Financial Services MBA

7/30/2019 Financial Services MBA

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FINANCIAL SERVICES ANDINSTITUTIONS

MBA (FINANCE)Paper 4.23


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MBA PAPER 4.23

FINANCIAL SERVICES AND INSTITUTIONS

SYLLABUS

UNIT 1 Financial Services: Concept And Scope of Financial Services Functions Concerning Public and PrivatePlacement of Capital Issue: Lead Management Issue Pricing And Promotion Disclosure Norms Issue Underwriting Collecting Banker SEBI Regulations Regarding Lead Managers And

Merchant Banking Functionaries.

UNIT 2 Mutual fund Services Concept, Need and Scope MFs in India: Types of schemes Performance portfolio performance Evaluation Measures-Regulations Regarding Mutual Funds

UNIT 3 Credit Rating Objectives Institutions: CRISIL ICRA CARE Debt and Deposit Rating and equity RatingProcedures Reading Different Grades of Rating International Credit Rating Institutions

UNIT 4 Role of UTI and LIC as Investment Institutions Portfolio Management Services: Concept and Need Services of NBFC to investors.

UNIT 5 Development Financial Institution Role on functions of IDBI, IFC, and IRBI RBI and Management of GiltSecurities Market

UNIT 6 Stock Exchanges: Role and Organisation of BSE and NSE OTCEI SEBI and Stock Exchanges.

Contents

UNIT I

1. Financial Markets and Financial Services

2. Raising of Capital / Issue of Shares

UNIT II

3. Mutual Funds

UNIT III4. Credit Rating Services

UNIT IV

5. Unit Trust of India

6. Life Insurance Corporation

7. Portfolio Management

8. Services Provided by NMFCs

UNIT V

9. IDBI

10. IFCI & IRBI

11. RBI & Management of Gilt Securities Market

UNIT VI

12. Stock Exchanges in India

13. Securities and Exchange Board of India


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Lesson 1

Financial Markets and Financial Services

Objective

Reading this lesson the student will be in a position to understand the concept and types of Financial Services, MajorCategories of Financial Services, Analysis of Categories of Financial Services, Financial Innovations.

Contents

Meaning of Financial Services

Types of Financial Services

Major Categories of Financial Services

Analysis of Categories of Financial Services

Global Integration of Financial Services

Financial Innovations

Introduction

Financial system is a set of complex and closely interlinked financial institutions markets, services, Practices,Instruments and Procedures. The financial system of any country comprise of specialized and non-specialized

financial institutions, of organized and unorganized financial instruments and services that enable transfer of funds.While financial institutions are business organizations that. act as mobilizes and depositors of savings, financialmarkets are the arrangements that provide facilities for buying and selling of financial claims and services. Financialmarkets are sometimes classified are primary and secondary markets. The Participants of the demand and supplysides of these markets are financial institutions, agents, dealers, brokers and others who are inter-linked by the laws,contracts and covenants. The efficient financial markets are characterized by the absence of information basedgain, by correct valuation of assets, by maximization of convenience and minimization of transaction costs and bymaximization of marginal efficiency of capital.

Financial markets today unfold a higher degree of integration, with large amounts \of capital flowing across borders totake advantage of slightest perceived financial benefits. Gross capital flows among industrial countries are also muchlarger not than a decade ago. The Indian economy has moved away from a highly regulated and controlled regime toa liberalized one governed by the market forces in allocation of resources for economic growth and development.With the changes taking place in he real sector of the economy, the financial system in India is also in the process of

rapid transformation. The Financial services have a crucial role to play in this process of reforms in the financialsector.

In India, the role of financial services industry has assumed great significance during the decade that witnessedphenomenal growth and changes in money market, capital market and foreign exchange market. On account of de-regulation and liberalized economic and legal environment and emergence of new financial instruments in capital andmoney markets, the utility of financial services industry has further increased to its users.

Meaning of Financial Services

A Financial Services is any service of financial nature offered by financial service supplier of a member nation.

Types of Financial Services

Besides traditional commercial and co-operative banks financial services include non-banking financial companieslike investment companies, hire-purchase and leasing companies, housing finance Companies, mutual funds,Venture Capital funds, Portfolio managers, Foreign Institutional Investors, merchant bankers, under writers, Stockbrokers custodians and depositories. In last decade, a number of non-banking specialized financial institutions likeMutual Funds, Venture Capital Funds, Credit rating agencies like CRISIL, CARE, ICRA, Equity Research, CreditCards, Factoring. Merchant banking organisatoins have commenced functioning in India to extend multifariousservices in the area of financial services. Financial services also include technical and economic consultancy, stock-holding, discounting and re-discounting, refinancing underwriting, funds transfer, safe deposit vaults, loan syndicatingand managing capital issues. Gross Capital outflows from the main industrial countries came to about $850 billion in1993, compared with an average of about $500 billion during 1985-93 and about $100 billion in the first half of the1980s.

Major Categories of Financial Services


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Financial Services could be grouped into five major categories as enumerated below:

Creating of Financial Instruments

Security transactions

Payment Services

Risk management

Other Financial Services

Analysis of Categories of Financial Services

Financial Instruments otherwise known as Financial Claims, are created through different contracts. The secondcategory include Financial Services fund. Organizations provide services to assist the development of securitytransactions both in Primary and Secondary markets. The third category include payment services which assist insettling debts without the direct exchange of cash and instruments used include cheques, Demand drafts, creditcards, travellers cheques and so forth. The fourth category of financial services namely risk management productspermit the investors to manage the risk associated with unexpected movement with interest rates and security prices.

Finally, the last residual category of financial services which include derivative financial instruments financial futurecontracts that are entered into with a view to providing for risk transfer. The development of financial assets ofeconomic entities is an indicator of growth of financial services. The assets of these institutions have gone from Rs.63,637 covers at the end of March 1981 to Rs. 4,95,099 crores at the end of March 1993, thus registering acompound annual growth of 18.6 percent.

Integration

The term integration refers to the establishment of close connections or effective linkages between differentconstituents and between different parts of the financial system. Financial integration is the opposite of the maturitywise, geographical, institutional, seasonal, instrumental, segmentation or Compartmentalization of the financialmarkets. The integration process has helped the financial markets both at national and international levels toenhance their efficiency and it has also facilitated in globalization of financial services. The flow of foreign capital fromthe industrialized countries to the developing countries has been the significant outcome of this integration process.

Global Integration of Financial Markets

In terms of international trade and financial flows, Indian economy is to a very great extent an open economy, thoughthe extent of its openness may not be as great as in countries like USA, UK, Germany, Japan, Philippines. Theforeign exchange markets are cleared at a conversion price, i.e. at the exchange rate. The foreign exchange rates

are an important part of financial analysis. Though the exchange rate is apparently determined by the supply of anddemand for foreign exchange, the complex forces of exports and imports lie behind the whole process of exchangerate determination. The international aspects of savings and investments flows are reflected in the volume of capitalflows between nations.

The world economy has witnessed significant changes in recent years. India has already opened up its economicfrontiers and presently expects increasing gains from the new world trade order and the world finance system. Since1990, the global economy has emerged very swiftly requiring significant changes. The openness of the economy isalso apparent in the projections of the Eight Plan. While exports are expected to grow by 13.6% p.a. in volume termsto reach a level of US $33.55 billion by the year 1996-97, imports are projected to increase by 8.4% in volume terms.The trade policy reforms have been made part of overall reform process for he realization of aforesaid objectives.

The GATT played a significant role in facilitating the rapid expansion in global trade through a succession of roundswhich culminated in the Uruguay Round and resulted in the transformation of GATT into World Trade Organisatoin.

The Uruguay Round has been the most ambitious and comprehensive multilateral trade negotiations in history.During the 1996-1994, international transaction sin good and non-factor services as a proportion of GDP enhancefrom 33% to 43% for the developing world as a whole. The General Agreement on Trade in services is the firstmultilaterally agreed and legally enforceable rules to cover international trade in services. Share of services in globaltrade has increased to over 22% in 1994 against 15% in 1980.

The way the Indian Corporate sector reacted to the domestic liberalization process as well as to the Uruguay Roundresults disclose that a large segment is quite conscious that this liberalization process is desirable, possibly alsoirreversible and the world trade liberalization through the Uruguay Round can be a position factor that will facilitatethe adjustments needed to be done at the corporate level in response to the domestic reforms process.

