- Discuss the evolution of financial services in India. What are the problems faced by financial services industry in India?
The internet has made life easier and has remodeled the way anyone and everyone live, shop, socialize and entertain oneself. Therefore, it has also come up as a resource people save and invest.
To differentiate their services and gain advantage over the raising competition, the financial service providers are trying to provide their services in all materialistic pleasures to the customer. The internet is emerging as the greatest helping hand to these service providers. Service Sector contributes 57% in the GDP, and so plays a vital role in Indian Economy.
With a growth rate of 8.5% every year, there are many ways in which Internet has affected Financial Services sector in India:
- Internet Banking
- Bill Payment
- E-Delivery of Financial Services
- Internet Banking
Two different necks of the woods have come up in the context of Internet Banking. One is that the banks and the NBFCs are trying their hands on the entire market of financial services. On the flip side, new Internet Sites are coming up and challenging the banks and the NBFCs. Banks are trying new schemes and melding moves to stronghold their customers while the dot-coms are fragmenting the market by providing first-rate aid.
The value of banking industry in India is $ 270 Billion by the total asset value, and the total deposits account for $ 220 Billion according to the report by IBEF. So, with such a great potential, this industry is becoming a milepost of opportunities. The rural penetration of Internet in India is 29% that will become 48% in 2018. So, they are in the limelight for the banks to take hold from products like Agri-Loan.
All characters share the same objective: take possession of the customers, provide them the knowledge about the domain with services and competitive products and increasing the value proposition of their brands.
Earlier, when the banking was offline, the customers had a gap between the content and the reach. So, this discontinuity has been filled up by internet banking. Institutions can now cover the wider audience, shifting the competition from products to services. The most benefitted through E-Banking are the private sector banks that have introduced the concept of Telephone Banking and Home banking.
Also, the eBanking has worked for the customers who can now apply for products like loans and insurance without getting into long queues. Instead of making an attempt of visiting individual websites of various banks and getting the charges like the Interest rates, they can use the power of technology and access Online Financial Services Comparison platforms which will help them understand the hidden charges and make their journey of availing services like loans and insurance smooth. The time has shifted from the basic Net Banking like NEFT and RTGS to the very economical E-Wallets.
The EBP (Electronic Bill Payment) have been proved a significant tool to attract customers by making the transactions more efficient and accessing the chapter and verse of their financial health more easily. Although the CMS (Cash Management Services) and the revenue generated by processing in the physical form have been affected by EBP but still banks take it as an integral and most vital part of services to the customers. Banks have consolidated platforms to pay the bills or recharge online which gives the customers relaxation from the hassles of late payments and issuing cheques, and also add-ons like real-time SMS alerts, etc. This has facilitated the customer to check their account balance while paying the bills. The upper hand of EBP in the market has facilitated the sale of Debit and Credit cards and also has given advantage to payment gateways.
eBrokerage is one of the fields where the online financial websites are giving a tough competition to the traditional service providers. The local DSAs and the brokers are facing threats by the online DSAs because of the value and the intelligent services these E- brokers provide to the customers. Banks and the NBFCs have also played a smart move, and they are getting into a tie-up with these e-brokers to expand their customer base and gain more on client acquisition. Banks have recorded the E- trading business and have sourced the e-traders so that the customer can buy or sell the stocks online and can also pay via the net. For example, ICICI has its trading podium icicidirect.com and HDFC have its platform called hdfcsec.com with features to integrate the Trading, Banking and Demat accounts of the customers and provide them a single solution to Internet trading.
eDelivery of Financial Services
The banks have come up with the delivery of services like checking your account status on fund transfer, writing the cheques and demand drafts through the internet. They are also trying to get into the B2C and B2B E-commerce by providing the value-added services to the customer online. Banks have also approached features like having a tie-up with the corporate so as to enter their supply chain by facilitating the electronic transfer of funds. The application process for a Personal Loan, Car loan and even mortgages have shifted Online and other products like bonds, and mutual funds are offered through their service portals. Banks have also planned their online shopping portals like HDFC has a way-in called easy2buy.com and Federal bank has a similar concept with Rediff.com and Fabmart. ICICI also has its e-tailing site called magiccart.com.
The time is not far when the customer will scan and upload his documents to avail any financial service in the comfort of his home. This will reduce the turnaround time of any product significantly, making India stand in the array of countries with highest growth rate through technology and financial knowledge.
The scrutiny the financial services industry is under has never been greater with increasing aggressive action against banks, insurers and funds and now individuals.
The hard numbers illustrate the increased clampdown. In the two and a half years to 30 September 2014, the FCA and FSA imposed more than £1 billion in fines – some £680 million more than in the entire decade before.
With that in mind, the sector is under huge pressure to prove it can successfully mitigate risks, uncover past misconduct and improve resilience – or pay the price. With public opinion still broadly mistrustful of financial services, 2015 is a crunch year for many firms in handling financial crime.
