UNIT -iii

Credit Cards
 Topics to be covered

Credit cards
Eligibility for getting credit cards
Particulars displayed on credit cards
16 digit code
Classification of credit cards
Credit card settlement cycle
Advantages of credit cards
Limitations of credit cards
 What are Credit Cards?
Pre-approved credit which can be used for the
purchase of items now and payment of them later.
 Credit cards
• It is a plastic card having a magnetic strip,
issued by a bank or business authorizing the
holder to buy goods or services on credit. Also
called charge cards
• The concept of using a card was first
described in 1887 by Edward Bellamy in
his utopian novel Looking Backward.
• The size of most credit cards is 85.60 ×
53.98 mm
 Eligibility For Getting The Card
• Person should have a savings/ current
account in the bank.
• His assets and liabilities on a particular
date are reported to bank.
• A statement of annual or monthly income.
• He is considered credit worthy up to certain
limit depending upon his income, assets
and expenditure.
 Particulars Displayed On Credit Cards
• Name of the customer
• 16-digit card number
• Validity date
• The VISA hologram and the VISA logo
• Name of the issuing bank
• Signature period
• Magnetic strip
• PIN
What does 16 digit means
 CLASSIFICATION OF
CREDIT CARDS

Based on mode Based on Based on Based on Based on

of credit status of geographical franchise/ issuer
recovery credit card validity Tie-up Category

Individ- Corpor-
Charge Revolving Domestic Internation-
ual ate
Card credit card card al Card
Cards Cards

Domestic
Proprie- Master VISA
Tie-up
tary card Card Card
Standard Business Card
Gold Card
Card Card
Based on mode of credit recovery
• Charge Card-A card that charges no interest but
requires the user to pay his/her balance in full upon
receipt of the statement, usually on a monthly basis.
While it is similar to a credit card, the major benefit
offered by a charge card is that it has much higher, often
unlimited, spending limits.
• Revolving credit card-A line of credit where
the customer pays a commitment fee and is then
allowed to use the funds when they are needed. It is
usually used for operating purposes, fluctuating each
month depending on the customer's current cash flow
needs
 Based on status of credit card
• Standard Card- it is a generally issued credit card
• Business Card- (Executive cards ) it is issued to
small partnership firms , solicitors, tax-
consultants ,for use by executives on their
business trips.
• Gold Card-a credit card issued by credit-card
companies to favoured clients, entitling them to
high unsecured overdrafts, some insurance
cover, etc
 Based on geographical validity
• Domestic card- Cards that are valid
only in India and Nepal are called
domestic cards.
• International Card- credit Cards that
are valid internationally are called
international cards.
 Based on franchise/ Tie-up
• Proprietary card- A bank issues such cards under its
own brands. Eg. SBI card Cancard of canara bank
• Master Card- this card is issued under the umbrella of
“MasterCard International”
• VISA Card – it is issued by any bank having tie up with
“VISA international”
• Domestic Tie-up Card- it is issued by any bank
having tie up with domestic credit card brands such as
CanCard and IndCard.
 Based on issuer Category
• Individual Cards- Non-corporate
cards that are issued to
individuals
• Corporate Cards- Issued to corporate
and business firms.
 Credit card cycle
• A card holder makes purchase , and present it
to the merchant instead of cash .
• The retailer will check the number on the card
, and he will tally signature of voucher and
credit card .
• Vouchers are send to banks, which in turn
reimburses it for the customer’s purchase.
 Credit card cycle
• Purchase of goods and
service on card
Credit purchase
• merchant delivers goods after taking an authenticated credit card
and noting the number and taking signature on certain forms.
Credit card processing

• Merchant raises the bill for the purchase and sends it to

the credit card issuing bank for payment
Bill raising

• Issuing bank pays amount to the merchant

establishment
payment

• Issuing bank raises bill on the credit cardholder and

Bill to card holder
sends it for payment

• Credit card holder makes the payment to

the issuing bank
Card payment
 Advantages
To Cardholders :
• Simple, convenient and can be substituted for cash
• Convenient method of payment
• He need not approach a bank for taking credit
• Credit cards issued by leading banks are acceptable in many
countries
• Holders can withdraw cash from any branch of major banks
worldwide.
• Issuer of card provides 24 hrs customer helpline available
across the world in case of any emergency.
To Merchants/ Shopkeepers :
• Guaranteed payment
• Lessens the security risk of holding the
cash
• Overseas visitors may purchase more,
providing new market for retailer
To credit card companies/ Banks :
• Source of revenue
- Joining fee
- card renew fee
- services charges from retailers
- Interest charged to customer
 Disadvantages
To cardholders :
• Loss or stealing of card
To Merchants/ Shopkeepers :
•Retailers are required to pay a certain fee and service
charges at an agreed percentage of their credit card
sales.
To credit card companies :
• Risk of bad debt
• Risk of fraud
Management of Financial Services
Unit 3rd
Plastic Money
PLASTIC MONEY
•WHAT’s PLASTIC MONEY?

 Plastic money or polymer money, made out of plastic

 A new and easier way of paying for goods and services

 Introduced in the 1950s and is now an essential

form of ready money

 It includes credit cards, debits cards, ATMs, smart

cards, etc.
WHY USE PLASTIC MONEY??

❑ Easy to carry
❑ Easy to operate
❑ Safer to carry
❑ More Security
❑ Durable
❑ Multiple functions
Types of Plastic money

CREDIT CARD
CASH Cr ATM CARD

DEBIT CARD

IN-STORE CARDS

PREPAID CASH CARD

CREDIT CARD

 A payment mechanism which enables the holder of the card

to purchase goods (or services).
 Without paying immediate cash.
 Facilitate payment at the end of a specified period (known
as the billing cycle which is usually a month)
 A provision for spreading this payment over several (EMI)
easy monthly installments….
What Is a Credit Card
Billing Cycle?
Your credit card payment due date is generally
about 21-25 days after your billing cycle ends.

For example: SBI Bank Credit Card billing cycle

starts from 16th March and ends by 15th April
then the due date will be after 21-25 days (i.e 6th
May to 10th May)
What is a debit
card??
 also known as a bank card or check card

 is a plastic payment card that provides the

cardholder electronic access to his or her bank
account(s) at a financial institution

 can be used instead of cash when making purchases

 In some cases, the primary account number is assigned

exclusively for use on the Internet and there is no
physical card.(Customer Id)
How to get a debit card

SAVINGS BANK A/c

Debit card in detail

 (1) is the bank logo.

 (2) is the EMV chip(commonly referred to as 'Chip&Pin')(Europay,
Mastercard, and Visa)
 (3) is the Hologram(This represents a valid card and is a sign that the
card is legal)
 (4) is the 16 digit card number
 (5) is the logo of the card type
 (6) is the expiry date
 (7) is the name of the cardholder
 (1) is the magnetic stripe.
 (2) is the signature strip
 (3) is the CVCormCVV(Card
verification code or value)code
Magnetic
Stripdebit/credit card’s magnetic stripe contains
➢The
three tracks of data.

➢Each track is about one-tenth of an inch wide.

➢The first and second tracks in the magnetic

stripe are encoded with information about the
cardholder’s account, such as their credit card
number, full name, the card’s expiration date and
the country code.

➢Additional information can be stored in the third

track.
TYPES OF DEBIT CARD SYSTEM
 Online Debit System: It require electronic
authorization of every transaction and the
debits are reflected in the user’s account
immediately.
 Offline Debit System: This type of debit card
may be subject to a daily limit, and/or a
maximum limit equal to the current/checking
account balance from which it draws funds.
 Transactions conducted with offline debit cards
require 2–3 days to be reflected on users’
account balances.
Offline Debit System

When you pay for goods or services with

your debit card, you have the option to
process your payment in one of two ways:
1) as an offline transaction via a credit
card processing network, or
2) as an online transaction via an electronic
funds transfer (EFT) system.
Cont…

Electronic Purse Card System : Smart-card-based

electronic purse systems (in which value is stored
on the card chip, not in an externally recorded
account, so that machines accepting the card need
no network connectivity)
ADVANTAGES
 Substitute for cheque
 Convenience
 Can be easily obtained
 Faster mode of transaction
 Security
#withdrawing cash
 Accepted internationally
#making payments to third-
party
#easy finalisation of a/c
 Multiple functioning
 Make payments at shops,
hotels, etc. at Point of
Sale(POS) terminal
 Withdraw money from any
ATM
DISADVANTAGES

 Not accepted everywhere

 Loss of card
 No cash-NO operation
 Restricted spending
 Record keeping is mandatory
 Internet scams
IN-STORE CARDS

 Store cards are credit cards which can only be

used to buy goods in one particular shop or
chain of shops (a number of shops owned by
the same company).

 The store card is provided by a particular shop

that you can use to buy goods at that shop.
PRE-PAID CASH CARD

 The user will add credit to the card themselves

 These are usually re-useable in that they can be

'topped up'

 They provide some specials benefits or discounts

to the holder of the card.
Cont…
The Axis Bank Smart Pay, for example, is a
rupee denominated card for disbursing
employees’ salaries.

One more example is the HDFC Bank

ForexPlus card. In this type of card, the
transaction amount is debited directly from
your HDFC Bank ForexPlus card balance.
This is useful for international travellers.
Companies in Plastic Cards
Walmart® Credit Card - Best Grocery Store Credit
Card
JCPenney Credit Card - Best Department Store Credit
Card
Target Credit Card - Best Superstore Credit Card
Amazon.com Store Card - Best Store Credit Card for
Online Shopping
Express Credit Card - Best Clothing Store Credit
Card
Pier 1 Store Card - Best Furniture Store Credit Card
Lowe's Store Card - Best Home Improvement Store
Credit Card
Shell Gas Card - Best Gas Station Credit Card
 Factoring in
India
Kalyana Sundaram Committee recommended
introduction of factoring in 1989.
Banking Regulation Act, 1949, was amended in 1991 for
Banks setting up factoring services.
SBI/ Canara Bank have set up their Factoring
Subsidiaries:-
SBI Factors Ltd., (April, 1991) ( an asset base of Rs
1908.00 corers as on March 31, 2008, highest in India)
Canara Bank Factors Ltd., (August, 1991).
RBI has permitted Banks to undertake factoring
services through subsidiaries.
 Defining
Factoring
Factoring is a financial transaction whereby a business
sells its accounts receivable (i.e., invoices) to a third party
(called a factor) at a discount in exchange for immediate
money with which to finance continued business.
 Cont…
Factoring means an arrangement between a factor
and his client which includes at least two of the
following services to be provided by the factor-
Finance
Maintenance of accounts
Collection of debts
Protection against credit risk
 Why a firm use
Factoring is used by a firm when the available Cash
factoring?
Balance held by the firm is insufficient to meet current
obligations and accommodate its other cash needs, such as
new orders or contracts.
 Parties involves
Factoring process can be
in factoring summarized in the
activities of all the parties:

Seller(clients),
Buyer and
Factor in a factoring agreement.
 Defining Factor
A factor is essentially a funding source that
agrees to pay the company the value of an
invoice less a discount for commission and
fees.

