscription:

 Meaning: Under-subscription occurs when the demand for a company’s shares is lower than the
number of shares offered. For example, if a company issues 10 million shares but receives
applications for only 8 million, the issue is undersubscribed.

 Handling Under Subscription:

o If the issue is underwritten, the underwriters (often the merchant bank) will purchase
the remaining unsold shares, ensuring that the company raises the necessary funds.

o If the issue is not fully underwritten, the company may have to cancel or delay the issue,
and it might consider revising the price or structure of the offering in future attempts.

VENTURE CAPITAL:

Venture Capital (VC) - Meaning

Venture capital refers to the financing provided by investors to startups and small businesses that are
believed to have long-term growth potential. Venture capital is usually extended in exchange for equity
or an ownership stake in the company. VC investors take on high risks, as these businesses are often in
their early stages and have uncertain prospects, but they seek high returns if the company succeeds.

Overview of Venture Capital

Venture capital is a form of private equity designed to help companies that are too small to raise capital
through public markets or traditional lending. It plays a key role in the startup ecosystem by offering not
just funding but also strategic support, business expertise, and networking opportunities. VC firms invest
in innovative, high-growth potential sectors such as technology, healthcare, and renewable energy.
Unlike traditional investors, venture capitalists (VCs) focus more on a company’s future growth potential
rather than its current profitability.

Key characteristics of venture capital:

 High risk, high reward investment.

 Focused on companies in early stages of growth.

 Investors take equity stakes in return for capital.

 Often involves hands-on involvement in the business.

Players in Venture Capital

Venture capital involves several key players, each serving a different role in the investment process:

 Venture Capitalists (VCs): These are the individuals or firms that provide capital to startups in
exchange for equity. VCs typically have a portfolio of investments, diversifying their risks across
multiple companies.

 Angel Investors: Wealthy individuals who invest their own capital in startups, often in the very
early stages, before VCs get involved. They may also provide mentoring and business advice.

 Institutional Investors: Pension funds, endowments, and insurance companies often invest in
venture capital funds as limited partners (LPs), supplying capital that the VCs will manage and
invest in startups.

 Entrepreneurs and Startups: The businesses receiving the funding, which are often at a nascent
or growth stage. They seek capital to scale up their operations, develop products, and expand
their market reach.

 Private Equity Firms: Though focused on larger and more established companies, some private
equity firms also engage in venture capital by providing funding to high-potential startups.

 Government Agencies and Development Funds: In some countries, government bodies or

development banks offer venture funding to foster innovation, promote entrepreneurship, and
support job creation.
Stages of Venture Capital Funding

Venture capital funding typically occurs in multiple stages, aligned with the growth and development
needs of the company:

1. Pre-Seed Stage:

o Overview: The earliest stage of funding, often provided by the founders themselves or
by friends and family.

o Purpose: To develop the business idea, create a prototype, or conduct market research.

o Investors: Angel investors, friends, family.

2. Seed Stage:

o Overview: The first official round of venture capital financing.

o Purpose: To fund product development, market entry, and early operations.

o Investors: Angel investors, early-stage venture capital firms.

o Investment Size: Typically small, around $500K to $2M.

3. Series A:

o Overview: The first significant round of VC funding, aimed at scaling up the business
model and expanding the user base.

o Purpose: To refine the product, build a strong user base, and generate revenue.

o Investors: Established venture capital firms.

o Investment Size: Ranges from $2M to $15M.

4. Series B:

o Overview: Focuses on expanding market reach, growing the team, and driving further
business development.

o Purpose: To scale the company’s operations and meet increasing demand.

o Investors: Larger VC firms, sometimes with participation from private equity firms.

o Investment Size: Around $10M to $50M.

5. Series C and Later Rounds:

o Overview: Aimed at scaling the company globally, expanding product lines, or acquiring
other companies.
 o Purpose: To achieve rapid growth and prepare for an Initial Public Offering (IPO) or a
strategic exit.

o Investors: VC firms, private equity, institutional investors.

o Investment Size: Can exceed $50M.

6. IPO or Exit:

o Overview: The company goes public or gets acquired, allowing early investors to realize
their returns.

o Purpose: To generate liquidity for investors and founders.

o Investors: Public markets, acquiring companies.

