Investment Banking and Financial Services

 Ans 1Merchant Bank

A merchant bank is a financial institution that provides banking and financial solutions to High Net-worth Individuals (HNIs) and large corporations. They provide services like underwriting, fundraising, issue management, loan syndication, portfolio management, and financial advice.

Merchant Bank Functions

The banks extend a variety of services and charge a fee. The services differ from those offered by regular banks.

Let us understand each service in detail:

Project Counselling: Merchant bankers assist their clients at every stage of the project—idea generation, report creation, budgeting, and financing. This is especially the case with new entrepreneurs.

Leasing Services: The banks extend leasing facilities—clients lease assets and equipment to generate rental income.

Issue Management: High net-worth individuals employ merchant banks to issue equity shares, preference shares, and debentures to the general public.

Underwriting: The banks also facilitate equity underwriting. They assess the price and risk involved in particular security and initiate public issue and distribution of stocks.

Fund Raising: Through various facilities like underwriting and securities issuance, bankers help the private companies generate capital from international and domestic markets.

Portfolio Management: On behalf of clients, these bankers invest in different kinds of financial instruments.

Loan Syndication: They finance term loans to back projects that need funding.

Promotional Activities: Merchant banks are financial intermediaries that promote new enterprises.

Merchant Banker

 “Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager-consultant, advisor or rendering corporate advisory services in relation to such issue management” -SEBI Merchant Bankers rules 1992.

Scope of merchant bankers:

FI would require the services of Merchant bankers because of the Changing policy of FI.

A good amount of capital will be raised through debt instruments. Hence there is a Development of the debt market

There are new Innovations in Financial Instruments

In order to get funds, Disinvestment is the reduction of some reasonably asset of a firm for the attainment of objectives

Merchant bankers can help in Cos. reviewing their strategies, structure and functioning etc. resulting in corporate restructuring.

Indian market Domestic and foreign investors or FIIs are fixing their biz here. There are many public and private issues springing up which further leads to Growth in the new issues market

 Importance 

They help in the Growth of Primary Markets.

They help in Purchasing Securities.

They ensure Capital Flow.

They Promote Financial Surplus.

The coordinating activities to the Share Issue.

They work in Complying with Rules and Regulations.

Advantages 

They give advice on ventures just as speculations on small customers.

They help the independent company raise finance without any problem.

Merchant banks approach organizations owned by dealers, monetary foundations, and customers

They help business in the dissemination of benefits to the investors.

They help in cash management and renting tasks too.

Disadvantages

One may not have access to each potential product.

The account is dearer than a banking account.

One can have no control over the interest rates or returns.

One can get size considerations that must be met.

One does not necessarily receive start-up funding.

Categories of Merchant Bankers

The following are the categories of merchant bankers:

1. Category I – can carry on all activities relating to management of issues such as preparation of prospectus, determining financial structure, conduct of market surveys, raising funds from capital market, raising of funds through new instruments, arranging bought out deals and to provide advice on: mergers and amalgamations, loan syndication, technology tie-ups, working capital finance, venture capital, lease finance, fixed deposit management, factoring, portfolio management of mutual funds, rehabilitation of sick units etc.

2. Category II – to act as advisor, consultant, co-manager, underwriter and portfolio manager.

3. Category III – to act as underwriter, advisor and consultant to an issue.

4. Category IV – to act only as advisor or consultant to an issue.

Ans 2How do credit rating agencies work?

Credit rating agencies assign a value to the credit risk of different securities such as bonds and loans. For example, AAA is seen as the industry standard as the highest rating, and AAA, AA, A and BBB are widely seen as investment-quality securities.

Ratings of BB or below are speculative grades which denote a higher credit risk or risk of default in the underlying security, but this often comes with a potentially higher return on an initial investment.

While they use alphabetical ratings, credit rating agencies will often not give a numerical probability to the risk of default such as 10%, 20% or 30%. Instead, they will use statements such as ‘the obligor’s (borrower’s) capacity to meet its financial commitments on the obligation (to repay the lender) is extremely strong’.1

However, it is generally accepted that AAA and AA rated securities have a default risk of less than 1%, and the probability of default increases for each subsequent rating.

Credit ratings agencies usually have analysts who recommend a rating, and then a committee which votes on the recommendation. Analysts will use information such as background data, management forecasts, risk reports and performance forecasts.

