It including
banking, insurance, stock broking and investment services business and professional services.
Cater the need of financial institutions, financial markets and financial instruments Financial services include the services offered by both
Asset Management companies and Liability Management companies
2
2.
3.
4.
5.
2.
Regulatory framework
1. Institutional regulations: also known as structural regulations which call for a clear demarcation of activities of Financial institutions. It is to promote healthy competition among players. Apex agencies like SEBI to regulate the MB, Stock Broking Co. and RBI another structural entity prescribing the activities of commercial banking.
2.
Prudential regulations: related to internal management of financial institutions and other financial services org, regarding capital adequacy, liquidity and solvency etc. Aims at preventing the entry of firms without adequate resources. (ex. Minimum net worth requirement for various financial service firms is fixed by the SEBI and RBI`s regulations relating to the NBFC`s)
Regulatory framework
3. 4. Investors regulations: the role of SEBI is highlighted with periodic guidelines on investor protection. Legislative Regulations: brought out by Govt. for all round development of financial services industry.
Banking Regulation Act, Securities Contract Regulation Act
5.
Self-regulations: this is addition to the above regulations that are self imposed regulations such as,
Foreign Exchange Dealers association, and Merchant Bankers association in addition to SEBI regulation that governs their members. AMFI
Regulatory Framework
MOF- department of economic affairs Departments:
Economic Affairs Expenditure Revenue Financial Services Disinvestment
Source:
http://finmin.nic.in/
Merchant Banking
MERCHANT BANKING
ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association
JM Finance was set up by Mr. Nimesh Kampani as an exclusive Merchant Bank in 1973. The growth of the industry was very slow during this period.
By 1980, the number of Merchant Bankers rose to 33 and were set up by Commercial Banks, Financial Institutions and private sector. The industry remained more or loss stagnant in the eighties.
This arrangement resulted in synergies as their individual strengths complemented each other. Some of the successful tie-ups are :
JM Finance-Morgan Stanley DSP Financial Consultants-Merrill Lynch Kotak Mahindra-Goldman Sachs Ind Global Fin Trust-Salomon Bros Creditcapital-Lazard Bros SBI Capital Markets-Lehman Bros
Services rendered
Organising finance for investment in projects Assistance in financial management Acceptance of house business Raising Eurodollar loans and issue of foreign currency bonds Financing export of capital goods, hydropower Financing of hire-purchase transaction, leasing Mergers, takeovers, valuation of assets
Functions
Corporate advisory services Merchant bankers offer customized solutions to their clients financial problems. The following are the main areas in which their advice is sought: Financial structuring includes determining the right debt-equity ratio and gearing ratio for the client, the appropriate capital structure theory is also framed. Merchant bankers also explore the refinancing alternatives of the client, and evaluate cheaper sources of funds. Another area of advice is rehabilitation and turnaround management. In case of sick units, merchant bankers may design a revival package in coordination with banks and financial institutions. Risk management is another area where advice from a merchant banker is sought. He advises the client on different hedging strategies and suggests the appropriate strategy.
Functions
Project advisory services- (done by foreign MB)
conceptualizing the project idea feasibility studies
Preparing different documents like the detailed project report.
ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities ieequity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening of issue, closing of issue, launching & publicity campaign etc.. They help the companies in fixing up the prices for their issues (will see the details later)
ISSUE MANAGEMENT :
Post-issue activities:
MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by atleast one authorised merchant banker but not more than two. For an issue of 100 crores, upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..
PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination. Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. Merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys.(Foreign MB)
NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India.Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilising more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a single company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree,negotiates mode of payment and gets approval from government.
Regulation
Merchant Bankers Regulations -Securities and Exchange Board of India Company Act 1956 Listing guidelines of Stock Exchanges Securities Contracts (Regulation) Act, 1956 Formation of divisions Subsidiaries companies
REGULATORY BANKING
FRAMEWORK
FOR
INVESTMENT
Pure investment banks that do not have presence in the lending or banking business are governed primarily by the capital market regulator (SEBI). Universal banks and NBFC investment banks are regulated primarily by the RBI in their core, business of banking or lending and insofar as the investment banking segment is concerned, they are also regulated by SEBI At the constitutional level, all investment banking companies incorporated under the Companies Act 1956are governed by the provisions of that Act. Universal Banks are regulated by the Reserve Bank of India under the RBI Act and the Banking Regulation Act which put restrictions on capital market exposures to be taken by banks.
The business of venture capital and private equity by such funds that are incorporated in India is regulated by the SEBI (Venture Capital Funds) Regulations, 1996 and by those that are incorporated outside India is-regulated under the SEBI (Foreign Venture Capital Funds) Regulations 2000. The business of institutional investing by foreign investment banks and other investors in Indian secondary markets is governed by the SEBI(Foreign Institutional Investors)Regulations 1995.
Structure
Category-I
to carry on any activity of the issue management,
preparation of prospectus and other information relating to the issue, determining financial structure, tie-up of financiers final allotment refund of the subscription; and
to act as
adviser, consultant, manager, underwriter, portfolio manager.
Structure
Category II
that is, to act as
adviser, consultant, co-manager, underwriter, portfolio manager;
Category III
that is to act as
underwriter, adviser, consultant to an issue;
Category IV
that is to act only as
adviser or consultant to an issue.
Segregation between
fee based and Fund based activities
Terms of Authorization
Authorization is valid for an initial period of 3 years Authorization fee, annual fee and renewal fee All issues should be managed by at least one authorized merchant bankers, functioning as sole manager or lead manager MB expected to exercise due diligence independently Involvement of MB in post-issue management Adhere a code of conduct prescribed by SEBI MB may be cancelled or suspended for suitable duration MB regulations integrate issue management with underwriting
BANKS PROVIDING MERCHANT BANKING SERVICES IN INDIA Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFC , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming, Klienwort Benson etc
Product Differentiation
In Investment Banking Industry, product expertise on both the issuing and investing side needs to be developed or acquired. Generally, product differentiation is not very high, because the ultimate deal structure is designed as per the advise of the client. The area where an Investment Banker can make the difference, is in the execution of the deal. Though new financial innovations also help a firm to differentiate from others, but they are easily initiated in this industry. For example, Videocon Leasing and Industrial Finance Ltd., introduced the concept of Bought-Out Deal for the first time for raising capital for Patheja Forgings Ltd., and later on many Investment Bankers followed it by raising money for their clients through this route.
