Evolution of investment banking

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At a very macro level, ‘Investment Banking’ as term suggests, is concerned with the primary function of assisting the capital market in its function of capital intermediation, i.e., the movement of financial resources from those who have them (the Investors), to those who need to make use of them for generating GDP (the Issuers). Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation.

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Nevertheless, it would be unfair to conclude so, as that would confine investment banking to very narrow sphere of its activities in the modern world of high finance. Over the decades, backed by evolution and also fuelled by recent technologies developments, an investment banking has transformed repeatedly to suit the needs of the finance community and thus become one of the most vibrant and exciting segment of financial services. Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for the price for excessive flamboyance as well. To continue from the above words of John F. Marshall and M.E. Eills,

‘investment banking is what investment banks do’

. This definition can be explained in the context of how investment banks have evolved in their functionality and how history and regulatory intervention have shaped such an evolution. Much of investment banking in its present form, thus owes its origins to the financial markets in USA, due o which, American investment banks have banks have been leaders in the American and Euro markets as well. Therefore, the term ‘investment banking’ can arguably be said to be of American origin. Their counterparts in UK were termed as ‘merchants banks’ since they had confined themselves to capital market intermediation until the US investments banks entered the UK and European markets and extended the scope of such businesses.

Investment banks

help companies and governments and their agencies to raise money by issuing and selling acquisitions and other types of financial transactions. Investment banks also act as intermediaries in trading for clients. Investment banks differ from stocks, bonds, and mutual funds. However some firms operate as both brokerages and investment banks; this includes some of the best known financial services firms in the world. More commonly used today to characterize what was traditionally termed” investment banking” is “sells side.” This is trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e. underwriting,research, etc.). The “buy side” constitutes the hedge funds, and the investing public who consume the products and services of the sell-side in order to maximize their return on investment. Many firms have both buy and sell side components. Definition

An individual or institution, which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. Also called investment banker.

Who needs an Investment Bank?

Any firm contemplating a significant transaction can benefit from the advice of an investment bank. Although large corporations often have sophisticated finance and corporate development departments provide objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment banking firm can provide the services required to initiate and execute a major transaction, thereby empowering small to medium sized companies with financial and transaction experience without the addition of permanent overhead, an investment bank provides objectivity, a valuable contact network, allows for efficient use of client personnel, and is vitally interested in seeing the transaction close. Most small to medium sized companies do not have a large in-house staff, and in a financial transaction may be at a disadvantage versus larger competitors. A quality investment-banking firm can provide the services

The main activities and units

The primary function of an investment bank is buying and selling products both on behalf of the bank’s clients and also for the bank itself. Banks undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he or she buys or sells a product to a client and does not hedge his or her total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet An investment bank is split into the so-called

Front Office

Middle Office


Back Office.

The individual activities are described below:

Front Office Investment Banking

is the traditional aspect of investment banks which involves helping customers raise Corporate Finance (often pronounced “corpfin”). mutual funds) . Research and Structuring. Sales desks then communicate their clients’ orders to the appropriate trading desks, which can price and execute trades, or structure new products that fit a specific need. Research is the division which reviews companies and writes reports about their prospects, often with “buy” or “sell” ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.


has been a relatively recent division as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Middle Office * operational risk” and the assurance Middle Offices provide now include measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.

Back Office Operations

involve data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While it provides the greatest job security of the divisions within an investment bank, it is a critical part of the bank that involves managing the financial information of the bank and ensures efficient capital markets through the financial reporting function. The staff in these areas are often highly qualified and need to understand in depth the deals and transactions that occur across all the divisions of the bank.

New products

Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, many have theorized that all investment banking products and services would be copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.

For example,

OTC contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities. In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients). Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the Chinese wall which prohibits communication between investment banking on one side and research and equities on the other.

Some of the conflicts of interest that can be found in investment banking are listed here:

  • Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble
  • Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
  • Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running.

Types of investment banks


(guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as

mergers and acquisitions

Merchant banks

were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike

Venture ca pital firms, they tend not to invest in new companies.

Investment banks provide four primary types of services:

Raising capital, advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories.

Raising Capital

An investment bank can assist a firm in raising funds to achieve a variety of objectives, such as to acquire another company, reduce its debt load, expand existing operations, or for specific project financing. Capital can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible debt or debt with warrants. Although many people associate raising capital with public stock offerings, a great deal of capital is actually raised through private placements with institutions, specialized investment funds, and private individuals. The investment bank will work with the client to structure the transaction to meet specific objectives while being attractive to investors.

Mergers and Acquisitions

Investment banks often represent firms in mergers, acquisitions, and divestitures. Example projects include the acquisition of a specific firm, the sale of a company or a subsidiary of the company, and assistance in identifying, structuring, and executing a merger or joint venture. In each case, the investment bank should provide a thorough analysis of the entity bought or sold, as well as a valuation range and recommended structure.

Sales and Trading

These services are primarily relevant only to publicly traded firms, or firms, which plan to go public in the near future. Specific functions include making a market in a stock, placing new offerings, and publishing research reports.

General Advisory Services:

Advisory services include assignments such as strategic planning, business valuations, assisting in financial restructurings, and providing an opinion as to the fairness of a proposed transaction.

Terms Related To Investment Bank

Buying and Selling

Buying Deciding on the proper time to purchase a security that you would like to add to your holdings can be a daunting task. If the price drops immediately after you buy, it may seem as if you missed out on a better buying opportunity. If the price jumps right before you make your move, you may feel as if you paid too much. As it turns out, you should not let these small fluctuations influence your decision too much. As long as the fundamentals that led you to decide on the purchase have not changed, a few points in either direction should not have a large impact on the long-term value of your investment. Similarly, the fact that an investment has been increasing in value of late is not a sufficient reason for you to purchase it. Momentum can be very fickle, and recent movement is not necessarily an indicator of future movement. Therefore, buying decisions should be based on sound and thorough research geared toward discerning the future value of a security relative to its current price. This analysis will probably not touch upon price movement in the very recent past. As you learn more about investing you’ll get better at deciding when to buy, but most experts recommend that beginners avoid trying to time the market, and just get in as soon as they can and stay in for the long haul. The proper time to buy a security is quite simply when it is available for less than its actual value. These undervalued securities are actually not as rare as they sound. However, the problem is simply that they are never sure bets. The value of a security includes estimates of the future performance of factors underlying the value of the security. For stocks, these factors include things like earnings growth and market share. Changes can be predicted to a degree, but they are subject to fluctuation due to forces both within and beyond the control of the company. The overall economic climate, changes in the industry or even bad decisions by management can all cause a security poised to ascend in value to become an under performer. Therefore, it is essential to practice your analysis before putting your money into action. Make some mock purchases based on your personal analysis technique and track the results. Not all of your decisions will lead to the results you were expecting, but if most of your choices turn out to be good and there are mitigating factors that you can learn from to explain your missteps, then you may be ready to put your analysis technique and investing strategy into action. At this point, the need to continuously monitor your investments does not disappear. Both under performers and overachievers should be studied carefully to fine-tune your strategy. You should also regularly look at your securities to make sure that the fundamentals for success that led you to buy in the first place are intact. If not, you may need to prepare to cash in and start looking for the next opportunity. One way to avoid the hassles of deciding when to buy altogether is to practice dollar-cost averaging. This strategy advocates investing a fixed dollar amount at regular intervals. The price when you first invest is relatively unimportant (as long as the fundamentals are sound) because you will be purchasing shares at a different price each time you buy. The success of your investment then lies not with short-term fluctuations, but with the long-term movement of the value of the security. Selling: There comes a time when investments must be liquidated and converted back into cash. In a perfect world, selling would only be necessary when investment goals have been reached or time horizons have expired, but, in reality, decisions about selling can be much more difficult. For one thing, it can be just as hard to decide when to sell as it can be to decide when to buy. No one wishes to miss out on gains by selling too soon, but, at the same time, no one wishes to watch an investment peak in value and then begin to decline. Investors often seek to sell investments that have dropped in value in the short-term. However, if conditions have not changed significantly, drops in price may actually represent an opportunity to buy at a better price. If the initial research, which led to the purchase, was sound, a temporary decline does not preclude the success that was originally predicted. Of course, things change, and if the security no longer meets the criteria that led to its purchase, selling may in fact be the best option. Selling may also become necessary if investment goals change over time. You may need to reduce the amount of risk in your portfolio or you may have the opportunity to seek out greater returns. Additionally, a security may have increased in value to the point that it is overvalued. This creates an excellent opportunity to cash in and seek out new undervalued investments. Often you will need to make this type of sale in the course of rebalancing a portfolio necessitated by gains and losses in different areas. Selling can be especially difficult when an under performing stock must be dumped. Some investors let their emotions dictate their actions and hold on to stocks that have fallen in value rather than to sell, thinking that selling at a loss is like admitting that they made a mistake. However, realizing the loss and moving on to better investments is often preferable to continuing to hold onto a loser in the hopes that it will somehow rebound. When considering any sale, you must factor in the costs of the sale itself. Fees and taxes will eat into profits, so they must be subtracted from any increases in value to understand the true impact of the transaction. Capital gains taxes are higher for gains on investments held less than one year, so it’s often wise to invest for the long term rather than to buy and sell quickly. On the other hand, it can be dangerous to hold an investment longer than you want to, simply to reduce the tax burden. It is essential to remember that just because an investment increases in value after it has been sold does not necessarily mean that it was sold prematurely. Managing risk and diversification are often more important than capitalizing on short-term gains in a particular security. Keeping in mind the initial goals for the investment and adjusting them to fit your present goals will allow you to make smarter decisions about selling.