Here´s six issues:
- Credit crunch: a long term legacy
The UK recovery may be under way, but the impacts of the 2008 crisis on business are still keenly felt. The latest surge of legislation – including Dodd Frank, Foreign Account Tax Compliance Act (FATCA), Basel III, Solvency II and new anti-money laundering rules – places a strain on compliance and change functions, as well as continuing to drive major disputes within the industry.
Where retail customers may have been disadvantaged in the past, regulators’ increasing focus on conduct means they tend towards redressing the balance in favour of consumers, often leading to complex remediation work.
- Market abuse: rebuilding trust and confidence
Interest and foreign exchange rate manipulation and commodities price fixing have continued to damage the reputation of banks and asset managers. The resulting fines and settlements are unprecedented and financially devastating for the institutions concerned. The biggest casualty may be future consumer confidence in traditional financial markets and exchanges.
Trading institutions need to clean up their act – or prepare for future financial pain in terms of fines and lost business.
- Senior Persons regime: individual responsibility for corporate failings
Accountability drives change. As regulators seek to pull these levers more directly, senior executives are increasingly being held accountable in more ways for the failures of their firms and any resulting losses suffered by consumers and investors.
With personal fines and even custodial sentences being applied to future failures, the message from government is clear: improve or suffer the direct and immediate consequences. With this in mind, comprehensive due diligence on individuals in key roles and improved management information are crucial.
- Macro-politics: a changing trade landscape
Upheaval in Crimea and the Middle East has led to international condemnation and stiff sanctions against states such as Russia who have previously been accepted participants in international trade. The ongoing democratisation of former Soviet states and continuing instability in both the Middle East and North Africa further complicate the picture. Unravelling whom you can trade with from whom you can’t is increasingly problematic, meaning corporate due diligence is both more complex and more critical.
- Changing culture: a new approach to risk management and governance
Long term behavioural change is now recognised as key to limiting exposure to financial crime risks. Regulators have taken the lead, encouraging and in some cases forcing firms to address underlying organisational culture and be more transparent in their governance, as evidenced by the focus of Skilled Person’s reviews.
Many firms now understand that addressing behaviour at this fundamental level has commercial benefits beyond mere regulatory compliance. The challenge they face is how to embed appropriate values in practice.
- Shifting borders: new frontiers in financial services
Disenchanted financial services consumers, new patterns of market behaviour and new digital technologies are all combining to build viable new channels and an entirely new infrastructure for ‘virtual’ financial transactions, much of which sits outside the control of existing financial institutions and regulators.
Whilst regulators catch up, firms need to understand what these changes mean, in terms of opportunity, future exposure to financial crime and other specific risks to their business models.
- Mutual funds are an important segment of financial markets. How is this role performed? Also discuss the management of a mutual fund company.
According to the Global Asset Management 2006 Report form Boston Consulting Group, India-managed assets will exceed more than $1 trillion by 2015. This means an annual growth rate of 21% for the next nine years. The Indian mutual funds industry has been growing at a healthy pace of 16.68 per cent for the past eight years and the trend will move further as has been emphasized by the report. With the entrance of new fund houses and the introduction of new funds into the market, investors are now being presented with a broad array of Mutual Fund choices. The total asset under management of Mutual Fund International Journal of World Research industry rose by 9.45% from Rs.309953.04 crores to 339232.46 crores in November, 2006 as published by AMFI. In 1987, its size was Rs.1,000 crores, which went up to Rs. 4,100 crores in 1991 and subsequently touched a figure of Rs.72,000 crores in 1998. Since then this figure has been increasing tremendously and thus revealing the efficiency of growth in the mutual fund industry. It has generally been observed that as the GDP of a country starts moving up, the share of AUM as a percentage of household financials assets start to increase. At present, India has a GDP of around $3,000 on a per capita basis and the AUM as a percentage of household financial assets is under 4%. This is undoubtedly very low as compared to other countries. As India’s GDP is expected to maintain its growth rate, households will surely be holding more assets through mutual fund than ever before. The tremendous growth of Indian Mutual Funds industry is an indicator of the efficient financial market we are currently having and the trust which investors have on the regulatory environment. Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). Different business groups / financial institutions / banks have sponsored these AMCs, either alone or in collaboration with reputed international firms. Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants areexpected to come into Indian markets in the near future.
Mutual Funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that is aimed for at the time of making investments. Money market funds offer the liquidity that is desired by big investors who wish to park surplus funds for very short-term periods. Balance Funds cater to the need of investors having an appetite for risk greater than that of the debt funds but less than the equity funds. The only pertinent factor here is that the fund has to be selected keeping the risk profile of the investor in mind because the products listed above have different risks associated with them. So, while equity funds are a good bet for a long term, they may not find favour with corporates or High Net-worth Individuals (HNIs) who have short-term needs.
Mutual Fund for Retail investors
Pure equity new fund offerings (NFOs) collected a whopping Rs 32,309 crore in 2006, almost 33% more than the money raised by Indian corporates through initial and follow-on issues.