Product Differentiation
JM Financial has designed and executed several innovative deals. In 1979, JM designed Fully Convertible Debentures (FCDs) for TISCO.
People rendering these services are in large number in the market, hence bargaining power of suppliers can be considered to be very less.
It includes preparation of project reports,deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions.
LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.
Capital Markets
Primary Issues
Listing price Listing gain Grey market ASBA account Application Supported by Blocked Amount Private placement
SEBI: The capital market regulator
An issuer may make IPO in following 3 options Option 1 Profitability Route An issuer company may make an IPO only if : Net tangible assets of at least Rs 3 crores in each of 3 preceding years, of which not more than 50% is held in monetary assets except were the issuer company has made firm commitments to utilise such excess monetary assets in its project Issuer company has a track record of distributable profits terms of section 205 of the Companies Act, 1956 for at least 3 years out of immediately preceding 5 years
Net worth of at least Rs 1 crore in each of preceding 3 years Size of the public issue sum of (proposed issue + all previous issues) made in the same financial year =< 5 times its pre-issue net worth as per the audited balance sheet of the preceding financial year
If its name is changed within last 1 year, 50% or more of the revenue for preceding 1 year has been earned from the activity indicated by new name
The minimum post-issue face value capital of the issuer is Rs. 10 crores
OR Issuer shall be compulsory undertake marketmaking for at least 2 years from the date of listing of specified securities subject to specified conditions.
Option 3 Appraisal Route An issuer not satisfying any of the conditions mentioned under option 1 may make an IPO if Minimum 15% of cost of project is appraised & participated by scheduled commercial banks or public financial institutions
The minimum post-issue face value capital of the issuer is Rs. 10 crores OR Issuer shall be compulsory undertake marketmaking for at least 2 years from the date of listing of specified securities subject to specified conditions.
OTHERS CONDITIONS
A company can make a public issue only if Issuer company / its promoters / promoter group / directors / persons in control of Issuer Company are not debarred from accessing the capital market. After entering into an agreement with depository for dematerialisation of specified securities already issued or proposed to be issued All existing partly paid up equity shares of the issuer company shall be either been fully paid or forfeited An issuer shall make an allotment only if prospective allottees are more than 1000 Issuer shall obtain grading for IPO from at least one credit rating agency on or before date of registering prospectus or red herring prospectus with Registrar of Companies A company should not have convertible securities or any other right which would entitle any person to receive equity shares after IPO
Green Shoe option means an option of allotting equity shares in excess of equity shares offered in the public issue as a post listing price stabilizing mechanism Issuer Company use green shoe option Mechanism during IPO to ensure that the shares price on the stock exchanges does not fall below the issue price after issue of shares.
A contract has been entered in relation to green shoe option with the existing shareholders (i.e with promoters) before the public issue of shares. The guidelines require the promoter to lend his shares (not exceeding 15% of issue size) which is to be used for price stabilisation to be carried out by a stabilising agent (normally merchant banker or book runner) on behalf of the Company. The stabilization period can be for a period of maximum period of 30 days from the date of allotment of shares to bring stability in post listing pricing of shares. The company then goes on to make allotment, including over allotment, to the extent it has exercised the greenshoe option.
Say, for instance, that a company is planning to issue only 100,000 shares, but in order to utilize the greenshoe option; it actually issues 115,000 shares, in which case the overallotment would be 15,000 shares. Please note that the company does not issue any new shares for the over-allotment.
The 15,000 shares used for the over-allotment are actually borrowed from the promoters with whom the stabilizing agent enters into a separate agreement. For the subscribers of a public issue, it makes no difference whether the company is allotting shares out of the freshly issued 100,000 shares or from the 15,000 shares borrowed from the promoters. Once allotted, a share is just a share for an investor.
For the company, however, the situation is totally different. The money received from the over-allotment is required to be kept in a separate bank account (i.e. escrow account)
The stabilizing agent start its process only after trading in the share starts at the stock exchanges. In case the shares are trading at a price lower than the offer price, the stabilizing agent starts buying the shares by using the money lying in the separate bank account. In this manner, by buying the shares when others are selling, the stabilizing agent tries to put the brakes on falling prices. The shares so bought from the market are handed over to the promoters from whom they were borrowed. In case the newly listed shares start trading at a price higher than the offer price, the stabilizing agent does not buy any shares.
It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. The sale of securities can be either through book building or through normal public issue.
Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. In case of Book Building, the demand can be known everyday as the book is being built. But in case of the public issue the demand is known at the close of the issue.
Difference between Offer of Shares through Book Building and Offer of Shares through Normal Public Issue
Cut-Off Price
In a Book building issue, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price.
Floor Price in case of Book Building Minimum Price at which bids can be made
French auction multiple price auction-System under which the bidders are allotted shares at the price they have bid. E.g.NTPC Dutch auction uniform price auction- System under which the cut-off price at which the shares are allotted to everybody participating in the bidding process is the one at which the issue gets fully subscribed. The lowest bid which ensures 100 per cent success of the issue becomes the norm.
Listing Gain
IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains.
Reliance Power.
The IPO was open from January 15 to January 18, 2008. It had 22.8 crore shares on offer, with 30% reserved for retail investors. Rp 6.84 crore shares were available for retail investors. The price band was Rs. 405 to Rs. 450. There was a discount of Rs. 20 for retail investors. There was an option that retail investors could pay only Rs. 115 at the time of application, and pay the remaining at the time of allotment. The allotment of shares happened on January 31, 2008.
Reliance Power.
Lets assume, to be very conservative, that ALL retail investors paid only Rs. 115 per share at the time of application. Also, lets assume that all retail investors applied only on January 18th, the last day of the IPO. The retail portion of the IPO was oversubscribed by 15 times. Thus, application was received for 102.6 crore shares.
At Rs. 115 per share, this means that Rs. 11,799 (115*102.6)crores was collected just from retail investors. (Now, this is the most conservative estimate. There are lots of media reports suggesting that the collection from retail investors was 2 -3 times this amount.
Reliance Power.
Lets do the math. Issue Close Date: January 18th Allotment Date: January 31st
Number of days for which money was held by Reliance Power: 14 days (31-17) Even if the banks invested this money (in some way or the other, on behalf of Reliance Power.) at a meager 5% per annum, how much money they would make? 11799 Crores * 0.05 * (14/365) = 22.63 Crores 22.63 Crores Now, thats a LOT of money. And this, when we have been the most conservative in our calculations.