The factor advances most of the invoiced

amount to the company immediately and
the balance upon receipt of funds from the
invoiced party.
 Buyer
Enters into an agreement, negotiates and
decides terms and conditions of sale
agreement.

Takes delivery with invoice bill and

instructions to make payment to the factor
on due date.

Makes a payment or asks for extension. In

case of default the buyer may face legal
actions.
 Seller
Enters into a contract of sale of goods on credit as
per purchase order.
Sells good as per contract.
Send copies of invoice, delivery challan along with
goods to the buyer with instructions for making
payment to factor.
Provides warranty that the customer has received
the merchandise without any couter claim or
disputes.
Sells the receivables received from the buyer to a
factor and receives 80% or more in advance.
Receives the balance after paying the service
charges.
 Process of
Enters into an agreement with the seller for
Factoring
rendering factor services i.e collection of
receivables
Advises client on credit worthiness of potential
clients
Pays up to 80% advance on receiving sales
documents
Renders statement of accounts at periodic
interval to client and buyer
Receives payment from the buyer and pays
balance after deducting commission.
 Types of
1) Recourse and Non recourse factoring:
Factoring
It depends upon the type of credit protection
provided by the factor.
In recourse factoring, the factor does not assume
credit risks associated with the receivables and
hence factoring does not include protection
against bad debt.
Note: In such a factoring agreement the factor
purchases the receivables arising out of sale of
goods and provides all collection and
maintenance services, but in case of non-
payment by the buyer the client(seller) has to
refund money back to the factor.
 Cont…
Non recourse factoring, the loss arising out
of irrecoverable receivables (non-payment)
is borne by the factor
He can only charge high commissions as
compensation but cannot claim a refund.
Hence the client is protected against bad
debts.
The additional fee charged as a premium
for risk bearing is called DEL CREDERE
Commission
 Cont…
2) Advance factoring: Here the factor pays a
specified portion ranging from ¾ to 9/10 of the
factored receivables in advance, the balance being
paid upon the collection or on the guaranteed
payment due.

3) Bank Participation factoring: Here the bank

(factor) provides an advance to a client for financing
a part of the factor reserve. Factor reserve is equal
to Factor debt less advance payment by factor.
 Cont…
4) Maturity or collection factoring: Here the
factor does not make an advance payment
to the client. The payment is made either on
the date of collection or on a guaranteed
payment date. It is fixed taking into
consideration-
Previous experience with the client
And period for slow collection
 Cont…
5) Full factoring: also known as old line
factoring. A full factoring agreement
involves a plethora of services provided by
the factor to the client including-
Collection of receivables
Protection against bad debts
Sales ledger administration
Short term finance
 Cont…
6) Disclosed and Undisclosed Factoring: In
disclosed factoring, the name of factor is
disclosed in the invoice and the supplier(
client) of the goods asking the buyer to make a
payment to the factor. The supplier may or
may not bear the risk of non-payment.
In undisclosed factoring, the name of factor is
not disclosed although he maintains the ledger
of supplier(client). Realization of business
transactions are done in the name of supplier
while the factor has all the control.
 Cont…
Domestic and International factoring:
They depend upon the domcile of the
parties involved in a factoring agreement
Here customer(buyer), client and factor
domicile in same country.

In international factoring these parties

reside in differnet countries.
Parties are exporter(client) , importer
buyer, import factor, export factor.
 Topics to be
Bill Discounting
covered
Factoring
Differences between Bill Discounting and
Factoring
 Bill Discounting
Bill Discounting: It is a short term finance
which is used to meet the immediate
requirement of cash. In bill discounting
three parties are involved:
Drawer
Drawee and
Payee
 Cont…
The Drawer is a maker of bill of exchange.

He has to sign the bill of exchange and send

it to drawee for acceptance.

The Drawer is also known as Creditor who

provides goods and services to customer on
credit.
 Cont…
The Drawee is a debtor of a company who
has to pay for goods and services provided
by creditor.
The debtor is also known as acceptor who
accepts the bill of exchange drawn by
drawer.

The drawee has to pay the amount mention

in bill of exchange on maturity date of bill.
 Cont…
The payee is a person who receives debt
amount from drawee.
The payee and the drawer is the same person.
But in some cases drawer and payee is
different person.
Payee is the person or institution which holds
the bill of exchange till maturity date.
If the drawer informs the drawee that the bill
is discounted and hold by bank then bank will
be the payee.
 Cont…
Bank will charge some interest, fees on bill
amount.
After deducting that amount the remaining
amount is given to creditor or company.
It is drawn for the duration of 3 months and 3
days grace period. For example a bill drawn on
5th March, 2020 will become due on 8th June,
2020.
It is regulated through Negotiable Instrument
Act, 1881.
 Factoring
It is also a short term finance which is used
to meet the immediate requirement of cash.
In factoring three parties are involved:
Creditor
Debtor and
Factor
 Cont…
The creditor is a person or company who
provides goods and services on credit.

The creditor act as a seller who sells the

invoice or bill receivables of a company to a
third party.
 Cont…
The debtor is a person/institution who
receives goods and services from company
on credit.
The factor is an institution or third party
who acts as a buyer by purchasing the
invoices or bill from buyer.
 Cont…
In factoring, the company (creditor) who
sells all the invoices or bill receivables to a
third party to get the immediate cash for
business activity.
The third party acts as a factor that charges
some fees for the services and paid rest of
the amount to seller or company.
 Difference
between Bill
Discounting
a) Nature of Bill Discounting andof Factoring
a) Nature

Factoring:
The company discounted its The company sells its bill of
bill of exchange from financial receivables to third party who
institution to meet immediate act as a factor and charges
need cash requirement. some fees for providing cash
and other services to company
 Cont…
Services Provided by
b) Services Provided by Bill Factoring
Discounting
The financial institution only The third party not only just
discounting the bills of a pay cash for invoices after
company and charges some deducting some charges on it.
interest for that. It also provide some services
It does not any such services of like maintaining the sales
maintenance of sales books or book, debtors account etc.
credit investigation. Collection of Debts, Credit
Reports on Debtors , Credit
Investigation.
 Cont…
c) Debtor pays on maturity c) Debtor pays on maturity

In bill discounting the drawee In factoring the debtor pay the

has to pay cash to drawer if cash on maturity to the third
the drawer does not inform the party.
drawee about the bill
discounting. Here payment is to be received
Here Payee could be a bank or by the factor only.
drawer itself
 Cont…

d) Governed by Act d) Governed by Act

Bill discounting comes under There is no such specific law
the Negotiable instrument act, for factoring.
1881.
e) Parties Involved e) Parties Involved
Drawer Creditor
Drawee and Debtor and
Payee Factor
f) Mostly Bank are third f) Mostly financial institutions
parties are third parties
 Cont…
f) Control over the Invoice f) Control over the Invoice
Collection Process Collection Process
Bill discounting will enable the When an entrepreneur opts
business owner to control both for factoring, he can no longer
credit approval or invoice control the credit approval or
collection processes. invoice collection process.
The factor will take care of
both credit approval and
invoice collection.
When the accounts receivables
are due the factor will receive
payment from the customer
directly.
 Cont…

g) Payment in Bill Discounting Payment in Factoring

No bill can be discounted Factor pays a very large
partially. When the drawer percentage of the amount as
discounts a bill with a lending advance when the transaction
institution, the bill is takes place.
discounted in full. He pays the remaining amount
The bill discounting service while settling the account
provider will pay the entire receivable.
amount when the transaction
takes place
 FORFAITING
Forfait” is derived from French word ‘A
Forfait’ which means surrender of fights.

Forfaiting is a mechanism by which the right for

export receivables of an exporter (Client) is
purchased by a Financial Intermediary
(Forfaiter) without recourse to him.
It means relinquishing the right . In this the
exporter renounces his/her right due at a future
date, in exchange for instant cash payment to
the forfaiter.
 Cont…
The forfaiter is the individual or entity that
purchases the receivables, and the importer then
pays the receivables amount to the forfaiter.

The receivables are typically in the form of

unconditionnal bills of exchange or promissory
notes that are legally enforceable providing
security for the forfaiter or a subsequent
purchaser of the debt.
 Characteristics
Converts Deferred Payment Exports into cash
of Forfaiting
transactions, providing liquidity and cash flow to
Exporter.
• Absolves Exporter from Cross-border political or
conversion risk associated with Export Receivables.
• Finance available upto 100% without recourse.
• It does not reflect as debt in Exporter’s Balance
Sheet.
• Provides Fixed Rate Finance and hence risk of
interest rate fluctuation does not arise
 Cont…
Simple Documentation as finance is available
against bills.

• Forfait transactions are confidential.

• It is different from International Factoring as

much as it deals with receivables relating to
deferred payment exports, while Factoring deals
with short term receivables.
 Parties involved
The exporterin Forfaiting
• The importer
• A forfaiting agency (Exporter’s Bank)
• A bank that stands guarantee (importers
bank)
• The Exim bank in India
 COSTS
Commitment Fee:- Payable to Forfaiter by
INVOLVEDof IN
Exporter in consideration forfeiting services.
• Commission:-
FORFAITING
Ranges from 0.5% to 1.5% per
annum.
• Discount Fee:- Discount rate based on
LIBOR (London Inter Bank Offered Rate) for
the period concerned.
• Documentation Fee:- where elaborate legal
formalities are involved.
• Service Charges:- payable to Exim Bank.
 Difference between Factoring and Forfaiting
POINTS OF FACTORING FORFAITING
DIFFERENCE
Meaniing It is an arrangement that It implies a transaction
converts your receivables into in which the forfaiter
ready cash and you don’t purchases claims from
need to wait for the payment the exporter in return
of receivables at a future for cash payment
date.
Extent of Finance 80 – 90% of invoice value. 100% of Invoice value

Maturity of Involves account receivables Involves account

Receivables of short maturities receivables of medium
to long term maturities
Recourse With or without recourse Always without recourse
Cost Cost of factoring borne by Cost of forfaiting borne
seller (client) by overseas buyer
Goods Trade receivables on ordinary Trade receivables on
goods capital goods
Secondary Market No Yes
COMPARATIVE ANALYSIS
POINTS OF Bill Discounting FACTORING FORFAITING
DIFFERENCE
Extent of Finance Upto 75% to 80% Upto 80% Upto 100%
Recourse With Recourse With or without Without Recourse
recourse
Term Short Term Short Term Medium
Charge creation Bill Discounting In factoring, In forfaiting,
have hypothecation receivables are receivables are
regularly assigned. regularly assigned
Hypothecation
occurs when an Assignment means
asset is pledged as the transfer of a
collateral to secure claim from an
a loan, without assigning creditor
giving up title, (assignor) to a new
possession or creditor or assignee
ownership rights, (assignee).
 Steps involved
There should be a commercial contract
in process
between the exporter and importer.
The exporter sells and delivers the goods to
the importer on a deferred payment basis.
The importer draws a promissory notes in
favour of the exporter for payment
including interest charge which is
guaranteed by a bank. The gaurantee by the
bank is known as Aval.
 Cont…
The exporter enters into forfaiting agreement
with the forfaiter and the exporter sells the
avalled notes to the forfaiter at a discount
without recourse.
Payment by forfaiter to the exporter of the face
value of the bill/ notes less discount.
The forfaiter holds these bills / notes till
maturity for payment by the importer’s bank
Alternatively he can securitize them.
 Factoring
Factoring contract is like any other sale-
purchase agreement regulated under the law of
contract.
There is no codified legal framework / code to
regulate factoring services in India.
The legal relationship between a factor and a
client is largely determined by the terms of the
factoring contract entered into before the
factoring process starts.
 Legal
1) Undertaking to sell and the factor agrees to
obligations
purchase receivables of to terms and
subject
conditions mentioned in the agreement.
the parties
(2) The client (seller) warrants that the
receivables are valid enforceable, undisputed
and recoverable. He also undertakes to settle
disputes, damages and deduction relating to the
bills assigned to the factor.
 Cont…
3) The client agrees that the bills purchased by the
factor on a non-recourse basis (i.e. approved bills)
will arise only from transactions specifically
approved by the factor or those falling within the
credit limits authorized by the factor.

(4) The client agrees to serve notices of assignments

in the prescribed form to all those customers whose
receivables have been factored.
 Cont…
(5) The client agrees to provide copies of all
invoices, credit notes, etc., relating to the factored
accounts, to the factor and the factor in turn would
remit the amount received against the factored
invoices to the client.

(6) The factor acquires the power of attorney to

assign the debts further and to draw negotiable
instruments in respect of such debts.
 Cont…
7) The time frame for the agreement and
the mode of termination are specified in the
agreement.

(8) The legal status of a factor is that of an

assignee. The customer has the same
defense against the factor as he would have
against the client.
 Cont…
(9) The customer whose account has been
factored and has been notified of the
assignment is under legal obligation to
remit the amount directly to the factor
failing which he will not be discharged from
his obligation to pay the factor even if he
pays directly to the client remits the amount
to the factor.
 Cont…
(10) Before factoring a receivable, the factor
requires a letter of disclaimer from the
bank which has been financing the book
debts through bank finance to the effect
that from the date of the letter the bank can
not create a charge against the receivables
i.e. the bank will not provide post-sales
finance as the factor provides.
 Cont…
11) Priority over other claimants to book debts:
It will be extremely important for
the factor to make sure that the book debts it
handles are free from any encumbrances(burden)
which would entitle someone else to the money due.
The firm has to guarantee that the book debts are
free from any rights of a third party in the factoring
agreement.
 Cont…
12)Other powers: The factor has sometimes
to act quickly to recover money due on
an invoice. A customer with money
outstanding to the factor may be in
difficulty and many delays in acting
quickly could see the money gone
forever.
The agreement must provide for
the factor to act swiftly in his name,
whenever necessary.
 Cont…
(13) The factoring agreement sets out in detail how
the firms to be paid.
(14) Approved and unapproved debts: The
attraction of factoring for many companies is that
non-recourse factoring can give a degree of
insurance against the customer who does not pay.
This depends on whether the debt is approved or
not, which is decided before the factoring process
starts.
 Cont…
(15) Where the factor may reclaim money
already advanced. Factoring agreements
provide for payment by the customer directly
to the factor. If any of the customers pay it to
the client by mistake, the agreement provides
that the firm must hold the money for the
factor.
If he does not do so, this is
effectively a breach of trust and the firm may be held
responsible for any losses incurred by the factor.
 Cont…
(16) Warrants Some warrants that are
required are:
(a) The firm should disclose any materials
facts that it knows might affect the factor’s
decision to approve a debt.
(b) It has to warrant that the invoices sent
for factoring represents a proper debt for
goods supplied.
 Cont…
17) Disputed debts: The factor may require
the customer to notify it immediately in case
of disputed debts. The firm may be expected
to return any advances made to it in respect
of the disputed debt.

(18) The factor’s power to inspect the firm’s

books and accounts and the period of the
factoring arrangements is usually laid down
in the agreement.
 Topics to be
Consumer finance
covered
Types of consumer finance
Sources of consumer finance
Mode of consumer finance
Demand for consumer finance
Products covered in consumer finance
Terms of consumer finance
Pricing of consumer finance
Advantage of consumer finance
Disadvantage of consumer finance
 Definition
• The term consumer finance refers to the activities
involved in granting credit to consumers to enable
them to possess goods meant for everyday use.

• Business procedure through which the consumers

purchase semi durable and durable goods other than
real estate in order to obtain a series of payments
extending over a period of 3 months to 5 yrs.
 Types of
• Revolving credit: it is a ongoing credit
arrangement where Consumer
by the financier on a
revolving basis grants credit. The consumer is
Credit
entitled to avail credit to the extent sanctioned
as credit limit ex: Credit Card

• Fixed credit: it is like a term loan where by the

financier provides loans for a fixed period of
time. The credit has to be repaid within a
stipulated period ex: monthly installment loan,
hire purchase.
•
Cont…
Cash Loan: Under this type of credit banks and
financial institutions provide money with which the
consumers buy goods for personal consumption.
Here the lender and seller are different and lender
does not have the responsibility of seller.
• Secured Finance: when the credit granted by
financial institutions is secured by collateral it takes
the form of secured finance. The collateral is taken
by the creditor in order to satisfy the debt in the
even of default by the borrower. The collateral may
be in the form of personal property, real property
or liquid assets.
• Unsecured Finance: When there is no security
offered by the consumer against which money
is granted by financial institutions, it is called
unsecured finance.
 Sources of
• Traders : The predominant agencies that are
involved inConsumer
consumer finance are traders.
They include sales finance companies, hire
purchase Finance
and other such financial
institutions.
• Commercial Banks: Commercial Banks provide
finance for consumer durables. Banks lend large
sum of money at wholesale rate to commercial
or sales finance companies, hire purchase
concerns and other such finance companies.
Banks also provide consumers personal loans
meant for purchasing consumer durable goods.
 Cont…
Credit Card Institutions: These institutions
arrange for credit purchase of consumer
goods through respective banks which issue
the credit cards.
The credit card system enables a person to
buy credit card services on credit.
On presentation of credit card by the buyer,
the seller prepares 3 copies of the sales
voucher, one for seller, 2nd for bank/credit
card company and 3rdfor the buyer.
 Cont…
The seller forwards a copy to the bank for
collection.
The seller’s bank forwards all such bills to
the card issuing bank or company.
The bank debits the amount to the
customers account.
The buyer receives monthly statement from
the card issuing bank or company and the
amount is to be paid within a period of 20 to
45 days without any additional charges.
•
Cont…
(NBFC’s):Non banking Financial companies
constitute an important source of consumer
finance. Consumer finance companies also known
as small loan companies or personal finance
companies are non saving institutions whose prime
assets constitute sale finance receivables, personal
cash loans, short and medium term receivables.
These companies charge substantially higher rate
of interest than the market rates.
• Credit Unions: A credit union is an association of
people who agree to save their money together and
in turn provide loans to each other at a relatively
lower rate of interest. These are caller co-operative
credit societies. They are non profit deposit taking
and low cost credit institutions.
 Mode of
• Open Account: any number of purchases per
month up toConsumer
a certain value
• Credit card:Finance
most popular mode of finance
• Revolving account: purchases during a month
and payment on installment basis
• Option plan: option of paying in full or part
• Installment account: Equal periodic
installments
• Cash loan : purchases are made through cash
and payment is made periodically.
 Demand for
• Increase in consumer
consumer disposable income
• Enhancement in real income of consumer
finance(Factors)
• Convenient size of installment payment
• Growth in nuclear families leading to number
of house holds
• Lower charges
• Down payment and credit contract
 Products
Consumers financing covers a wide range of products
such as covered
Cars,
Televisions,
washing machines,
refrigerators,
Air conditioners,
computers etc.
The products covered possess some distinct feature
such as durability, sustainability, salability and
serviceability etc.
 Terms of
•Eligibility : The basic eligibility for consumer
Finance
finance is the income of the individual customer
and the nature of employment. The EMI’s are
worked out on the basis of number of
installments and tenure of employment of the
customer.

•Guarantee: Financiers insist on guarantee for

the credit availed by the customer. Guarantee is
obtained in order to ensure prompt payment of
the installment.
 Cont…
•Tenure : Consumer finance is granted for short period ranging
from 3 months to 5 yrs. The tenure also depends on the value of
the asset purchased. Assets of smaller value are given short
term credit and assets of higher value are given comparatively
longer term credit.

•Rate of interest : the effective rate of consumer finance is much

higher than the rates applicable to business finance. This is
because the loans are granted based on the personal integrity of
the customer. The effective interest varies between 20% and
30%. Finance companies use different methods of disclosing
interest rates.
 Cont…
•Other charges : in addition to rate of interest
finance companies also charge documentation
fees, processing fees, management fees, service
charges, collection costs etc. A deposit is also
taken as a precautionary measure to guard
against default in payment of installments.

•Mode of payment: in case of individual loans

payments are usually collected in advance in the
form of post dated checks.
 Cont…
In the case of institutional financing there is an
arrangement for deduction of installments from the
salary of the employee which is remitted to the finance
company.

Credit evaluation: A verification of details furnished by

the customer is carried out in order to ascertain the
validity of the statement and the credit standing of
customer. The evaluation may be carried out by the
financier or an independent agency details collected
include age, monthly income, status of employment,
previous record, assets own, borrower’s equity, type of
collateral offered etc.
 Pricing of
The pricing of consumer credit depends on the
Consumer
extent of facility offered by the financier. The
components of priceFinance
are
risk free rate of interest assuming no probability
of default,
default risk premium,
administrative expenses.
 Advantages of
Enjoying position : An important benefit of
consumer credit is Consumer
that it allows people to enjoy
possession of goods without having to pay for
Credit(Finance)
them immediately.
Saving : consumer credit allows for a
mechanism of compulsory saving this induces
people to use their income wisely.
Convenient mode : Consumer credit offers a
convenient mode of acquiring consumer durables.
Meeting emergency : Consumer credit is useful in
meeting emergencies such as illness, accident and
death which involve unexpected expenses.
 Cont..
• Maximization of revenues: Consumer credit facilitates
speedy disposal of goods which would have remained
unsold in the absence of credit facility to consumers.
This helps in increased sales and profits through credit
sales.
• Accelerates industrial investment: Consumer credit
accelerates investment in consumer durable industry
giving rise to growing level of income and
employment.
• Enhanced living standard : consumer credit enables
people of limited means to acquire goods to enhance
their general standard of living.
 Cont…
Promoting Economic development : Consumer credit
promotes higher levels of investment, employment and
income thus raising the effective demand and promoting
higher standard of growth and development.
 Disadvantages of
• Thoughtless buying : consumer credit being attractive
Consumer
tempts people to buy goods indiscriminately even if
Finance
they are not needed.
• Insolvency : Credit forces people to mortgage a
substantial portion of their fixed future income which
may lead to insolvency and bad debts.
• Costly Credit : Consumer credit with its benefit of
convenient buying brings with it severe consequence of
costliness of credit because the effective rate of interest
is much higher than on paper.
 Cont…
• Risk to traders : Consumer Credit posses considerable
risk to traders because if the buyer defaults on payment
the lender can acquire the good but cannot sell it at the
original price.
• Artificial Boom: Consumer credit creates artificial
boom in consumer durable industry.
• Bad Debt : Consumer credit generates a substantial
amount of revenue for traders but there is a high risk
of bad debt.
• Economic instability: Indiscriminate consumer credit
leads to economic instability because of recurrence of
booms and slumps. In boom there is credit extension
and in recession there is credit tightening.
 Topics to be covered
Introduction
Purpose
Interest Rate
Types of Housing Finance
Objectives of National Housing Bank
Functions of NHB
Housing Urban Development
Cooperation(HUDCO)
Objectives of HUDCO
Institutions Providing HUDCO
Conclusion
➢ It refers to finance that is provided to
individuals or group of individuals including
co- operative societies for purchase/build
house or houses.
➢ Housing Finance refers to the finance for
meeting the various needs related to housing:
▪ Purchase of land
▪ Acquisition of a Flat
▪ Construction of a house
▪ Extension of a house
▪ Housing loans from other banks/HFCs.
➢ Purpose :
- It provides for:
▪ Purchase of flat / house or purchase of plot of
land.
▪ For renovation / repairs of an existing house/
flat.
▪ For extending an existing house.
▪ Short term bridge finance while purchasing
another house/ flat.
➢ Quantum :
▪ The Quantum of loan varies from bank to bank
normally bank stipulate minimum of Rs. 1
lakh.
▪ The maximum would depend on the bank and it
could vary from Rs. 10 lakhs to Rs. 2 crores or
more.
▪ For repairs the amount is less i.e around Rs.
10 lakhs.
➢ For housing loan, there are two types of
interest rate:
▪ fixed - for entire tenure of the loan
▪ floating - which is changing through out
the duration of loan.
➢ It refers to the finance provided to individuals
or groups of individuals including co-operative
societies.
➢ Under this category, the following types of
bank finance are included :
▪ Bank finance extended to a person who already
owns a house in town/ village where he
resides, or for buying / constructing a second
house in the same or Other town / village for
the purpose of self - occupation.
▪ Bank finance extended for the purchase of a
house by a borrower who proposes to let it out
on rental basis on account of his posting outside
the headquarters or because he has been
provided accommodation by his employer.
▪ Bank finance extended to a person who
proposes to buy an old house where he is
presently residing as a tenant.
▪ Bank finance granted only for purchase of a
plot, provided a declaration is obtained from
the borrower that he intends to construct a
house on the said plot, with the help of bank
finance or otherwise, within such period as
may be laid down by the banks themselves
➢ Banks may consider requests for additional
finance within the overall ceiling for carrying
out alterations / additions / repairs to the
house / flat already financed by them.
➢ In the case of individuals who might have raised
funds for construction / acquisition of
accommodation from other sources and need
supplementary finance, banks may extend such
finance after mortgaging charge over the
property mortgaged in favor of other lenders
and / or against such other security, as they
may deem appropriate.
➢ The Banks ensures that their indirect housing
finance is channeled by way of term loans to
housing finance institutions, housing boards,
other public housing agencies, etc primarily for
augmenting the supply of serviced land for the
constructed units.
➢ It should also be ensured that the supply of
plots / houses is time bound and public
agencies do not utilize the bank loan merely for
acquisition of land.
➢ The National Housing Bank (NHB) was set up on
July 9, 1988 under the National Housing Bank
Act, 1987 as the Apex level institution for
housing finance.
➢ To promote the housing financial institutions
both at local and regional levels.
➢ The NHB is wholly owned by the RBI which has
contributed the entire paid-up capital.
➢ To promote a sound, healthy, viable and cost
effective housing finance system to cater to
all segments of the population.
➢ To promote a network of dedicated housing
finance institutions to adequately serve
various regions and different income groups.
➢ To augment resources for the sector and
channelize them for housing.
➢ To make housing credit more affordable.
➢ To encourage augmentation of supply of
buildable land and also building materials for
housing and to upgrade the housing stock in the
country.
➢ To encourage public agencies to emerge as
facilitators and suppliers of served land, for
housing.
 Promotion and Development Function
 Regulatory Function
 Financing Function
➢ NHB has designed and conducted the various
training programmes considering the need for
trained persons.
➢ The NHB also contributes to improve or
strengthen credit delivery network for housing
finance in the country.
➢ As a part of this role, NHB has framed a
scheme for guaranteeing the bonds to be
issued by the housing finance company.
➢ NHB operates as a multifunctional
Development Finance Institution (DFI) for the
housing sector.
 NHB has been financing the following housing
schemes at all India level:-
➢ Indira Awas Yojna
➢ Golden Jubilee Rural Housing Finance Scheme
➢ Bharat Nirman
➢ Productive Housing in Rural Areas(PHIRA)
➢ 1% Interest subvention scheme
The Indira Awaas Yojana is a public housing scheme
that was introduced by the government in 1985, as a
sub-scheme of the Rural Landless Employment
Guarantee Programme (RLEGP). This programme
aimed to construct houses for free bonded laborers
and individuals falling under the SC/ ST category.

Golden Jubilee Rural Housing Refinance Scheme

The National Housing Bank also provides refinance of
loans under the Scheme for loan upto Rs. 15 lakhs.
Bharat Nirman
It comprises projects on irrigation, roads (Pradhan
Mantri Gram Sadak Yojana), housing (Pradhan
Mantri Awaas Yojana), water supply (National Rural
Drinking Water Programme), electrification (Rajiv
Gandhi Grameen Vidyutikaran Yojana) and
telecommunication connectivity.

Productive Housing in Rural Areas (PHIRA) A new

scheme from NHB. ... Hence, housing can be used
for productive purposes by combining housing with
income generation
1% Interest Subvention:

During the Budget for 2009-10, had announced a

Scheme of 1 per cent Interest Subvention in respect of
individual housing loans upto Rs.10 lakh, provided
the cost of unit does not exceed Rs.20 lakh.

The objective of the Scheme is to provide interest

subsidy on housing loan as a measure to generate
additional demand for credit and to improve
affordability of housing to eligible borrowers in the
middle & lower income groups.
➢ According to NHB Act, 1988, NHB is expected
to regulate the housing finance system of the
country to its advantage.
➢ To prevent any housing finance institutions
being conducted in such a manner which may
be against the interest of depositors or of the
housing finance institutions.
➢ For this purpose, NHB has been given power to
determine the policy.
➢ To give directions to the housing finance
institutions and their auditors.
➢ To provide financial assistance to various banks
and housing finance institutions.
➢ The financing of housing sector by the NHB is
done by extending refinance to different
primary lenders in respect of:
▪ Eligible housing loans extended by them to
individual beneficiaries.
▪ For project loans extended by them to various
implementing agencies.
▪ Acting as special purpose vehicle for
securitizing the housing loan receivables.
➢ Housing Urban Development Corporation ltd.
established on April 25, 1970
➢ HUDCO is fully owned by the Government of
India .
➢ HUDCO plays a major role in implementation
of National Housing Policy.
➢ HUDCO offers housing loans for the
buying/constructing house/flat & Loans are
also offered for
renovation/extension/alteration of existing
house/flat.
➢ It is one of the top financing company in India.
 Provide long term finance for construction of
house for residential purpose in urban & rural
areas.
 To subscribe to debentures & bonds issued by
the state housing & urban development boards,
trusts, authorities etc especially for the
purpose of housing.
 To administrate the amount received from
time to time, from Government of India (GOI)
and other sources for the purpose of financing
or undertaking housing and urban development
programmes in the country.
 To promote ,establish ,assist ,collaborate and
provide consultancy services for the projects
in designing and planning of works relating to
housing and urban development.
➢ In India, the following types of institutions
provide long term finance for housing:
▪ Commercial banks- a bank that offers services
to the general public, companies & are the
largest mobilizers of savings in the country.
▪ Cooperative banks- A bank that holds deposits,
makes loans and provides other financial
services to cooperatives and member-owned
organizations & are apex level institutions of
the state cooperative credit structure.
▪ Regional rural banks- to serve primarily
the rural areas of India with basic banking and
financial services & are allowed to lend for
financing.
▪ Agriculture and rural development banks- these
are term lending institutions operating
exclusively in the rural sector & reaches out to
allied economies and supports & promotes an
integrated development.
▪ Housing finance companies- these are non
banking financial companies which should form
a major share of the company’s assets
▪ Cooperative housing finance societies-these are
specialized housing finance which is used to
support and help the housing needs of
community at large.
 Housing Finance sector is set to see higher
growth in next few years, with an increase in
the demand and supply of housing projects.
 HUDCO plays a major role in implementation of
National Housing Policy. 44.33% of housing loan
of HUDCO has been allocated for Economically
Weaker Section (EWS) and Low Income Group
(LIG).
 NHB operates as the principle agency for
promoting, regulating and providing financial
and other support to HFCs at local and
regional level.
 Topics to be
Bank Guarantee
covered
Example
Features of Bank Guarantee
Types of Bank Guarantee
 Bank Guarantee
A contract of guarantee is defined as ‘a contract to
perform the liability of a third person in case of
default’. The parties to the contract of guarantee
are:
Applicant : The principal debtor : The person at
whose request the guarantee is executed.
Beneficiary : The person to whom the guarantee is
given and who can enforce it in case of default.
Guarantor : The person who undertakes to
discharge the obligations of the applicant in case of
his default. Thus, a contract of guarantee is a
collateral contract, consequential to a main contract
between the applicant and the beneficiary.
Example of Bank Guarantee
There is a buyer who is willing to purchase a
computer equipment
There is a seller of computer equipment.
The buyer will purchase for Rs 1 crore.
May be possible buyer may not be having
immediately Rs 1 crore to do payment to
seller.
Buyer may be receiving his pending payments
from other parties hence he is unable to pay to
seller.
Cont…
Seller also may not have trust on buyer.
So there is issue of trust and issue of credit as
well.
In order to solve such issues bank takes
guarantee and acts as a third party.
Buyer states to bank to give seller bank
guarantee of Rs 1 crore so that he receive the
goods from the seller.
When the bank guarantee is received by seller,
he will deliver computer equipment to buyer.
 Cont…
So the bank guarantee is a promise given by bank to
seller that if buyer defaults in doing payment to
seller then bank will do payment to the seller.
It is the responsibility of buyer to do payment to
seller.
Bank guarantee becomes null and void when the
buyer does payment to the seller.
Buyer is also called as applicant/ borrower.
Seller is basically called as beneficiary/ creditor.
Such process may be for contracts.
Buyer may be a contractor and seller may be
tendering agency.
 Cont…
In Govt. contracts a contractor is appointed.
In that case bank guarantee is taken from the
contractor if he does not perform then tendering
agency would be ruining into losses.
It is promise from a bank that the liabilities of a
borrower will be met in the event that the borrower
fails to fulfill his contractual obligations.
It means bank will become responsible for the part
of payment for which the buyer defaults.
Bank need not to pay if the borrower makes
payment as per contract
Reduces transaction risk and trust issues.
 Features of
Validity : 3,6,9,12 months or 10 years
Specific amountBank Guarantee
Purpose
Events under which bank guarantee can be invoked
BGs can be given against collateral of buyer- FDs, Bank
Deposits etc
Bank Charges fee for the providing bank guarantee
services.
Banks offer financial guarantees through bank
guarantee that help finance international trade
transactions.
Banks should not normally issue guarantees valid for
more than 18 months. For BGs of more than 18 months,
prior approval is required
 Types of Bank
1) Trading Guarantee
a) Financial Guarantee
b) Foreign Bank Guarantee
c) Deferred Payment Guarantee
2) Contracts
a) Bid Bond (Earnest Money Deposit)
b) Advance Payment Guarantee
c) Performance Payment Guarantee
 Types of Bank
1) Trading Guarantee
a) Financial guarantee: the guarantee which is taken by bank on behalf of
buyer is called financial guarantee.
Under a Financial Guarantee, a bank guarantees the customer’s (applicant’s)
financial worth, creditworthiness and his capacity to take up financial risks.
Banks should satisfy themselves that customers would be in a position to
reimburse the Bank in case the Bank is required to make the payment under
the guarantee.
 Cont…
b) Foreign Bank Guarantee: if export and import activities are performed.
Guarantee which is issued in terms of foreign currency for example dollar.
c) Deferred Payment Guarantee: if the buyer is not doing any immediate
payment and is ready to do in 6 months or 1 year depending upon the terms
and conditions of bank so bank states now they will charge interest and
collect from buyer Rs 1.2 crore
 Cont…
2) Contracts(roads, infrastructure,
electrification)
a) Bid Bond or EMD (Earnest Money Deposit)
b) Advance payment guarantee
c) Performance Bank Guarantee
 Cont…
a) Bid Bond: in bid bond the government
agency short list few companies for putting
their bid for a project estimated cost for
example Rs 10 crore.
So may be possible companies A,B and C are
shortlisted for filling bid.
All the companies now would give bank
guarantee of Rs 10 lakh each to govt agency.
Such bid offered to A company for 1% to 2%
i.e. Rs 10 lakhs
 Cont…
If the company A backs out from the
contract then the govt would be facing big
issue of loss of cost due to time delay and
cost would also escalate.
All the expenses beard by govt. in issuing
tender will also go waste.
So in such case if they default then bid bond
of Rs 10 lakh would be revoked.
 Cont…
b) Advance Payment Guarantee:
Here the advance payment of 10% or more is done
by government agency against which bank
guarantee is taken from the company as collateral.
An advance payment bond ensures repayment to the
importer of any advance payments they have made
(usually an agreed percentage of the contract
amount (typically 10%-30%) if the exporter does
not fulfill its contractual obligations.)
Or it enables the govt agency to get the refund of
advance payments made in the event of default by
the contractor.
 Cont…
c) Performance bank guarantee:
it is given against the defects, unfinished/ unsupplied
items.
They are basically construction linked payments
The bank’s guarantee obligations relate to the
performance related obligations of the applicant
(customer).
Banks should exercise due caution and have sufficient
experience with the customer to satisfy themselves that
the customer has the necessary experience, capacity,
expertise and means to perform the obligations under the
contract and no default is likely to occur.
 Cont…
A performance bond safeguards the
importer if the exporter fail to meet its
contractual obligations.
Performance bonds are usually issued for
10% to 20% of the contract amount but
may be fixed by the local law of the
importer's country.
Letter of Credit
Letter of credit is a contractual agreement between a
bank, known as the issuing bank, on behalf of one of
its customers, authorizing another bank, known as
the advising or confirming bank, to make payment to
the beneficiary(seller).
A letter of credit is a document that guarantees the
buyer’s payment to the sellers.
It is issued by a bank and ensures the timely and full
payment to the seller.
If the buyer is unable to make such a payment, the
bank covers the full or the remaining amount on
behalf of the buyer.
 Cont…
A letter of credit is issued against a pledge of
securities or cash.
Banks typically collect a fee, ie, a percentage of
the size/amount of the letter of credit.
The issuing bank, on the request of its
customer, opens the letter of credit.
The issuing bank makes a commitment to
honor drawings made under the credit.
The beneficiary is normally the provider of
goods and/or services
 Elements of a
A payment undertaking given by a bank (issuing bank)
Letter of Credit
On behalf of a buyer (applicant)
To pay a seller (beneficiary) for a given amount of money
On presentation of specified documents representing the supply
of goods
Within specified time limits
Documents must conform to terms and conditions set out in the
letter of credit
Documents to be presented at a specified place
 Parties to a letter
of creditrequests the bank to
Applicant (importer)
issue the LC
Issuing bank (importer’s bank which issues
the LC [also known as the Opening banker
of LC])
Beneficiary (exporter)
Advising/Paying/Confirming
Bank(exporter’s bank)
 Beneficiary
The beneficiary(seller) is entitled to payment as
long as he can provide the documentary evidence
required by the letter of credit.
The letter of credit is a distinct and separate
transaction from the contract on which it is based.
All parties deal in documents and not in goods.
The issuing bank is not liable for performance of the
underlying contract between the customer and
beneficiary.
The issuing bank's obligation to the buyer, is to
examine all documents to insure that they meet all
the terms and conditions of the credit.
 Cont…
Upon requesting demand for payment the
beneficiary warrants that all conditions of
the agreement have been complied with.
If the beneficiary (seller) conforms to the
letter of credit, the seller must be paid by
the bank.
Issuing Bank
The issuing bank's liability to pay and to be
reimbursed from its customer becomes absolute upon
the completion of the terms and conditions of the
letter of credit.

Under the provisions of the Uniform Customs and

Practice for Documentary Credits, the bank is given a
reasonable amount of time after receipt of the
documents to honor the draft.
 Cont…
The documents requested will include a
commercial invoice, a transport document
such as a bill of lading or airway bill and an
insurance document; but there are many
others Letters of credit deal in documents, not
goods.
Bill of Lading A document evidencing the
receipt of goods for shipment and issued by a
freight carrier engaged in the business of
forwarding or transporting goods.
 Advising
An advising bank, usually a foreign correspondent
Bank/Confirming
bank of the issuing bank will advise the beneficiary.
Generally, the Bank
beneficiary would want to use a local
bank to insure that the letter of credit is valid.
In addition, the advising bank would be responsible
for sending the documents to the issuing bank.
The advising bank has no other obligation under the
letter of credit.
If the issuing bank does not pay the beneficiary, the
advising bank is not obligated to pay.
 Confirming
The correspondent bank may confirm the
letter of creditBank
for the beneficiary.
At the request of the issuing bank, the
correspondent obligates itself to insure
payment under the letter of credit.
The confirming bank would not confirm the
credit until it evaluated the country and bank
where the letter of credit originates.
The confirming bank is usually the advising
bank.
 Letter of Credit
1) Negotiability
Letters of credit Characteristics
are usually negotiable. The issuing bank is
obligated to pay not only the beneficiary, but also any
bank nominated by the beneficiary.
Negotiable instruments are passed freely from one party
to another almost in the same way as money. To be
negotiable, the letter of credit must include an
unconditional promise to pay, on demand or at a definite
time.
The nominated bank becomes a holder in due course.
As a holder in due course, the holder takes the letter of
credit for value, in good faith, without notice of any claims
against it.
Cont…
2) Revocability
Letters of credit may be either revocable(cancellable) or
irrevocable.
A revocable letter of credit may be revoked or modified for
any reason, at any time by the issuing bank without
notification.
A revocable letter of credit cannot be confirmed if a
correspondent bank is engaged in a transaction that involves a
revocable letter of credit, it serves as the advising bank.
Once the documents have been presented and meet the terms
and conditions in the letter of credit, and the draft is honored,
the letter of credit cannot be revoked.
It is generally used to provide guidelines for shipment.
 Cont…
The irrevocable letter of credit may not be
revoked or amended without the agreement
of the issuing bank, the confirming bank,
and the beneficiary.
An irrevocable letter of credit from the
issuing bank insures the beneficiary that if
the required documents are presented and
the terms and conditions are complied with,
payment will be made.
 Cont…
3) Transfer and Assignment
The beneficiary has the right to transfer or assign the right to
draw, under a credit only when the credit states that it is
transferable or assignable.
Credits governed by the Uniform Commercial Code
(Domestic) maybe transferred an unlimited number of times.
Under the Uniform Customs Practice for Documentary Credits
(International) the credit may be transferred only once.
However, even if the credit specifies that it is nontransferable
or not assignable, the beneficiary may transfer their rights
prior to performance of conditions of the credit.
 Cont…
4) Sight and Time Drafts
All letters of credit require the beneficiary to present a
draft and specified documents in order to receive payment.
A draft is a written order by which the party creating it,
orders another party to pay money to a third party. A
draft is also called a bill of exchange.
There are two types of drafts: sight and time.
A sight draft is payable as soon as it is presented for
payment.
The bank is allowed a reasonable time to review the
documents before making payment.
 Cont…
A time draft is not payable until the lapse of
a particular time period stated on the draft.
The bank is required to accept the draft as
soon as the documents comply with credit
terms.
The issuing bank has a reasonable time to
examine those documents.
The issuing bank is obligated to accept
drafts and pay them at maturity.
Process of Letter of Credit
 Process
1. Applicant approaches Issuing/ Opening Bank with LC
application form duly filled and requests Issuing Bank to issue a
Letter of Credit in favour of Beneficiary.
2. Issuing Bank issues a Letter of Credit as per the application
submitted by an Applicant and sends it to the Advising Bank,
which is located in Beneficiary’s country, to formally advise the
LC to the beneficiary.
3. Advising Bank advises the LC to the Beneficiary.
4. Once Beneficiary receives the LC and if it suits his/ her
requirements, he/ she prepares the goods and hands over them
to the carrier for dispatching to the Applicant.
5. He/ She then hands over the documents along with the
Transport Document as per LC to the Negotiating Bank to be
forwarded to the Issuing Bank.
 Cont…
6. Issuing Bank reimburses the Negotiating Bank
with the amount of the LC post Negotiating Bank’s
confirmation that they have negotiated the
documents in strict conformity of the LC terms.
Negotiating Bank makes the payment to the
Beneficiary.
7. Simultaneously, the Negotiating Bank forwards
the documents to the Issuing Bank to be released to
the Applicant to claim the goods from the carrier.
8. Applicant reimburses the Issuing Bank for the
amount, which it had paid to the Negotiating Bank.
9. Issuing Bank releases all documents along with
the titled Transport Documents to the Applicant.
 Statutory
Changes
1) RBI Regulations for all the rejected NBFCs
i) Rejected NBFCs holding public deposits to submit a
monthly return in Form NBS-4 furnishing therein
the information on repayment of public deposits.
ii) Companies whose application for Certificate for
Registration (CoR) have been rejected should
a) continue to repay their deposits on due dates
b) dispose of their financial assets within three years
from date of rejection / cancellation or
c) convert into non- banking non-financial companies
within the same period.
 Cont…
(2) Companies Amendment Act, 2000 -
Applicability of requirement of reporting to
CLB
In terms of section 58AA of the Companies Act,
1956 Applicability of requirement of reporting to
CLB about non-repayment of matured public
deposits by defaulting NBFCs within 60 days of
default
 Cont…
3) Companies Amendment Act, 2000 -Acceptance of
public deposits by private limited NBFCs
i) Under provisions of section 3 (1) the Companies Act,
1956 definition of `private company’ has been
modified.
Any invitation or acceptance of deposits from persons
other than its members (shareholders), directors or
their relatives is prohibited.
 Cont…
ii) It is advised that the NBFCs which were until
now private limited companies and were intending
to take or holding public deposits are now public
limited companies under the Companies Act,
1956.

They may approach RBI for change in the

certificate of registration to reflect the new name
as a public limited company.
 Regulatory
(4) New Financial Leases – Accounting Standard
19 of ICAI amendments
i) (AS) 19 "Accounting for Leases". ---
capitalization of Finance lease assets in
the books of lessee instead of lessor.
The lessor is now required to show the
assets given on lease only as receivables
in its balance sheet instead of as fixed
assets.
 Cont…
ii) all the fresh leases (financial leases)
written on or after April 1, 2001 would now
be accounted like hire purchase
transactions.
 Cont…
5) Section 292A of the Companies Act, 1956 –
Constitution of Audit Committee for NBFCs
i) An NBFC having the assets of Rs. 50 crore and
above as per its last audited balance sheet shall
constitute an Audit Committee, consisting of not
less than three members of its Board of
Directors."
 Cont…
(6) Safe Custody of liquid asset securities
i) NBFCs are also permitted to keep the
securities with Stock Holding Corporation of
India Ltd (SHCIL) with designated banker
with prior approval of RBI.

ii) to permit NBFCs to keep these securities with

any depository participant having registration
from SEBI, subject to prior written approval of
RBI.
 Cont…
(7) Accounting of investments- AS 13 of
ICAI
i) The Board of Directors of the NBFC
should frame and implement investment
policy for the company.
ii) Each investment shall be classified into
current and long term at the time of making
investment.
 Cont…
8. Investments by NBFCs in joint venture
for insurance
"the maximum equity contribution such an
NBFC can hold in the joint venture company
will normally be 50 per cent of the paid-up
capital of the insurance company.
 Cont…
9. Classification of NBFCs into EL/HP
categories:
NBFCs having not less than 60 per cent of
the total assets in lease and hire purchase
and deriving not less than 60 per cent of
their total
income from such activities can be
classified as hire purchase/equipment
leasing companies.
Merchant Banking
 What Is Merchant Banking ?

• Merchant Banking may be defined as an

institution which covers a wide range of activities
such as underwriting of shares, portfolio
management, Project counseling, insurance etc.
They all render these service for a fee. Both
commercial and investment banks may engage in
merchant banking activities.
• The original purpose of merchant banks was to
facilitate and/or finance production and trade
of commodities and hence the name "merchant".
 Who Is A MerchantBanker?
• A merchant banker is one who is a critical link
between a company raising fund and the
investors.
• Merchant banker is one who underwrites
corporate securities and advices on issues like
corporate mergers.
• The merchant banker may be in the form of a
bank, a company, firm or even a proprietary
concern.
• Merchant Banker understands the requirements of
the business concern and arranges finance with
the help of financial institutions, banks, stock
exchanges and money market.
 Merchant Banking Regulations
According to Securities and Exchange Board of India
(Merchant Bankers) Rules, 1992, it is mandatory for a
merchant banker to hold a certificate of registration
granted by the Securities and Exchange Board of
India.
If a person/ organization wants to carry or
undertake any of the authorized activities, has to get
registered under the regulations. To obtain the
certificate of registration, one has to apply in the
prescribed form and fulfill two set of norms (a)
operational capabilities and (b)capital adequacy
norms
 Capital Adequacy Norms
• The minimum net worth requirement for acting
as merchant banker is given below:
• Category I – Rs. 5 cores
• Category II – Rs, 50 lakhs
• Category III – Rs. 20 lakhs
• Category IV – Nil
 Merchant Banking In India
• Need for merchant banking was felt with rapid growth in
number and size of issues made in primary issue.
• Merchant Banking services started by foreign banks,
namely National Grindlays in 1967 followed by Citi
Bank in 1970.
• Merchant Banking services was offered along with other
traditional banking services.
• SBI was first Indian bank to set up merchant banking
division in 1972.
• Later, the ICICI set up its merchant banking division in
1973.
• It was followed by other commercial banks like Canara
Bank, Bank of Baroda, Bank Of India, Syndicate Bank,
Central Bank Of India, PNB, UCO Bank etc.
 Functions Of Merchant Banks
• Promotional Activities – Merchant Banks helps
the entrepreneur in conceiving an idea,
identification of projects, preparing feasibility
reports, obtaining Government approvals and
incentives etc.
• Issue Management - Management of issues
refers to effective marketing of corporate
securities viz., equity shares, preference shares
and debentures or bonds by offering them to
public. Merchant banks act as intermediary
whose main job is to transfer capital from those
who own it to those who need it .
 Functions Of Merchant Banks (cont)
• Credit Syndication - Credit Syndication refers to
obtaining of loans from single development
finance institution or a syndicate or consortium.
Merchant Banks help corporate clients to raise
syndicated loans from commercials bank.
• Project Counselling- It includes preparation of
projects reports, deciding upon the financing
pattern, appraising the project relating to its
technical, commercial and financial viability. It
includes filling up of application forms for
obtaining funds from financial institution.
 Cont…
Syndicated loan is a form of loan business in which
two or more lenders jointly provide loans for one or
more borrowers on the same loan terms and with
different duties and sign the same loan agreement.

Usually, one bank is appointed as the agency bank to

manage the loan business on behalf of
the syndicate members
 Functions Of Merchant Banks (cont)
• Portfolio Management - It refers to the effective
management of Securities i.e., the merchant banker helps
the investor in matters pertaining to investment decisions.
Taxation and inflation are taken into account while
advising on investment in different securities. The
merchant banker also undertakes the function of buying
and selling of securities on behalf of their client
companies. Investments are done in such a way that it
ensures maximum returns and minimum risk.
• Working capital Finance: Merchant bankers provide the
following services as a part of working capital finance
• Assessment of working capital requirement
• Preparing the application for the sanction of appropriate
credit facilities
• Providing assistance in negotiations with the banks.
• Advising on issue of debenture for augmenting long term
requirement of working capital.
• Acceptance credit and bill discounting: Activities relating to the
acceptance and discounting of bills of exchange, besides
advancement of loans to business concerns on strength of such
instruments. In order that the bill accepting and discounting takes
place it is imperative that the firms have a good reputation.
Collecting credit information and credit rating is part of this
function.
• Mergers and acquisitions: This is a specialized service provided by
merchant bankers who arrange for negotiating acquisitions and
mergers by offering expert valuation regarding the quantum and
nature of consideration. The activities involved include
• Undertaking management audits to identify the areas of strength
and weakness in order to help formulate guidelines for future
growth.
• Conducting exploratory studies on a global basis to locate overseas
market, foreign collaborations, and JVs
• Obtaining approval from shareholders, depositors, creditors,
government and other authorities.
• Assisting in capital restructuring.
• Assisting in legal compliance.
 Functions Of Merchant Banks (cont)
• Leasing and Finance – Many merchant bankers
provide leasing and finance facilities. Some of
them even maintain venture capital funds to
assist the entrepreneurs. They also help
companies in raising finance by way of public
deposits.
• Servicing Issues – Merchant Bankers helps in
servicing the shareholders and debenture holders in
distributing dividends, debenture interest.
• Other Specialized Services – Merchant Banks also
provide corporate advisory services on issues like
mergers and amalgamations, tax matters, recruitment
of executives and cost and management audit etc.
 Leading Banks
•Bank of America Merrill Lynch
•Citigroup
•Goldman Sachs
•J.P. Morgan
•Morgan Stanley

Excellent Banks
•Barclays Capital
•Credit Suisse
•Deutsche Bank AG
•Evercore
 Conditions by SEBI for merchant bankers