Thus global integration of financial markets resulted from de-regulatory measures, technological and informationexplosion and financial innovations. The Indian Corporate Sector has appreciated the concept of globalization of


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economyand have been initiating measures to emerge as Indian multinationals. The measures include improvedquality products, establishment of overseas distribution and marketing channels, capacity utilization, costconsciousness, strategic alliances for both domestic and international operations and so forth.

Financial Innovations

Financial innovation can be variously defined as the introduction of new financial instrument or service or practice, orintroducing new uses of funds, or finding out new sources of funds, or introducing new process or techniques tohandle day-to-day operations, or carrying out a new organisatoin all these changes being on the parts of existingfinancial institutions. In addition, the emergence and its spectacular growth of new financial institutions and markets

is also part of financial innovation.

Financial innovations encompass wide ranging changes in the financial system and they also have wide rangingeffects. They lead to the broadening deepening, diversification, structural transformation internationalization andsophistication of the financial system. They result in the financialization of the economy whereby financial assets tototal assets ratio tends to increase.

Changes in the financial market during the Nineteen witnessed considerable amount of financial innovations. Theyare generally the outcome of the changing needs for financial services and the availability of new technology toprovide them. There are continuous efforts to innovate and serve the financial consumers and this brings about newproducts for consumers, new functions of financial institutions and call for changes in the strategies of regulatingagencies. Financial innovations improve market integration and the efficiency of international financial markets bybringing about structural changes and by offering broader and more flexible range of instruments. This results inimproved allocations would strengthen global financial intermediaries and would provide hedge exposure to risk

associated fluctuation in many financial parameters through a variety of techniques. A number of companies havecome out with new financial instruments in the recent years. The innovative corporate new financial instrumentsinclude zero interest bonds, deep discount bonds, partially convertible debentures, zero coupon convertible note,Debt for equity swap and so forth.


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Lesson 2

Raising of Capital/Issue of Shares

Objective

Reading his lesson the students will be in a position to understand the various notes of rising of capital form public,SEBI Guidelines for issue of shares to the Public, Public Issue by Unlisted Companies (Other than a bankingcompany), Pricing of Issue, Public Issue by listed companies, Promoters Contribution, Meaning of Book Building,underwriting, SEBI guidelines for Underwriting, SEBI Regulations regarding Lead Managers and Merchant Banking

Functionaries, Lead Managers Obligation.Contents

Raising of capital /Issue of shares

SEBI Guidelines for issue of share to the Public (IPOs)

Public Issue by Unlisted Companies (Other than a banking company)

Exemption from Eligibility Norms

Pricing of Issue

Public Issue by listed companies

Promoters Contribution

Meaning of Book Building

Meaning of underwriting

Firm underwriting

Agreement between Underwriter and Client Company

Underwriters General Responsibilities

SEBI guidelines As per SEBI Guidelines, 2000

Merchant Banking

Role of Merchant Bankers

Services Rendered by Merchant Banks

Merchant Banking in India

SEBI Regulations regarding Lead Managers and Merchant Banking Functionaries

Lead Managers Obligation

Companies limited by shares have to issue shares to rise the necessary capital for their operations. Issue of sharesmay be made in 3 ways:

1. By private placemen of shares;

2. By allotting entire shares to an Issue House, which in turn, offer the shares for sale to the public; and

3. By inviting the public to subscribe for shares in the company through a prospectus.

Private placement of shares

A Private Company limited by shares is prohibited by the Act and the Articles from inviting the public for subscriptionof shares or debentures. It also need not file a statement in lieu of prospectus. Its shares are issued privately to asmall number of persons known to the promoters or related to them by family connections.

A public Company can also rise its capital by placing the shares privately and without inviting the public forsubscription of its shares or debentures. In this kind of arrangement, an underwriter or a broker finds persons,normally his clients who wish to buy the shares, i.e., to place them. Since no public offer is made for shares, there isno need to issue any prospectus. However, under section 70 of the Act, such a company is required to file with theRegistrar a statement in lieu of prospectus at least 3 days before making allotment of any shares or debentures.


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As per the guidelines issued by SEBI, private placement by a public company of its shares should not be made bysubscription of shares from unrelated investors through any kind of market intermediates. This means promotersshares should not be contributed by subscription of those shares by unrelated investors through brokers, merchantbankers, etc. however, subscription of such shares by friends, relative and associates is allowed.

By an offer for sale

Under this arrangement, the company allots or agrees to allot shares or debentures at a price to a financial institutionor an Issue-House for sale to the public. The Issue-House publishes a document called an offer for sale, with anapplication form attached, offering to the public shares or debentures for sale at a price higher than what is paid by it

or at par. This document is deemed to be a prospectus [Section 64(1)]. On receipt of applications from the public, theIssue-House renounces the allotment of the number of shares mentioned in the application in favour of the applicantpurchase who becomes a direct allottee of the shares.

By inviting public through prospectus

This is the most common method by which a company seeks to raise capital from the public. The company invitesoffers from members of the public to subscribe for the shares or debentures through prospectus. An investor isexpected to study the prospectus and if convince about the prospectus of the company, may apply for shares.

Issue of shares to existing shareholders

Further capital is also raised by issue of rights shares to the existing shareholders (section 81). In this, case, theshares are allotted to the existing equity shareholders in proportion to their original shareholding, e.g., one shareagainst every two shares held by a member.

Public Issue of Shares

Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus.For raising capital from the public by the issue of shares or debentures, a public company ahs to comply with theprovisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956 including the Rules madethereunder and the guidelines and instructions issued by he concerned Government authorities, the Stock Exchangeand the Securities and Exchange Board of India (SBI), etc. Management of a public issue involves coordination ofactivities and cooperation of a number of agencies such as manages to the issue, underwriters, brokers, registrars tothe issue, solicitor/legal advisors, printers, publicity and advertising agents, financial institutions, auditors and otherGovernment/statutory agencies such as Registrar of Companies, Reserve Bank of India, Stock Exchange, SEBI etc.Before discussing he procedure for issue of shares, it is advisable to first understand the guidelines issued by SEBIwith regard to issue of shares termed as Guidelines for Disclosure and Investor Protection.

SEBI Guidelines for Issue of Shares to the Public [IPOS]

SEBI guidelines, 2000 require companies to comply with the following requirements in case of issue to the public(IPOs):

1. The appointment of Category 1 Merchant Banker to manage an issue shall be compulsory.

2. Registrar to Issue must be appointed.

3. Partly paid shares must either be made fully paid or forfeited.

4. The company shall not make public issue where it has been prohibited by the SEBI (Board)

5. Draft offer document (prospectus) shall be filed with the SEBI at least 21 days before filing of the prospectuswith Registrar of Companies.

6. The draft offer document filed with the SEBI shall be made public for a period of 21 days from the date of

filing the offer document with the SEBI.7. The lead merchant banker shall.

While filing the draft document with the SEBI also file the draft offer document with the stock exchangeswhere the securities are proposed to be listed;

Make copies of draft offer document available to the public

Shall made ten (10) copies of the draft offer document available to the dealing office of the SEBIU, three (3)copies to the Primary Market Department, SEBI, Head Office and 25 copies to the stock exchange(s) wherethe issue is proposed to be listed.


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The lead merchant banker shall submit the draft offer document on a computer floppy to the dealing office ofthe Board and to the Primary Market Department, SEBI, Head Office;

Obtain and furnish to the SEBI, an in-principle approval of the stock exchanges for listing of the securitieswithin 15 days of filing of the draft offer document with the stock exchange(s)

8. The company shall carry out the changes suggested by SEBI before filing of prospectus with Registrar ofCompanies.

Public Issue by Unlisted Companies (Other than a Banking Company)

An unlisted company shall be allowed to make a public issue subject to the following conditions:

1. It must have a tract record of distributable profits in terms of section 205 of the Companies Act, 1956 (i.e.ability to pay dividends) for at least 3 out of immediately preceding 5 years;

2. It must have a minimum pre-issue net worth of not less than Rs. 1 crore in 3 out of preceding 5 years andalso in immediately preceding 2 years. Three years out of immediately preceding five years, shall meanthat at least three (3) audited accounts for a period of not less than thirty six (36) months are available forcomputation of the minimum tract record of three (3) years of distributable profits.

3. The issue size must not exceed 5 times its pre-issue net worth as per the last available audited accountseither at the time of filing offer documents with SEBI or at the time of opening of issue.