Considering the. average industry P/E of 8.60, and multiplying it with the weighted average EPS, one could arrive at the most conservative price or the lower end of the trading price band that the scrip of the issuer company can rule. This would work out to:
Therefore, the most optimistic price would be as follows: Highest EPS = Rs 7.10 x P/E of 12 .
Thus, the upper price limit works out to Rs 85.20. The price band thus arrived at ranges from 47 to 85.
Reliance Power.
In January 2008, Reliance Power came out with its initial public offering of Rs. 10 per share face value and 26 crore equity shares. The company priced it at Rs 450 per share (i.e. Rs. 440 per share premium). It is an IPO so premium pricing is justified and to top it off it was a Reliance brand. With this premium pricing the company intended to raise a total of approximately Rs. 11,563 crore (after IPO expenses).
Reliance Power.
The companys annual financial report ending March 2007 shows it had a net profit after tax of Rs. 16.10 lacs.
Based on the equity base at that point in time, the earrings per share was Rs. 0.01 only. In addition, it was stated in the IPO prospectus that the money is being raised to buy lands and build power stations, meaning to buy assets for the company. There was kind of slip through on how it will use these assets to generate earnings. After buying assets one needs resources to make it operational (fuel, water, transmission, power purchase agreement, etc)
Reliance Power.
So what is the valuation for the company at IPO. [450 per share] divided by [0.01 earning per share]. In general, market valuations are anywhere from PE of 20 to 50. The company will have to generate earnings per share of Rs. 22(450/20) to Rs. 9.00(450/50).
Reliance Power.
NTPC which is Indias biggest power producer. It has a capital base of Rs. 8245 crore (Reliance power had Rs 2259 crore including IPO), and generates earning per share of Rs. 9. This is approximately four times the capital base to generate Rs. 9 per share.
How will Reliance Power achieve that level with only Rs. 2259 crore?
NTPC is a very well established player with the full supply chain in place. i.e. coal, power, transmission, purchase agreements, easy access operational capital, etc. In addition, during January 2008, the NTPC stock traded in the range of Rs. 188 to Rs. 282.
Reliance Power.
Investors need to see if there is justification for such high premiums. Compare its investment preposition with industry practice to see if it makes sense.
Grey market
Price is market determined.
Sellers place sell orders. Buyers place buy orders.
In case the share price closes at Rs 120, higher than the premium price, the seller pays the buyer Rs 10 in cash. Thats because the buyer pays the difference between the closing price and the premium set, if the latter is lower.
Grey market
The market regulator has asked stock exchanges to crack down on common irregularities such as brokers involvement in the grey market and unregistered trading terminals. Grey market means trade through channels which, while legal, are unofficial or unauthorised.
Grey market
The grey market in small towns of Gujarat, Rajasthan, Maharashtra, West Bengal and some north Indian states has revived of late.
Sebi found grey market operations by intermediaries such as stock brokers and merchant bankers which often misled investors, who got influenced by the high premium on an issue before it opened in the official markets.
After listing, punters (mainly high net worth individuals) who bet on the issue in the grey market buy shares on the exchanges to settle grey market trades and the share price witnesses a spurt.
Grey market
Sources say there could easily be over 1,000 such terminals in Indias small towns.
Green-shoe Option
Green Shoe option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days. This is an arrangement wherein the issue would be over allotted to the extent of a maximum of 15% of the issue size. From an investors perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability as compared to market. TCS Public Issue
Reservation
In a book built issue allocation to Retail Individual Investors (RIIs), High Net Worth Individuals (HNI) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.
Reservation
Retail individual investor means an investor who applies or bids for securities of or for a value of not more than Rs.2,00,000. Any bid made in excess of this will be considered in the HNI category.
Change/Revise .. bid
The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue.
Safety Net
Any safety net scheme or buy-back arrangements of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original resident individual allottees limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities.
Syndicate Member
The Book Runner(s) may appoint those intermediaries who are registered with the Board and who are permitted to carry on activity as an Underwriter as syndicate members.
The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.
Terminology
E IPO Hard underwriting Soft underwriting
Differential pricing
Pricing of an issue where one category is offered shares at a price different from the other category is called differential pricing.
In DIP Guidelines differential pricing is allowed only if the securities to applicants in the firm allotment category is at a price higher than the price at which the net offer to the public is made.
The net offer to the public means the offer made to the Indian public and does not include firm allotments or reservations or promoters contributions.
These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process.
Rights Issue
Issue of new shares to existing shareholders on a basis Why rights? pro-rata
to reward shareholders to reflect the stocks true worth to hike promoters stake
Preferential Allotment
An issue of shares to a select group of persons under Section 81 of the Companies Act. Select group consists of
Promoters Foreign partners Technical collaborators Private equity funds
GDRs / ADRs
The company deposits a large number of its shares with a bank located in the country (foreign country) where it wants to list indirectly.
The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4).
FCCBs
Bonds issued by Indian companies in foreign currency
Fixed interest/coupon rate Convertible into ordinary shares Bonds listed and traded abroad
ECBs
Supplement domestic resources
Low cost of borrowing Two routes of access
Automatic Approval
Gujarat Pipavav
Gujarat Pipavav Port is coming out with its IPO which will open on 23rd August, and close on 26th August. The IPO is priced between Rs. 42 48, and has been graded 4 out of 5 by CRISIL, which denotes above average fundamentals.
One Billion = One Hundred Crores 100 crores 1 billion = 1000 million, 1million= 10 lacs 10 million=1 crore or 100 lacs
As there was a 115 sell order, the 125 buy order will get executed at Rs 115.
Newspaper Quotes
'Banks will have to unload bad loans to Asset Reconstruction Companies by FY2007' Read a leading business newspaper headline sometime back. A bank selling its bad loans! This might sound strange, but it is
Concept
Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Securitisation is the process of conversion of existing assets (asset-backed) or future cash flows into marketable securities (future-flows).
Securitisation deals with the conversion of assets which are not marketable into marketable ones.
Car loans, Housing loans, Future cash flows like ticket sales, Credit card payments, car rentals or any other form of future receivables
Steps
Creation of a special purpose vehicle to hold the financial assets underlying the securities; Sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets; Issuance of securities by the SPV, to investors, against the financial assets held by it.