This is a clear indication that retail investors are increasingly tapping the stock market through the mutual fund route. The mutual fund (MF), as a capital market intermediary, has emerged as new avenue for capital resources. It bridges the gap between retail investors and capital markets. According to Value Research data, the top five equity NFOs were Reliance Equity (Rs. 5,790 crore), SBI Bluechip (Rs. 2,850 crore), Reliance Long Term Equity (Rs. 2,100 crore), UTI Leadership Equity (Rs. 2,080 crore) and Templeton India Equity Income (Rs. 2,030 crore). Close to 40 NFOs were made in 2006 with average collections of Rs. 950 crore. The top five IPOs of 2006 were made by the following companies — Cairn India (Rs. 5,260 crore), Reliance Petroleum(Rs. 2,700 crore), Bank of Baroda (Rs. 1,633 crore), Parsvnath Developers (Rs. 1,089 crore) and Lanco Infratech (Rs. 1,067 crore). So, it is clearly evident that MF is providing more opportunities for the corporates to raise more funds. It is offering several options in structured forms. The International Journal of World Research, industry is going to play a major role model in the capital markets. According to a study conducted by the Associated Chambers of Commerce and Industry of India, the size of the Mutual Funds industry is expected to be worth Rs. 4 lakh crores by 2010. Mutual Funds would be one of the major instruments of wealth creation and wealth saving in the years to come, giving positive results. The consistency in the performance of mutual funds has been a major factor that has attracted many retail investors. The Indian Mutual Funds industry has been growing at a healthy pace of 16.68 per cent for the past eight years and the trend will move further. According a study, it has been found out that almost 54 % of people invests for security and certainty while 38 % of the people invests for current spending. Some 53 % of the people prefer long term investment whereas 23% people each prefer medium term and small term investment. All these studies relate to retail investors. Actually, it is the consistence performance of mutual funds which is attracting retail investors towards it. Today, MF equity portfolio is worth around $32 billion, while individual investors own $88 billion. It is the retail investors who have been heavily investing in equities through MFs over the past couple of years. This observation can be made from the fact that close to $17 billion of NFO collections made in the last four years from equity funds. Eventually, money collected on these have made their way to equity market. On an average, MF net investments into equity markets remained at around 50% of that by FIIs in the past three to four years. As retail investor’s investments are typically long-term oriented, they are therefore important for maintaining stability in any equity market. Another very significant development for retail investors in the field of mutual funds is the entry of mutual funds in real estates. For the last three years the real estate sector has been growing at a fast pace of 30-40 %, especially in the metros. But for retail investors, participating in this growth was not easy. By opening the real estate investment for mutual funds, retail investors, who cannot invest directly in real estates (which needs huge investments to start with), are actually allowed to investment in real estates through mutual funds. Retail investors are expected to account for 60% of the industry’s AUM. But this can be possible only if mutual funds in the country manage to enter into nonurban cities. This becomes more important because this is where savings deposits account for 49% of the total assets. These small towns account for only 30% of their holdings in mutual funds. So, one thing can be said for sure that retail investors are going to participate more and more in mutual funds in the times to come and thereby a lot of financial resources are going to be mobilized to financial market of India. Money Market Mutual Fund
A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free.
Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money market mutual fund is similar to a high-yield bank account but cannot be said to be entirely risk free. When investing in a money market fund, one should be more attentive to the interest rate that is being offered. Money market mutual funds are very significant financial resource mobilizer for short term period.
FUTURE TREND OF MUTUAL FUND
In recent years, SEBI has taken several steps to consolidate the Indian MF industry. There are some changes in guidelines that include standardization of the Funds Portfolios and disclosure of the balance sheet of the fund. Among other changes that are scheduled is reduction in the time taken by AMCs to complete formalities from 90 to 42 days. Also proposed is the use of unclaimed money for investor education. The present structure of funds is likely to change from the three - tier framework. This is expected to streamline the operations of the funds and will give them more flexibility. Finally, though International Journal of World Research, Vol: I Issue XI, November 2014, Print ISSN: 2347-937X mutual funds are primarily composed of stocks, there is a slight difference between these two which makes mutual funds more advantageous to the common investors. Diversification is the biggest advantage associated with mutual funds. Diversification is the idea of investing money across many different types of investment avenues. When one investment is not doing well, other might be yielding good profit.
Diversification reduces risk significantly. In addition to this, by purchasing mutual funds, one is actually hiring a professional manager at an especially inexpensive price. Now-a-days, a higher portion of investors´ savings is now invested in market-linked avenues like mutual funds as compared to earlier times. However, if we compare proportion of people investing in mutual funds in India with that in U.S then we find that in U.S more than 50 % people invest in mutual funds whereas in India the proportion is less than 10%. This gives the indication that there is much more untapped potential for growth in this industry in India which must be explored in the coming time. In conclusion, it can be said that despite few problems, the recent changes in the mutual funds industry in India has really favoured its amazing growth and in conclusion it can be said that in times to come mutual funds will continue to be a significant resource mobilizer in the Indian financial market.