They can also consider macroeconomic data, data provided by a company, bank or government which is being reviewed, or any information which is publicly available about the security which is being reviewed for a rating. Once the analysts have gathered enough data and information to give a recommendation, there will be a pre-committee and then a committee stage.

The pre-committee stage serves to assess whether the full rating process should proceed – if there is not enough information available to grant a recommendation, then the ratings process may be suspended. If it is decided that the process should proceed, then the recommended rating will be submitted to a committee for review.

The committee is often provided with a review package which contains the analysts’ findings and rationale for a recommended rating. The committee will consider the findings in the review package and determine whether the recommendation provided by the analysts is correct.

This determination will be achieved through a vote of the committee members, who are chosen based on experience and seniority – but different agencies might have slightly different criteria for selecting committee members. The members will then vote on the recommended rating and agree on either that rating, or they’ll assign a different credit rating based on a majority decision.

The ratings themselves are also only ever presented as opinions of a particular agency, but market participants will use multiple agencies to determine an aggregate credit risk rating.

Top Credit Rating Agencies in India are:

1.Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired 8.9% stake in CARE credit rating agency in 2017. It launched India's first index to benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-income market, in the rupee as well as dollar version in 2018. The company’s portfolio includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

2.ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries - Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for - corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.

3.Credit Analysis and Research limited (CARE)

Launched in 1993, CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

4.Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognised as external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.

5.India Rating and Research Pvt. Ltd.

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognised by the Reserve Bank of India and National Housing Bank.

6.Acuite Ratings & Research Limited

Acuité Ratings & Research Limited is a full-service Credit Rating Agency registered with the Securities and Exchange Board of India (SEBI). The company received RBI Accreditation as an External Credit Assessment Institution (ECAI), for Bank Loan Ratings under BASEL-II norms in the year 2012. Since then, it has assigned more than 8,300 credit ratings to various securities, debt instruments and bank facilities of entities spread across the country and section of industries. It has its Registered and Head Office in BKC, Mumbai.

7.Infomerics Valuation and Rating Private Limited

An RBI-accredited and SEBI-registered credit agency, Infomerics Valuation and Rating Private Limited saw its inception by eminent finance professionals and is now run under the leadership of Mr. Vipin Mallik. The credit bureau strives to offer an unbiased and detailed analysis and evaluation of credit worthiness to NBFCs, banks, corporates and small and medium scale units. It is through their rating and grading system that they determine the credit worthiness of an organisation. Infomerics helps in reducing any kind of information asymmetry amongst investors and lenders. Keeping transparency as it is core value, the credit bureau makes sure to deliver comprehensive and accurate reports and records of all their clients

Ans 1-A lead manager is primarily in charge of overseeing the progress of a particular office or department. Although the responsibilities will vary depending on their industry, it will typically revolve around producing progress reports, reviewing documentation and transactions, managing the budget, procuring supplies, and devising strategies to generate leads and reach goals faster. Furthermore, as a lead manager, it is essential to spearhead projects and encourage staff, all while implementing the company's policies and regulations.

LEAD MANAGER RESPONSIBILITIES

Here are examples of responsibilities from real lead manager resumes representing typical tasks they are likely to perform in their roles.

• Lead a team of in home geek squad agents that have the highest productivity in the company.

• Define processes and procedures for manual and automate testing and implement tools to achieve the overall QA objectives.

• General duties consist of managing payroll and appointment setting, as well as training and creating schedules for employees.

• Manage social media networks for increase public visibility through Facebook.

• Manage employee payroll activities and effectively evaluate employee performance for promotion opportunities.

• Manage several customer service incidents and tend to emergencies including the administration lifesaving CPR to a gym patron.

• Require to be certify in CPR, a and first aid.

• Cover property in absence of gm.

• Work under strict deadlines and respond to service requests and emergency call-outs.

• Deliver emergency pantry services to the homes of those with assess need for food.

• Report QA process and progress to upper management and align testing goals to overall corporate objectives.

• Research items using internet and shipping carriers, to resolve problems and comply with routing guides and government guidelines.

• Used reservation software, run various computer reports, take payments and post charges with credit cards and cash.

