Merchant Banking And Financial Services 6lb4j

Merchant Banking And Financial services MA 0041

Que1. Identify the role of merchant banking as financial intermediaries. Ans.

Merchant banking is an essential service provided by financial institutions that helps in the growth of corporate sector, which eventually reflects in the overall growth and economic development of the country. Merchant banking helps with the following:

 Channelize the financial surplus of the public into productive investment prospectus.  Coordinate the activities of intermediaries to the share issues such as bankers, registrars, underwriters, and brokers.  Ensure the compliance with the rules and regulations governing the market. Role of merchant banking as financial intermediaries: Financial intermediation is a process by which capital is mobilised from large number of investors and is made available to all those who need them, mainly to corporate customers. Merchant banking is a financial intermediary which helps to transfer capital from one who owns it to those who require it. Merchant banks invest their capital in client companies and provide fee- based services for mergers and acquisitions. Many companies approach merchant banks to enhance their financial stability or to meet an essential capital requirements. Due to their Knowledge in international finances, merchant banks specialise in dealing with multinational corporations. Merchant banks do not offer regular banking services to the public.

Que2. Describe the issuance process of depository receipts. Ans.

As per the definition given in the Companies Rules, 2004, IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian depository, which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be

held by an overseas custodian, which shall authorise the Indian depository to issue the IDRs. The following are the eligibilities which the company must fulfil to issue an IDR :  Capital requirement  The foreign company must have paid up capital and free reserve of at least USD 100 million, in order to issue IDR.  Sale turnover of companies  There must be an average turnover of USD 500 million for previous three years.  Profits or dividends  Company must have made profits in the previous five years and must have confirmed dividend of at least 10 percent for each of the previous year.  Debt equity ratio  the pre-issue debt equity ratio must not be more than 2:1.  Level of issue  The issue during a particular year must not go beyond 15 percent of the paid up capital plus free reserves and the size of issue must not be less than Rs. 500 million.  Redemption  The IDRs will not be redeemable into original equity shares before one year from the date of issue.  Valuation  The IDRs will be valued in Indian rupees, irrespective of the value of original shares.  Profit  In addition to other opportunities, IDR will be an extra investment opportunity to Indian investors for overseas investment.

Que3. Explain the operational guidelines that need to be followed by a merchant banker. Ans. Operational Guidelines:1. Submission of draft and final offer document  First, the lead merchant banker files the offer documents of size up to Rs. 50 crores with the regional office of SEBI under the jurisdiction of the ed office of the issuer company. Then the lead merchant banker or stock exchange makes the draft offer document available to the public. The lead merchant banker makes 10 copies of the draft document available to the Board, and 250 copies to the stock exchange, where the issue is proposed to be listed. Within three days of filing the offer document with registrar of companies or the stock exchange, the lead merchant bankers submits two copies of the final printed copy of the offer document to dealing offices of the

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Board and one final copy to the primary market department, SEBI, and head office. Instructions on post-issue obligation  The merchant banker ensures with the following post –issue obligations:  Association of resource personnel  A public representative nominated by the Board will be associated with the process of finalising the basis of allotment in case of over- subscription in public issues. The lead merchant banker informs the nominated person about the date, time, venue and other details with regard to the process of finalisation of basis of allotment.  Redressal of investor grievances  The merchant banker assign high priority to investor grievances and take all measures to minimise the number of complaints. The lead merchant bankers sets up proper grievance monitoring and redressal system in coordination with the issuers and the registrars to an issue, and takes all steps to resolve the grievances as soon as possible.  Issue of No Objection Certificate( NOC)  The issuer companies deposit 1% of the amount of securities offered to the public and/or to the holders of the existing securities of the company with the regional stock exchange based on the listing agreement of the stock exchanges. The deposit amount an NOC from the board. The issuer company to the board submits an application for NOC in the required format. Registration and renewal of registration of Merchant bankers  Merchant bankers make the application for renewal of certificate of registration as per Regulation 9 of SEBI. The renewal application for the certificate of ing as a merchant banker provides a statement that highlights the changes in he information submitted to the Board in an earlier registration. The earlier registration is accompanied by a declaration that there will not be any further changes in the statement. Registration with Association of Merchant Bankers of India (AMBI)  The ed merchant bankers will inform the board of of their registration with AMBI, accompanied by relevant details. Issue of penalty points  The board can penalise the merchant banker if there is any violation regarding the provisions of operational guidelines. The merchant banker who is penalised by giving four or more penalty points cannot file

any offer document or manage any issue for certain periods of time.