- Why do you think financial markets are required. What are your views on proper regulation of these markets?
Financial markets have several economizing features, however, that help to overcome the limitations inherent in saving and investing that arise in the absence of financial institutions. As we shall see, financial markets confer social benefits by extending the division of knowledge (really an extension of the division of labor), shifting capital into the hands of those most capable of investing it, helping reduce uncertainty inherent in human action which is future-oriented, and provide liquidity to investors who possess shorter time horizons.
Financial markets improve the division of knowledge in society by bringing savers and investors together who would not otherwise know about each other. Information is not uniform among all individuals. Someone who has low time preference, and has saved accordingly thus has capital to invest. However, in an international economy, this saver may be ignorant of many investment opportunities.
Likewise, investors who may be aware of certain profitable opportunities may not have personally engaged in capital accumulation through saving. Financial markets allow for the linkage of those with resources to invest and those with knowledge about profitably investable opportunities.
Additionally, those individuals with low time preferences and large pools of savings may not be the same individuals who have superior entrepreneurial foresight. Thus, financial markets couple the saved resources of individuals with low time preferences with investors who have superior investment skills. Closely related is the fact that different individuals have different temperaments more or less suited to bearing uncertainty.
In short, those who save may not have the skills either through foresight or risk-taking capabilities to execute particular investments. Thus, financial markets allow the division of labor to be extended as individuals align with their comparative advantage.
Next, financial markets help us deal with the uncertainty that is inherent in investable projects (note that all human action is speculative because the future is uncertain). Ceteris paribus, individuals prefer less risk than more risk for a given return. In order to understand how financial markets pool risk, we must first distinguish between risk and uncertainty, alternately termed “class probability” and “case probability” respectively. Risk or class probability refers to the fact that in certain circumstances, we know everything about a class of events, but we do not know anything about individual events except whether or not they are members of a particular class.
Insurance is the typical financial market that helps to dilute this type of risk, and it does so through a probability density function that can be known through empirical evidence. Like-minded individuals can pool their resources to insure against catastrophic destruction such as a tornado, for instance. No one middle-class individual could insure himself against a tornado because the asset of his house is more than his yearly salary. Thus, with insurance markets that deal in class probability, risk has been diluted over a large group of people instead of one person bearing it individually.
Lastly, financial markets provide greater liquidity to individuals who desire it, and in so doing, allow for investment in projects with a wider variety of time horizons until completion. Without financial markets, only individuals with extremely low time preferences would be able to make any loans at all. If there is no secondary market in which to sell the claim to the loan, the lender is essentially “stuck” into the time horizon of the investment project.
The same holds true for equity. If individuals had to hold equity for a twenty year time horizon, few people would buy it. It becomes efficient, however, for businesses to fund thirty (or longer) year projects via bond financing as long as there is market for these bonds to be traded. Because there is no necessary time horizon congruence between savers and investors, financial markets allow for long term projects to be financed through the buying and selling of claims to bonds and equities. This makes a saver more likely to buy in to long-term investments.
By bringing together savers and investors, shifting investable capital into the right hands, pooling risk, and allowing for long-term projects, financial markets exert positive influences on the growth of the real economy.
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors, by decreasing borrowing costs and increasing the variety of financial products available.
Aims of regulation
The objectives of financial regulators are usually:
- market confidence – to maintain confidence in the financial system
- financial stability – contributing to the protection and enhancement of stability of the financial system
- Consumer protection – securing the appropriate degree of protection for consumers.
- Reduction of financial crime – reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.
- Regulating foreign participation in the financial markets.
Structure of supervision
Acts empower organizations, government or non-government, to monitor activities and enforce actions. There are various setups and combinations in place for the financial regulatory structure around the global.
Supervision of stock exchanges
Exchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the pricing process, execution and settlement of trades, direct and efficient trade monitoring.
Supervision of listed companies
Financial regulators ensure that listed companies and market participants comply with various regulations under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad hoc notifications or directors´ dealings. Whereas market participants are required to publish major shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure requirements is to ensure that investors have access to essential and adequate information for making an informed assessment of listed companies and their securities.
Supervision of investment management
Asset management supervision or investment acts ensures the frictionless operation of those vehicles.
Supervision of banks and financial services providers
Main article: Bank regulation
Banking acts lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent unwelcome developments that might disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system.
Authority by country
Main article: List of financial regulatory authorities by country
Number of countries having a banking crisis in each year since 1800. This is based on This Time is Different: Eight Centuries of Financial Folly which covers only 70 countries. The general upward trend might be attributed to many factors. One of these is a gradual increase in the percent of people who receive money for their labor. The dramatic feature of this graph is the virtual absence of banking crises during the period of the Bretton Woods agreement, 1945 to 1971. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "banking Crises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).
The following is a short listing of regulatory authorities in various jurisdictions, for a more complete listing, please see list of financial regulatory authorities by country.