In case a company does not satisfy the aforesaid requirements or the issue size exceeds five times its pre-issue networth as per last available audited accounts, it can make a public issue only through book-building subject to at least

60% of the issue being allotted to Qualified Institutional Buyers (QIBs) failing which full subscription monies must berefunded.

Qualified Institutional Buyer shall mean-

Public financial institutions as defined in section 4A of the Companies Act, 1956,

Scheduled commercial banks;

Mutual funds;

Foreign institutional investors registered with SEBI;

Multilateral and bilateral development financial institutions;

Venture capital funds registered with SEBI.

4. The company shall enter into agreements with all the depositories for dematerialization of securities.However, the investors shall have an option to receive allotment of securities through any of thedepositories.

Exemption from Eligibility Norms

The eligibility norms for making a public issue as noted above shall not be applicable in case of.

1. a banking company including a Local Area Bank (hereinafter referred to as Private Sector Banks) set upunder sub-section (c) of section 5 of the Banking Regulation Act, 1949, and which has received licence fromthe Reserve Bank India, or

2. a corresponding new bank set up under the Banking Companies (Acquisition and Transfer of Undertaking)Act. 1970, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, State Bank of India Act,

1955 and State Bank of India (Subsidiary Banks) Act, 1959 (herein-after referred to as public sector banks),3. an infrastructure company;

whose project has been appraised by a Public Financial Institution or Infrastructure Development FinanceCorporation (IDFC) or Infrastructure Leasing and Financing Services Ltd. (IL&FS) and

not less than 596 of the project cost is financed by any of the institution referred to in sub-clause (a) jointly orseverally, irrespective of whether they appraise the project or not, by way of loan or subscription to equity ora combination of both.


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Pricing of Issue

Fee pricing has been allowed under SEBI Guidelines, 2000. In other words, every company, which is entitled to makea public issue, shall be free to offer its public issue either at par or at a premium.

Issuer company can mention price band of 20% (cap in the price band should not be more than 20% of the floorprice) in the offer document filed with the Board and actual price can be determined at a later date before filing of theoffer document with the ROC. When the Board of directors has been authorized to determine the offer price within aspecified price band, such price shall be determined by a resolution to be passed by the Board of Directors.

Differential pricing1. Any unlisted company or a listed company making a public issue of equity shares or securities convertible at

a later date into equity shares, may issue such securities to applicants in the firm allotment category at ap[rice different from the price at which the net offer to the public is made provided that the price at which thesecurity its being offered to the applicants in firm allotment category is higher than the price at whichsecurities are offered to public.

The net offer to the public means the Indian public and does not include firm allotments or rese4rvations orpromoters contributions.

2. A listed company making a composite issue of capital may issued securities at differential prices in its publicand rights issue.

3. In the public issue which is part of a composite issue, differential pricing as per (i) above is also permissible

4. Justification for the price difference shall be given in the offer document.

A banking company shall be allowed to make a public issue at a price approved by the Reserve Bank ofIndia.

Public Issue by Listed Companies

A listed company shall be free to make a public issue. However, it the net worth of the company becomes morethan 5 times the net worth prior to the issue, it shall be allowed only through book building subject to at least 60% ofthe issue being allotted to Qualified Institutional Buyers (QIBs) failing which full subscription monies must berefunded. A listed company which has changed its name so as to indicate that it is a company in the informationtechnology sector during a period of three years prior to filing of offer document with the SEBI, shall comply with therequirements of unlisted companies, before it can make a public issue of equity shares or securities convertible at alater date into equity shares. A listed company shall be allowed free pricing of its issue.

Denomination of shares

The companies, which have already issued shares in the denomination of Rs. 10 or Rs. 100, may change thestandard denomination of the shares by splitting or consolidating the existing shares. The companies proposing toissue shares in any denomination or changing the standard denomination shall comply with the following:

The shares shall not be issued in the denomination of decimal of a rupee;

The denomination of the existing shares shall not be altered to a denomination of decimal of a rupee;

At any given time there shall be only one denomination for the shares of the company;

The companies seeking to change the standard denomination may do so after amending the Memorandumand Articles of Association, if required;

The company shall adhere to the disclosure and accounting norms specified by the SEBI from time to time.

Promoters Contribution

1. Unlisted company The promoters contribution shall be at least 20 percent of the post issue capital.

2. Listed company The promoters contribution shall be:

At least 20 percent of the proposed public issue; or

Shall not fall below 20 percent of the post issue capital.

3. In case of composite issues of listed companies, rights issue component of the composite issue shall beexcluded while calculating the post issue capital.

4. Private placement of promoters through market Intermediaries shall not be allowed.


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5. Promoters contribution shall be at the same price as applicable to the investing public.

6. Minimum amount to be contributed by each promoter shall not be less than Rs. 25,000 per application. Thislimit shall also apply to contributions made by business associated such as dealers and distributors.However, in case of contributions made by firms or body corporate not being business associates, theminimum contribution shall be Rs. 1,00,000.

7. In case of listed as well as unlisted companies:

Promoters must bring in the full amount of their contribution (including premium at least one day before the

issue opens which shall be kept in an escrow account with a Scheduled Commercial Bank and the saidcontribution/amount shall be released to the company along with the public issue proceeds).

Where promoters contribution exceeds Rs. 100 crores, they shall bring Rs. 100 crores before opening of theissue and the balance on pro rata basis in advance before calls are made on public.

The companys Board shall pass a resolution allotting the shares or convertible instruments to promotersagainst the monies received.

A copy of the resolution along with a Chartered Accountants Certificate certifying that the promoterscontribution has been brought in shall be filed with the SEBI before opening of the issue.

The certificate of the Chartered Accountants shall also be accompanied by a list of names and addresses offriends, relatives and associates who have contributed to the promoters quota along with the amount ofsubscription made by each of them.

Promoters shall not acquire shares through private placements either directly or through any intermediary.

Reservations and firm allotment

Reservations for allotment on firm/preferential basis for various categories together with promoterscontribution must not exceed 75% of the total issue amount.

Reservation on competitive basis can be made in a public issue to the following categories

S. No. Category of persons

1. Permanent employees (including working directors) of the company and in the case of a new company, thepermanent employees of the promoting companies.

2. Shareholders of the promoting companies in the case of the a new company and shareholders of group

companies in the case of an existing company.3. Indian mutual funds

4. Foreign institutional investors (including non-resident Indians and overseas corporate bodies)

5. Indian and multilateral development institutions

6. Scheduled banks.

Firm allotment in public issues can be made to the following:

S. No. Category at persons

1. Indian and multilateral development financial institutions

2. Indian mutual funds

3. Foreign Institutional Investors (including non-resident Indians and overseas corporate bodies)

4. Permanent/regular employees of the issuer company

5. Scheduled banks.

Reservations in favour of employees shall not exceed 1096 of the issue. Reservations in favour ofshareholders and lead merchant bankers must not exceed 10% and 5% respectively.

In case promoting companies are designated financial institutions / State and Central Financial Institutions,the employees and the shareholders of such promoting companies shall not be eligible for the saidreservations.

The allotments to the reserved category(ies) shall be subject to a lock-in period of one year.


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Minimum application

The minimum number of shares for which application shall be allowed to be made has been fixed at 200 shares ofthe face value of Rs. 10 each. In case of issue at a premium, the minimum amount payable (on application, allotmentand calls) shall not be less than Rs. 2,000.

Minimum application money

The minimum application money to be paid by an applicant along with the application shall not be less than 25% ofthe Issue price. Further, the minimum number of instrument for which an application has to be made shall not be less

than the tradeable lot.Minimum tradeable lot

The minimum tradeable lot, in case of shares of face value of Rs. 10 each, shall, at the option of the issuer/offerer, befixed on the basis of offer price as given below:

Provided that the maximum tradeable lot in any case shall not exceed 100 shares.

Offer price per shares Minimum tradable lot

Up to Rs. 100 100 shares

Rs. 101 Rs. 400 50 shares

More than Rs. 400 10 shares

Share application form to seek permanent account numberIn respect of application for the value of Rs. 50,000 or more, the application(s) shall mention his/her/their permanentaccount number /GIR number and income-tax circle/ward, district or the fact of non-allotment of PAN/GIR number asthe case may be. Applications not complying with these provisions are liable to be rejected.

Closure of Issue

Issue must be kept open for at least 3 working days and not more than 10 working days. However, public issuesmade by infrastructure companies may be kept open up to 21 working days.