Effects
This process leads to the financial asset being take off from the balance sheet of the originator, thereby relieving pressures of capital adequacy, and provides immediate liquidity to the originator.
Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors.
To free these blocked funds the assets are transferred by the originator (ABC Bank in this case) to a special purpose vehicle (SPV).
Cont
The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile. Only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities.
Cont
These securities issued by the SPV to the investors and are known as pass-throughcertificates (PTCs). The cash flows (principal repayment, interest and prepayments) received from the obligors are passed onto the investors (investors who have invested in the PTCs). The difference between rate of interest payable by the obligor and return promised to the investor investing in PTCs is the servicing fee for the SPV.
Cont
The administrator or the servicer is appointed to collect the payments from the obligors. The servicer follows up with the defaulters and uses legal remedies against them.
In the case of ABC bank, the SPV can have a servicer to collect the loan repayment installments from the people who have taken loan from the bank.
Normally the originator (ABC Bank) carries out this activity.
Cont
Once assets are securitised, these assets are removed from the bank's books and the money generated through securitisation can be used for other profitable uses, like for giving new loans.
For an originator (ABC bank ), securitisation is an alternative to corporate debt or equity for meeting its funding requirements.
Impact on Banking
Incremental Credit Deposit Ratio What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. The growth of credit off take though has not been matched with a growth in deposits.
SLR RAISE INTEREST RATE
The security receipts issued by these companies will be securities within the meaning of the Securities Contract (Regulation) Act, 1956. These companies would have powers to acquire assets by issuing a debenture or bond or any other security. once an asset has been acquired by the asset reconstruction company, such company would have the same powers for enforcement of securities as the original lender.
A report in a business daily quotes , Rajendra Kakkar, ARCIL's Chief Executive as saying, "We have got a buyer, we have got a seller, it so happens that the seller is the loan side of the same institutions and buyer is the treasury side."
FY09 also witnessed introduction of new asset classes, like gold loans, microfinance loans and loan against property, in the securitization market. The microfinance loans are categorized as loans to weaker sections under priority sector lending norms which enhance the attractiveness of this asset class.
Single loan CLO market was larger than ABS / MBS market, with mutual funds being the single largest investor class in the segment. Single loan CLOs issuances have sharply dropped in recent months after mutual funds withdrew from the market and RBIs proposal of minimum lock-in period requirement for underlying loans.
Securitization
Dr. Anjala Kalsie Faculty- Finance
Securitization Primer
The Credit Rating Agency (CRA) assigns the rating on the instrument based on
the risks in the transaction, credit quality of the pool, the transaction structure and the credit enhancement mechanism.
The stringent regulation of the Reserve Bank of India, conservative origination standards and simple structures ensured the damage caused by sub-prime structures in US, UK and Europe, were not witnessed in the Indian markets .
The intrinsic inadequacies in the Indian debt markets have also compounded to the shrinking trade volumes and value.
Recommendations to Securities and Exchange Board of India (SEBI) Market Maker To improve liquidity in securitization market, there is a strong need for a Market Maker. It is recommended that SEBI may consider formulating regulations that will encourage market making in securitized assets.
2. Allowing SPVs to enter into interest rate swap for mitigating interest
rate risk
Presently, SPVs are not eligible to enter into interest rate swap. In a transaction with significant interest rate risk, like a long tenure MBS, there is critical need to mitigate it through tools such as interest rate swap.
Lack of availability of such tool creates a major hindrance in the growth of the market.
It is recommended that SEBI many consider SPVs to be included in eligible entities to enter into interest rate swap to mitigate interest rate risk for a securitized pool.
It is recommended that SEBI may consider including securitized papers in the definition of eligible debt securities for FIIs.
This will enhance the transparency and help develop the market.
The Gujarat High Court ruled that an assignment of debt by a bank amounts to trading in debt and cannot be permissible activity for a bank under the Banking Regulation Act. Since this is the 60-year old Act, it is not in tune with the current financial products, trading and business practices.
The judgment came to be passed in a dispute between ICICI Bank and Kotak Mahindra Bank one side while APS Star Industries challenging the assignment of NPAs on the other side.
30 th sep 2010
The Dispute
On 31.3.2006 a Deed of Assignment (deal for sale of assets of insolvent debtor) was executed between Kotak Mahindra Bank Ltd. (as assignee) and ICICI Bank Ltd. (as assignor) by which an aggregate of Rs 52.45 crore (principal amount outstanding under the trade credit facilities) was due and payable by the borrowers to ICICI Bank Ltd. One of the borrowers of ICICI Bank at the relevant time was APS Star Industries Ltd., a company which subsequently went under liquidation, whose application for winding up was pending before Company Court. Kotak Mahindra Bank had then moved Company Application for being substituted in place of ICICI Bank Ltd.
The Repercussion
The decision can go a long way in strengthening the securitisation and restructuring process as the sale of NPAs inter se among banks will result in asset consolidation in the hands of one or fewer banks facilitating sale of NPAs and their restructuring by Asset Reconstruction Companies under Securitisation Act in a better manner.
It is recommended that the Central Government in consultation with the State Government may consider bringing necessary rationalization and uniformity in Stamp Duty and Registration.
This would increase the size of the market and also the scope of assets being securitized.
It is also recommended that the Ministry of Finance get the approval of the Ministry of Labor to authorize Pension/Provident funds to invest into securitized paper.
Source
National Institute of Securities Markets November, 2009 various reports. Business standard various issues.
In the current year, for reasons of their own, the borrowing needs of this set of borrowers were lower. Secondly, investor appetite for some sectors, mainly NBFCs and real estate, reduced, mostly arising out of the experience of October-November 08
Securitization Primer
Securitization is the process of converting loans into marketable securities. Under the securitization process, pool of illiquid bilateral loans is converted into marketable securities.
The originator (lender) transfers his financial interest (called an assignment) to an investment vehicle (called a Special Purpose Vehicle or SPV).
The SPV, in turn, uses the future cash flows from receivables to issue securities called Pass Through Certificates (PTCs) to investors.
Securitization Primer
If the underlying assets are corporate loans, the instrument is referred as Collateralised debt obligation (CDO) If the underlying assets are retail loans, the instrument is referred as Mortgage backed securities (MBS consisting of housing loans) or Assets backed securities (ABS consisting of other retail loans like auto loans, commercial vehicle loans, unsecured personal loans etc). In India, the Direct Assignment structure is more prevalent in which there is no intermediate SPV and the transaction is on a bilateral basis between seller and buyer.