U.S. Securities and Exchange Commission (SEC)
Financial Industry Regulatory Authority (FINRA)
Commodity Futures Trading Commission (CFTC)
Federal Reserve System ("Fed")
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency (OCC)
National Credit Union Administration (NCUA)
Office of Thrift Supervision (OTS) (dissolved in 2011)
Consumer Financial Protection Bureau (CFPB)
Bank of England (BoE)
Prudential Regulation Authority (PRA)
Financial Conduct Authority (FCA)
Financial Services Agency (FSA), Japan
Federal Financial Supervisory Authority (BaFin), Germany
Autorité des marchés financiers (France) (AMF), France
Monetary Authority of Singapore (MAS), Singapore
Swiss Financial Market Supervisory Authority (FINMA), Switzerland
People´s Republic of China
China Banking Regulatory Commission (CBRC)
China Insurance Regulatory Commission (CIRC)
China Securities Regulatory Commission (CSRC)
In most cases, financial regulatory authorities regulate all financial activities. But in some cases, there are specific authorities to regulate each sector of the finance industry, mainly banking, securities, insurance and pensions markets, but in some cases also commodities, futures, forwards, etc. For example, in Australia, the Australian Prudential Regulation Authority (APRA) supervises banks and insurers, while the Australian Securities and Investments Commission (ASIC) is responsible for enforcing financial services and corporations laws.
Sometimes more than one institution regulates and supervises the banking market, normally because, apart from regulatory authorities, central banks also regulate the banking industry. For example, in the USA banking is regulated by a lot of regulators, such as the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Office of Thrift Supervision, as well as regulators at the state level.
In the European Union, the European System of Financial Supervision consists of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA) as well as the European Systemic Risk Board. The Eurozone countries are forming a Single Supervisory Mechanism under the European Central Bank as a prelude to Banking union.
There are also associations of financial regulatory authorities. At the international level, there is the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors, the Basel Committee on Banking Supervision, the Joint Forum, and the Financial Stability Board, where national authorities set standards through consensus-based decision-making processes.
The structure of financial regulation has changed significantly in the past two decades, as the legal and geographic boundaries between markets in banking, securities, and insurance have become increasingly "blurred" and globalized.
Regulatory reliance on credit rating agencies
Think-tanks such as the World Pensions Council (WPC) have argued that most European governments pushed dogmatically for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, they forced European banks, and, more importantly, the European Central Bank itself e.g. when gauging the solvency of EU-based financial institutions, to rely more than ever on the standardized assessments of credit risk marketed by two private US agencies- Moody’s and S&P, thus using public policy and ultimately taxpayers’ money to strengthen an anti-competitive duopolistic industry.
- Why should a public issue be marketed? What are the issues involved in marketing a public issue?
Issue management by merchant bankers mainly focuses on three basic functions viz, origination, underwriting and distribution of securities. Distribution services of lead managers include the activities and cost incurred in selling and delivering the securities to the investors. Along with performing the function as a bridge between the issuing company and the investors, merchant bankers also have to generate interest and build the confidence of the investors in the capital market. So distribution is a function of sale of securities to the ultimate investors. This service, managed by lead manager, is performed by brokers and dealers in securities who maintain regular direct contact with the ultimate investors. Merchant bankers make efforts for the promotion and marketing of the issue. They plan, co-ordinate and control the entire activities relating to public issues and direct different agencies to contribute to the successful marketing of securities. In India, lead managers do not own an issue before its distribution to general public. They simply underwrite and arrange the distribution through the underwriters. The liberalization and globalization of Indian capital market has widened the geographical and demographical range of investors. Now, issuing companies call the applications for their shares not only from domestic investors, but from the foreign investors. Similarly, efforts are on to include every strata of society in the list of investors. Advancement of technology in communication and data processing has posed a new challenge for the merchant bankers in the area of marketing of public issues. Today, merchant bankers need top care about being in the centre of ‘information flow’ rather than in the centre of ‘capital flow’. The present chapter aims to study the responsibilities of lead merchant bankers regarding marketing of public issues, SEBI Guidelines on public issue advertisement and the response of the investors for the public issues of equity and debt instruments during the period under review. 7.1 Market Design of Public Issues The market design of public issues is provided in the provisions of the Companies Act, 1956. It deals with the issue, listing and allotment of securities. In addition to this, SEBI Disclosures and Investor Protection Guidelines, 2000 as 190 amended from time to time prescribe a series of disclosures about the issuing company, management, promoters, project, risk factors and eligibility norms for accessing the market. 7.1.1 Responsibilities of Lead Manager(s) in Marketing of Public Issue The process of marketing of securities in primary market starts with the preparation of prospectus. The success of public issue depends upon the excellent marketing techniques worked out by the lead manager. It covers the institutional and retail distribution capacity, equity research capability, retail distribution network, advertising strategies and international distribution capability. A general standardized methodology of marketing may not be ideal for all issues. It may be worked out on a case to case basis depending on the nature of public issues in hand. The responsibilities of lead merchant banker(s) for marketing of public issues may be summarized as under: (i) Deciding the time of floating the issue Timing of the public issue is an important decision taken by lead manager. It is an important marketing strategy and is a futuristic decision which involves the expected market conditions during the time of the issue. It is very strategic decision to determine the right time for the public issue. The main considerations with lead manager for deciding the time of issue include the present and probable future market conditions, research reports by financial analysts, clashing with mega issues, major economic and political events in the country and response of the investors to recent public issues. In the words of Ritter, “Marketing timing ability of (lead manager) is manifested in the tendency for firms to issue after high market returns and before low market returns.” 