Minimum subscription

The following statements shall appear in the prospectus:

1. For non-underwritten Public issues: If the company does not receive the minimum subscription of 90% of the

issued amount on the date of closure of the issue or if the subscription level falls below 90% after the closureof issue on account of cheques having being returned unpaid or withdrawal of applications, the companyshall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after thecompany becomes liable to pay the amount, the company shall pay interest as per section 73 of Companies

Act, 1956.

2. For Underwritten Public Issues: If the company does not receive the minimum subscription of 90% of the netoffer to public including devolvement of Underwriters within 60 days from the date of issue, the companyshall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after thecompany becomes liable to pay the amount, the company shall pay interest prescribed under section 73 ofthe Companies Act, 1956.

3. For composite Issues:

The Lead Merchant Banker shall ensure that the requirement of minimum subscription is satisfied bothjointly and severally, ie., independently for both rights and public issues.

If the company does not receive the minimum subscription in either of the issues, the company shall refundthe entire subscription received.

The aforesaid requirements of 90% minimum subscription will not be relevant in case of offer for sale of securities(i.e. the management offering their shareholdings through public offer with a view to convert a closely held companyinto a widely held company). The requirement of 90 per cent subscription for issue of capital by an infrastructurecompany shall not be mandatory if disclosures are made in the prospectus regarding the alternate sources offunding. The lead manager shall verify and confirm the same as part of his due diligence.


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Over-subscription

No retention of over-subscription shall be allowed except to the extent of maximum 10% necessitated byapproximation while making proportionate allotment.

Allotment to be on proportionate basis

In case of over-subscription, the allotment shall be on proportionate basis subject to a minimum of 50% of the netpublic offer to be reserved for allotment to individuals applying for 1,000 or less shares. SEBI in this regard has

clarified that reservation in favour of small investors ahs to be a minimum of 50%. It means that if the category ofindividual applicants up to 1,000 shares would have got 70 per cent of the public offer in accordance withproportionate formula, they would get 70% and not 50%. On the other hand, if they are entitled to only 30% as perthe formula, they would be given 50% of the net offer to the public.

Issue to be made fully paid up

Issue must be made fully paid up within 12 months except where the total issue size exceeds Rs. 500 crores. If theinvestor fails to pay call money within 12 months, as aforesaid, the subscription money already paid may be forfeited.

Refund of over-subscription

All monies in excess of the application money on shares allotted must be repaid forthwith without interest. Section73(2A) provides that if such money is not repaid within 8days from the day the company becomes liable to pay, thecompany and very director of the company, who is an officer in default, shall be jointly and severally liable to repay

the same with interest @ 15% p.a. There shall be no escape from payment of interest irrespective of circumstances.

Refund orders/shares or debentures certificates

Refund orders of the value over Rs. 1,500 and shares/debentures certificates shall be sent by registered post only.

Safety net or buy-back arrangement

Where any safety net scheme or buy-back arrangement is proposed, it must be ensured that:

The safety net scheme or buy-back arrangement has been finalized in advance and disclosed in theprospectus;

The facility can be made available only to original allottees who are persons resident in India;

The facility is limited up to a maximum of 1000 shares per allottee;

The offer must be kept open for a period of at least six months from the last date of dispatch of securities;

The financial capacity of the person (viz., promoters, directors or merchant bankers) making available suchfacility must have been disclosed in the draft prospectus; and

No buy-back or stand-by or similar arrangements are allowed with the persons for whom securities arereserved for allotment on firm basis.

Other requirements

Updation of offer document: The lead merchant banker shall ensure that the particulars as per auditedstatements contained in the offer document are not more than 6 months old from issue opening date. Inrespect of a Government company making public issue, the auditors report in the prospectus shall not bemore than six months old as on the date of filing of the prospectus with the Registrar of Companies or theStock exchange as the case may be.

Compliance Officer to be appointed by lead merchant banker: The lead merchant banker shall appoint asenior officer as Compliance Officer to ensure that all rules, regulations, guidelines, notifications, etc. issuedby the Board, the Government of India, and other regulatory authorities in various maters and providenecessary guidance and also ensure compliance internally. The Compliance Officer shall also ensure thatobservations made/deficiencies pointed out by the Board do not recur.

Incentive to prospective shareholders: The issuer shall not offer any incentives to the prospective investorsby way of medical insurance scheme, lucky draw, prizes. etc.

Requirement of monitoring agency: In case of issue exceeding Rs. 500 crores, the issuer shall makearrangements for the use of proceeds, of the issue to be monitored by one of the financial institutions. A copy


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of the monitoring report as per the format specific in Schedule XIX of SEBI guidelines, shall be filled with theBoard by the said monitoring agency, on a half-yearly basis, till the completion of project, for the purposes ofrecord.

Option to receive securities in dematerialized form: The lead merchant banker shall incorporate a statementin the offer document and in the application form to the effect that the investors have an option to eitherreceive securities in the form of physical certificates or hold them in a dematerialized form.

Meaning of Book Building

SEBI has allowed book building as an alternative to firm allotment. Under the process of book building prospectivebuyers make offers to purchase specified number of shares at a particular price. SEBI Guidelines, 2000 define bookbuilding to mean a process undertaken by which demand for the securities proposed to be issued by a bodycorporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum ofsuch securities to be issued by means of a notice, circular, advertisement, document or information memoranda oroffer document. In case the issuer chooses to issue securities through book building, it must follow the SEBIguidelines in this regard.

75% of Book Building Process [w.e.f. 27-1-2000]

In an issue of securities to the public through a prospectus the option for 75% book building shall be available to theissuer company subject to the following:

Issue of securities through book building shall be separately indicated as placement portion category andthe securities available to the public should be identified as net offer to the public.

At least 25% of the issue must be offered to the public.

Underwriting shall be mandatory for the net offer to the public portion.

Draft prospectus containing all information except the price shall be filed with SEBI.

One of the lead merchant banker shall be nominated as a Book Runner and his name mentioned in theprospectus.

The draft prospectus indicating the price band may be circulated by the Book Runner to the institutionalbuyer who are eligible for firm allotment and to the intermediaries eligible to act as underwriters inviting offersfor subscribing to the securities.

The institutional buyers and underwriters shall intimate to the Book Runner orders received by them as well

as the securities they are willing to subscribe alongwith the relevant price. The Book Runner will keep arecord of the same.

The Book Runner and the issue company shall determine the price at which the securities shall be offered tothe public. The issue price for the placement portion and offer to the public shall be the same.

On determination of the issue price, the underwriter shall enter into an underwriting agreement with theissuer company indicating the number of securities the underwriter shall subscribe to. The Book Runner mayrequire the underwriters to bring in advance monies with respect to the net offer to the public.

Within tow days of determination of the price, the prospectus shall be filed with ROC.

Two separate accounts for collection of application money, viz., for placement portion and net offer to thepublic shall be opened.

The institutional buyers and underwriters shall pay the application money on the securities proposed to beallotted to them one day prior to the opening of the issue to the public.

Allotment for the private placement portion shall be made on the second day from the closure of the issue.

Allotment of securities under the public category shall be made as per the Guidelines.

In case of under subscription in any category, spillover shall be permissible.

The Book Runner and other intermediaries associated with the book building process shall maintain recordsof the book building process. SEBI will have the right to inspect such records.


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Underwriting

Meaning of underwriting

According to Palmer, underwriting is an expression used in company matters signifying a contract by which a person(known as the underwriter) agrees (usually for a commission) that if the shares, debentures, or debenture stockabout to be offered for subscription or some specified proportions thereof, are not, within a specified time, taken upby the public, or by that section of the public to which they are to be offered, he will himself take them up and pay for

what the public do not take up or some specified proportions thereof.SEBI Guidelines, 2000 define underwriting; to mean an agreement with or without conditions to subscribe to thesecurities of a body corporate when the existing shareholders of such body corporate or the public do not subscribeto the securities offered to them.

Firm underwriting

When an underwriter desires to take in a firm way, the whole or a portion of the number of shares he hasunderwritten, the effect will be that an allotment of that number would be made to him irrespective of whether theissue is over or undersubscribed. To the underwriter who takes on firm basis a given number of shares will be, so faras the rest of the shares are concerned, in the same position as other underwriters.