Growth of Venture Capital in India

Venture capital in India has experienced rapid growth over the last decade, driven by the country’s
burgeoning startup ecosystem and government policies that promote entrepreneurship. Some key
factors contributing to the growth of venture capital in India include:

1. Government Initiatives: Programs like Startup India and Digital India have encouraged
entrepreneurship by providing tax incentives, simplified regulatory processes, and access to
funding.

2. Growing Tech Ecosystem: India's booming tech industry, with companies focused on sectors like
fintech, e-commerce, and edtech, has attracted significant venture capital. Major cities like
Bangalore, Mumbai, and Hyderabad have become tech hubs, fostering innovation and attracting
global VC firms.

3. Increased Foreign Investment: Global venture capital firms such as Sequoia Capital, Tiger Global,
and SoftBank have made significant investments in Indian startups, especially in sectors like
technology, consumer services, and financial technology (fintech).

4. Unicorn Surge: India has seen a rapid rise in the number of unicorns (startups valued at over $1
billion), such as Flipkart, Paytm, and Ola, further enhancing investor confidence in the Indian
startup ecosystem.

5. Local Venture Funds: Several India-based VC firms such as Blume Ventures, Chiratae Ventures,
and Kalaari Capital have emerged, supporting startups at different stages of growth.

6. Sectoral Focus: Venture capital in India has increasingly focused on sectors like healthcare,
agritech, and clean energy, in addition to technology.

Financing Patterns Under Venture Capital

Venture capital financing follows specific patterns that vary depending on the company's growth stage
and the nature of the business:

1. Equity Financing: VCs provide capital in exchange for an equity stake in the company, making
them part-owners. The equity stake typically increases in value as the company grows.

2. Convertible Debt: In some cases, VCs provide convertible debt, which allows the loan to be
converted into equity at a later stage, often during the next round of financing or at the time of
the IPO.

3. Milestone-Based Financing: VC funding is often structured in stages, with additional funding

released only when the startup reaches certain milestones (e.g., revenue targets, product
launches).

4. Preferred Stock: VCs typically receive preferred stock rather than common stock. Preferred
stockholders have priority in receiving dividends and, in case of liquidation, they are paid before
common stockholders.

5. Exit Mechanisms:

o Initial Public Offering (IPO): The startup goes public, allowing VCs to sell their shares in
the public market.

o Acquisition: The company gets acquired by a larger firm, providing a profitable exit for
the VCs.

o Secondary Sale: VCs may sell their shares to other private investors or investment funds
in the secondary market.

6. Syndication of Funds: In many cases, VCs join forces with other firms to co-invest in startups,
distributing risk while allowing startups to raise a larger sum of capital.

Venture capital plays a crucial role in the growth of innovative startups, providing not just the necessary
funding but also the strategic and operational support needed to succeed in highly competitive
industries.

Debt Securitization

Debt securitization is a financial process where illiquid assets, such as loans or receivables, are
converted into tradable securities. These securities are backed by the underlying pool of assets and can
be sold to investors, allowing the originator (often a bank or financial institution) to raise capital and
transfer the credit risk to other market participants. This technique is widely used to package and sell
various types of debt, including mortgages, credit card debt, auto loans, and commercial loans.

1. Meaning of Debt Securitization

Debt securitization involves pooling various types of debt, such as loans or receivables, and converting
them into securities that can be sold to investors. These securities, known as asset-backed securities
(ABS), represent claims on the future cash flows generated by the underlying assets. The process helps
to improve liquidity for the originator while allowing investors to earn returns based on the performance
of the underlying asset pool.

Key terms related to debt securitization:

 Originator: The entity (usually a bank or lender) that owns the original debt or loan.

 Special Purpose Vehicle (SPV): A separate legal entity that holds the securitized assets and
issues securities backed by those assets.

 Asset-Backed Securities (ABS): Tradable securities that represent claims on the future cash flows
of the underlying debt assets.

Benefits of Debt Securitization

Debt securitization offers several advantages for various stakeholders:

For Originators:

1. Improved Liquidity: By selling off loans or receivables, the originator converts illiquid assets into
cash, which can be used for further lending or business expansion.

2. Risk Transfer: The originator transfers the credit risk associated with the loans to the investors
who buy the securitized assets.

3. Capital Relief: Securitization allows financial institutions to remove assets from their balance
sheets, freeing up capital and enabling them to comply with regulatory capital requirements
(such as Basel III norms).

4. Access to Cheaper Funding: Originators can often raise funds at lower costs by securitizing
assets than by issuing debt or equity.

For Investors:

1. Diversification: Investors gain exposure to a pool of diversified loans or receivables, reducing the
risk associated with investing in a single debt instrument.

2. Stable Cash Flows: ABS offer a steady stream of income, as the underlying assets (such as
mortgages or loans) generate regular payments from borrowers.

3. Customizable Risk: Securitization allows investors to choose securities with different risk levels,
depending on their risk tolerance. Securities are often issued in tranches that offer varying
returns and risk profiles.

For the Economy:

1. Increased Credit Availability: By improving liquidity, securitization allows banks and financial
institutions to extend more credit to businesses and consumers, boosting economic activity.
 2. Efficient Capital Allocation: Securitization enables a more efficient allocation of capital, as
investors can directly access returns from specific types of loans or assets.

Concept and Application of Debt Securitization

Concept

Debt securitization is based on the idea of converting illiquid financial assets, such as loans, into
marketable securities. The originator pools multiple loans together and sells them to a Special Purpose
Vehicle (SPV), which issues tradable securities backed by the cash flows from these assets. Investors who
buy these securities receive returns based on the performance of the underlying loans. This process is
beneficial for both lenders (who free up capital) and investors (who gain access to income-generating
assets).

Applications

Debt securitization can be applied to a variety of asset classes and industries:

 Mortgage-Backed Securities (MBS): One of the most common forms, where home loans
(mortgages) are securitized and sold to investors. This played a major role in the growth of
housing markets but was also central to the 2008 financial crisis.

 Auto Loans: Car loans issued by banks or finance companies can be bundled and securitized into
Auto Loan-Backed Securities.

 Credit Card Receivables: Credit card debts owed to financial institutions can be securitized into
asset-backed securities.

 Student Loans: Student loan portfolios are often securitized and sold to investors to improve
liquidity for educational institutions.

 Commercial Loans: Businesses can also securitize receivables or other debt instruments to raise
capital efficiently.

Mechanism of Debt Securitization

The debt securitization process involves several steps:

Step 1: Origination of Loans or Receivables

 Financial institutions (banks, credit card companies, etc.) originate loans to customers. These
loans generate future cash flows in the form of payments (interest and principal) made by the
borrowers.

Step 2: Pooling of Assets

 The originator groups similar loans or receivables (e.g., mortgages, car loans, or credit card
debts) into a single pool. This pool of assets becomes the base for issuing asset-backed
securities.
Step 3: Formation of a Special Purpose Vehicle (SPV)

 The originator creates an independent legal entity known as a Special Purpose Vehicle (SPV) to
hold the pooled assets. This step separates the pooled assets from the originator's balance sheet
and provides legal and financial insulation for the securitized assets.

Step 4: Issuance of Securities

 The SPV issues securities backed by the pooled assets. These securities are typically divided into
different tranches, each with its own risk and return profile. For instance:

o Senior Tranche: Has the highest priority for payment and is considered the safest, but
offers lower returns.

o Mezzanine Tranche: Riskier than the senior tranche but offers higher returns.

o Equity Tranche: The most junior tranche, which absorbs any losses first but also provides
the highest potential returns.

Step 5: Selling Securities to Investors

 The issued securities (ABS) are sold to institutional investors (such as mutual funds, pension
funds, or insurance companies) or individual investors. The investors receive periodic payments
based on the cash flows generated by the underlying assets.

Step 6: Servicing of Loans

 A servicer, usually the originator or a third party, continues to manage the loan payments from
borrowers. This includes collecting interest and principal payments, handling defaults, and
ensuring that the cash flows are distributed to the holders of the ABS.

Step 7: Repayment and Distribution of Cash Flows

 As borrowers make payments on the underlying loans, these cash flows are passed through the
SPV to the investors who hold the ABS. The senior tranches are paid first, followed by the
mezzanine and equity tranches, based on the structure of the deal.

In summary, debt securitization converts illiquid loans or receivables into marketable securities, offering
benefits such as improved liquidity, risk transfer, and diversified investment opportunities. The process
involves the creation of an SPV, the issuance of tranches with varying risk profiles, and the sale of these
securities to investors. It has broad applications across various sectors, from mortgages to credit cards,
and plays a key role in modern financial markets.