Unlike developed countries where Mortgage Backed securities (MBS) are more prevalent, it is the Asset Backed securities (ABS) which have been the main driver of Securitisation market in India. The market for MBS has been comparatively subdued with lack of investors interest in long term paper and high interest rate risk prevalent in the paper. FY09 also witnessed introduction of new asset classes, like gold loans, microfinance loans and loan against property, in the securitization market.
MUTUAL FUNDS
MUTUAL FUNDS
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities Various investment avenues available to an investor such as : o Real estate, o bank deposits, o post office deposits, o shares, o debentures, o Bonds Mutual fund is just one more type of investment avenue available to investors
Offer Diversification Convenient Administration : Return Potential: Low Costs: Liquidity: Transparency: Flexibility: Through features such as Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP) and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. Choice of Schemes :
SPONSOR
Sponsor is the person who acting alone or in combination with other body corporate, establishes a mutual fund
Net worth of the immediately preceding year should be greater than the capital contribution of the sponsor in asset management company.
Not found guilty of fraud or economic offences.
TRUSTEES
Trustees of the mutual fund mean the board of Trustees or the trustees Company who hold the property of the mutual fund trust for the benefit of the unit holders.
AMC Characteristics
AMCs Board of Directors must have at least 50% of Directors who are independent directors . An AMC Has to be approved by SEBI AMC in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees Charges a fee for providing its services. SEBI has prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a percentage of the schemes net assets
CUSTODIAN
Appointed by the Board of Trustees ROLE OF A CUSTODIAN Safe keeping of physical securities Keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested Participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities
Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Not listed
Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. Lock in period of 3 years. Debt/Income Funds These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks
Fund of Funds
These are funds which do not directly invest in stocks and shares but invest in units of other mutual funds which they feel will perform well and give high returns. Such funds are relying on the judgment of other fund managers.
The distributor (also called a mutual fund advisor) could be an Independent Financial Advisor, a bank or a large national distributor or a regional distributor etc. EXAMPLE. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives 10000/13.13 = 761.6146 units.
EXPENSE RATIO
Expense Ratio is defined as the ratio of expenses incurred by a scheme to its Average Weekly Net Assets. annual expenses/ average weekly net assets
It means how much of investors money is going for expenses and how much is getting invested.
This ratio should be as low as possible.
Assume that a scheme has average weekly net assets of Rs 100 cr. and the scheme incurs Rs. 1 cr as annual expenses, then the expense ratio would be 1/ 100 = 1%. In case this schemes expense ratio is comparable to or better than its peers then this scheme would qualify as a good investment, based on this parameter only.
PORTFOLIO TURNOVER
Portfolio Turnover is the ratio which helps us to find how aggressively the portfolio is being churned. This churning can be done very frequently or may be done after sufficient time gaps While churning increases the costs, it does not have any impact on the Expense Ratio, as transaction costs are not considered while calculating expense ratio
LIQUID FUNDS
Attracts 40% of the industry AUM Known as money market mutual funds Average maturity of less than 1 year Normally do not carry any interest rate risk Advantage of liquid fund: Less risky Better returns than a bank current account Liquid paper having maturity of less than 182 days is valued using cost plus interest accrued method
Long term capital gain-pay STT(security transaction tax @.25% of selling price) Incase the investment is 100% in foreign equity then it is not an equity scheme from taxation point of view and tax has to be paid even on long term capital gain Marginal rate-For non equity schemes incase the investor makes capital gain within 12 months then the capital gain along with income is taxed as per the tax slab
INDEXTATION BENEFIT
Indexation is a procedure by which the investor can get benefit from the fact that inflation has eroded his returns.
EXAMPLE
An investor buys a unit @ Rs 10 and sells at Rs 30 after 5 years. Profit = Rs 30 - Rs10 = Rs 20 But the profit of Rs 20 needs to be adjusted for inflation because inflation reduces your purchasing power Suppose inflation is @12% Adjusted cost of purchase of unit=Rs 10*(1+.12) Profit= Rs 30 - Rs11.2 = Rs18.8 So by reducing profits his tax liability has gone down
The choice of having or not having indexation is upon the investor Without indexation:
Profit=Rs 20 Tax@10%=Rs2
With indexation:
Profit=Rs 18.8 Tax@20%=Rs 3.76 So investor would chose paying tax without taking benefit of indexation
paid to
AMC issues units to a few designated large participants, called as Authorised Participants (APs), who in turn act as market makers for the ETFs. Relatively lesser costs as compared to a mutual fund scheme. While a typical Index fund would have expenses in the range of 1.5% of Net Assets, an ETF might have expenses around 0.75%.
Thereby earning Rs. 2 as the difference. Also this transaction is that the AP does not increase/ decrease his holding in the ETF.
Assets in ETFs
Practically any asset class can be used to create ETFs. Globally there are ETFs on Silver, Gold, Indices In India, we have ETFs on Gold and Indices (Nifty, Bank Nifty etc.). We also have ETFs which are similar to Liquid Funds. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8,2002.
INDEX ETF
An index ETF is one where the underlying is an index, say Nifty.
The APs deliver the shares comprising the Nifty, in the same proportion as they are in the Nifty, to the AMC and create ETF units in bulk known as Creation Units
Once the APs get these units, they provide liquidity to these units by offering to buy and sell through the stock exchange. An index ETF should replicate the index return. However due to expenses there is the difference between the return received and that of the benchmark to imitated. Due to lower expenses, the Tracking Error for an ETF is usually low.
GOLD ETFs
G-ETFs are a special type of ETF which invests in Gold and Gold related securities. Gives the investor an option to diversify his investments into a different asset class, other than equity and debt. Holding physical Gold can have its disadvantages:
Fear of theft Payment Wealth Tax No surety of quality Changes in fashion and trends Locker costs Lesser realisation on remoulding of ornaments
G-ETFs score over all these disadvantages, while at the same time retaining the inherent advantages of Gold investing.