1 (ii) Appointment of Printers for issue stationery The printers are involved in the process of printing and distribution of issue related stationery. Merchant bankers maintain a list of approved printers and the company in consultation with the lead manager appoints printer after considering the cost and quality of service. Lead merchant banker is responsible to ensure the printing of prospectus, application forms, posters, brochures and other stationery. It must ensure itself the accuracy of statements made and application form and confirm that the prospectus is as per standard prescribed by the stock exchange. 1. Ritter, Investment Banking and Securities Issuance. 191 Main functions of the printer include the layout and design of the offer document, application form, printing of prospectus, application form, brochures etc. However, nowadays, a copy of the offer document is placed on the website of lead managers and syndicate members associated with the issue. A copy of prospectus is also made available on the website of SEBI. (iii) Dispatch and Distribution of Issue Material It is the duty of lead manager that the public issue offer document and other issue related material is dispatched to the designated stock exchange(s), brokers, underwriters, bankers to the issue etc. in advance as agreed upon. In case of rights issue, lead manager must ensure that the abridged letter of offer is dispatched to all shareholders at least three days before the date of opening of the issue. (iv) Appointment of Advertising Agency However sound the project is or the promoters of the issuer company are, the success of the public issue can be attributed to the advertising agency and its campaign for marketing the issue. Merchant bankers maintain a list of advertising agencies having experience and expertise in the publicity of public issues. Normally, merchant bankers call upon various agencies to make a presentation on their advertising and publicity strategy. Based on their presentation and further consultation, the advertising agency is selected. The Company decides on the size of the advertising budget in consultation with the lead manager. Then the advertising agency and lead manager draw up a publicity campaign. (v) Publicity Campaign The selected advertising agency is responsible for carrying on publicity campaign for wide distribution of public issue. It covers the preparation of all publicity material including prospectus, brochures, announcements, advertisements in the media, hoardings etc. Lead merchant banker plays a key role by helping the choice of media, determining the size and the publication in which the advertisement should appear.
In the case of a public issue the company is required to take certain steps by which the potential investing community is appraised of the features of the forthcoming issue. The need for marketing the public issue arises because of the highly competitive nature of the capital market. Moreover, there is a plethora of companies which knock at the doors of investors seeking to sell their securities. Added to this, the media bombards the modern investors with eye catching advertisements to sell their concepts to prospective investors
Following are the steps involved in the marketing of the issue of securities to be undertaken by the lead manager:
- Target market: The first step towards the successful marketing of securities is the identification of a target market segment where the securities can be offered for sale. This ensures smooth marketing of the issue. Further it is possible to identify whether the market comprises of retail investor or institutional investors.
- Target concentration: After chosen the target market for selling the securities steps are to be taken to assess the maximum number of subscriptions that can be expected from the market would work to the advantage of the company if it concentrates on the regions where it is popular among prospective investors.
- Pricing: After assessing market expectations, the kind and level of price to be charged for the security must be decided. Pricing the issue also influences the design of capital structure. The offer has to be made more attractive by including some unique features such as safety net, multiple options for conversion, attaching warrants etc.
- Mobilizing intermediaries: For successful marketing of public issues, it is important that efforts are made to enter into contracts with financial intermediaries such as an underwriter, broker/sub-broker fund arranger etc.
- Information contents: Every effort should be made to ensure that the offer document of the issue is educative and contains maximum relevant information. Institutional investors and high net worth investors should also be provided with detailed research on the project, specifying its uniqueness and its advantage over other exiting or upcoming projects in a similar field.
- Launching advertisements campaign: In order to push the public issue, the lead manager should undertake a high voltage advertisement campaign. The advertising agency must be carefully selected for this purpose. The task of advertising to issue shall be entrusted to those agencies that specialize in launching capital offerings. The theme of the advertisement should be finalized keeping in view SEBI guidelines. An ideal mix of different advertisement vehicles such as the press, the radio and the television, the hoarding etc should be used. Press meets, brokers and investors conference etc shall be arranged by the lead managers at targeted regions. It would be appropriate to make use of the services of Market Research organizations that specialize in carrying out opinion polls. These services would be useful in collecting data on investors’ opinion and reactions relating to the public issue of the company. Such a task would be to develop an appropriate marketing strategy. This is because there are vast numbers of potential investors in semi-urban and rural areas. This calls for sustained efforts on the part of the company to educate them about the various avenues available for investment.