1. SEBI will give authorization for a merchant

banker to operate for 3 years only. Without
SEBI’s authorization, merchant bankers
cannot operate.
2. The minimum net worth of merchant
banker should be Rs. 5 crore.
3. Merchant banker has to pay authorization
fee, annual fee and renewal fee.
4. All issue of shares must be managed by one
authorized merchant banker. It should be the
lead manager.
 Cont…
5. The responsibility of the lead manager will
be clearly indicated by SEBI.
6. Lead managers are responsible for
allotment of securities, refunds, etc.
7. Merchant banker will submit to SEBI all
returns and send reports regarding the issue
of shares.
8. A code of conduct for merchant bankers
will be given by SEBI, which has to be
followed by them.
9. Any violation by the merchant banker will
 Code of Conduct
• Should make all efforts to protect theinterest of
investors.
• Should maintain high standards of integrity,
dignity and fairness in conduct of business.
• Should fulfill all obligations in a professional
and ethical manner.
• Should not discriminate among the clients.
• Should endeavor to ensure that the inquiries,
grievances are adequately dealt with in timely
and appropriate manner.
• Should ensure that prospectus/letter of offer is
available to investors at the time of issue.
 Code of Conduct (cont)
• Should render best possible advice to its
clients.
• Any penal action taken by SEBI should
be informed to its clients.
• Should inform the Board about legal
proceedings initiated against it.
• Should abide by the rules of SEBI
• Should ensure that any person it employs
should have the capacity to be a merchant
banker.
• Should not create false market.
 Obligations And Responsibilities
• Merchant banker not to associate with any business other
than that of the securities market.
• Maintenance of book of accounts, records, etc. Every
merchant banker shall keep and maintain the following books
of accounts, records and documents namely:
• a. A copy of balance sheet at the end of each accounting period
• b. A copy of profit and loss account for thatperiod
• c. A copy of auditor’s report on the accounts of thatperiod
• d. A statement of financial position
• Submission of half-yearly results.
• Report on steps taken on auditor’s report.
• Acquisition of shares prohibited.
• Information to the Board.
• Disclosure to the Board
 Underwrite
r
• Underwriter are important intermediary in the
new issue /primary market who agree to take
up securities which are not fully subscribed.
They make a commitment to get the issue
subscribed or subscribe to the issue themselves
in the case of non subscription.
• Underwriters are appointed by the issuing
companies in consultation with the lead
managers/ merchant bankers to the issues
 Registration
• To act as underwriter,
a) A certificate of registration must be obtained from
SEBI. A SEBI registered merchant banker/ broker
would not require a separate registration.
b) The necessary infrastructure like adequate office
space, equipment and manpower to effectively
discharge the activities
c) past experience in underwriting/ employment of at
least two persons with experience in underwriting.
d) Any person directly/indirectly connected with the
applicant is not registered with SEBI as
underwriter or previous application of any such
person has been rejected or any disciplinary action
has been taken against such person under the SEBI
act regulations.
 Cont…
e) Capital adequacy requirement of not less than the net
worth of Rs 20 lakh.

f) The applicant/director/principal officer/partner has not

been convicted of offence involving moral turpitude or
found guilty of any economic offence and is fit and proper
person
 Fee
• The application fees for registration as
underwriter since 1999 is Rs 5 lakh. To keep
the registration in force renewal fees of Rs. 2
lakhs every 3 years from the date of initial
registration is payable.

•Failure to pay the fee would result in the

suspension of the certificate of registration.
 Code of
• conduct
Same as that for merchant bankers.
 General Responsibilities
• An underwriter cannot derive any direct or
indirect benefit from underwriting the issue
other than the underwriter commission .
• The maximum obligation under all under
writer agreements of an underwriter cannot
exceed 20 times his net worth .
• Underwriters have to subscribe for securities
under the agreement within 45 days of the
receipt of intimation from the issuers.
 Bankers to an
issue
• The bankers to an issue are engaged in
activities such as acceptance of applications
along with application money from the
investors in respect of issues of capital and
refund of application money.
 Registratio
To carry on the activities as a banker to an issue, a person must
obtain a certificaten
of registration from the SEBI.
The SEBI grants registration on the basis of all the activities
relating to banker to an issue in particular with reference to the
following requirements:
(1) The applicant has the necessary infrastructure,
communication and data processing facilities and
manpower to effectively discharge his activities,
(2) The applicant/any of the directors of the applicant is not
involved in any litigation connected with the securities
market/has not been convicted of any economic offence;
(3) Is a scheduled bank and
(4) Grant of a certificate is in the interest of the investors.
(5) A banker to an issue can apply for renewal of his
registration three months before the expiry of the
certificate.
 List of Non Scheduled Banks

1 Akhand Anand Co-Operative Bank Ltd.

2 Alavi Co-Op Bank Ltd.
3 Amarnath Co-operative Bank Ltd.
4 Amod Nagrik Sahakari Bank Ltd.
5 Amreli Nagrik Sahakari Bank Ltd.
6.Coastal Local Area Bank Ltd.
7.Capital Local Area Bank Ltd.
8. Krishna Bhima Samruddhi Local Area
Bank Ltd.
 Fee
• Every banker to an issue has to pay to the
SEBI an annual fee of Rs 2.5 lakh for the
first two years from the date of initial
registration, and Rs 1 lakh for the third year
to keep his registration in force.
• The renewal fee to be paid by him annually
for the first two years is Rs 1 lakh and Rs
20,000 for the third year.
• Non-payment of the prescribed fee may lead
to suspension of the registration certificate.
General Obligations and Responsibilities
When required a banker to an issue has to furnish
to the SEBI the following information:
(1) The number of issues for which he was
engaged as a banker to an issue;
(2) The number of applications/details of
applications’ money received;
(3) The dates on which applications from
investors were forwarded to the issuing
company/ registrar to an issue;
(4) The dates/ amount of refund to the investors.
 Books of Account / Record / Documents

• A banker to an issue is required to maintain

books of account/records/ documents for a
minimum period of three years :
• number of application received,
• the names of the investors,
• the times within which the applications
received were forwarded to the issuing
company/ registrar to the issue,
• and dates and amounts of refund money to
investors
 Public Sector Merchant Bankers

SBI capital markets ltd

Punjab national bank
Bank of Maharashtra
IFCI financial services ltd
Karur Vysya bank ltd,
State Bank of Bikaner and Jaipur
 Private Sector Merchant Bankers

ICICI Securities Ltd

Axis Bank Ltd (Formerly UTI Bank Ltd.)
Bajaj Capital Ltd
Tata Capital Markets Ltd
ICICI Bank Ltd
Reliance Securities Limited
Kotak Mahindra Capital Company Ltd
Yes Bank Ltd.
 Foreign Players in Merchant Banking

Goldman Sachs (India) Securities Pvt. Ltd.

Morgan Stanley India Company Pvt. Ltd
Barclays Securities (India) Pvt. Ltd
Bank Of America, N.A
Deutsche Bank
Deutsche Equities India Private Limited
Citigroup Global Markets India Pvt. Ltd.
DSP Merrill Lynch Ltd
FEDEX Securities Ltd
 Disciplinary Action by the RBI
• If the RBI takes any disciplinary action against
a banker to an issue in relation to issue
payment, the latter should immediately inform
the SEBI.
• If the banker is prohibited from carrying on
his activities as result of the disciplinary
action, the SEBI registration is deemed as
suspended/ cancelled.
 Code of Conduct
▪ In the conduct of his business, he should observe high
standards of integrity and fairness in all his dealings with
clients/ investors / other members of the profession. He should
exercise due diligence and ensure proper care.
▪ He should not make any statement/indulge in any act,
practice/ unfair competition harmful to the interest of other
bankers or likely to place the latter in a disadvantageous
position.
▪ Further, he should not make exaggerated oral/written
statements to his clients about his qualification / capability to
render services or his earlier achievements in this regard.
▪ Moreover, a banker to an issue should always endeavour to
render the best possible advice to his clients and ensure that all
professional dealings are affected in a prompt, efficient and
cost effective manner.
 Code of
• conduct
He should not divulge to other clients/press/any other
party any confidential information in his knowledge
about his client.
• He should also not allow blank applications forms
bearing brokers’ stamp to be kept at the bank premises
/ near the entrance of the premises and accept
applications after office hours / or after the date of
closure of the issue/or o bank holidays.
• Finally, he should not act at any time in collusion with
other agents in a manner that is detrimental to small
investors.
• He has to abide by all acts, rules, regulations,
guidelines, resolutions, notification, directions,
circulars and instructions issued by the Government
/RBI/ Indian Banks Association / SEBI relevant to his
activities as a banker to an issue.
 Brokers to the
•
issue
Brokers are the persons mainly concerned with the
procurement of subscription to the issue from the prospective
investors.
• The appointment of a broker is not compulsory
• The issuing company is free to appoint any number of
brokers.
• The broker has to get a letter of consent from the
respective exchange to act as broker to an issue.
• Brokerage must be paid according to the agreement between
the broker and the company.
 Conditions for Grant of Certificate Of
Registration as broker
• He holds the membership of any stock
exchange
• He shall abide by rules, regulation and
bye-laws of stock exchange of which he is
a member.
• He shall pay the fees for registration in
the manner provided in the regulations
• He shall take adequate steps for redressal
of grievances of the investors within one
month of the date of receipt of complaints
 Registrar to the Issue and
Share transfer agent
• Registrar perform function of
collecting applications from investors and keep
a proper record of application and money
received from investor.
•They assist in allotment and finalizing
the allotment of securities in consultation with the
stock exchange.

•They process allotment letters, refund

orders and other documents related to issue.
 Category of Registrar and Share
transfer agent
There are two categories
Category-I -those who carry on activities of both
Registrar and Share transfer agent
Category-II- those who carry on activities of
either Registrar or Share transfer agent
• Share transfer agent maintain record of
holder of securities of company for
& on behalf of company & handle all
matters related to transfer and redemption
of securities of the company.

▪ Both require registration with SEBI

 Capital adequacy
▪ Capital adequacy in terms of net worth
• Category-I –Rs 6 lakh
• Category-II.-- Rs 3 lakh
▪ Category-I
registration fees - Rs. 50000
renewal fees of Rs.40000 every 3 years

•Category-II
registration fees Rs. 30000

renewal fees Rs. 25000

 Debenture Trustee
• A debenture trustee is a trustee for a trust deed
needed for securing any issue of debentures by a
company or any private placement of debentures by
a listed company.
• Private Placement: a sale of stocks, bonds, or
securities directly to a private investor, rather than
as part of a public offering.
• To act as a debenture trustee a certificate from SEBI
is necessary.
• The entity should either be a scheduled bank
carrying on commercial activity, a public financial
institutions, an insurance companies and body
corporate fulfilling the capital adequacy
requirement of Rs 2 crore can act as trustees
How to apply for registration as a Debenture Trustee

For registration as a Debenture Trustee, an

applicant is required to pay a non-refundable
application fee of Rs. 50,000/- by way of
demand draft drawn in favour of ‘Securities
and Exchange Board of India’, payable at
Mumbai
 Is there any registration fee to be paid by the
Debenture Trustee?
Type Fees Prescribed
Tenure

Initial Registration 20,00,000 5

Permanent Registration 9,00,000/- After completion of
initial period of 5 years.