In case of Gold ETFs, investors buy Units, which are backed by Gold. Thus, every time an investor buys 1 unit of G-ETFs, it is similar to an equivalent quantity of Gold being earmarked for him somewhere. Thus his units are as good as Gold. Example 1 G-ETF = 1 gm of 99.5% pure Gold. Buys 1 G-ETF unit every month for 20 years would have given the investor a holding of 240 gm of Gold. After 20 years the investor can convert the G-ETFs into 240 gm of physical gold by approaching the mutual fund or sell the G-ETFs in the market at the current price and buy 240 gm of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007.
WORKING
The G-ETF is designed as an open ended scheme . Investors can buy/ sell units any time at then prevailing market price. In case of open ended funds, investors get/redeem units at a price based upon that days NAV In case of ETFs, investors can buy/sell units at a price which is prevailing at that point of time during market hours. For all investors of open ended schemes, on any given day their buying/redemption price will be same, whereas for ETF investors, the prices will vary for each, depending upon when they bought/sold units on that day.
Investors give money to AMC and AMC gives units to investors in return
AMC buys Gold of specified quality at the prevailing rates from investors money EXAMPLE
Amount Invested (Rs.): 5000 Price of 1 gm of Gold (Rs.): 1000 Since 1 ETF unit = 1 gm of Gold Issue Price (Rs.) = 1000 Units Allotted (Number = Investment/ Issue Price): 5
On an on going basis
Authorised Participants give money/ Gold to AMC AMC gives equivalent number of units bundled together to these AP APs split these bundled units into individual units and offer for sale in the secondary market Investors can buy G-ETF units from the secondary markets either from the quantity being sold by the APs or by other retail investors Retail investors can also sell their units in the market
TRACKING ERROR
The custodian maintains record of all the Gold that comes into and goes out of the schemes Portfolio Deposit. The custodian may appoint a sub-custodian to perform some of the duties.
The custodian charges fee for the services rendered and has to buy adequate insurance for the Gold held. The premium paid for the insurance is borne by the scheme as a transaction cost and is allowed as an expense under SEBI guidelines.
This expense contributes in a small way to the tracking error.
EXAMPLE
Growth OptionGrowth option is for those investors who are looking for capital appreciation Say an investor invests Rs 1 lakh in an equity scheme Say scheme gives return @12% after 1 year His money would grow by Rs 12,000 Assuming he invested with NAV of Rs100 Current NAV=Rs112 Notice here that neither is any money coming out of the scheme, nor is the investor getting more units. His units will remain at 1,000 (1,00,000/ 100) which he bought when he invested Rs. 1 lakh @ Rs. 100/ unit
Dividend Payout OptionAfter 1 year Dividend=Rs 12 So NAV would fall by Rs 12 to Rs 100 in an year Here he will not get any more number of units (they remain at 1,000), but will receive Rs 12,000 as dividend (Rs. 12 per unit * 1,000 units) Dividend Payout will not give him the benefit of compounding as Rs. 12,000 would be taken out of the scheme and will not continue to grow like money which is still invested in the scheme
Dividend Reinvestment OptionIn case of Dividend Reinvestment option, the investor chooses to reinvest the dividend in the scheme Rs. 12, which he receives as dividend gets invested into the scheme again @ Rs. 100
Thus the investor gets Rs. 12,000/ Rs. 100 = 120 additional units. Here although the investor has got 120 units more, the NAV has come down to Rs. 100
Hence the return in case of all the three options would be same. For Growth Option, the investor will have 100 units @ 112, which equals to Rs. 1,12,000.
Dividend Reinvested Option the investor will have 1120 units @ Rs.100 which again amounts to Rs. 1,12,000. Thus it can be seen that there is no difference in either Growth or Dividend Reinvestment Plan
For equity schemes there is no Dividend Distribution Tax, however for debt schemes, investor will not get Rs. 12 as dividend, but slightly less due to Dividend Distribution Tax. In case of Dividend Reinvestment Option, he will get slightly lesser number of units and not exactly 120 due to Dividend Distribution Tax
If a scheme invests in another scheme of the same or different AMC, no fees will be charged. Aggregate inter scheme investment cannot exceed 5% of net asset value of the mutual fund No scheme can invest in unlisted securities of its sponsor or its group entities Schemes can invest in unlisted securities issued by entities other than the sponsor or sponsors group. Open ended schemes can invest maximum of 5% of net assets in such securities whereas close ended schemes can invest upto 10% of net assets in such securities. (NA) Schemes cannot invest in listed entities belonging to the sponsor group beyond 25% of its net assets
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Corporate Restructuring
B. Through transfer of Equity-change in shareholding pattern-resulting in change in ownership or control-the integration is not at the balance sheet level
acquisition and takeover
To create long term holding structure- Aditya Birla group23/07/2002 , TATA group mid nineties. To restructure balance sheet with a view to reflect the asset and liability profile better or to increase the asset base and fund base-Mahindra & Mahindra Ltd. To facilitate distribution of assets and family business settlements-Reliance ,Bajaj, Thapar, Chhabrai s, Modies Apollo Tyres Group. To exit non core business- Times Bank,TISCO cement business. Strategic divestitures-company is nurtured with a strategic sale in mind- VC backed firms-sale of Spectramind to Wipro, Indiaworld to Sytyam Infoway. Entry and exit of business partner-JV-UB group-the united breweries group hived off its beer division into a separate SPV, which inducted Scottish &Newcastle as a strategic partner. To capture forward and backward linkages in value chain-RPG group-tyre and rubber division 2002.the rubber business consolidated in CEAT ltd- backward linkages. CEAT investment portfolio was demerged to a separate subsidiary.
Corporate Restructuring
Internal and external Internal-no change in the legal entity financial debt(debt swap, bailout), equity(capital reduction), operational- change in the organization structure, divisionalzation-separate division with in the same company.
Transfer of equity
Subsidiarisation of business undertaking
De- Subsidiarisation through spin off De- Subsidiarisation through equity crave route
External (splits ups)- change in corporate structure and control I Transfer of assetA. Hive-off/asset sale/reconstruction1.An existing business segment(ASSET AND LIABILITIES) or division is transferred to a new company or another existing company-separate from one B/S to another. non core assets and surplus asset that can be sold off at a later date.
2.The transferee company is a group company, associate or a subsidiary. Transferor retain strategic control.
3.Involves transfer of assets (and liabilities if chosen) from the transferor to transferee company.
4. Consideration is usually in stock by the transferee co. to the transferor co. the shareholder of the parent company do not directly hold stakes in hived off entity. 5. No court approval. Section 391-394 of CA 1956 6.Aditya Birla Nova Group Subsidiarisation through hive-off-TCS ,JINDAL Group-economic times 9th Jan 2003
Hive off- transferor company transfer all its business undertaking to a new company-transferor company is dissolved-reconstructions-bankrupt companies. Asset sale Hive off is restricted to sale of some (surplus /redundant)asset Subsidiarisation through hive-off 100% Subsidiary new company or existing company Separation of business activity, inviting strategic or business partner, eventual exit route. CASE jindal group , TCS
B. Divestiture(sell off)/Slump sale1.The transferor retains no future interest in the business or asset sold off.(no longer considered as core activity)
2. Sell off-direct, two stage process first hive-off and then sale.
C. Demerger(SPLIT UP) A demerger is a method of reconstruction under which the share holder of the parent company are given direct representation in the demerged business in the same proportion in which they hold shares in the parent company. Mirror shareholding pattern in the parent and demerged co. Parent company B/S sizes shrinks. Resulting company-company to whom the business is transferred (it can be an existing company or a new company) parent company that shrink in its size is called the demerged company. Section 391-394 of companies act.-sanction of HC is must. Income tax act- sec 2(19AA)
demerger should be a scheme of arrangement under section 391-394 of company act 1956+ approval of HC is must. It must full fill all the conditions to avail tax benefits:
all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; BOOK VALUE the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; the transfer of the undertaking is on a going concern basis;
In case of demerger of a listed company of its undertaking, the shares of the resulting company are listed on the stock exchange where the demerged companys shares are traded. -Reliance Industries wherein its 4 businesses
Structured demerger
The parent company directly holds upto 25% of share capital in the resultant company. The balance of 75% is held by the share holders of parent company in proportion to their holding in parent company.
Structured demeger can be in any ratio- if the ratio is more than 25% -demerger is not covered under IT act. L&T cement division(demerged company ultra tech cement(resulting company).
De-Subsidiarisation through equity crave out/dilutionparent company stake in the subsidiary company is diluted either in one step or in gradual step.
IL &FS De- Subsidiarisation TCS
BOD approvals. Sec 372 A of company act Section 108A-108I-certain transfer which require prior of the central govt. Stamp duty on transfer of shares has to be paid. Income tax no benefit under IT act there can be incidence of capital gain for the recipient shareholders based on the valuation of such shares. FEMA-RBI POLICH , FDI POLICY
FACTORING
WHAT IS FACTORING ?
Factoring is the Sale of Book Debts by a firm (Client) to a financial institution (Factor) on the understanding that the Factor will pay for the Book Debts as and when they are collected or on a guaranteed payment date. Normally, the Factor makes a part payment (usually upto 80%) immediately after the debts are purchased thereby providing immediate liquidity to the Client.
PROCESS OF FACTORING
CLIENT(firm) CUSTOMER (debtor)
FACTOR (FI)
a) b)
c) d)
A Financial Intermediary That buys invoices of a manufacturer or a trader, at a discount, and Takes responsibility for collection of payments. normally requires no collateral.
The parties involved in the factoring transaction are:a) b) c) Supplier or Seller (Client) Buyer or Debtor (Customer) Financial Intermediary (Factor)
Clients.
Purchase of Receivables with or without recourse. Help in getting information and credit line on customers (credit protection) Sorting out disputes, if any, due to his relationship with Buyer & Seller.
Factoring Process
SALE OF GOODS / SERVICES (2)
AGREEMENT(1)
SELLING FIRM
COPY OF INVOICE & DELIVERY CHALLAN(3)
FACTOR
CUSTOMERS
ADVANCE PAYMENT/DISCOUNTING (4) FINAL PAYMENT AFTER DEDUCTING FEES AND CHARGES,IF ANY(6)
PAYMENTS (5)
Client sells the customers account to the Factor and notifies the customer.
Factor makes part payment (advance) against account purchased, after adjusting for commission and interest on the advance. Factor maintains the customers account and follows up for payment. Customer remits the amount due to the Factor. Factor makes the final payment to the Client when the account is collected or on the guaranteed payment date.
MECHANICS OF FACTORING
The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due on account of this invoice is assigned to and must be paid to the Factor (Financial Intermediary).
The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by buyer, to the Factor. The Factor, after scrutiny of these papers, allows payment (,usually upto 80% of invoice value). The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve. The drawing limit is adjusted on a continuous basis after taking into account the collection of Factored Debts. Once the invoice is honoured by the buyer on due date, the Retention Money credited to the Clients Account. Till the payment of bills, the Factor follows up the payment and sends regular statements to the Client.
TYPES OF FACTORING
Recourse Factoring Non-recourse Factoring
Maturity Factoring
Cross-border Factoring
RECOURSE FACTORING
Upto 75% to 85% of the Invoice Receivable is factored. Interest is charged from the date of advance to the date of collection. Factor purchases Receivables on the condition that loss arising on account of non-recovery will be borne by the Client(company). Credit Risk is with the Client. Factor does not participate in the credit sanction process. In India, factoring is done with recourse.
NON-RECOURSE FACTORING
Factor purchases Receivables on the condition that the Factor has no recourse to the Client, if the debt turns out to be non-recoverable. Credit risk is with the Factor. Higher commission is charged. Factor participates in credit sanction process and approves credit limit given by the Client to the Customer. In USA/UK, factoring is commonly done without recourse.
MATURITY FACTORING
Factor does not make any advance payment to the Client. Pays on guaranteed payment date or on collection of Receivables. Guaranteed payment date is usually fixed taking into account previous collection experience of the Client. Nominal Commission is charged. No risk to Factor.
International factoring
1.
Pre-payment made against all unpaid and not due invoices purchased by Factor. Factor has responsibility of Sales Ledger Administration and collection of Debts.
2.
Financial Institution does not have responsibility of Sales Ledger Administration and collection of Debts. No notice of assignment provided to customers of the Client.
3.
3.
4.
4.
5.
Financial Institution can get the bills re-discounted before they mature for payment.
5.
Factor cannot re-discount the receivable purchased under advanced factoring arrangement.
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Amalgamations- Merger
Regulatory Framework
Applicable Indian Laws Companies Act, 1956 [Sec 391-394] Listing Agreement Accounting Standard 14 SEBI Takeover Code (in case of acquisition by/of a listed company) Company Court Rules FEMA (in case of merger of companies having foreign capital) Competition Act, 2002 Income Tax Act, 1961
Indian Stamp Act
Amalgamation in the nature of merger is one which satisfies the following conditions: All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. Shareholders not less than 90 percent of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation. The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company. No adjustment is indeed to be made to the books value of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of the accounting policies.
Amalgamation in the nature of purchase is defined as an amalgamation which does not satisfy any one or more of the conditions specified above.
IT ACT-75 % shareholders
Amalgamation through merger for preferred tax treatment. Amalgamation through purchase as normal commercial transaction.
AS 14-90% shareholders
Horizotional mergers-same lines of business Vertical merger synergies through value chain RIL
Reliance petrolum
Methods of Accounting
The pooling of interests method (for Amalgamation in the nature of merger) The assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts Reserves of the transferor company appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company.
The balance sheet of the combined entity is arrived at by a line by line addition of the corresponding items in the balance sheets of the combining entities. No asset write-up or write-down. No goodwill.
There is no question of bringing to the books of the transferee the profits/reserves of the transferor
The amount of the consideration is deducted from the net assets of the transferor company acquired by the transferee company and the difference, if any, is debited to goodwill or credited to Capital Reserve, as the case may be. Goodwill arising on amalgamation is treated as an asset and amortized over a period of five years.
AS 14
The transferor and the transferee companies have conflicting accounting policies, a uniform accounting policy must be adopted following the amalgamation. Treatment of Reserves on amalgamation.
Amalgamation in the nature of a merger- the identity of the reserves is prescribed and they appear in the financial statements of the transferee company in the same form in which they appeared in the statements of the transferor company.
Standard prescribed certain disclosure to be made in the first financial statements following the amalgamation : 1. 2. 3. 4. 5. Names and general nature of business of the amalgamating companies, Effective date of amalgamation for accounting purposes, The method of accounting used to reflect the amalgamation, Description and number of shares issued, together with the percentage of each companys equity shares exchanged to effect the amalgamation The amount of difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.
shareholding pattern
Obtain fairness opinion from an Independent merchant bankers on valuation of assets / shares done by the valuer While submitting the scheme with the SE, also submit an auditors certificate to the effect that the accounting treatment contained in such schemes is in compliance with all the applicable Accounting
Various Concepts
Private Equity Investors are individuals or firms which provide private equity funds to different ventures. They generally receive a return on their investment through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization
Private Equity Capital It is the form of capital that buys majority stakes in companies and/or entire business units to restructure its capital, management and organization. Usually the targets are held private for three to five years
Private Equity firms are firms which provide private equity funds to different ventures. They generally receive a return on their investment through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization
Companies Act, 1956 (the "Act"), Foreign Exchange Management Act, 2000 Securities and Exchange Board of India Act, 1992 along with the rules and regulation therein. SEBI Venture Capital Regulations, 1996 SEBI Foreign Venture Capital Investors Regulations,(2000), FDI and RBI FEMA provisions. Guidelines issued by the Central Board of Direct Taxes (CBDT).
Mergers and acquisitions : As the Indian economy's growth has kept a steady pace, industry-wide consolidations are an attractive route for a PE investor to make an exit
10 Apr 2010
Singapore-based Temasek Holdings has signed an agreement with GMR Energy Ltd (GEL) to raise capital for energy expansion plans. Temasek Holdings would invest $200 million (about Rs 880 crore) through its wholly-owned subsidiary Claymore Investments (Mauritius).
Blackstone to Invest INR 2250 Million in Jagran Media Network 07 Apr 2010
The Blackstone Group (NYSE: BX), will be investing INR 2250 million (approximately USD 50 million) in Jagran Media Network Private Limited, which will hold majority share of Jagran Prakashan Limited (JPL).
JPL is Indias leading media and communications group, with the groups flagship brand, Dainik Jagran, being the most widely read newspaper in the world with a total readership of 54.6 million.
Jagran Media Network Private Limited -approvals for the investment from the Foreign Investment Promotion Board
Sources
Venture Intelligence (Press Release from www.india infoline.com) EMPEA, March 2009 Global Private Equity Report, 2008 PWC
EMPLOYMENT IN PRIVATE EQUITY FIRM????? GOOD OPTION
One Billion = One Hundred Crores 100 crores 1 billion = 1000 million, 1million= 10 lacs 10 million=1 crore or 100 lacs
Sec47(vii)-exemption from capital gain tax- capital ga arising from transfer of Shares by the shareholders of selling company
(2) Accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless (a) the amalgamating (selling) company (i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years; (ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation; (b) the amalgamated (purchasing) company (i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; (iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
Accumulated Loss
accumulated loss means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head Profits and gains of business or profession (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or conversion or amalgamation or demerger had not taken place;
Unabsorbed Depreciation
unabsorbed depreciation means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place;
35DD
Expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking One-fifth of such expenditure for a period of five successive years beginning with the previous year in which such amalgamation or demerger takes place. Indian Company Qualifying Assessee
No deduction would be allowed in respect of such expenses under any other provisions of the Act
Section 35(5)- expenditure on scientific research.(unwritten portion) Section 35D(5)- treatment of preliminary expenses. (unwritten portion). Section 35ABB(6)-expenditure for obtaining a licenses to operate telecommunications services
In certain States there are specific provisions for levy of stamp duty on amalgamation/ demerger order viz. Maharashtra, Gujarat, Rajasthan etc.
Where there is no specific provision, there exists an ambiguity as to whether the stamp duty is payable as per the conveyance entry or the market value of immovable property. Stamp duty is payable in the States where the registered office of the transferor and transferred companies is situated. In addition to the same, stamp duty may also be payable in the States in which the immovable properties of the transferred business are situated.
Normally, set off for stamp duty paid in a particular State is available against stamp duty payable in the other State. However, the same depends upon the stamp laws under the various States.
STAMP DUTY
Additional stamp duty on issue of shares is also payable based on the rates prevailing in the State in which shares are issued. The Department of Revenue, Ministry of Finance in May 2010, released the draft Amendment Bill containing certain proposed amendments to the Indian Stamp Act, 1899. One of the key amendments is to extend the scope of application of the Stamp Act by levying stamp duty on every order of the HighCourt/Tribunal sanctioning the scheme of amalgamation or reconstruction of companies, including banking companies, by which property is transferred.
(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if (a) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and (b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated;
(vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if -
(a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
(b) The amalgamated company is an Indian company;