The underwriting business has flourished with the boom in the primary market. In 1993-94, the total amount raisedthrough public offerings was about Rs. 12,500 crores from 770 issues. During 1993-94, primary market raised about

Rs. 27.000 crores from 1100 issues. Till 1993-94, devolvements on issues or under subscriptions were a rareexception. Chambal Fertilizers made a history with only 33 percent subscription. The situation worsened in first half1995 with the under subscription going down to as low as less than one per cent. Some recent examples of undersubscriptions are M.S Shoes, Bhushan Steels, Malvika Steels, TCI Finance, Kothari Global, Niwas Spinning, PitteCement, Pal Peugeot, Pashupati Fabs, Metropoli Overseas, Parasrampuria synthetics, BSM Knitfab, ElquePolyesters etc.

The Stock market and primary markets have been weak since March, 1995 and there were several cases ofdevolved issues. Promoters were found using the following strategies to avoid devolving of issues:-

Engineering dummy applications during first 2-3 days of issues and looking to the response, brokers adviseinvestors to subscribe.

Convincing brokers to subscribe, promising to buy back their shares at a premium after a particular period.

Borrowing money through a front, who uses the funds to apply for shares, Devolvement is avoided and thepromoters return the loans from the amount collected.

In case of devolved issues, the medium term impact on the share prices will be negative because underwriters willlook out for a exit route.

Underwriting which is safety net for the promoters on one hand and a major source of income for underwriters, is nowat cross roads. The reasons which can be attributed to this declining business is SEBI guidelines to makeunderwriting optional and the declining capital market conditions. Presently, good issues and confident promoters donot go for underwriting to save on costs. in the CCI era, almost all issues used to get oversubscribed anddevolvements were rare. Free pricing introduced in 1992 has led to flood of new issues, bunching of issues, issuesby finance companies and NBFCs, poor quality issues and dull market conditions, especially since last two years.

Underwriters have formed an association known as Stock Brokers Underwriters Association (SUA) to fight for theircommon causes.

Underwriters make a commitment to get the underwritten issue subscribed either by others or by themselves. Theyagree to take up unsubscribed portion of the issue. They render this service for a commission agreed upon betweenthe issuing company and the underwriter subject to the ceiling under the Companies Act. Underwriting services areavailable from brokers, investments companies, commercial banks and term lending institutions. The quality ofservice rendered by them differ greatly. Underwriting of issues is not obligatory after April 1995. However, theycontinue to be an important element in the development of primary market: because they ensure success of theIssue and render other related services.

Underwriters are appointed by the issuing company in consultation with the merchant bankers / lead managers. Theyhave to testify that in their opinion, the underwriters assets are adequate to meet their obligations. A statement tothis effect is alos to be incorporated in the prospectus.


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Registration with SEBI

Only such person (an individual, firm or a company) who has obtained certificate of registration from SEBI, can act asan underwriter. Merchant bankers and stock brokers already having a valid certificate of registration from SEBI do notrequire a separate registration from SEBI for working as underwriters.

Conditions for granting registration

Before granting certificate of registration, SEBI satisfies itself that the applicant:

Has the necessary infrastructure like adequate office space, equipment and manpower to effectivelyfunctions and discharge his duties.

Has past experience in underwriting or has in employment at least two persons with experience inunderwriting.

Meets capital adequacy requirements of net worth of not less than Rs lakh.

The applicant (director, principal officer or partner) has not been convicted of an offence involving moralturpitude or found guilty of any economic offence.

Undertakes to fulful obligations under the SEBI Act, Rules and Regulations.

Undertakes to abide by the prescribed code of conduct, and

Pays the prescribed fee for grant of registration certificate and for its renewal, which is Rs. 2 Lakh for thefirst and the second years from the Initial grant of certificate and Rs. 20,000 per annum subsequently forkeeping the certificate in force or for its renewal. Certificate of registration can be suspended by SEBI in caseof failure to pay the fee.

Agreement between Underwriter and Client company

There has to be an agreement between the underwriter and the issuing company. Among other relevant matters, theagreement specifically includes the following:

The period during which the agreement will remain in force.

The amount of underwriting obligation,

He maximum period within which the underwriter will have to subscribe to the offer after being intimated by or

on behalf of the issuing company. The rate and amount of commission/brokerage chargeable by the underwriter, within the limits imposed by

the Companies Act, and

Any other details regarding the arrangements made by the underwriter for fulfilling the underwritingobligations.

Underwriters General Responsibilities

In addition to other responsibilities under SEBI Act rules and regulations, and those arising from valid agreement withthe issuing company, an underwriter has the following general responsibilities.

Cannot derive any other or indirect benefit from underwriting the issue except receiving the underwritingcommission at the agreed rate, the ceiling for which is 5 per cent in case of underwriting of shares and 2.5per cent in case of debentures.

Cannot take up total underwriting obligation, at any point of time under all underwriting agreements,exceeding twenty times his net worth, and

Subscribe for securities under the agreement within 45 days of the receipt of intimation from the issuingcompany.

SEBI Guidelines As Per SEBI Guidelines, 2000

1. Underwriting shall be optional.

2. The lead merchant banker shall satisfy themselves about the ability of the underwriters to discharge theirunderwriting obligations.


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3. The lead merchant banker shall:

Incorporate a statement in the offer document to the effect that in the opinion of the lead merchant banker,the underwriters assets are adequate to meet their underwriting obligations;

Obtain Underwriters written consent before including their names as underwriters in the final offer document.

4. In respect of every underwritten issue, the lead merchant banker(s) shall undertake a minimum underwritingobligation of 5% of the total underwriting commitment or Rs. 25 lacs whichever is less.

5. The outstanding underwriting commitments of a merchant banker shall not exceed 20 times its networth atany point of time.

6. In respect of an underwritten issue, the lead merchant banker shall ensure that the relevant details ofunderwriters are included in the offer document.

Underwriting commission

Section 76 permits the payment of underwriting commission subject to the compliance of the following conditions:

It should be authorized by the Article of the company. An authority in the memorandum is not sufficient.

The commission payable should not exceed 5 percent in the case of shares and 2 per cent in the case ofdebentures. Any lesser amount may be prescribed by the Articles and if it is so prescribed, it is the amountprescribed in the Articles that shall be payable as the underwriting commission by way of maximum.

Underwriting commission may be paid in cash or kind or as lump sum or by way of percentage but in no casecan it go beyond the statutory limits of 5 percent or 2% percent as the case may be. However, if he articlesauthorizes payment by a certain percentage, a lump sum payment cannot be made.

Underwriting commission should be disclosed in the prospectus or statement in lieu of prospectus, as thecase may be, or in a statement filed with the Registrar before the payment of the commission. However, therequirement of disclosure is relevant to the main underwriting agreement only; it does not cover sub-underwriting agreements.

The number of shares or debentures which persons have agreed to subscribe absolutely or conditionallyshould also be disclosed as in (iv) above

A copy of the contract relating to the payment of the commission should be delivered to the Registrar.

Sub-underwriting

The underwriting usually chooses to spread his risk by using sub-underwriters who agree to take certain number ofshares for which they receive a commission. The liability of sub-underwriter is contingent upon:

The number of shares subscribed by the public;

The intimation by the underwriters to the sub-underwriter that the latter shall subscribe or procuresubscriptions.

A sub-underwriting letter authorizing an underwriter to apply for shares for a valuable consideration, if the offer isaccepted by the underwriter, amounts to an authority coupled with interest and is irrevocable.

Merchant Bankers

Definition of Merchant Banker

The Notification of the Ministry of Finance defines a merchant banker as, any person who is engaged in thebusiness of issue management either by making arrangements regarding selling, buying or subscribing tosecurities as manager, consultant, advisor or rendering corporate advisory service in relation to such issuemanagement.

Role of Merchant Bankers

Merchant Banker is the most important link between a company receiving funds and the investors. The role ofMerchant banker is that of a catalyst in the process of converting formulation of projects into industrial ventures.They provide fund-based and fee-based services. The primary merchant banking functions are as under.

1. The provide long-term source of funds required by industries/trade/commerce for investment. The merchantbanker primarily came into being as corporate counselors for restructuring base of capital, thereafter forissue management and underwriting of the same.


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2. Project counselling which includes credit syndication and the working capital.

3. Capital structuring.

4. Portfolio management.

Their accountal for activities connected with an issue right upto the allotment of shares. They have to certify thestatement in the prospectus to the SEBI. Penalty points are awarded to the merchant banker who do not comply withthe stipulated conditions.