The Debenture Trustee has to apply for permanent registration

certificate to SEBI, 3 months before the expiry of the validity of
the certificate, if it wishes to continue as a registered Debenture
Trustee.

The applicant has to pay a sum of 9,00,000/- every 3 years

 Portfolio
Managers
• Portfolio managers are defined as a person
who in pursuance of a contract with the clients,
advise/direct/ undertake on behalf of the
clients , the management administration of
portfolio of securities/funds of clients.
• Portfolio management can be
i) Discretionary
ii) Non Discretionary
 How Shares are Issued
Public issue in the Primary Market
A public limited company can raise the
amount of capital by selling its shares to the
public. Therefore, it is called public issue of
shares or debentures.
For this purpose the company has to
prepare a 'Prospectus'. A prospectus is a
document that contains information
relating to the company such as;
 Red Herring
Red HerringProspectus
Prospectus is a prospectus,
which does not have details of either price
or number of shares being offered, or the
amount of issue.
This means that in case price is not
disclosed, the number of shares and the
upper and lower price bands are disclosed.
 Cont…
Name
Address
Registered Office
Names And Addresses of;
-- Company Promoters
-- Managers
-- Managing Director
-- Directors
-- Company Secretary
-- Legal Advisors
-- Auditors
-- Bankers.
 Cont…
It also includes the details about project, plant location,
technology, collaboration, products, export obligations
etc.
The company has to appoint brokers and underwriters
to sell the minimum number of shares and it has to fix
the date of opening and closing of subscription list.
The new issue of shares or debentures of a company are
offered for exclusive subscription of general public. But
the prospectus should be approved by SEBI.
A minimum of 49 per cent of the amount of the issue at a
time is to be offered to public.
 Company
A corporate promoter is a firm or person who does
the preliminaryPromoters
work incidental to the formation of
a company, including its promotion, incorporation,
and flotation, and solicits people to invest money in
the company, usually when it is being formed.
Markets regulator Sebi has come out with new rules
for re-classification of a promoter as a public
investor, wherein an outgoing promoter will have to
relinquish special rights as well as control over the
affairs of the listed firm and not be allowed to hold
over 10 per cent stake.
 Cont…
the promoter would not be allowed to have
any representation on the board of directors
or act as a key managerial person in the
listed entity.
the promoter seeking re-classification must
not be a wilful defaulter or a fugitive
economic offender
 Cont…
Finance Minister Nirmala Sitharaman in her
Budget speech urged Sebi to consider
increasing the minimum public shareholding
in listed firms to 35 per cent from 25 per cent.

At present, there are over 1,400 listed

companies where promoters have over 65 per
cent stake, as of latest regulatory disclosures.
 Cont…
Among the Nifty50 companies, five companies,
Wipro (73.90 per cent), TCS (72.10 per cent), Coal
India (71 per cent) and Hindustan Unilever (67.2
per cent) and Bharti Airtel (67.1 per cent) have
promoter holding in excess of 65 per cent as of
March 31.
Rough estimates suggest that if these firms were to
meet the 35 per cent public shareholding, they may
need to sell shares worth Rs 1 lakh crore.
 Different kinds
a) Public issue
(i) Initial Publicof issues
offer (IPO)
(ii) Further Public offer (FPO)
b) Rights issue
c) Composite Issue
d) Bonus issue
e) Private placement
(i) Preferential issue
(ii) Qualified institutional placement
(iii) Institutional Placement Programme
 Initial Public
(a) it has netoffer
tangible assets
(IPO) of at least three
crore rupees in each of the preceding three
full years (of twelve months each), of which
not more than fifty per cent are held in
monetary assets
 Cont…
(b) it has a track record of distributable
profits in terms of section 205 of the
Companies Act, 1956, for at least three out
of the immediately preceding five years.
(c) it has a net worth of at least one crore
rupees in each of the preceding three full
years (of twelve months each);
 Cont…
(d) the aggregate of the proposed issue and
all previous issues made in the same
financial year in terms of issue size does not
exceed five times its pre-issue net worth as
per the audited balance sheet of the
preceding financial year
 Cont…
(e) if it has changed its name within the last
one year, at least fifty per cent of the
revenue for the preceding one full year has
been earned by it from the activity indicated
by the new name.
 Cont…
Right Issue: When an issue of shares or
convertible securities is made by an issuer
to its existing shareholders as on a
particular date fixed by the issuer
 Cont…
Only listed company can make right issue
Right issue can be made only in respect of
fully paid up shares.
Company will have to make announcement
before such issue and this cannot be
withdrawn
The rights issue should be open for
minimum period of 30 days, and maximum
up to 60 days.
 Cont…
Company will have to make an agreement
with the depository to issue the share in
demat form.
A no complaints certificate is to be filed by
the Lead Merchant Banker with the SEBI
after 21 days from the date of issue of offer
document.
A minimum subscription of 90 per cent of
the issue should be received.
 Cont…
Composite Issue: An issue of securities by a
listed company on a public-cum rights basis
offered through a single offer document
wherein the allotment for both public and
rights component of the issue is proposed to
be made simultaneously.
 Cont…
Bonus issue: When an issuer makes an issue
of shares to its existing shareholders
without any consideration based on the
number of shares already held by them as
on a record date it is called a bonus issue.
Example : one bonus share for every 5
shares held.
The shares are issued out of the Company’s
free reserve or share premium account
 Cont…
(e) Private placement:
A private placement is the sale of securities to a
relatively small number of selected investors not
exceeding 49, and which is neither a rights issue nor
a public issue as a way of raising capital.
Investors involved in private placements are usually
large banks, mutual funds, insurance companies
and pension funds.
A private placement is different from a public issue,
in which securities are made available for sale on
the open market to any type of investor.
 Cont…
Private placement of shares or convertible
securities by listed issuer can be of three types:

i) Preferential allotment: When a listed issuer

issues shares or convertible securities, to a
select group of persons in terms of provisions
of Chapter VII of SEBI Regulations, 2009, it is
called a preferential allotment.
 Cont…
(ii) Qualified institutions placement:
It occurs when the Securities and Exchange
Board of India (SEBI) allows an Indian
company to issue securities in India without
providing preliminary filings regarding the
issue.
Indian companies that are listed on an
Indian stock exchange are generally eligible
to offer QIPs only to qualified institutional
buyers (QIBs).
 Cont..
is a capital-raising tool, primarily used in
India and other parts of southern Asia,
whereby a listed company can issue equity
shares, fully and partly convertible debentures,
or any securities other than warrants which
are convertible to equity shares to a qualified
institutional buyer (QIB).
The SEBI limits companies to only raising
money through issuing securities.
 Cont…
A Share Warrant is a document issued by
the company under its common seal, stating
that its bearer is entitled to
the shares or stock
specified therein.
Share warrants are negotiable instruments.
They are transferable by mere delivery
without registration of transfer.
 Cont…
A qualified institutional buyer (QIB )is a
company that manages at least $100 million
of securities on a discretionary basis.
A QIB can be an insurance company, a
bank, an employee benefit plan comp., a
trust fund comp., a business development
company (BDC), a charity, or even an entity
owned by qualified investors
 Cont…
These are investors having expertise in the
market and are given some privileges as per
the SEBI rules
Qualified Institutional Buyers are those
institutional investors who are generally
perceived to possess expertise and the financial
muscle to evaluate and invest in the capital
markets
 Cont…
‘Qualified Institutional Buyer’ shall mean:
a) Public financial institution as defined in section
4A of the Companies Act, 1956;
b) Scheduled commercial banks;
c) Mutual funds;
d) Foreign institutional investor registered with
SEBI;
e) Multilateral and bilateral development financial
institutions;
f) Venture capital funds registered with SEBI.
g) Foreign Venture capital investors registered with
SEBI.
h) State Industrial Development Corporations.
 Cont…
i) Insurance Companies registered with the
Insurance Regulatory and Development Authority
(IRDA).
j) Provident Funds with minimum corpus of Rs.25
crores.
k) Pension Funds with minimum corpus of Rs. 25
crores
These entities are not required to be registered with
SEBI as QIBs. Any entities falling under the
categories specified above are considered as QIBs
for the purpose of participating in primary issuance
process.
 Cont…
Institutional Placement Programme (IPP):
When a listed issuer makes a further
public offer of equity shares, or offer
for sale of shares by promoter/promoter
group of
listed issuer in which the offer,
allocation and allotment of such shares is
made only to
qualified institutional buyers
 Cont…
IPP is one of the methods available to
Indian listed companies for the purpose of
complying with minimum public
shareholding requirements under the
Securities Contracts Regulation (Rules),
1957 (SCRR).
The IPP enables private companies to
comply with the mandatory listing
requirement of 25% public shareholding.
 QIP & IPP
QIP is meantDifference
for listed companies who are
in compliance with minimum public holding
requirements.
IPP is opted by listed companies that have
not complied with minimum public holding
requirements.
 Book Building
Book building is the process by which an
underwriter attempts to determine the price at
which an initial public offering (IPO) will be
offered.
An underwriter, normally an investment bank,
builds a book by inviting institutional investors
(fund managers et al.) to submit bids for the
number of shares and the price(s) they would
be willing to pay for them.
The process of price discovery involves
generating and recording investor demand
for shares before arriving at an issue price
that will satisfy both the company offering
the IPO and the market.
Once the price is finalize---
Lower Price --Floor Price
Higher Pric– Ceiling Price
 The book
The issuing company building
hires an investment bank
to act as underwriter who is tasked with
process
determining the price range the security can be
sold for and drafting a prospectus to send out
to the institutional investing community.
Invite investors, normally large scale buyers
and fund managers, to submit bids on the
number of shares that they are interested in
buying and the prices that they would be
willing to pay.
 Cont…
The book is 'built' by listing and evaluating the
aggregated demand for the issue from the
submitted bids.
The underwriter analyzes the information then
uses a weighted average to arrive at the final
price for the security, which is termed the 'cut
off' price.
The underwriter has to, for the sake of
transparency, publicize the details of all the
bids that were submitted.
Allocate the shares to the accepted bidders
Thank you