• Provide thorough supervision for day-to-day operations of facility in accordance with policies.

• Provide assurance to facility management that all personnel receive relevant safety & health training.

Ans 2SEBI Guidelines 

SEBI advises certain guidelines in issue of fresh share capital, first issue by new companies in Primary Market and functioning of secondary markets in order to maintain quality standards. A few such guidelines and objectives of the Securities and Exchange Board of India (SEBI) are discussed here.

SEBI Guidelines for issue of fresh share capital

1. All applications should be submitted to SEBI in the prescribed form.

2. Applications should be accompanied by true copies of industrial license.

3. Cost of the project should be furnished with scheme of finance.

4. Company should have the shares issued to the public and listed in one or more recognized stock exchanges.

5. Where the issue of equity share capital involves offer for subscription by the public for the first time, the value of equity capital, subscribed capital privately held by promoters, and their friends shall be not less than 15% of the total issued equity capital.

6. An equity-preference ratio of 3:1 is allowed.

7. Capital cost of the projects should be as per the standard set with a reasonable debt-equity ratio.

8. New company cannot issue shares at a premium. The dividend on preference shares should be within the prescribed list.

9. All the details of the underwriting agreement.

10. Allotment of shares to NRIs is not allowed without the approval of RBI.

11. Details of any firm allotment in favor of any financial institutions.

12. Declaration by secretary or director of the company.

Ans4Process of Venture Capital Financing: 6 Main Steps

This article throws light upon the six steps involved in the process of venture capital financing. 

The steps are: 1. Deal Origination 2. Screening 3. Evaluation 4. Deal Negotiation 5. Post Investment Activity 6. Exit Plan.

Venture Capital Financing: Step # 1.

Deal Origination:

Venture capital financing begins with origination of a deal. For venture capital business, stream of deals is necessary. There may be various sources of origination of deals. One such source is referral system in which deals are referred to venture capitalists by their parent organizations, trade partners, industry association, friends, etc.

Another source of deal flow is the active search through, networks, trade fairs, conferences, seminars, foreign resist etc. Certain intermediaries who act as link between venture capitalists and the potential entrepreneurs, also become source of deal origination.

Venture Capital Financing: Step # 2.

Screening:

Venture capitalist in his endeavor to choose the best ventures first of all undertakes preliminary scrutiny of all projects on the basis of certain broad criteria, such as technology or product, market scope, size of investment, geographical location and stage of financing.

Venture capitalists in India ask the applicant to provide a brief profile of the proposed venture to establish prime facie eligibility. Entrepreneurs are also invited for face-to-face discussion for seeking certain clarifications.

Venture Capital Financing: Step # 3.

Evaluation:

After a proposal has passed the preliminary screening, a detailed evaluation of the proposal takes place. A detailed study of project profile, track record of the entrepreneur, market potential, technological feasibility future turnover, profitability, etc. is undertaken.

Venture capitalists in Indian factor in the entrepreneur’s background, especially in terms of integrity, long-term vision, urge to grow managerial skills and business orientation. They also consider the entrepreneur’s entre-preneurital skills, technical competence, manufacturing and marketing abilities and experience. Further, the project’s viability in terms of product, market and technology is examined.

Besides, venture capitalists in India undertake thorough risk analysis of the proposal to ascertain product risk, market risk, technological and entrepreneurial risk. After considering in detail various aspects of the proposal, venture capitalist takes a final decision in terms of risk return spectrum, as brought in figure 31.1.

Venture Capital Financing: Step # 4.

Deal Negotiation:

Once the venture is found viable, the venture capitalist negotiates the terms of the deal with the entrepreneur. This it does so as to protect its interest. Terms of the deal include amount, form and price of the investment.

It also contains protective covenants such as venture capitalists right to control the venture company and to change its management, if necessary, buy back arrangements, acquisition, making IPOs. Terms of the deal should be mutually beneficial to both venture capitalist and the entrepreneur. It should be flexible and its structure should safeguard interests of both the parties.

Venture Capital Financing: Step # 5.

Post Investment Activity:

Once the deal is financed and the venture begins working, the venture capitalist associates himself with the enterprise as a partner and collaborator in order to ensure that the enterprise is operating as per the plan.