Services Rendered by Merchant Banks

The working of merchant banking agencies and subsequent units formed to offer merchant banking services hasshown that merchant banks are rendering diverse services and functions, such as organizing and extending financefor investment in projects, assistance in financial management, acceptance holes business, raising Euro-dollar loansand issue of foreign currency bonds, financing of local authorities, financing export of capital goods, ships,hydropower installation, railways, financing of hire-purchase transactions, equipment leasing, mergers and takeovers,valuation of assets, investment management and promotion of investment trusts. Not all merchant banks offer allthese service. Different merchant bankers specialize in different services.

Merchant banking in India

Merchant banking activity was formally initiated into the Indian capital markets when Grindlays Bank received thelicence from Reserve Bank in 1967. Grindlays which started with management of capital issue, recognized the needsof emerging class of entrepreneurs for diverse financial services ranging from production planning and systems

design to market research. Apart from meeting specially the needs of small scale units, it provided managementconsultancy services to large and medium sized companies. following Grindlays Bank, Citibank set up its merchantbanking division in 1970. The division took up the task of assisting new entrepreneurs and existing units in theevaluation of new projects and raising funds through borrowing and issue of equity. Management consultancyservices were also offered.

Consequent to the recommendations of Banking Commission in 1972, that Indian banks should start merchantbanking services as part of their multiple services which banks could offer their clients. State Bank of India started theMerchant Banking Division in 1972. In the initial years the SBIs objective was to render corporate advice andassistance to small and medium entrepreneurs.

The commercial banks that followed State Bank of India were Central Bank of India, Bank of India and SyndicateBank in 1977; Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978; and United Bank of India,United Commercial Bank, Punjab National Bank, Canara Bank and Indian Overseas Bank in the late seventies andearly 80s followed by IFCI (1989) and IDBI (1991),

Merchant banking activities are regulated by (1) Guidelines of SEBI and Ministry of Finance, (2) Companies Act,1956 and (3) Listing Guidelines of Stock Exchange and (4) Securities Contracts (Regulation) Act, 1956.

SEBI (Merchant Bankers) Rules and Regulations, 1992

Merchant Banking in India is governed by the SEBI (Merchant Bankers) Rules 1992 and SEBI (Merchant Bankers)Regulations 1992. Under these Rules & Regulations, the registration of Merchant Bankers with SEBI is compulsory.The regulations provide for the registration of four categories of Merchant Bankers.

Under the first category, bankers can act as an issue manager, adviser, consultant, underwriter and portfoliomanager. Under the second category, he can act as an adviser, consultant, co-manager, underwriter and portfoliomanager. In the third category, he can act as an underwriter, adviser and consultant and in the fourth category hecould act only as an adviser or consultant to an issue.

The Merchant Bankers are required to fulfil the capital adequacy requirements which are Rs. 5 crore, Rs. 50 lakh, Rs.20 lakh for the first three categories of Merchant Bankers, respectively. As category four Merchant Bankers areauthorizes to act as consultant or advisers to an issue, no capital adequacy requirements has been prescribed. TheCode of Conduct specified that every merchant banker should observe high standards of integrity and fairness in hisdealings with clients and other Merchant Bankers.

Merchant Bankers are required to take adequate steps for allotment of securities and refund of application moneywithout delay and not indulge in price rigging and manipulation. To ensure transparency and accountability, SEBI hasadvised Merchant Bankers to enter into agreements with corporate bodies setting out their mutual rights, liabilitiesand obligations relating to an issue particularly on disclosures, allotment and refund, maintenance of books ofaccounts, and submission of half yearly report to SEBI. The regulations stipulate that all issue should be managed byatleast one Merchant Banker functioning as a lead manager.


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Number of lead managers

The number of lead manages depends on the size of the pubis issue. The guidelines stipulate that for an issue uptoRs. 50 crores/ the number of lead managers should not exceed two, for issues between Rs. 50-100 crores maximumof three, for issues between Rs. 100-200 crores, four, for issue above Rs. 200 crores but less than Rs. 400 crores,five and for issues above Rs. 400 crores, five or as may be agreed by SEBI.

Responsibilities of lead manager

Lead managers should not agree to manage any issue unless his responsibilities relating to the issue mainlydisclosures, allotment and refund are clearly defined. A statement specifying such responsibilities should befurnished to SEBI.

Underwriting obligation

Lead merchant banker in Category I should accept a minimum underwriting obligation of five per cent of the totalunderwriting commitment or Rs. 25 lakhs whichever is less.

The lead Merchant Banker is responsible for verification of contents of a prospectus or the letter of offer in respect ofan issue and is required to submit to SEBI, a due diligence certificate confirming that the disclosures made in thedraft prospectus are true, fair and adequate to enable to investor to make a well informed decision. The leadmanager undertaking the responsibility for refunds on allotment of securities would continue to be associated with theissue till the subscribers have received the shares or excess application money.

The regulations provide for a procedure for inspection of Merchant Bankers for SEBI. Under these regulations, SEBIwill be empowered to suspend a registration of a merchant banker in case he furnishes wrong or false information,fails to resolve the complaints of investors, indulges in price rigging or fails to maintain capital adequacy requirement.In case of deliberate manipulation or price rigging or cornering activities or deterioration in the financial position, theBoard is empowered to cancel the registration of the Merchant Banker.

The penalty of suspension or cancellation of registration can be imposed by the SEBI only after holding an inquiryand giving sufficient opportunity to the Merchant Banker of being heard.

SEBI Guidelines for Merchant Bankers

SEBI has issued a number of general instructions to authorized Merchant Bankers. These have been consolidatedand codified in the form of a Circular issue by the SEBI. All registered Merchant Bankers are required to ensurecompliance with the instructions contained in the Compendium, which particularly deals with the following matters:

1. Registration2. Pre-Issue Obligations:

Memorandum of Understanding

Inter se allocation of responsibilities

Submission of Draft Offer Documents

Disclosures

Application form

Front, Outer Cover page

Payment to other intermediaries

Despatch of Issue Material

Certificate relating to Promoters contribution.

3. Underwriters

4. Advertisements

5. Post Issue Obligations

6. General

7. Capital Structure


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Submission of due diligence certificate

A due diligence certificate about verification of contents of prospectus or the letter of an offer in respect of an issueand the reasonableness of the views excessed therein should be submitted to SEBI atleast two weeks prior to theopening of an issue by the lead merchant banker.

Documents to be submitted to SEBI by lead Manager

The lead manager should submit to SEBI,

(a) Particular of the issue, draft prospectus or letter of offer,

(b) Any other literature intended to be circulated to the investors including the shareholder and

(c) Such other documents relating to prospectus or letter of offer as the case may be.

These documents should be furnished at least two weeks before filing the draft prospectus or letter of offer with ROCor with Regional Stock Exchange. The lead manager has to ensure that modifications suggested by SEBI areincorporated. The lead manager undertaking the responsibility for refunds or allotment of securities in respect of anyissue should continue to be associated with the issue till the subscribers have received share certificate or refund ofexcess application money.

Insider trading

Merchant bankers either directly or indirectly are prohibited from entering into any transaction in securities on the

basis of unpublished price sensitive information.

Acquisition of shares

Merchant Bankers should submit to SEBI particulars of any transaction for acquisition of securities of a companywhose issue is managed by them within 15 days from the date of entering into such transaction.

Disclosures

As and when required by SEBI, merchant banker has to disclose his,

(a) Responsibilities with regard to the management of the issue,

(b) Any change in information furnished which have a bearing on the certificate granted,

(c) The names of the companies whose issue he has managed,

(d) Breach of capital adequacy and

(e) His activities as a manager, underwriter, consultant or adviser to an issue.

SEBI Regulations Regarding Lead Managers And Merchant Banking Functionaries

Lead Managers obligation

As per SEBI, the Lead Managers will have to fulfil the following obligations:

1. To enter into a Memorandum of Understanding with the Company in the format given in appendix setting outtheir mutual rights, liabilities and obligations relating to the issue.

2. To ensure that the offer documents comply with all requirements as per the Companies Act, 1956, SEBIGuidelines and other relevant Notifications of the Government.

3. To furnish the due diligence Certificate in the prescribed format along with the draft offer documents.

4. To furnish to SEBI along with the draft offer document the following undertakings/certificates:

a. An undertaking form

The Chief Executive Officer of the Company that the complaints received

In respect of the issue which would be attended to expeditiously and satisfactorily

The Company Secretary that the Company will get the instruments of the proposed issuelisted within the prescribe time period and would take necessary steps in time for thepurpose.


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The Company Secretary that the Company would apply in advance for the listing of theshares which would be generated by the conversion of Debentures/ Bonds (whereverapplicable)

The Company that the requisite funds for the purpose of dispatching refund orders /allotment letters / certificates by registered post will be made available to the Registrars tothe Issue.

b. An undertaking from the Issue that the Promoters contribution, including premium, in full willbe brought in advance before the issue opens.

c. Certificate signed by the Company Secretary confirming the following:

i. All refund orders against the previous issues have been dispatched to the applicants

ii. All shares/debentures certificates have been dispatched to the allottees; and

iii. The instrument(s) has been listed on the Stock Exchanges mentioned in theconcerned offer documents.

iv. An undertaking from the Lead Manager to get the issue fully under written to theextent of offer to the public and to include details thereof in the final prospectus.

5. To independently assess the capability and capacity of the various intermediaries to handle the issue and

ensure that they are registered with SEBI. Where the Lead manager is the sole/one of the lead managers ofan issue, he cannot act as Registrar to the said issue. Where the issuer of a capital is a registered Registrarto an Issue, the issuer will have to appoint on outside Registrar to process its issue. To ensure that thenumber of co-managers to an issue does not exceed the number of lead managers to the said issue andthat number of advisors to the issue is only one.

6. To ensure that Bankers to the issue are appointed in the mandatory collection centres per Ministry ofFinance, Stock Exchange Division Guidelines. No. F. 1/36/SE/90 dated July 11, 1990. To ensure that widerproper and equitable distribution of public issue material takes place to avoid complaints of inadequatesupply of such material from Stock Exchanges, brokers, under-writers etc.

7. To furnish to SEBI a certificate from a Chartered Accountant/Company Secretary in practice to the effect thatthe promoters contribution including premium in its entirely has been brought in advance before the publicissue opens. This certificate should be forwarded at least one dye prior to the date of opening of the issue

accompanied by a list of names and addresses of friends, relatives and associates who have contributed tothe promoters quota along with the amount of subscription made by each of them.

8. To accept a minimum underwriting obligation of 5 percent of the total underwriting commitment (of the issue)or Rs. 25 lakhs whichever is less. The outstanding underwriting commitments of the merchant banker shallnot exceed 5 times his net worth at any pint of time.

9. To satisfy himself that the issue is fully subscribed before announcing closure of the issue.

10. To exercise due caution while finalizing the underwriting arrangement keeping in view the tract record ofunderwriters in meeting their commitments in the devolved issues managed by the lead manager.

11. To ensure that the underwriting obligations are carried out in the following manner:-

The Company shall within 30 days after the date of closure of subscription list communicate in writing to theUnder-writer, the total number of shares/ debentures remaining unsubscribed, the number ofshares/debentures required to be taken up by the underwriter of subscription to be procured thereof by theunderwriter.

The company shall make available to the Underwriter the manner of computation of underwriting obligationand also furnish a certificate in support of such computation from the Companys Auditors.

The underwriter on being satisfied about the extent of devolvement of the underwriting obligation, shallimmediately and in any case not later than 30 days after receipt of the communication under sub-clause (a)above, make or procure the applications to subscribe to the shares/debentures and submit the sametogether with the application moneys to the company.


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In the even of failure of the underwriter to make the application to subscribe to the shares as required underclause (iii) above, the company shall be free to make arrangement(s) with one or more persons to subscribeto such shares without prejudice to the rights of the company to take such measures and proceedings asmay be available to it against the Underwriter including the right to claim damages for any loss suffered bythe Company by reason of failure on the part of the part of the underwriter to subscribe to the shares asaforesaid.

12. To ensure that the issuers relate an advertisement giving details relating to over subscription, basis ofallotment, number, value and percentage of applications received alongwith stock-invest, number, value and

percentage of successful allottees who have applied through stock invest, date of completion of refundorders, date of dispatch of certificates, date of completion of dispatch of cancelled stock invests directly tothe investors by the Registrars and date of filing of listing application This advertisement should be releasedwithin 10 days from the date of completion of the various activities.

13. To confirm to SEBI within 7 days from the date of closure of the issue that the issue is subscribed to theextent of atleast 90 percent.

14. To ensure compliance report of 45 days and 90 days. Respectively submitted by the issuer.

15. To maintain close co-ordination with the Registrars to the Issue and ensure, compliance of all stipulationsrelating to the Issue.

16. Where there is reservation for NRIs in public issue, to ensure that copies of the prospectus with applicationforms are sent to the Indian Investment Centre, New Delhi.

17. To ensure compliance by the Registrars to an Issue in respect of handling of applications accompanied bystock invest.

18.Lead managers should note that if the offer documents modified in the light of SEBIs observations and dulyhighlighting the changes made are not received by SEBI with 30 days from the date of conveying itsobservations (in writing or through discussions), the file will be treated as closed at SEBI. The LeadManagers will have to refile the documents afresh.

19. To ensure necessary compliance by the issuer with the Companies Act requirements with regard toappointment of whole time. Company Secretaries before filing of offer documents with Registrar ofCompanies.

20. To ensure that capital structure is presented as follows in the offer documents:-

Number of instruments, description, aggregate nominal value and Issue amount should be given in thatorder.

Present issue offer document should be net of promoters contribution in present issue plus offer throughoffer document.

Offer through offer document should be net of promoters contribution but inclusive of reservations/firmallotments to permitted reserved categories.

Percentage of reservation permitted reserved categories should be reckoned only with reference to the offerdocument (i.e. amount offered to the public through the offer documents.

Net offer to the public will be the offer made to Indian public excluding reservations/ firm allotments.

If any firm allotment has been made to any person(s) in the specified categories, no further application fromthat person(s) [excepting persons from employees category] should be entered. Similarly, where reservation

ahs been made to specific category(ies), person(s) belonging to that category(ies) [except employees andshareholders categories] should not make application in the public offer category.

Where reservations have been made to shareholders of group companies, name of group companies whoseshare-holders are covered should be disclosed in the offer document. Such information should also becontained in the Memorandum 2A.

An applicant in the public category can make an application for that number of securities only which isoffered to the public. Similarly, in the case of reserved categories, no single applicant in the reservedcategory can make an application for a number of securities which exceeds the reservation.

Notes under capital structure relating to promoters contribution and lock-in-period should clearly state thedate of allotment, number of instruments, face value. Issue price, percentage to total and date upto which


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locked in, together with a statement that the same has been brought in, in multiples of specified minimum lotand from persons falling within the definition of promoters as per SEBI guidelines. Further, eligible sharesissued last to the core promoters should be locked in first for a period of 5 years.

In case the already issued capital includes shares issued for consideration other than cash, complete detailsabout the manner in which such shares were issued should be incorporated immediately after the capitalstructure presentation.

21. In the case of unlisted companies going public for the first time, bonus shares issued to the promoters out offree reserves built out of the genuine profits or share premium collected in cash only will be allowed to beincluded for the puroses of reckoning minimum promoters contribution. In other words, where such bonusshares have been issued out of revaluation reserve or reserves without accrual of cash resources during thepreceding 3 accounting years, the same will not be considered eligible for reckoning promoters contribution.

In case of all companies (including partnership firms converted into companies and going public), whereshares (other than by way of bonus) have been issued to the promoters for consideration other than cashduring the preceding 3 accounting years the same will be reckoned for promoters contribution only if theysatisfy the following.

No revaluation of assets is involved in such a transaction

The shares have been issued only at the same price at which the public issue is proposed.

The lead managers should ensure that in the case of first public issue by an existing unlisted or new company, thepromoters partake to the required extent in each class of securities which are offered to the public and that an offer tothe public is made to the minimum required extent of each class of securities which are sought to be listed, in termsof rule 19(2) (b) of Securities Contracts (Regulation) Rules.


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Lesson 3

Mutual Funds

Objective

Reading this lesson the students will be in position to understand the concept of objectives of Mutual Funds, MutualFunds in India, Phases of Development, Structure of Indian Mutual Funds, Types of Schemes, Regulations regardingMutual Funds, Merits of Mutual Funds and Limitations.