Que4. Explain the basic features of securities lending & borrowing schemes. Ans.

Following are the features of Securities lending & borrowing Schemes: 1) Eligibility  Under the Securities Lending Scheme,1997 the securities transacted in F&O segment are authorised for lending and borrowing. The scheme is open for all the market in the Indian Securities market. 2) Participation  The scheme permits participation by all sections of investors. This include retail, institutional and so on. The AIs aet up the platform for lending and borrowing which is accessed by the borrowers and lenders through the clearing , banks and custodians who are authorised by the AIs, the AIs, CMs and the clients enter into an agreement. 3) Tenure  The tenure of lending and borrowing is fixed as standardised contracts. 4) Settlement  The settlements of the lending and borrowing transactions is independent of normal market settlement. The settlement cycle for the scheme is based on T+1. The abbreviation T+1 denote the settlement date of security transaction date plus one day. The netting of transactions at any level is not permitted as settlement of the lending and borrowing transactions is done on a gross basis at the level of the clients. 5) Operation  The scheme is operated on an order-matching, screen based, automated platform, provided by the Approved Intermediaries. 6) Agreement  The agreement consist of the basic conditions for lending and borrowing of securities that is recommended in the scheme. The AIs also include appropriate conditions in the agreement for proper management. 7) Risk management systems  The AIs frame suitable risk management systems to provide guaranteed delivery of securities to the borrower and return of securities to the lender. The AIs conducts an auction for obtaining securities if the lender or borrower fails to return securities to the AI. 8) Position limits  AIs in consultation with SEBI decides the position limits at the level of market, CM and client.

Que5. Discuss the difference between asset and fee based financial services. Ans. Asset based financial services : It facilitates corporate and other business entities to mobilise resources at lower rates and open up investment opportunities with enhanced returns. These services enable the corporate institutions, in particular, to reject the traditional bank finance and opt for the more competitive financial market. The debt market enables a borrower to organise his borrowings and structure the repayment to match future cash flows. The investment options have widened significantly to enable the corporate entities to use their surplus cash in short- term maturities and increase the revenue. The agreement to asset based securities is facilitated by financial intermediaries through fee based services. The asset based financial services has emerged as an important supplementary source of finance in the industry. The following are some of the asset based financial services: 1) 2) 3) 4) 5) 6)

Leasing Hire purchase Customer credit Factoring Forfaiting Bill discounting

Fee based financial services : Fee based services are not used to create assets or liabilities. These financial services facilitate certain financial functions such as managing capital issues, making managements for the placement of capital and debt instruments, and arrangement of funds from financial institutions. They also undertake the responsibility of getting all government and other clearances. In addition, this sector does a large number of other services like rendering project advisory services, plan mergers and acquisitions, and guiding in capital restructuring to their client. In fee based services, the intermediaries charge fees for their financial services, like merchant banking services, assisting in mergers, stock broking and so on. The following are some fee based financial services: 1) Issuing of Letters of credit 2) Issuing Letters of Guarantee 3) Other services.

Que6. Describe ing and Reporting for Operating Lease in details. Ans.

Examine the operating lease in the financial statement of lessees. The entire payment is charged to the profit and loss . IAS 17 requires the rental to be charged on a depreciation basis over the lease term, if the payments are not made on such a basis. If the term of the lease requires a heavy initial payment, a percentage of the payment can be treated as prepaid expense. Since the lessee will not consider the risk of ownership, the lease expenditure is treated as an operating expenses in the income statement; the lease does not affect the balance sheet. The operating lease will not show up as part of the capital of the firm. A lease agreement allows the use of an asset, but does not convey rights similar to ownership of the asset. The ing treatment for an operating lease is simple for both the lessor and the lessee. The lessee has acquired an operating expense, so the lease rental to be paid is written off in the profit and loss . The lessee will have to disclose in the notes to the s the total amount charged in the year and the total amount of the payments to which the entity is committed at the year end. The lessor has made revenue from renting out the asset and consequently recognises the lease rental receivable as income in the profit and loss .