The venture capitalists participation in the enterprise is generally through a representation in the Board of Directors or informal influence in improving the quality of marketing, finance and other managerial functions. Generally, the venture capitalist does not meddle in the day-to-day working of the enterprise, it intervenes when a financial or managerial crisis takes place.

Venture Capital Financing: Step # 6.

Exit Plan:

The last stage of venture capital financing is the exit to realise the investment so as to make a profit/minimize losses. The venture capitalist should make exit plan, determining precise timing of exit that would depend on an a myriad of factors, such as nature of the venture, the extent and type of financial stake, the state of actual and potential competition, market conditions, etc.

At exit stage of venture capital financing, venture capitalist decides about disinvestments/realisation alternatives which are related to the type of investment, equity/quasi-equity and debt instruments. Thus, venture capitalize may exit through IPOs, acquisition by another company, purchase of the venture capitalist’s share by the promoter and purchase of the venture capitalist’s share by an outsider.

Ans 5 the concept of Credit Rating?

Since a credit rating is an assessment of a borrower's creditworthiness, a higher credit rating suggests that the company or entity is more likely to repay the borrowed credit. On the other hand, a lower credit rating might mean that they have a higher probability of turning into a defaulter. This can make it difficult for them to borrow money, as lenders will consider them high-risk borrowers.

However, there are other ways that credit rating is important:

For Lenders

• Lenders and investors can make better and more sound investment decisions by taking into account the risk of the entity who is borrowing the money.

• When lenders know the credit rating of potential borrowers, they can be assured that their money will be paid back in time, with the correct amount of interest.

For Borrowers

• When companies have a higher credit rating, they will be seen as lower risk and therefore get loan applications approved more easily.

• Lenders like banks and financial institutions will also offer loans at a lower interest rates for entities that have a higher credit rating.

Thus, having a higher credit rating can help a company raise money and expand, while also reducing the cost of borrowing. And, for lenders, these ratings can help them obtain more detailed financial information and encourage better accounting standards.

1. ANs 1Offer Document

The prospectus that consists information regarding the public issue or offer for sale and in case of a rights issue, it is the letter of offer, which is filed with Stock Exchange and Registrar of Companies is known as Offer Document. This document covers every relevant information that helps an investor make his/her decision on investment.

Points to remember:

• An offer document is a written document issued by a company for the shareholders of another company that explains why it wishes to purchase shares in their company and describes all the details related to its offers.

Ans 2What Is a Promoter?

A stock promoter is an individual or organization that helps raise money for some investment activity. Stock promoters may raise money for a company by offering investment vehicles other than traditional stocks and bonds, such as limited partnerships and direct investment activities. Often, promoters are paid in company stock, or they receive a percentage of the capital raised.

Ans 3 What is venture capital?

Venture capital or VC funding is a type of financing that involves investing capital in startups or businesses with a minimal operating history but a high potential for growth in exchange for equity. It can be provided at different stages of their evolution, right from seed funding through Series F. A prime characteristic of venture capital financing is that the investment isn’t limited to just the capital but is extended to strategizing and mentoring for the young, often tech-focused startups. VC Funds typically come from institutional investors and high net worth individuals and are pooled together by specialized investment firms. This pooled capital is called a venture capital fund.

Ans 4What Is Securitization?

Securitization is the process of taking an illiquid asset or group of assets and, through financial engineering, transforming it (or them) into a security. The derisive phrase "securitization food chain," popularized by the film "Inside Job" about the 2007-2008 financial crisis, describes the process by which groups of such illiquid assets (usually debts) are packaged, bought, securitized and sold to investors.

A typical example of securitization is a mortgage-backed security (MBS), a type of asset-backed security that is secured by a collection of mortgages.1 First issued in 1970,2 this tactic led to innovations like collateralized mortgage obligations (CMOs), which first emerged in 1983.3 MBS became extremely common by the mid-1990s. The process works as follows.

Ans 5Definition of Mortgage-Backed Securities

Mortgage-backed securities are a specific type of asset-backed security. In other words, they're a kind of bond that's backed by real estate like a residential home.1

 The investor is essentially buying a mortgage so they can collect monthly payments in place of the original lender.

Typical buyers of these securities include institutional, corporate, and individual investors. However, if the homeowner defaults, the investor who paid for the mortgage-backed security won't get paid, which means they could lose money.