- Brokers’ and investors’ conference: As of the part issue campaign the lead manager should arrange for brokers’ and investors’ conferences in the metropolitan cities and other important centers which have sufficient investor population. In order to make such endeavors more successful advance planning is required, It is important that conference materials such ads banners, brochures, application forms, posters etc reach the conference venue in time. In additions, invitation to all the important people, underwriters, bankers at the respective places, investors’ association should also be sent.
- Timing of the Issue: A critical factor that could make or break the proposed public issue is its timing .the market conditions should be favorable. Otherwise, even issue from a company with a recent track record, and whose shares are highly priced might flop. Similarly the number and frequency of issues should also be kept to a minimum to ensure success of the public issue.
- Differentiate ´Financial restructuring´ and ´Organziational restructuring´ What factors in your view affect the decision of merger or takeover of a firm?
Restructuring can mean any of the following things:
A process of reorganizing a company’s ownership, legal, or operation structure for the betterment of the company or to increase its profits in the market.
It can also imply a change in the ownership, demerger, or change in the business like a buyout or a bankruptcy.
Three other terms can imply its meaning: financial restructuring, debt restructuring, and corporate restructuring.
The whole process of restructuring is based on a crucial decision of whether to reposition the company or save it by either selling a part of the company to investors or reducing services, or taking care of financial debts. To carry out this responsibility, either the company hires financial and legal advisors or a new CEO to make the decision.
Reorganization is taking control of a bankrupt or financially unstable firm by restating its assets and liabilities. It involves discussions with creditors about repayment so that the recurrence of the financial debts is minimized. Reorganization can also refer to the sale or merger of a company that involves a change in ownership, legal and management level changes, as well as a change in stocks. It is a court-supervised formal process that restructures a company’s finances after it faces bankruptcy. During the period when a company files for bankruptcy and the court reviews it, the company is saved from the creditors. Reorganization can also occur to take advantage of any changed tax regulations. This brings about legal as well as corporate structural changes to the firm involved. One of the aims of reorganization is to repay creditors as much of the debt amount as possible, and also restructure the company’s management, operations, and finances keeping in mind that the same problem (of bankruptcy) does not reoccur.
Differences between restructuring and reorganization:
- Restructuring is done to make an organization profitable or to make it reach the current market standards. Reorganization is needed to stabilize a company that is facing bankruptcy.
- A legal and financial advisor or a new CEO is hired to take care of a company during restructuring. During reorganization, the entire process takes place under the supervision of the court to take care of legal and management structural changes.
- Restructuring ensures that a company becomes more effective and better organized.
It focuses on the core business and takes care of changed strategic and financial plans.
- Reorganization makes sure that new opportunities are opened up, there is a rise in profits, and updated legal and financial protections are given to companies during trying times.
Corporate leaders working to expand their market share or brand, or looking to reduce company costs, often look to mergers and acquisitions as an efficient way to achieve these goals. The strategy is a way to bypass the time and resources entailed in achieving organic growth. With mergers and acquisitions, growth occurs by finding complementary alliances among the competition. Although an ample upside is associated with a successful merger or acquisition, potential risks dictate prudence before companies tie the knot.
One of the key concepts associated with mergers and acquisitions is strategic fit. Companies operating in the same sector must have some degree of alignment in terms of competitive situation, strategy, organizational culture and leadership style. Greater overlap of these elements between organizations creates a more conducive environment for merging two separate companies into a single entity. Although many factors play into these alignments, company leadership spearheads these elements and, therefore, contributes the greatest influence among them
Market Share and Branding
Fierce protectiveness over market share exists between competitors operating within the same sector. When the opportunity to combine operations presents itself, however, company leaders see a probable growth in market share on the horizon. Whether combining operations turns out to be as profitable as hopeful numbers project, however, depends on how well the merger or acquisition is executed. Included here is the idea of branding and how customers perceive the new, larger company and whether customer loyalty transfers to the new entity.
Strengths and Weaknesses
Understanding the strengths and weaknesses each company brings to the table is another element in determining the viability of potential mergers and acquisitions. Big companies with large balance sheets and little debt make an attractive partner in terms of capital. Smaller companies with nimble management might be eyed for ingenuity prowess. Excessive debt or a questionable workforce also factors into the equation.
Decision makers studying the viability of potential mergers and acquisitions are well-served in understanding the motivation of the players involved. During the deal-making process, however, the motivation of both the buyer and seller can affect the financials. A buyer going into negotiations who is particularly convinced of a company´s value, for instance, is likely willing to pay a higher price to close the deal, or an especially motivated seller might settle for a lower price as a means of getting the deal done.
- Compare and contrast ´Leasing´ and ´Hire Purchasing´. Why do companies go for leasing of assets? Briefly explain?