Contents

Mutual Funds

Objectives

Worlds Leading Mutual Fund

Operations

Mutual Funds in India

Private sector mutual funds

Registration of Mutual Funds

Phases of Development

Structure of Indian Mutual Funds

Types of Schemes

Performance of Mutual Funds

Regulation regarding Mutual Funds

Merits of Mutual Funds

Limitations

In India, mutual fund came into being through the Unit Trust of India. UTI came into existence in 1964 and pioneeredthe concept of units in India. However, the first mutual fund scheme in the real sense of the term had to wait until

1986 when UTI introduced the Master Share. The response from the investors was splendid and its successheralded the birth of other mutual funds. Now mutual funds are operated by public sector organisation like the StateBank of India, PNB, Canara Bank, Bank of India, Indian Bank, LIC, GIC, ICICI and IDBI through their wholly ownedsubsidiaries and also by private sector operators such as the Alliance Capital, 20th Century finance etc.

The latest entrant is the IDBI with a novel feature of safety net, whereby the original subscribers are assumed ofprotection of face capital value, in the case of the scheme faltering. There are about 20 operators, providing as manyas 250 schemes. 50 schemes are quoted in stock exchanges, 90 schemes are repurchased while the rest are neithertraded in stock exchange nor repurchased. Mutual funds are subject to stock market fluctuations, which is turn arecaused by several factors.

Objectives

The objectives of mutual funds are:

To provide an investment opportunity for the investors, especially the small income group of people toparticipate in the growing corporate securities market though not directly, but in an indirect manner.

To provide a return that is more than bank deposit rate, to the subscribers without corresponding rise in thelevel of risk.

To mobilize the savings of the public and channel them into productive investments.

To provide for different investment objectives like current return, capital appreciation, tax benefit or a mixtureof these and


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To strengthen the capital market by adding the mutual and dimension to the same.

Worlds Leading Mutual Fund

According to U.S. News and world report, Indias largest mutual fund. Unit Trust of India is far behind worlds leadingmutual funds as is revealed from the following statistics.

Mutual Fund Assets ($ in billion) No. of Schemes Expenses ratio (%)

Fidelity 295.0 210 1.20

Vanguard 132.0 90 0.30

Merrill Lynch 114.2 128 0.40

American Funds 102.0 28 0.80

Franklin Templeton 56.3 102 0.80

Unit Trust of India 20.0 59 0.54

Italy recorded a growth of 200% in Mutual Fund industry during 1980s and 1990s, Japan 600%, U.K. 350% andGermany about 320%. M.F. industry has also shown good growth in countries like Canada, South Africa, Mexico and

Australia.In developed countries, hardly any direct investment take place since Mutual Funds dominate the scene and the levelof institutionalization is very high.The Mutual Fund industry in U.S.A. is 70 years old. Mutual funds in developednations are a parallel investment instrument to banks, offering near identical security, with assured higher returns.

The first American Mutual Fund to hit the Indian Market was Morgan Stanley in January, 1994. In just 72 hours,Morgan Stanley mopped up Rs. 900 crores and retained it fully as against its announcement that it would retain Rs.300 crores on a first come first serve basis. Internationally, mutual Funds have been in a position to ensureacceptable returns and sustain level performances. Investments in mutual funds, commodity funds and pensionfunds have been on rise all over the world. All investments are routed through mutual funds.

American Mutual Funds have about $ 2 trillion savings from about 40 million Americans. American Mutual Fundsdeclare as much of information as possible. For example, Mutual Funds are required to make public theircorrespondence with companies they have invested in. Declaration of quarterly results, display of portfolio on a

quarterly basis to investors and daily computation of net asset values are the other major disclosures. The fundsdiscuss their country weightings for the second quarter and their view of the stock market. By defining theirinvestments policies they intend to let the investor know his risks. American Mutual Funds also engage in practice oftrading on the margins, which involved a number of trades in any scrip daily and over a month, by making a smalldown payment of the total cost of investment. The gains are taken and losses replenished. The other area ofinvestment is asset backed derivatives like mortgage backed securities. Such practice can lead to collapse of a fundany time.In US, John Hanwcks Mutual Fund prospectuses are detailed, often running to 32 pages but written inlanguage understandable to an average investor. Its prospectuses contain an easy-to-understand section explaininga funds risks and bar charts to show how fund performs in different markets. It accurately and succinctly describe therisks and the investment strategies of its funds.

Assets of few Leading Mutual Funds World Wide

Funds Asset ($ billion) No. of Schemes

Unit Trust of India 20.00 59

Franklin/Templeton 56.3 102

American Funds 102.00 28

Men-ill Lynch 114.2 128

Vanguard 132.00 90

Fidelity 295.0 210

The above data reveals that whereas Fidelity alongwith Merrill Lynch of US accounts for US $ 409.20 billion. UnitTrust of India having history of over 30 years just manages assets worth US $ 20 billion only.


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Operations

The mutual fund operation works this way. The mutual fund management designs a scheme with specified goal, viz,income, growth, tax off or mixture of these and floats the scheme after meeting the legal formalities thereto. Thepublic are invited to subscribe to the scheme. Baring a handful of schemes, all other schemes just require a minimumexposure of Rs. 500, at present, per application. So many can participate in mutual fund schemes unlike publicissues of shares requiring minimum exposure of Rs. 5000. The collected sum is invested, on behalf of thesubscribers to the schemes, by there fund managers in corporate, money market and other securities. The capitalgains realized by dealing in the securities and interest and dividend earned from the scrips are distributed or

reinvested after meeting fund expenditures, subject to the nature of the fund. In an income scheme major portion ofearnings is distributed as dividend on the units of the funds, while in the case of growth scheme, the earnings aremostly ploughed back.

Mutual Funds in India

In India, the only mutual fund operating for a long time since 1964 was the Unit Trust of India (UTI). It is an open-ended mutla fund, whose units can be sold and repurchased at any time. It is in the public sector enjoying amonopoly position and some unique tax benefits such as exception from income-tax of its entire income. UTI wasalone in the field until 1987.

Mutual Funds have been established since 1987 by the public sector banks following an amendment to the Banking(Regulations) Act in 1983, which empowered the RBI to permit the banks to carry on non-banking business such asleasing, mutual funds etc under section 6 of this Act. The growth of the mutual fund industry in India was very slow tillthe end of the 1980s, primarily due to government controls and over regulations of the financial services industry.

Severe entry barriers restricted the growth of the mutual fund industry in terms of number of players, mobilization ofsavings and creating of assets. This was the Scenario till 1986-87.

The mutual fund market in India was solely controlled by a single institution, namely Unit Trust of India which wasformed by the Government of India under an Act of parliament. UTI commenced operations in July 1964, with a viewto encourage savings and investment and participation in the income, profits and gains accruing to the corporationfrom the acquisition, holding, management and disposal of securities.Today there are three different types of playersoperating in the Indian market. UTI, non-UTI, Public Sector Mutual Funds and private sector mutual funds (includingforeign mutual funds).

Private sector mutual funds

Performance of existing mutual funds promoted by nationalized banks had been viewed with interest and with theentry of private sector mutual funds, this industry is all set for explosion. Government allowed entry of private mutualfunds in the country in 1992 buy none of the private mutual funds has commenced operations yet although SEBI has

cleared a number of private mutual funds. The following have launched their mutual funds so far

Kothari Pioneer Mutual Fund

20th Century Mutual Fund

ICICI Mutual Fund

IDBI Mutual Fund

Morgan Stanley Growth Fund

Alliance 1995

GIC Mutual Fund

JM Mutual Fund

SRF Mutual Fund

Biria Mutual Fund

ITC Threadneedle Mutual Fund

IDBI Mutual Fund

Templeton Mutual Fund

Jardine Fleming Mutual Fund


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Entry of private mutual funds has encouraged competition in the financial sector and improved the existinginvestment climate, both qualitatively and quantitatively. Many more companies, which have announced MFactivities, are companies with proven tract record. The entry of private M.F. will also ensure better accountingstandards, policies, disclosures and transparency in accounts and operations.

Registration of Mutual Fund

All mutual funds are required to obtain a certificate of registration from SEBI. The application shall be made by thesponsor in Form A alongwith a fee of Rs. 25,000. The application should be complete in all respects and mustconform to the instructions specified in the form. The sponsor may be required to furnish further information or

clarification or to appear personally before the Board, The Board shall consider the following aspects, before grantingthe certificate.

The sponsor has a sound track record and experience of at least 5 years, professional competence, financialsoundness and general reputation of fairness and integrity.

Mutual Fund is in the form of a Trust and managed by an Asset Management Company (AMC) with acustodian to keep custody of the securities.

Sponsor contributes at

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