Principles of Investing

1. Start Investing Now We say this not just to discourage procrastination, but because an early start can make all the difference. In general, every six years you wait doubles the required monthly savings to reach the same level of retirement income. Another motivational statistic: If you contributed some amount each month for the next nine years, and then nothing afterwards, or if you contributed nothing for the first nine years, then contributed the same amount each month for the next 41 years, you would have about the same amount. Compounding is a beautiful thing. 2. Know Yourself The right course of action depends on your current situation, your future goals, and your personality. If you don’t take a close look at these, and make them explicit, you might be headed in the wrong direction.

Current Situation:

How healthy are you, financially? What’s your net worth right now? What’s your monthly income? What are your expenses (and where could they be reduced)? How much debt are you carrying? At what rate of interest? How much are you saving? How are you investing it? What are your returns? What are your expenses?


What are your financial goals? How much will you need to achieve them? Are you on the right track?

Risk Tolerance:

How much risk are you willing and able to accept in pursuit of your objectives? The appropriate level of risk is determined by your personality, age, job security, health, net worth, amount of cash you have to cover emergencies, and the length of your investing horizon. 3. Get Your Financial House In Order Even though investing may be more fun than personal finance, it makes more sense to get started on them in the reverse order. If you don’t know where the money goes each month, you shouldn’t be thinking about investing yet. Tracking your spending habits is the first step toward improving them. If you’re carrying debt at a high rate of interest (especially credit card debt), you should unburden yourself before you begin investing. If you don’t know how much you save each month and how much you’ll need to save to reach your goals, there’s no way to know what investments are right for you. If you’ve transitioned from a debt situation to paycheck-to-paycheck situation to a saving some money every month situation, you’re ready to begin investing what you save. You should start by amassing enough to cover three to six months of expenses, and keep this money in a very safe investment like a money market account, so you’re prepared in the event of an emergency. Once you’ve saved up this emergency reserve, you can progress to higher risk (and higher return) investments: bonds for money that you expect to need in the next few years, and stocks or stock mutual funds for the rest. Use dollar cost averaging, by investing about the same amount each month. This is always a good idea, but even more so with the dramatic fluctuations in the market in the past 10 years. Dollar cost averaging will make it easier to stomach the inevitable dips.

And remember; never invest in anything you don’t understand.

4. Develop A Long Term Plan Now that you know your current situation, goals, and personality, you should have a pretty good idea of what your long-term plan should be. It should detail where the money will go: cars, houses, college, and retirement. It should also detail where the money will come from. Hopefully the numbers will be about the same. Don’t try to time the market. Get in and stay in. We don’t know what direction the next 10% move will be, but we do know what direction the next100% move will be. Review your plan periodically, and whenever your needs or circumstances change. If you are not confident that your plan makes sense, talk to an investment advisor or someone you trust. 5. Buy Stocks Now that you’ve got a long term view, you can more safely invest in ‘riskier’ investments, which the market rewards (in general). This requires patience and discipline, but it increases returns. This approach reduces the entire universe of investment vehicles to two choices: stocks and stock mutual funds. In the long run, they’re the winners: In this century, stocks beat bonds 8 out of 9 decades, and they’re well in the lead again. According to Ibbotson’s Stocks, Bonds, Bills and Inflation 1995 Yearbook, here are the average annual returns from 1926 to 1994 (before inflation):

  • Stocks: 10.2% (and small company stocks were 12.1%)
  • Intermediate term treasury bonds: 5.1%
  • 30-day T-bills: 3.7%

But is it really worth the additional risk just for a few percentage points? The answer is yes. 10% a year for 20 years is 570%, but 7% a year for 20 years is only 280%. Compounding is God’s gift to long-term planners. If you buy outstanding companies, and hold them through the market’s gyrations, you will be rewarded. If you aren’t good at selecting stocks, select some mutual funds. If you aren’t good at selecting mutual funds, go with an index fund (like the Vanguard S&P 500). 6. Investigate Before You Invest Always do your homework. The more you know, the better off you are. This requires that you keep learning, and pay attention to events that might affect you. Understand personal finance matters that could affect you (for example, proposed tax changes). Understand how each of your investments fits in with the rest of your portfolio and with your overall strategy. Understand the risks associated with each investment. Gather unbiased, objective information. Get a second opinion, a third opinion, etc. Be cautious when evaluating the advice of anyone with a vested interest. If you’re going to invest in stocks, learn as much as you can about the companies you’re considering. Understand before you invest. Research, research, Read books. Consider joining an investment club or an organization like the American Association of Individual Investors. Experiment with various strategies before you put your own money on the line. Examine historical data or participate in a stock market simulation. Try a momentum portfolio, a technical analysis portfolio, a bottom fisher portfolio, a dividend portfolio, a price/earnings growth portfolio, an intuition portfolio, a mega trends portfolio, and any others you think of. In the process you’ll find out which ones work best for you. Learn from your own mistakes, and learn from the mistakes of others.

If you don’t have time for all this work consider mutual funds, especially index funds.

7. Develop the Right Attitude

The following personality traits will help you achieve financial success:


Develop a plan, and stick with it. As you continue to learn, you’ll become more confident that you’re on the right track. Alter your asset allocation based on changes in your personal situation, not because of some short-term market fluctuation.


Let your intelligence, not your emotions; make your decisions for you. Understand that you will make mistakes and take losses; even the best investors do. Re-evaluate your strategy from time to time, but don’t second-guess it.


Don’t let your emotions be ruled by today’s performance. In most cases, you shouldn’t even be watching the day-to-day performance, unless you like to. Also, don’t ever feel like it’s now or never. Don’t be pressured into an investment you don’t yet understand or feel comfortable with. The following personality traits will hurt your chances of financial success:


If you are unwilling to take any risk, you will be stuck with investments that barely beat inflation.


As an investment class, ‘get rich quick’ schemes have the worst returns. If your expectations are unrealistically high, you’ll go for the big scores, which usually don’t work.

It is generally a good idea to avoid making financial decisions based on emotional factors.

8. Get Help If You Need It The do-it-yourself approach isn’t for everyone. If you try it and it’s not working, or you’re afraid to try it at all, or you just don’t have the time or desire, there’s nothing wrong with seeking professional assistance. If you want others to handle your financial affairs for you, you will nevertheless want to remain involved to some degree, to make sure your money is being spent wisely. Initial Public Offerings Initial Public Offerings (IPOs) are the first time a company sells its stock to the public. Sometimes IPOs are associated with huge first-day gains; other times, when the market is cold, they flop. It’s often difficult for an individual investor to realize the huge gains, since in most cases only institutional investors have access to the stock at the offering price. By the time the general public can trade the stock, most of its first-day gains have already been made. However, a savvy and informed investor should still watch the IPO market, because this is the first opportunity to buy these stocks. Reasons for an IPO When a privately held corporation needs to raise additional capital, it can either take on debt or sell partial ownership. If the corporation chooses to sell ownership to the public, it engages in an IPO. Corporations choose to “go public” instead of issuing debt securities for several reasons. The most common reason is that capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds must be repaid with interest. Despite this apparent benefit, there are also many drawbacks to an IPO. A large drawback to going public is that the current owners of the privately held corporation lose a part of their ownership. Corporations weigh the costs and benefits of an IPO carefully before performing an IPO. Going Public If a corporation decides that it is going to perform an IPO, it will first hire an investment bank to facilitate the sale of its shares to the public. This process is commonly called “underwriting”; the bank’s role as the underwriter varies according to the method of underwriting agreed upon, but its primary function remains the same. In accordance with the Securities Act of 1933, the corporation will file a registration statement with the Securities and Exchange Commission (SEC). The registration statement must fully disclose all material information to the SEC, including a description of the corporation, detailed financial statements, biographical information on insiders, and the number of shares owned by each insider. After filing, the corporation must wait for the SEC to investigate the registration statement and approve of the full disclosure. During this period while the SEC investigates the corporation’s filings, the underwriter will try to increase demand for the corporation’s stock. Many investment banks will print “tombstone” advertisements that offer “bare-bones” information to prospective investors. The underwriter will also issue a preliminary prospectus, or “red herring”, to potential investors. These red herrings include much of the information contained in the registration statement, but are incomplete and subject to change. An official summary of the corporation, or prospectus, must be issued either before or along with the actual stock offering. After the SEC approves of the corporation’s full disclosure, the corporation and the underwriter decide on the price and date of the IPO; the IPO is then conducted on the determined date. IPO’s are sometimes postponed or even withdrawn in poor market conditions. Performance The aftermarket performance of an IPO is how the stock price behaves after the day of its offering on the secondary market (such as the NYSE or the NASDAQ). Investors can use this information to judge the likelihood that an IPO in a specific industry or from a specific lead underwriter will perform well in the days (or months) following its offering. The first-day gains of some IPO’s have made investors all too aware of the money to be had in IPO investing. Unfortunately, for the small individual investor, realizing those much-publicized gains is nearly impossible. The crux of the problem is that individual investors are just too small to get in on the IPO market before the jump. Those large first-day returns are made over the offering price of the stock, at which only large, institutional investors can buy in. The system is one of reciprocal back scratching, in which the underwriters offer the shares first to the clients who have brought them the most business recently. By the time the average investor gets his hands on a hot IPO, it’s on the secondary market, and the stock’s price has already shot up. SEBI Guidelines The Government has setup Securities Exchange Board of India (SEBI) in April 1988. For more then three years, it had no statutory powers. Its interim functions during the period were: i. To collect information and advise the Government on matters relating to Stock and Capital Markets. ii. Licensing and regulatory and Merchant Banks, Mutual Fund, etc.. iii. To prepare the legal drafts for regulatory and developmental role of SEBI and iv. To perform any other functions as may be entrusted to it by Government. The need for setting up independent Government agency to regulate and develop the Stock and Capital Market in India as in many developed countries was recognised since the Seventh Five Year was launched (1985) when some major industrial policy changes like opening up of the economy to out side the world and greater role to the Private Sector were initiated. The rampant malpractices noticed in the Stock and Capital Markets stood in the way of infusing confidence of investors, which is necessary for mobilisation of large quantity of funds from the public, and help the growth of the industry. The malpractices were noticed in the case of companies, Merchant Bankers and Brokers who are all operating in Capital Markets. The need to curb the malpractices and to promote healthy Capital Market in India was felt. The security industry in India has to develop on the right lines for which a competent Government agency as in UK (SIB) or in USA (SEC) is needed. As referred to earlier, malpractices have been reported in both the primary market and secondary market. A few examples of malpractices in the primary market are as follows:


Too may self styled Investment Advisers and Consultants.


Grey Market or unofficial premiums on the new issues.


Manipulation of markets before new issues is floated.


Delay in allotment letters or refund orders or in dispatch of Share Certificates


Delay in listing and commencement of trading in shares.

A few examples of malpractices in the Secondary Market are as fallows:


Lack of transparency in the trading operations and prices charged to clients.


Poor service due to delay in passing contract notes or not passing contracts notes, at all.


Delay in making payments to clients or in giving delivery of shares.


Persistence of odd lots and refusal of companies to stop this practice of allotting shares in odd lots, which disappeared with the introduction of Demat form of trading.


Insider trading by agents of companies or brokers rigging and manipulating prices.


Takeover bids to destabilise management.


The SEBI has been entrusted with both the regulatory and development function. The objectives of SEBI are as follows:

a) Investor protection, so that there is a steady flow of savings into the Capital Markets. b) Ensuring the fair practices by the issuers of securities, namely, companies so that they can raise resources at least cost. c) Promotion of efficient services by brokers, merchant bankers and others intermediaries so that they become competitive and professional. SEBI AND FREE PRICING OF EQUITY SHARES With the repeat of Capital Issuers Control Act of 1947 in May 1992, the SEBI issued fresh guidelines for new Capital issues from June 11, 1992. Pricing of Shares expect in case of new companies with no track record is left to free market forces. The new Companies have to issues shares at par only. The existing unlisted companies if they desire listing can make public issue upto 20% of equity and price can be determined by free market forces, as determined by the issuer or the lead manager. Similarly, an existing listed company can also fix the price of issue depending on the markets forces. In all these cases, the reasons for such price fixation, transparency and proper disclosers are insisted upon by the SEBI. The draft letter of offer to the public is to be vetted by SEBI, which was delegated to lead merchant bankers by SEBI after 1996. As per SEBI guidelines, 12 months should elapse between bonus issue and public or rights issue. A private placement of promoters’ quota is not permitted. Merchant bankers held responsible for ensuring that prospectus is fair and disclosures are full and correct and that highlights and risk factors are slept out in all issues. Although free pricing is permitted, the rationale of such fixation is to be provided to the SEBI when it examines the drafts letter of offer. SEBI POWERS The SEBI powers on stock exchanges and their member brokers and sub brokers were exercised under SEBI (stock brokers and sub brokers) Regulations of October 23 1992. These relate to registration, licensing, code of conduct, and inspection of books accounts, etc. These powers were exercised under Section 12 of SEBI Act. SEBI was delegated more powers of administration of SC (R) Act in respect of many provisions including recognition of stocks exchanges (Sec.3, 4&5) and control and regulation of stocks exchanges under Sections 7, 13, 18, 22 and 28 etc., These were concurrent powers wielded by both Government and SEBI, effective from September1993. Subsequently, by an ordinance in January 1995, the SEBI was given further powers to impose penalties on insider trading and capital markets intermediaries for violation of SEBI regulations and companies for not complying with Listing agreement. In particular penalties can be imposed in monetary terms, for failure to furnish books of accounts, failure to enter into agreements with clients, failure to redress investor grievances, defaults in case of mutual funds, and non-disclosures of acquisition of shares and take over etc. Venture capital funds like mutual funds were brought under the control of SEBI. Earlier to that, the SEBI has started licensing and regulations the underwriters, debenture trustees, collecting bankers, and all intermediaries in the capital market.

SEBI in the New Millennium:

SEBI has got all the needed powers to regulate the Capital Market including all affairs of listed Companies, Venture Funds, MMMFs, etc. Already it has been regulating the foreign agencies or a body operating in the capital market and it has announced guidelines for all players in markets, including a code of conduct.

Institutional Agencies:

All the FIIs together can invest upto 24-30% of the company’s paid up capital, of which a limit of 50% is allowed to foreign individuals and corporates investing in India through FIIs; this limit of 30% was raised to 40% by the Central Budget for 2000-01.

The SEBI has also allowed the domestic Mutual Funds to invest in foreign listed securities and to manage foreign portfolios. According to some amendments to Mutual Fund regulations of SEBI, the Mutual Funds are required to send a complete statement of their portfolios to all unit holders within one month from the close of each half-year. In order to deter mutual funds from delay in despatch of redemption warrants, SEBI has directed mutual funds to provide for payment of interest to the unit holders on this delayed payment, wherever applicable.

Latest Primary Markets Reforms

In pursuance with the recommendations of the Informal Group on Primary Markets, the SEBI has dispensed with the requirements of issuing shares at fixed par value of Rs.10 and Rs.100. They are now free to issue shares at any value of Rs.1 and above. The SEBI modified the existing framework for the book building. Some issues following the book building process have already been issued in 1999-2000.

In order to encourage Initial Public Offer, the SEBI has relaxed the guidelines stipulating “the ability to pay” criteria in place of existing criteria of “actual payment of dividend” by the issuing companies to be eligible to make public offers. The regulations for Credit Rating Agencies were finalised and published by the SEBI. The categories of promoters who are eligible to promote CRA’s are laid down.

Book Building Process:

The changes in book building guidelines:

The modified framework makes display of demand at terminals optional. The reservation of 15% of issue size for individual investors bidding upto 10 marketable lots is no longer compulsory. Allotment in Book Building process should be in Demat form only and other requirements shall be the same as for any public issue. The issuer is allowed to disclose either the issue size or number of securities to be offered to the public.

The regulatory mechanism on secondary market was strengthened during 1999-2000, through the rationalisation and refinement of margin system and through mark to market margins, volatility margins, incremental carry forward margins, etc. The circuit breakers for the volatility have been fixed by SEBI at 8% to 12% to be raised upto 16%. The exposure limits for members are also fixed.

Informal Group on Primary Market

As part of its efforts to receive the dressed primary market, the SEBI has relaxed the listed norms for I.T. sector companies to make initial public offers with a minimum offer of 10%, instead of 25% for all other companies. Book building norms are to encourage new issues. The norm of 90% subscription as the minimum for enabling the company offering public issue to make allotment was waived. Similarly, the stipulation of actual payment of dividend in three out of the past 5 years for the company to come out with a public issue was replaced by requirements of “ability to pay” the dividends. As recommended Informal Group on primary market, measures initiated to improve the sentiment in the Primary Market. The SEBI has given freedom to the Companies to determine the par value of shares issued by them in accordance with section 13(4) of the Companies Act, 1956. the companies with dematerialized shares have been allowed to alter the par value of share indicated in the Memorandum and Articles of Association Reference was already to changes in Book Building Norms.

SEBI has also accepted the introduction of a system of using the existing infrastructure of stocks Exchanges for marketing of IPOs and NSE has offered these services through its wide network terminals spread all over the country.

Demat Coverage:

From January 2000, the scrips for trading in Demat form was raised to 200. With this, the compulsory trading in Demat form has raised the proportion of market deliveries in Demat form to 90% of the total deliverers. The physical deliverers of shares has come down drastically. The transaction costs have been reduced and volume have increased phenomenally due to electronic form of trading and in demat form.

Committee on Market Making:

A committee on the Market Making under the Chairmanship of Shri G.P. Gupta was set by the SEBI to study the various facets of the market making, including the merits and demerits of order driven system and quote driven system. The committee was of the view that shares should be classified into the categories namely liquid and illiquid and market making facility should be provided to the illiquid category of shares. Market making should be made compulsory in such cases and market markers have to give two way quotes for each such scrip. The mechanism pf market making and risked involved in it are to be understood by market makers.

Legal Framework:

In the legal field, the securities Laws, 1999 was passed by the Parliament in December 1999. This has incorporated the derivative instruments in the definition of securities under Securities Contract Regulation Act, 1956, as also the units of Collective Investments Schemes, with a view to facilitating their transaction and regulation. The new Act provided for transfer of Appellate functions under the securities Laws Securities Appellate Tribunal (SAT). The stamp duty payable on derivative transactions those in demat Form was withdrawn by necessary legal changes. Banks now accept the ownership pf securities in Demat Form.

Negotiated Deals:

A negotiated deal in listed company has to be reported to stock exchange within 15 minutes and information in such deals has to be disseminated to all Stock Exchanges. A negotiated deal is defined as any transaction which has on order value of 25 lakhs or trade volume of not less than 10,000shares at one price, not formed on Stock Exchanges and through the order matching system. But with a view to enhance the price discovery process and improve the transparency, SEBI made such deals not permissible in 1999. Guidelines were issued to permit negotiated deals only if they are executed on the screen of Stock Exchange, following the price and order matching system of the exchange.

SEBI Committee on Corporate Governance:

The committee on Corporate Governance, set up by SEBI has reported and the report was accepted by SEBI and implemented. The Stock Exchanges listing agreement was amended to include a clause on corporate governance to be observed by listed companies. It is an important tool for corporates listed on Stock Exchange. The SEBI code on Corporate Governance was released in January 2000 for adoption by listed companies. It is expected that this measures may raise the standard of corporate governance in India and improve the disclosure standards and investor protection.

SEBI Guidelines on Listing:

In February 2000, the SEBI has asked the Stock Exchanges to amend the listing agreement by adding clause 49, providing for corporate governance mandatory for companies seeking listing for the first time. The companies which are included Group A of BSE and in S&P CNX Nifty Index have to comply with the requirements by March 31, 2001. Besides listed companies with paid up capital of Rs.10crores and above or networth of Rs.25crores or more have to comply with this requirement by March end 2002. Other listed companies with a paid up capital of Rs.3crores and above have to comply with this requirement of corporate governance by March end 2003.

The SEBI has also directed the companies listed, to reduce the No-delivery period to one week in the case of Demat shares. A committee was set up to streamline the existing risk containment measures namely the margin system and simplify it.

SEBI’s Record:

The SEBI has set a creditable record of regulation for the growth of a healthy Capital Market during the period of 1995-2000. In the year 2000, it has set for itself the tasks of speeding up the following measures.

1) Pursuit of healthy Corporate Governance Regulations.

2) Strengthening of Rolling Settlement System by adding 500 more scrips to its.

3) Introduction of Derivative Trading.

4) Development of the internet practices by brokers.

5) Promotion of trading in debt market and in securities debt instruments

Products and Services

Venture Capital:

Venture capital is risks money, which is used in risky enterprises either as equity or debt capital. It may be in new sunshine industries or older risk enterprises. The funds, which finance such risky, venture capital funds. Ventures capital was originated & popularised in USA in sixties. In developed countries, this capital came from pension funds, insurance companies & even large banks. Some large companies with excess funds may provide this capital to achieve diversification, market expansion & ‘window on technology’ or to share in this result of R&D of others. In India, as the majority of the above institutions are in the public sector, only the government or public financial institutions can provide the funds for venture capital.

What is Venture Capital?

Venture capital is a post-war phenomenon in the business world, mainly developed as a sideline activity of the rich in USA. To connote the risk & adventure & some element of investment, the generic name of ‘venture capital’ was coined. In the late 1960’s a new breed of professional investors called venture capitalists emerged whose specialty was to combine risk capital with entrepreneurial management & to use advance technology to launch new products and companies in the markets place. Undoubtedly, it was ‘venture capitalists’ astute ability to assess and manage enormous risks & export from them tremendous returns that changed the face of America. Innovative, hi-tech ideas are necessarily risky. It is here that the concept of venture capital steps in. Venture Capital provides long start up costs to high risks & returns project. Typically, these projects have mortality rates and therefore are unattractive to risks-averse bankers & private sectors companies.

Venture Projects:

Proposals come to the venture capitalists in the form of business plans. He appraises the same, giving due regard to the credentials of the founders, the nature of the product or services to be developed, the market to be saved & the financing required. If satisfied, he will invest his own money in the equity shares of the new company, known as the assisted company. In addition to money, managerial & marketing assistance may also be provided that is, the venture capitalist not only provides funds but also on line operational advice. In short, he identifies himself with the project as much as the innovator promoter & as such works hard to accomplish ambitious targets & consequents higher appreciation of his capital.

Indian Position:

In India, most project financing schemes require at least 25 per cent of the project cost to be contributed by the promoters, while the latter can raise barely 5-10 percent. For long, there were a few agencies such as IFCI’s subsidiary company, Risks Capital And Technology Foundation of India, which provides finance to bridge the shortfall in the promoter’ contribution, but they could fulfill the requirements of a great many budding entrepreneurs. As results of promoters not being able to bring in those vital initial inputs of money, many of their good projects were hanging fire. Venture capital could remedy this situation as well. A beginning was made in this direction by the setting up of venture capital divisions under the aegis of ICICI, IDBI & IFCI. Encouraged by the response to technology financing, ICICI floated a separate company —Technology Development and Information Company of India (TDICI) includes, apart from venture capital financing, technology, consultancy as well as entrepreneur escort services such as marketing, business management, vendor development etc. The successful operation of this fund will hopefully spark off some interest from the private sector, which will then consider entering this line of activity. Ultimately, it is only when venture capital financing becomes more broad-based and widespread that it will truly taking root in economy. In tune with its tradition of pioneering new ideas, ICICI deviated from the beaten path to usher in an unusual type of financial support. Addition to equity participation (up to maximum of 49 percent) undertaken by typical venture capital companies, TDICI offer the conditional loans. The entrepreneur neither pays interest on it nor does he have to repay the principal amount. If the venture capital succeeds, TDICI recoups its investment in the form of royalty on sales which ranges between two and eight percent. On the other hand, if the venture fails to take off even after five years TDICI will consider writing off the loan.

Public financing agencies :

It is to be noted that the floating venture capital companies are the financial institutions or banks (the Andhra Pradesh Industrial Development Corporation, Canara bank and others). This can be directly attributed to the Government guidelines, which restrict private sector participation in venture capital funds to a maximum of 20 percent. But if the concept is to make a mark in the economy it needs private sector initiative and not institutional or government patronage. In fact, herein lies the strategic significance of the venture capital. It paves, the way for the private sector to share the burden of industrial finance, particularly risk finance with the public sector. The activities of the venture capital fund of ANZ Grindlays bank include making equity investments in new companies, which may or may not involve any new technology or other such related risk. This activity of the direct subscriptions by financial institutions and banks has been going on for decades and cannot be termed as venture capital activity. The difference in ANZ Grindlays bank activity id one of the nomenclature and not of means of financing. Also, on the whole, venture capital is provided more in the nature of mezzanine loans than equity.

Private Agencies:

One Venture Capital fund set up the private sector in India is Credit Capital Venture Capital (India) or CVF for the short, the principal shareholders of which are Credit Capital Finance Corporation, Bank of India, Asian Development Bank, and CommonWealth Development Corporation. Another set up in the private sector jointly by the ICICI 20th Century Finance Corporation, bank of Baroda, Asian development Bank and Asian Finance and investment Corporation is the 20th Century Venture Capital Corporation Ltd. One reason why private capitalists are generally shy may be the high rate of capital gains tax applicable to the profit of Venture Capital Funds. Though the guidelines provide for a concessional rate of capital gains tax, the move can hardly be deemed as a ‘concession’ in view of the enormous risks involved in the activity.

Policy Initiatives:

The idea of providing venture capital finance (VCF) to the new entrepreneurs in India was mooted by the then finance minister in the long-term fiscal policy announced by him in 1985. A fresh reference to the

“difficulties faced by new entrepreneurs in raising equity capital”

was made by the finance minister in his 1988-89 budget speech and detailed guidelines for providing such finance by registered companies or funds were announced. In India, the government has set up a Venture Capital Funds with a contribution of Rs.10crore. The fund was brought into operation on 1st April 1986 by the IDBI. For financing this fund, a levy was imposed on all payments made by Indian industries for the acquisition of foreign technologies. This fund finance projects with minimum and maximum project costs of Rs.5lakhs and Rs.250lakhs respectively. Grindlays Bank has set up the Indian Investment Fund to Finance the start up cost of entrepreneurs. This fund was subscribed mainly by Non-resident Indians. The Government of India also announced on 1989 a National Equity Fund for financing small-scale entrepreneurs setting up units in rural areas and urban areas population of below Rs.5lakhs. Institutions like ICICI,IFCI,SBI Capital Markets Canbank Financial Services and others have also set up their own funds for providing Venture Capital Finance. However, in general, the experience is that the Indian financial institutions are yet to reorient their financing policies to meet the Venture Capital maxims. The traditional conservation of these organisations makes their approach unacceptable. They fail to recognise that normal criteria of debt-equity ratio, existence of security etc., are not the criteria for evaluating venture capital projects. The policy of Government with regard to Venture Capital Funds has changed in 1999-2000. The Government has allowed a free hand and transparency for I.T. Venture Funds Foreign Funds are allowed freely into these Funds.

Difficulties in India:

Fundamentally, there are no private pools of the capital of finance risk ventures in India. The financial institutions perforce occupy a dominant position in the provision of long-term capital to Indian industry. They and the State development agencies do provide limited amount of equity finance to assist the development of new business but there is no private, professionally managed investment capital sources. There are no private sector insurance companies or the pension funds gathering regular premium income and virtually no private banks willing to devote a small portion of their resources to the venture capital niche. It is unlikely that such enterprises will be created in the foreseeable future to mobilise private saving for investments. As an answer the situation, mutual funds and investment trusts are permitted to set up and to commit the part of their resources to the venture capital area. As a part of the broader equity investment fund, given suitable standards of the valuation for unquoted investments, it should be possible for the fund managers to commit the portion of there portfolios to venture capital situations. The participation of the private sector in venture capital funding, as it has come to be defined in the narrow Indian context, is not possible in isolation from the opportunity to develop a broadly spread investment business.

Tax Treatment:

The tax treatment of the venture capital funds in India is ungenerous and falls well short of what is required. Whereas the Mutual Funds established by the government controlled financial institutions and nationalised commercial bank suffer no tax on either income or capital gains, a venture capital fund would suffer at 20 per cent on dividend income and a similar rate on long-term capital gains. Given an adequate investment spread and tax incentives, mutual funds step into the early stage financing arena, professionally assess and the monitor investments assist the launch of new medium size businesses. SBI Mutual Fund is really undertaking investment work with its ‘brought deals’. The creation of more funds to participate in this area of the market is now clearly seen. Early stage financings could then be syndicated between number of professionally managed funds and sound, competitive situation between them might also be created. The Government has since 1995-96 been treating the venture funds like Mutual funds for tax benefits and brought them under Regulation of SEBI. The SEBI has set out the guidelines for their registration and control by itself a code of conduct for them to operate as in the case of capital market mutual funds and for their investment and operations on the fund. In the Central Budget for 2000-01 the income of the Venture Capital Fund is taxed at the rate of 20%, although the dividends declared in the hands of the investors are tax-free.

Need for Growth of Venture Capital:

There is need for encouragement of risk capital in India, as this will widen the industrial base of, high-tech industries and promote the growth of technology. The initial step might be to permit the launch of the mutual fund by all those banks authorise to conduct business in India, at the same time extending the investment range of such funds to embrace unquoted stocks. Liberating the capital market would bring greater depth to the capital market as a whole, introducing more genuine investors of substance with long time horizons, provide avenues for the institutions to realise their equity portfolios more easily (freeing funds for more new investments), and generally improve market liquidity. This would improve equity cult. So moves towards a freer and less regulated market are important in considering measures to simulate the entry of the private sector into the risk capital formation.

Latest Policy Charges:

In the year of 2000 of new millennium, the I.T. industry along-with many start up industries like Telecom, Biotech, Multimedia etc…have experienced rapid growth potential but with Scarcity of the Venture Funds. To encourage Venture Capital Funds to grow rapidly to help these industries, the Government has announced the following measures early in 2000. 1. SEBI to be the sole authority for the regulation of Venture Capitals. 2. The single window clearance facility is extended without the need for going for clearance with the government RBI and I.T. Authorities. 3. In the first Millennium Budget, 2000-2001, Venture Capital have got “on par” Status with Mutual Funds for the purpose of the tax treatment under section 10(23D) of I.T. Act. Tax exemption is granted to Venture Capitals like those of Mutual Funds, so that double taxation is avoided and tax is levied only at one level, namely at the hands of investors. 4. The IPO norms are liberalised for the Venture Capital Funds for the purpose of listing. Appraisal and finding are allowed to extent of 10% of the equity capital of a start-up company. The condition of 3 years track record of profitability is waived. Even a public issue of 10% of paid up capital is enough for the I.T companies for the purpose of listing. 5. The Government have set up a separate ministry of I.T and started an I.T Venture Fund of Rs.100crores for the financing new start up I.T projects. 6. Venture Funds were set up by ICICI, UTI, IDBI, Tatas etc.

Venture Capital Vs. Mutual Fund

In the matters of tax, venture capital funds and mutual fund are kept on par. Foreign Venture funds are given a free hand tom flow in for the investments permitted for foreign investment. During the first quarter of 2000, about $17 billon have flowed in as Venture Funds mostly invested in the technology based small companies, according to a Survey Conducted by price waterhouse coopers (PWC) Company. Among the measures to promote the capital market banks are now allowed to invest in equities and bonds on a discretionary basis and to invest in Venture Capital Funds beyond the permitted ceiling of 5% of their funds in shares and securities of the companies during 1999-2000. Funds: The norms of Venture Capital Funds are liberalized early January 2000. While earlier, a Venture Capital Funds could not acquire more than 40% of equity of a high risk business or a start up company, now there is no such ceiling and Venture Capital Funds is free to invest as it likes. However, the only restriction that remains is that the Venture Capital Funds cannot invest more than 25% of its own Fund base in any one company. Now Venture Capital Funds can hold upto even 100% of equity of a start up the company as that ceiling of 40% is now removed, but it can now hold up to 25% of its own fund in any company’s equity. Foreign Venture Capital is made eligible to participate in book building process since July 2001. There is no lock in period for the pre issue share capital of an unlisted company held by Venture Capital Funds and FVCFs. Mutual Funds are now eligible to invest in units of the Venture Capital Funds, like investments in listed and unlisted securities. There has been a considerable liberalisation in investments by Venture Capital Funds as much as investments in Venture Capital Funds.

Merchant banking

What is Merchant Banking?

Merchant banks are issue houses rendering such services to industrial projects or corporate units as floatation of new ventures and new companies, preparation, planning and execution of new projects, consultancy and advice in technical, financial, managerial and organisational fields. A number of other function such as restructuring, revaluation of assets, takeovers, acquisitions, etc, are also undertaken by them. A major function of merchant banking is the issue management. The issue can be public issue through prospectus, offer of sale, or private placements etc.

Issue Management

The issue management involves the following functions in respect of issue through prospectus: (a) Obtaining approval for the issue from the SEBI (b) Arranging underwriting for the proposed issue. (c) Drafting and finalizing of the prospectus and obtaining its clearance from the underwriters, stock exchanges, auditors, solicitors, Registrar of Companies and other necessary consents required for filing the prospectus. (d) Drafting and finalization of other documents such as application forms, stock exchanges. (e) Selection of the registrar to the issue, printing press, advertising agencies underwriters, brokers and bankers to the issue and finalisation of the fees and charges to be paid to them. (f) Arranging through the advertising agency the press, brokers and investor’s conferences. (g) Co-coordinating the printing, and advertisements relating to the issue, and work of the registrars to the issue, the receipt and processing of applications and preparation of the basis of allotment, negotiation of the same with the stock exchanges and preparation of register of allotment.

In the case of management of debentures, apart from the Managers to the issue have to do the following things:

(a) To finalize the terms of the issue which will make the debenture issue attractive; and (b) To assist in the finalisation of the relative security or mortgage documents and obtaining approval there to from the Company’s solicitors and trustees

Other Functions

Merchant banks in foreign countries undertake a larger number of activities. They operate both in the money market and capital market, undertake direct and indirect lending portfolio management for institutions, trusts, charities, etc, funds management for existing companies, underwriting for new and old companies etc. They are also active in the money market and discount market operations in undertaking bills discounting and investing the short-term funds in treasury bills, commercial bills and other money market instruments. In India, these functions are carried on by banks themselves with the result that their merchant banking divisions confine to underwriting, consultancy, new issue business, involving management of issues and related activities. The Indian merchant banking is still in its infancy and their activities are, therefore, limited to a few selected activities of new issues market at present such as project planning, financial consultancy, advice and planning and execution of these projects, involving the preparation for the public issue, observance of necessary formalities for such issued applications to SEBI, RBI and for listing on the stock exchange, collection and allotment of share application moneys, underwriting etc .s

Offer of


Usually, when the closely-held companies, whose shares are not listed on the stock exchange, approach the financial institutions for assistance for the expansion of their existing operations or diversification, the financial institutions stipulate a condition that the company should get its shares listed. Where the capital base of the company is already large and issuing further equity capital is not justified from the servicing angle, the promoters can offer such part of their exist holding for sale through a letter of offer to the members of the public as Is necessary to get the equity shares of the company listed on the stock exchange. Although the letter of offer is not governed by the provisions of the Companies Act, 1956, in practice, the letter of offer contains all the similar provisions which are to be found in the prospectus. The offer for sale must give all material particulars relating to the company as if it were a prospectus issued under the Companies Act. In particular, it should include information regarding the shares on offer and the terms of sale, its capital structure, and capitalisation of reserves, any revaluation of assets or schemes of arrangements or reorganizations, last five years’ profit and loss account summarised accordance with the prescribed listing requirements. Any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company and all enactments and rules of law as to the contents of prospectuses and as to the liabilities in respect of statement’s or omissions from prospectuses otherwise relating to the prospectus, shall apply as if the shares or debentures had been offered to the public for subscription and as if the persons accepting the offer in respects of any shares or debentures were subscribers for those shares or debentures. The said letter of offer will have to be signed by the persons offering the shares or debentures for sale in the same manner as the directors of the company sign the prospectus in terms of Section 60 of the Companies Act. The offers collectively and individually accept full responsibility for the accuracy of the information given in this offer of sale and confirm that to the best of their knowledge and belief there are no other facts, the commission of which makes any statement in the offer for sale misleading, and they further confirm that they have made all reasonable inquiries to ascertain such facts. The offers have to certify that neither the stock exchange to which an application for official quotation is made nor the Central Government or SEBI has any responsibility for the financial soundness of this offer, or for the price at which the offer of sale is made, or for the statements made or opinions expressed in the offer of sale. The initial issues should normally be at par and if further issues are made at a premium, this has to be justified by acceptable norms by the merchant bankers.

Private Placement

When the financial institutions directly subscribes to the equity/preference shares and/or debentures issued by the company, the company is said to have privately placed these securities with the financial institutions. This does not require either a prospectus or letter of offer. The terms and conditions subject to which the financial institutions agree to subscribe to the privately placed shares or debentures are usually incorporated in the debenture subscription agreement or the investment agreement entered into between the financial institutions and the company. The company could, if it so desires, approach, in the place of financial institutions, a well-identifiable body of persons like merchant banks for private placement. The provision of the Act are to be interpreted strictly and therefore, if the company sends the offer to Mr. X and the offer is accepted by Mrs.X to whom the allotment is finally made, it could deem to be the public offer necessitating compliance of requirements of the prospectus. This exercise is, therefore, to be undertaken with great caution to see that the final transfer takes place only to those for whom the original offer was made. In practice, till recently the companies hardly took any recourse to this mode of private placement of their securities due to these restrictions. The company has to agree upon the list of persons to whom the offer is to be sent much in advance and its is thereafter necessary that the company should send offers to the same persons as per the list approved by the Company with a clear-cut instructions to the officers that the securities offered are strictly to be subscribed for by them and them alone and the officers are not supposed to pass on the offer of the company to someone else. He would also ensure that the company would receive subscription only from those persons to whom the original offers had been sent by the company and finally, the company would allot securities to the same persons.

Services of Merchant Banks

Merchant banking is normally considered to be related only to the services associated with public issue management but they also offer domestic project finance syndication. Large merchant banks in the country offer a wide range of services. Merchant banks offer generally the following services. (a)

Pre-investment studies for investors:

These are in the nature of financial feasibility explorations in selected areas of interest of the client. They include such studies for foreign companies wishing to participate in joint adventures in India, and often involve a package covering advice on the nature of participation and Government regulatory factors. (b)

Project finance:

Once the decision embark on a particular project/expansion/modernisation scheme has been taken, assistance in working out a comprehension package for the project funding and pattern of financing is available from the merchant banks. They work in close liaison with the client, his technical consultants, and the funding institutions, prepare and submit complete e financial dossiers, and arrange for the various sources of finance. Assistance in legal documentation for the finance arranged is also provided. (c)

Working capital:

Finance for working capital, particularly for new ventures, often needs to be syndicated on behalf of the promoters, and merchant banks assist in this as well. For existing companies, non/traditional sources such as through the issue of debentures for this purpose, and others have been successfully tapped by merchant bankers. (d)

Foreign currency finance:

Of late, India has become increasingly active in the international money markets, and this trend is likely to continue. For import of capital goods and services from overseas, the arrangement of various kinds of export credits from different countries is also required. In addition to this wide range of services, some of the larger banks are also involved in areas such as the arrangement of lease finance, and assistance in acquisitions and mergers etc.

Why Merchant Banks?

The following are some of the reasons why specialist merchant banks have a crucial role to play in India: 1. Growing industrialisation and increase of technologically advanced industries. 2. Need for encouragement of small and medium industrialists, who require specialist services. 3. Growing complexity in rules and procedures of the Government. 4. Need to develop backward areas and states which require different criteria. 5. Exploring the possibility of joint ventures abroad and foreign markets. 6. Promoting the role of New Issue Market in mobilising savings from of public.


With increasing industrialisation of the country and the growing emphasis in the Five Year Plans on industrialisation, merchant banking in India has a very extensive role to play. The National & Gsrindlays Bank was the first to set up merchant banking division in India followed by the State Bank of India and other banks.

Functions of the merchant banking divisions are as follows:

1 advice and liaison obtaining consent of the Central and Stat e Government, for the project if necessary; 2. Preparation of economic, technical and financial feasibility reports; 3. Initial project preparation, pre-investment survey, and market studies; 4. Help in raising rupee resources from financial institutions and commercial banks; 5. Underwriting and also for subscription, if necessary, to the new issues or syndication of loans, etc; 6. Assistance in raising foreign exchange resources so as to enable the industrial concerns to import machinery and technical know-how and secure foreign collaboration. 7. Advice on setting up turnkey project s in foreign countries and locating foreign markets; 8. Help in financial management and in designing proper capital structure and debt-equity ratio, etc, for the company. 9. Advice on restructuring of capital, amalgamation, mergers, takeovers, etc; 10. Management of investment trust, charitable trusts etc; 11. Management aid and entrepreneurial aid (management audit providing designs of the complete system, operational research and management consultancy); and 12. Recruitment (selection of technical and managerial personnel), etc.

Role of Merchant Banks

To promote the new issue market there is need for a qualitative improvement in the offer of new issues both in terms of time taken and the cost of floatation. The time taken for organising a new issue is between 12 to 18 months and the cost of raising new capital varied from 3% to 8% and sometimes even 20%. This has been brought down relatively by specialised merchant banking institutions by catering to the requirements of both large and small industrial units. Cost of floatation of equity and preference capital is higher for new companies than for existing companies, indicating thereby the difficulties experienced by new companies in making a new issue. Merchant banks help saving in the cost of new companies and of small companies. The new issue market has not succeeded fully in mobilising savings partly due to the preferences of the public to company deposits and partly due to low yields on equities as compared to those on fixed interest securities. There has been a decline in the proportion of share capital in the total capital employed due to the steep rise in the cost of new issues. There are certain minimum costs to be incurred in respect of fees to brokers, promoters’ expenses, underwriting commission etc, irrespective of the size of the project. While bigger companies are able to manage this, small units find it extremely difficult to meet this minimum cost with uncertain prospects of their own internal resources in order to avoid the high cost of making public issues.


The main work of merchant banks relates to underwriting of new issues and rising of new capital for the corporate sector. Of the amount underwritten, some part devolves on the underwriters, which varies depending on the state of the capital market, and the intrinsic worth of the project. The SEBI has made underwriting Compulsory for all issues offered to Public first but later it was made optional. SEBI made it necessary for merchant bank to undertake or make a firm commitment for 5% of issued amount to the public.

Type of Expertise Required

The type of staff required for a merchant bank will depend upon its functions which are themselves flexible. The merchant bank should have an organisation large enough to deal with a number of applications at a time. The issue house which acts as the merchant banker normally pays visits to the company’s plant, warehouses, and other physical assets and if a company is making its first issue, it might secure independent reports from Chartered Accountants, industrial consultants, technical experts etc. The issue house, which is a merchant bank also, requires, plant, management, labour, competitors, profit margins, taxations, etc. They have to keep ready all the information needed in the form of dossiers with respect to the affairs of the company generally enquired into by the investing public, lending financial institutions and the government. Secondly, a merchant bank has to suggest an appropriate time of issue and provisional terms. Once these terms are settled the share certificates, prospectus and other documents are drafted by the merchant bank with the assistance of lawyers, accountants and others. They have to satisfy the Companies Act and other SS requirements of law. Subsequently, the merchant bank may have to get ready the application to the SEBI for the public issues. This requires familiarity with the regulations under the Companies Act and the SEBI guidelines and the procedures to be followed and the authorities to be approached. The provisions under the MRTP Act regulating monopoly practices and other activities of big industrial houses should also be looked into. Thirdly, they may have to make an application to the appropriate stock exchange for quotation and satisfy the stock exchange authorities with respect to the terms of issue and prospectus.Listing requirements are to be observed and familiarity with the stock exchange rules and bye-laws as well as the provisions of the Securities Contracts Regulations) Act would be essential. They may have to advise on the desirability or otherwise of listing on the stock exchange as well as help the companies go through the process of getting their shares listed. Advertisements containing all the information legally required to be given in the prospectus must be published in all the leading proposed date of opening and closing, a summary of the company’s business history, balance sheet, etc, to which a reference was made earlier. Once the issue made, the work of the merchant bank relates to arranging for the allotment of shares in consultation with the company and the stock exchange authorities with the help of Registrars.


(a) Authorisation

Any person or body proposing to engage in the business of Merchant Banking would need authorisation by SEBI in the prescribed format. This will apply to those presently engaged in the Merchant Banking activity, including as Manager, Consultants or Advisers to issues.

(b) Authorised Activity

(i) Issue Management (ii) Corporates Advisory services relating to the issue (iii) Underwriting (iv) Portfolio Management Services (v) Managers, Consultants or Advisers to the issue

(c) Authorisation Criteria

All Merchant Bankers are expected to perform with high standards of integrity and fairness in all their dealings. A code of conduct for the Merchant Bankers is prescribed by SEBI which will take into account the following: (i) Professional Competence (ii) Personnel, their adequacy and quality and other infrastructure (iii) Capital Adequacy (iv) Past track record, experience, general reputation and fairness in all their transactions.

(d) Terms of Authorisation

(i) All Merchant bankers shall have a minimum net worth of Rs.5 crore. (ii) The Authorisation will be for an initial period of 3 years. (iii) All issues should be managed by at least one authorised to Merchant banker functioning as the Lead Manager or sole Manager.

Issue Amount

No. of Lead


Up to Rs. 50crores Not more than 2 Over Rs. 50 crores not more Not more than 3 Than Rs.100 crores Over Rs.100 crores Not more than 4 (iv) The Merchant Bankers shall exercise due diligences independently verifying the contents of the prospectus. The Merchant Bankers of the issues shall certify to this effect to SEBI. (v) In respect of issues managed by the Merchant Bankers, they would be required to accept a minimum 5% underwriting obligation in the issue subject to a ceiling of Rs. 25 lakh. (vi) Lead managers would be responsible for ensuring timely refunds and allotment of securities to the investor. (vii) The merchant banker’s involvement will continue till the complete on of essential follow-up steps including listing of the shares and dispatch of certificates and refund. (viii) The Merchant Banker shall make available to SEBI such information, returns and reports as may be called for. (ix) Merchant Bankers shall adhere to the code of conduct which shall prepared by SEBI. (x) Merchant Bankers to ensure that Publicity / Advertisement material accompanying the application form to the issue meets the requirement of GOI/SEBI. (xi) SEBI shall be informed well before the opening of the issue the Inter allocation of activities/sub-activities, among lead managers to the issue. (xii) Merchant Bankers performing or planning to perform portfolio management services shall furnish the details in the prescribed format.

(e) Classification of merchant Bankers

———————————————————————————————————————– Category Requirement Authorised to Act as (1) (2) (3) ———————————————————————————————————————– Category 1 Minimum Net worth Rs.50 crore Lead Manager/co.manager Adviser/consultant to an issue, Portfolio manager and underwriter to an issue is Mandatory required. ———————————————————————————————————————–

(f) Grading of Prospectus

Grading of Prospectus will be done by SEBI using the following parameters: (i) Objective description of the project, its status and implementation. (ii) Track record of the promoters and their competence. (iii) Disclosure about Demand – Supply position, Market and Marketing arrangements, Raw materials availability and infrastructural facility. (iv) Disclosure of Risk factors. (v) Objective assessment of Business prospects and profitability.

If highlights are provided the following deficiencies will attract negative points:

1. Absence of Risk Factor 2. Absence of Listing 3. Extraneous contents in prospectus

The Maximum grading points of prospectus will be 10



More than or Equal to 8 + A More than or equal to 6 but less than 8 A More than or equal to 4 but less than 6 B Less than 4 C

(g) Penalty Point System

SEBI has introduced penalty point system for Merchant Bankers who fail to comply with the various provisions. The areas of non-compliance/defaults have been categorised into following four categories. The activities are classified within these four categories:

Type Nature Penalty Points

———————————————————————————————————————– I General Defaults 1 II Minor Defaults 2 III Major Defaults 3 IV Serious Defaults 4



The term “Investor Protection” is a wide term encompassing various measures designed to protect the investors from malpractices of companies, brokers, merchant bankers issue managers, Registrars of new issues, etc. “Investors Beware” should be the watchword of all programmes for mobilisation of savings for investment. As all investment has some risk element, this risk factor should be borne in mind by the investors and they should take all precautions to protect their interests in the first place. If caution is thrown to the winds and they invest in any venture without a proper assessment of the risk, they have only to blame themselves. But if there are malpractices by companies, brokers, etc, they have every reason to complain. Such grievances have been increasing in number in more recent years.

The complaints of investors come from two major sources:

(i) Against member brokers of Stock Exchanges; (ii) Against companies listed for trading on the Stock Exchanges. Besides, there can be complaints against sub-brokers, agents, merchant bankers, issue managers, etc, which cannot be entertained by the stock exchanges as per their rules. However, complaints against registered sub-brokers can be entertained.

Complaints against Members

Investors have complaints against brokers regarding the price, quantity etc. at which transactions are put through, defective delivery or delayed delivery, delayed payment or non-payments etc, non-settlement of vyaj badla ducs, non-payment of agreed brokerage to authorised assistants, etc. In the event of default of a member broker, the dues of clients are also to be looked into. There is a Grievance Cell in many Stock Exchanges which attends to investor complaints. Of the total, nearly 95% are against companies and they are more difficult to settle, as many companies do not attend to the complaints promptly despite reminders and warnings by the stock exchange, in view of the fact that penal powers of the Exchange are limited SEBI has been given these penal powers in respect of listed companies by an amendment to the SEBI Act in 1995 and many other subsequent a amendments including the latest in 2002.

The grievance procedure in respect of complaints against members is as follows:

(a) Joint meeting of member’s vis-à-vis the clients for an amicable settlement. (b) Arbitration proceedings by the committee under the bye-laws. (c) Special committee appointed by the Executive Director for settlement (d) Disciplinary proceedings including warnings, fines penalties, etc. particularly in cases of fraud, cheating, etc. by the members.

Grievances Cell

Complaints against members were in the nature of non-payment of sale proceeds, non-settlement of accounts etc. Of the total complaints against members, about 85% are settled during the year, itself.

Complaints against Companies

The complaints against companies are in the nature of non-receipt of allotment Letters, refund orders, non receipt of dividends, interest etc., delay in transfer of shares and in splitting and consolidation. The clearance of these complaints is also attended to by the Cell by writing to the companies, follow-up telexes, etc. and finally by warning to delist the companies concerned. But the clearance of these complaints is slow due to the non-compliance or slow compliance by the companies to the References made by the Cell. The powers of the Stock Exchange are limited to warnings and delisting of shares and as such compliance by the companies was poor.

Customers’ Protection Fund

The Customers’ Protection Fund is constituted by all Stock Exchange to safeguard the interests of the investor clients from defaults of the stock brokers. The Fund is financed by way of a levy on the turnover of members and from out of the listing fees, earmarked by the Exchanges.

Investors Beware

Investors in stock and capital market need a word of caution. Firstly, these investments are more risky, returns are uncertain and share values are subjected to wide fluctuations. Secondly, such investments require an art and expertise to pick up the right stocks, failing which the investors would burn their fingers. Thirdly, the players in the market namely, Brokers and issuers of securities, companies’ etc are not rated high for their honesty with the result that the investor’s complaints against stock brokers and companies have been increasing over the years.

Specific Goals

The investor should be clear in the objectives of the income, capital appreciation, short term gains or long term gains etc. He should have made already enough investments in housing and for a regular income to meet his minimum needs and comforts of life. Even if all the stock market investments are wiped out due to a market crash, the investor should not be pauper on the streets. Besides, if the investor spends sleepless nights on the fall of share prices, he cannot be a good stock market investor.

Pre-requisites of Investor

The investor should have abundant common sense and a strong heart to withstand the vicissitudes of fortune. He need not be a holder of high academic degrees like an MBA from Harvard or a finance graduation from the Wharton School. Nor does he need to have hereditary characteristics or family tradition of investment. The only requirement he should have is abundant logic and common sense and strong nerves and develops the art of investment on a scientific basis.

Preparing to Invest

Investors desiring to invest in stocks require a lot of preparation. The weak hearted and risk -averter should first make an entry by buying only debentures, particularly convertible debentures of good companies, or subscribe to new issues of promising and well-established companies. After sufficient study and preparation, the investor should act like stag-pickers in the market, picking up scripts on a selective basis. That means selected companies from promising and growing industries should be picked up after collection of all relevant information and data on the companies and scientific analysis of their fundamentals. The undervalued scripts should be purchased at the right time with the help of technical analysis. Rumors and advices: of so-called consultants have to be carefully scrutinized. As the market investment is both a science and an art, it requires both expertise and intuition. There is need for prior preparation and a lot of home works before investments are undertaken. A high degree of caution and planning is necessary but the scientific basis and knowledge are to be acquired by a proper study.

Balance Sheet Study

Investors entering the stock market should also get into the habit of detailed and careful study of the balance sheets of companies in which they wish to invest. Similarly, they should examine carefully the detailed prospectus before subscribing to the new issues of companies. The habit of relying on rumours, or advice of brokers or friends should be replaced by habit of self-study of balance sheets and prospectus of the companies.

Choice of a Broker

Investors should as far as possible deal only with registered members of recognised stocks exchanges. In place where no stock exchanges are; they may deal with those sub-brokers who have connections with registered brokers. An honest and dependable broker is too chosen through proper introduction and orders should be placed with him in proper manner with limits on prices at which sales or purchases can be made. As and when a transaction is completed, he should insist on a contract note in due time.

Protection in the New Issues Market

The main sources of information on which investors depend in the new issues market is the prospectus, which should contain correct statements of fats. Any false statements, fraud, etc. are punishable under the Companies Act. Under Section56 of the Companies Act, the Directors are subject to civil liability for any misstatement facts or untrue statements. Under Section 63 and 68 of the companies Act, the directors are also liable criminally for any fraud of false statement in the prospectus. Companies’ liability for misstatements arises from statements and statements, which are material to the investors and the particulars on which investors depend to make investments. The directors or promoters of the company are thus subject to both criminal and civil liability under the Act for nay misstatements in the prospectus. Even so, the small investors cannot afford to go to court and, should therefore, carefully read and examine the prospectus for the viability of the project and marketability of the product and for integrity and dependability of the promoters. The investors have also a responsibility to assess the prospectus and risk involved in the project before making any investment.

Protection for Fixed Deposits

Section 58A of Companies Act, deals with the subject of Fixed Deposits. There are some rules, which apply to non-banking companies, private limited companies, who wish to raise deposits from the public. No deposits can be invited from investors or the public unless the companies follow the rules and guidelines made by the Department of company Affairs in consultation with the RBI. Interest rates, maturity period of deposits, and the amounts permissible to be raised by the companies are all given in the form of guidelines by the Department of Company Affairs. The companies have to follow these guidelines while accepting deposits from the public. Renewal and repayments are also regulated by the Companies Act and the rules framed by the Department of Company Affairs. When the company fails to repay the deposit, the depositor can complain to the Company Law Board (CLB) in the specified form duly filled in together with the fees for non-payment of the interest or non-payment of deposits. The order of the CLB is final and binding on the company and the company has to comply with it. Any non-law would invite penalty of imprisonment and fine. This provision however, does not apply to sick companies. All NBFCs been registered and licensed by the RBI since July 1997 and guidelines for them have been issued by the RBI early in 1998. The raising of deposits by them is subject to credit rating and a host of other requirements.

Guidelines to Investors
  1. Deal with a registered member of the stock exchange. If you are dealing with a sub-broker, make sure that all bills and contracts are made in the name of a registered broker and sub-broker is also registered with the SEBI.
  2. Insist that all your deals are done in the trading ring or through the exchange.

3. Give specific orders to buy or sell within the fixed price limits and/or time periods within which orders have be executed. 4. Insist on contacts notes to be passed on to you on the dates. When the orders are executed. 5. Make sure that your deal is registered with the stock exchange. In the case of a dispute, this will help trace the details of the deal easily. 6. Collect a settlement table from the stock exchange mentioning the pay-in and payout days. Each stock exchange has its one trading periods, which are called settlements. All transactions done within this period are settled at end of it. All payments for the shares bought and share deliveries take place on the pay-in day. An awareness of pay-in and payout days is use full when a broker tries to make excuses. 7. Keep separate records of dealings in specified shares (Group A) and non-specified shares (Group B1 and B2). The settlements for each is on different days with the present compulsory rolling settlements system, deliveries and payments are made quicker with in three to five days. 8. Execute periodic settlements of dues and delivery of shares to avoid accumulation of transactions. 9. Insist on delivery. If the company returns your papers and shares with objections, contact your broker immediately. 10. Ensure that shares bought are transferred in your name before the company’s book closure date. This is necessary to make sure that you receive benefits like dividend, interest and bonus shares. All companies have a book closure date on which the list of shareholders in the company is finalised. 11. Complain if broker does not deliver the shares bought in your name. Proceed to contact another broker with the bill/ contact given to you by the earlier broker and the latter will purchase the shares on your behalf. In such an event, the first broker will have to pay the difference in price. 12. Do not sell shares that are transferred in your name after the book closure, as there are not valid in the market. 13. Do not sell/deal in shares where even one of the holders has passed away. In cases where the holder has died, a succession certificate is necessary. In cases where one of the joint holders passed away, the surviving holder should send the shares along with the death certificate to the company. Only after the name of the deceased has been deleted from the shares, can they be transferred. 14. Do not expect the money shares to come immediately. It will take at least 7 to 15 days from the date of transaction, which is now made quicker in, demat form of trading. 15. Unless you have special arrangements with the broker, do not expect the adjustments of purchases and sales against one another. One pays first and receives later. 16. Do not take delays or harassment lying down. You have to complain to the Grievance Cell of the stock exchanges or Securities and Exchanges Broad of the India (SEBI) in case of delay or harassment.


A list of all those services and facilities that are provided by a portfolio manager to its clients, relating to the management and administration of portfolio of securities or the funds of clients, is referred to as ‘portfolio management services’. The term ‘portfolio’ means the total holdings of securities belonging to any person.

Portfolio Manager:

According to SEBI, ‘Portfolio Manager’ means any person who pursuant to contract or arrangements with a clients, advices or directs or undertakes on behalf of the clients the management or administration of a portfolio of securities or the funds of client, as the case may be

Discretionary Portfolio Manager:

According to SEBI, ‘discretionary portfolio manager’ means a portfolio manager who exercises or may, under a contract relating to portfolio management, exercises any degree of discretion as to the investments or management of the portfolio of securities or the funds of the clients, as the case may be. FUNCTIONS The objective of portfolio management is to develop a portfolio that has maximum return at whatever level of risk the investor deems appropriate.

Risk Diversification

An essential function of portfolio management is spread risk akin to investment of assets. Diversification could take place across different securities and across different industries. Diversification achieved in different industries is an effective way of diversifying the risk in an investment. Simple diversification reduces risk within categories of stocks that all have the same quality rating. The portfolio managers could as well adopt the ‘Markotiwz model’ whereby portfolio risk are sought to be reduced through combining assets, which are less than perfectly positively correlated.

Efficient Portfolio:

A portfolio manager aims at building ‘dominant investment’ called ‘efficient portfolio’. An efficient portfolio consists of combination of assets that maximizes return and maximizes the risk level of expected return. The objective of portfolio management is to analyze different individual assets and delineate efficient portfolios. A group of portfolio of efficient portfolios is called ‘efficient set of portfolios’. The efficient set of portfolio comprises efficient frontier.

Asset allocation

An important function of portfolio management is asset allocation. It deals with attaining proportion of investments from categories. Portfolio managers basically aim at stock-bond mix. For this purpose equally weighted categories of assets are used.

Beta Estimation

Another important function of a portfolio manger is to make an estimate of beta coefficient. It measures and ranks the systematic risk of different assets. Beta coefficient is an index of the systematic risk. This is useful in making ultimate selection of securities for investment by portfolio manager.

Rebalancing Portfolios:

Rebalancing of portfolio involves the process of periodically adjusting the portfolios to maintain the original conditions of portfolio. The adjustments may be made either by way of ‘constant proportion portfolio’ or by way of ‘constant beta portfolio’. In constant proportion portfolio, adjustments are made in such a way as to maintain the relative weighting in portfolio components according to the change in prices. Under the constant beta portfolio, adjustments are made to accommodate the values of component betas in the portfolio.


A Portfolio manager may adopt any of the following strategies as part of an efficient management:

Buy and Hold Strategy

Under the ‘buy and hold’ strategy, the portfolio manager builds a portfolio of stock, which is not disturbed at all for a long period of time. This practice is common in case of perpetual securities such as common stock.


Another strategy employed by portfolio managers is ‘ indexing’. Indexing involves an attempt to replicate the investment characteristics of a popular measure of the bond market. Securities that are held in best-known bond indexes are basically high-grade issues.

Laddered Portfolio

Under the laddered portfolio, bonds are selected in such a way that their maturities are spread uniformly over a long period of time. This way a portfolio manager aims at distributing the funds throughout the yield curve.

Barbell Portfolio

Under this portfolio strategy, less investment of funds is made in middle maturities.


Following are steps involved in the registration of portfolio managers:

Application for Grant of Certificate

An application by portfolio manager for grant of a certificate shall be made to the Board in ‘Form A’. Any application is made by portfolio manager prior to coming into force of these regulations containing such particulars or as near thereto as mentioned in the Form A shall be treated as an application made in pursuance of sub-regulation (1) and dealt with accordingly.

Conformance to Requirements

Any application, which is not complete in all respects and does not conform to the instructions specified in the form, shall be rejected by the Board. Before rejecting any such application, the applicant shall be given an opportunity to remove within the time specified such objectives as may be indicated by the Board.

Furnishing of Further Information, ETC.

The board may require the applicant to furnish further information or clarification regarding matters relevant to his activity of a portfolio manager for the purpose of disposal of application. The applicant or its principal officer shall, if so required, appear before the Board for personal representation.

Consideration of Application

For the consideration the grant of certificate of registration to the applicant, the Board takes into account all matters, which it deems relevant to activities relating to the activities to portfolio management. The Board considers the following in this regard:

  1. Whether the applicant is abody corporate.
  2. Whether the applicant has thenecessary infrastructurelike adequate office space, equipments and the manpower to effectively discharge the activities of a portfolio manager.
  3. Whether the principal officer of the applicant has theprofessional qualificationsin finance, law, accountancy or business management from an institution recognized by the Government.
  4. Whether the applicant has in itsemployment a minimum of two personswho, between them, have at least five years of experience as portfolio manager or stock broker or investment manager or in the areas related to fund management.
  5. Whether any previous application for grant of certificate made by any person directly or indirectly connected with theapplicant has been rejectedby the Board.
  6. Whether anydisciplinary actionhas been taken by the Board against a person directly or indirectly connected with the applicant has been under the Act or the Rules or the Regulations made thereunder.
  7. Whether the applicant fulfills theCapital adequacy requirementsas specified in regulation 7
  8. Whether the applicant, its director, principal officer or the employee as specified in clause (d) isinvolved in any litigationconnected with securities markets which has an adverse bearing on the business of the applicant.
  9. Whether the applicant, its director, principal officer or the employee as specified in clause (d) has at any time beenconvicted for any offenceinvolving moral turpitude or has been found guilty of any economic offence.
  10. Whether the applicant isa fit and proper person.

11.Whether the granting of certificate to the applicantis in the interests of investors.

Capital Adequacy Requirement

The capital adequacy requirement shall not be less than the net worth of fifty lakhs rupees. For the purpose of this regulation, “net worth” means the “aggregate value of paid up equity capital value of paid up equity capital plus free reserves reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off.”

Procedure for Registration

The Broad on being satisfied that the applicant and on receipts of the payment of fees as specified in Schedule II, then grants a certificate in ‘Form B’.

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