Definition of Hire Purchasing
Hire Purchasing is an agreement, in which the hire vendor transfers an asset to the hire purchaser, for consideration. The consideration is in the form of Hire Purchase Price (HPP) which includes cash down payment and instalments. The hire purchase price is normally higher than the cash price of the article because interest charges are included in that price. The instalment paid by the hirer at periodical intervals up to a specified period. The instalment is a sum of finance charges i.e. interest and the capital payment i.e. principal.
Under Hire Purchase transaction only the possession of the assets is transferred to the hirer. However, there is a condition of the transfer of ownership, i.e., hire-purchaser ought to pay all the instalments due on the asset transferred. By virtue of this, if the hire purchaser is unable to pay the outstanding instalments, then the hire vendor can repossess the asset without paying any compensation to the hirer.
The recording of accounting transactions in the books of hire vendor and hire purchaser is different. The method of accounting used by the parties is as under:
In the books of hire vendor:
- Interest Suspense Method
- Sales Method
In the books of hire-purchaser:
- Interest Suspense Method
- Cash Price Method
- Definition of Leasing
A contract in which one party (lessor) permits to use the asset for a specified period to another party (lessee) in exchange for periodic payments for a specified time is known as Leasing. Accounting standard – 19 deals with leases which apply to all the enterprises, subject to certain exemption.
At regular intervals, the lessee pays a sum to the lessor which is known as Lease Rents, as a consideration for using the asset owned by the lessor. In addition to this, the lessor also gets a terminal payment known as Guaranteed Residual Value (GRV). The aggregate of the lease rent and guaranteed residual value is known as Minimum Lease Payments (MLP). If the Lessor receives, the amount more than the guaranteed residual value is known as Unguaranteed Residual Value. There are two ways of leasing the asset, which is as under:
Operating Lease: The lease which covers only a small part of the useful life of the asset is Operating Lease. In this kind of lease, there is no transfer of risk and rewards.
Finance Lease: A lease agreement to finance the use of the asset for the maximum part of its economic life is known as Finance Lease. All the risk and rewards incidental to the ownership is transferred to the lessee with the transfer of the asset.
Key Differences Between Hire Purchasing and Leasing
The difference between hire purchasing and lease financing are discussed in the points given below:
An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical instalments is known as Hire Purchasing. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.
Leasing is governed by AS – 19 whereas there is no specific Accounting Standard for Hire Purchasing.
Down Payment is a must, in hire-purchasing but not in leasing.
The duration of leasing is longer than the hire purchasing.
Leasing may cover asset like land and building, plant, and machinery, etc. Conversely, cars, trucks, tempos, vans, etc. are the kind of assets which are sold on hire purchasing.
The instalment paid in hire purchasing includes the principal amount and interest. In contrast to Leasing, in which the lessee has to pay the cost of using the asset only.
In hire-purchasing, the ownership is transferred to the hirer only if he pays all the outstanding instalments. On the other hand, in a finance lease, the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease, there is no such option available to the lessee.
There are many reasons why companies lease equipment. Business equipment leasing provides flexibility and protection against technological obsolescence. Business equipment leasing allows a company to better match cash outflow with revenue production through the use of equipment. Business equipment leasing conserves valuable working capital and bank lines. Business equipment leasing is efficient, convenient, and allows for 100% financing.
Top Ten Reasons Why Companies Lease
- Purchasing Power. Equipment lease financing allows the lessee to acquire more and/or higher-end equipment.
- Balance Sheet Management. Certain types of leases help the lessee better manage the balance sheet and improve the overall financial picture, by conserving operating capital and freeing up working capital and bank credit lines for inventory, expansion and emergencies. See Operating vs Capital Lease
- 100 Percent Financing. With equipment leasing, there is no down payment. The term of the lease can be matched with the useful life of the equipment.
- Asset Management. A lease provides the use of equipment for specific periods of time at fixed payments. It assumes and manages the risks of equipment ownership. At the end of the lease, the lessor disposes of the equipment.
- Service Additions. Many lessees choose to structure their leases to include installation, maintenance and other services, if needed.
- Tax Treatment. Leasing offers the option of deducting 100 percent of the lease payment as a business expense. See Operating vs Capital Lease
- Upgraded Technology. Leasing provides companies with the ability to keep pace with technology. The lessee can upgrade or add equipment to meet ever-changing needs.
- Specialized Assistance. Lessors are specialists in equipment leasing and financing, and understand capital equipment markets.
- Flexibility. There are a variety of leasing products available, allowing the lessee to customize a program to address needs and requirements - cash flow, budget, transaction structure, cyclical fluctuations, etc.
- Proven Equipment-Financing Option. Over 30 percent of all capital equipment in the United States is acquired through leasing. In fact, eight out of 10 companies lease their equipment.
- Stock exchanges in India have not served their purpose.´ Do you agree? Validate your arguments?
Important functions of stock exchange
Important functional contribution of stock exchange are as follows:
(1) Providing Liquidity and Marketability to Existing Securities:
Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis.
Whenever required, an investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increases their marketability and enhances liquidity.
(2) Pricing of Securities:
A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.
(3) Safety of Transactions:
Stock exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange h