1. Development Banking – The Concept
2. An Overview of International
Financial Corporation (IFC)
3. Overview of the Financial Markets
4. Sources of Funding by IFC
6. Project Appraisal
7. Financial restructuring /
rescheduling
8. Loan/Asset Classification system
9. Credit Rating Agencies
Contacts
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Development Banking –The Concept
• The concept of development banking
is that credit is used purposefully
with an aim to make available more
opportunities to undeveloped and
under developed countries and
economies.
• It is a systematic and planned
approach to achieve certain goals by
providing need based credit.
• Development banking uses credit as a
lever for development.
• They finance private sector projects
in developing countries.
Development banking Vs Traditional Banking
ReasonableHighInterest rate6.
Flexible & liberalRigid and strictAttitude7.
Less importantNecessarySecurity5.
All sectors of economyTrade & CommerceFinance for4.
Not profit aloneProfit earningAimed at3.
National & SocialCommercialObjectives2.
Economically weaker
Sections
Economically affluent
Sections of society
Beneficiaries1.
Development bankingTraditional BankingParameterS.No
International Finance Corporation:
Its Mission and Challenges
World Bank Group IFC Mission
“Promoting sustainable private
sector investment in developing
countries, helping to reduce poverty
and improve people’s lives.
• IFC is a member of the World Bank
Group
• IFC’s shareholders: 175 Countries
Other Countries
54.2%
United States
24.1%
Japan 6.0%
Germany 5.5%
France 5.1%
United Kingdom 5.1%
Introducing IFC
Brief Facts
• First and single largest multilateral source of
financing for private sector projects in developing
world
• Term “emerging markets” coined by IFC
• Created Emerging Markets Data Base (sold to S&P)
• IFC bonds rated AAA
• The Corporation has made profit every years since
its inception in 1956
Staff Profile
• Over 2,300 staff worldwide
• About 40% of IFC staff are stationed in over 80
IFC field offices.
• Staff from 125 countries
• Specialized skills:
– Investment Operations (Investment Officers
& Analysts)
– Financial Advisory
– Environmental & Social
– Information Technology
• Participates only in private sector
ventures
• Shares same risks as other investors
• Invests in equity
• Has market pricing policies
• Does not accept government guarantees
• Is profit oriented
IFC’s Beneficial Role
• IFC presence reassures
head2right Foreign investors
head2right Local partners
head2right Governments
• Reputation and standing to help negotiations
• Measure of political risk cover
• Catalyst for other investors and lenders
Services Offered
by IFC
• Financial products: loans, equity, quasi-equity,
guarantees, risk management products; includes
transactions in many local currencies
• Resource mobilization: loan participations and
structured finance
• Technical assistance and advisory services: on
environmental/social performance, links with
small businesses, corporate governance,
capacity building, investment climate—many
other issues
How does IFC make money?
• Interest Income
– Fixed
– Floating (PLR, LIBOR)
– Bridge Loans
• Fees
– Processing Fee
– Appraisal Fee
• Guarantees
• Syndication
• Listing of Equity Shares
• Huge lending capability
• Huge visibility
• Door opener for other institutions
Why does a promoter go to IFC
• Application for IFC Financing
• Project Appraisal
• Public Notification
• Board Review and Approval
• Resource Mobilization
• Legal Commitment
• Disbursement of Funds
• Project Supervision
• Closing
IFC Project Life Cycle
Project Cycle and Timing
Internal to IFC
Supervision/Evaluation
As Seen by Client
Management Approval
Board Approval
Initial Discussions
Mandate Letter
Appraisal
Financing Negotiations
Info. Memo and Syndication
Legal Documentation
Disbursement
Initial Review
& Authorization
to Appraise
• Land and Building
• Plant and Machinery
• Factory buildings
• Escalations and contingencies
• Other Fixed assets
• Technical know-how fees
• Interest during construction
• Preliminary and pre-operative
expenses
• Margin money for working capital
Project Financing -Cost of Project
•Basis of selection:
– Debt Equity Gearing
– Owned Funds
– Cost of Capital
– Availability of finance from various
sources
At a high level, there are only two
ways of arranging capital
– Own funds
– Others funds
Project Financing –Means of Finance
Types of Assistance by IFC
•Intermediary Services
•Risk Management Products
•Local Currency Financing
•Municipal Finance
•Trade Finance
•Loans for IFC's Account
•Syndicated Loans
•Equity Finance
•Quasi-Equity Finance
•Equity & Debt Funds
•Structured Finance Fundamental Concepts in Equity :
The owned capital of a company is represented by shares . Each
share represents a unit of measurement of the capital and
created proportionate ownership in the capital of the
company to the extent of its value.
A company can issue only as much shares as it has been
authorized by its Memorandum of Association (its charter
document ). Such capital is known as the authorized capital.
The actual amount of shares at their face that have been
issued to investors out of the authorized capital is known as
the issued capital.
The actual amount paid up by the investors is called the
paid-up capital.
Few Concepts in Equity
• At Par
• At Premium
• At Discount
• Dividend
• Capital Gains
• Directors
• Listing / Trading
Underwriting is a fund-based service , which
consists of taking a contingent obligation to
subscribe to an agreed number of securities
in an issue , if such securities are not
subscribed by the intended investors. If the
issue is fully subscribed by the investors,
then the underwriter has no fund obligation
to the issue , but collects the underwriting
fee. However if the investors do not
subscribe to the issue fully , the obligation
devolves on the underwriter to the extent of
the unsubscribed portion of the issue.
Underwriting
Equity / Capital
• Equity Capital :
– Promoters Own Capital Vs. Others Capital
– Characteristics of Equity
• High Risk – High Reward
• No assurance to capital
• Can come from multiple sources
• Can be listed on the Stock market
• Income from both dividend and capital gains
• Man’s Best Discovery to date
• Preference Capital
– Preference in relation to equity
– Still Risky
– Convertible Vs. Non-convertible
– Dividend at a fixed rate
IFC Equity Investments
• Equity investments based on anticipated
return
• IFC not normally the largest shareholder
(not more than 35 percent)
• Passive investor
• Often considered “local” shareholder
• Long-term investor of 8 to 15 years
• Public listing the preferred exit
mechanism
IFC Quasi Equity Financing
• Convertible Preference Shares
• Convertible Debentures
• Conversion is only an Option
Venture Capital
• Venture capitalist provides long-term financial assistance for
high risk ventures promoted by inexperienced entrepreneurs
who do not have sufficient capital to fund the project but has
a high profit viability.
• Venture capital funds provide services right from conception
of an idea by entrepreneur till project completion. A venture
capitalist normally exits after 4-5 years.
• Modes of Venture Finance :
1. Equity participation
2. Conditional loans where repayment is linked to the venture’s
sale turnover in the form of royalty.
3. Participation debentures. (Include the bank’s name along with
the venture’s name while issuing debenture)
Fund Based
• Debentures
• Term Loans
• Syndications
• Leasing
• Margin money for Working Capital
Non Fund Based
• Credit Guarantees
• Risk Management products
These are the more important
forms of loans
Types of Loans
Debentures
A ‘debenture’ is a corporate instrument that
evidences the company’s debt obligation
towards the person whose name is
mentioned on the debenture certificate.
• Interest is called coupon
• Can be traded on stock exchanges
• Carries a fixed rate of interest
• Secured by assets of the project
• Convertible Vs. Non-convertible
• Involves few payments
• Not a very popular instrument in India
• Also generally referred to as bonds
• Quasi Equity
10,000 6% Convertible Debentures
of Rs.100/- each ranking pari-
passu Series VI ranking pari-passu
with 5,000 5% Convertible
debentures of Rs.10/- each
Debentures
Term Loans -‘A’Loans in IFC
Term Loans :
• A Term Loan is a loan to a business
unit to meet cost of the project,
including for expansion,
development and/or restructuring.
• Loans from IFC are typically Long
Term.
• Borrowers are required to submit
periodic financial statements, and
meet other conditions, such as
implementing a proper review
mechanism, Quality control,
Security measures, and insurance
on the collateral etc
• Local Currency Loans
• Foreign currency loans –
• Carry a specified rate of interest
• Fixed and floating rates of
interest
• Involve continuous payment – 7-
12 years of payment
• Based on the Projected Cash Flow
• Secured by assets of project
• Personal guarantees of promoters
• Regular audit of the project
Term loans
• Buyer’s Credit:
– Lending institution in the
exporter country will provide
the credit to buyer
• Suppliers Credit
– Lending institution in the
exporter country will provide
the credit to supplier
• Fixed Rate Loans
Types of Foreign Currency Loans
• Forwards – cover your
future exposure
• Options – Call and Put
• Swaps – Fixed and floating
interest Rate
Forwards
An insurance by a risk averse to a risk taker for a
fees
These are all together called Derivative instruments Loan Sanction Terms
Every Loan / credit comes with a set of
conditions.
Commitment (Limit/Sanctioned) is the eligible
sanctioned loan limit for the borrower . This
is the maximum permissible outstanding in
the account at any point of time.
Disbursement:- Amounts actually funded
Interest Rate:-
Repayment Period
Management
Supervision / Status Reports
• Fixed Interest : The rate of interest payable by the
borrower will remain the same throughout the
tenure of the loan .By locking the interest rate the
borrower is protecting himself from the adverse
impact of any upward movement of interest .
• Floating rate of interest : The rate of interest
varies over the period of the loan & is linked to
“benchmark rate” also called LIBOR/ PLR (Prime
Lending Rate ) with reference to which the interest
rate payable by the borrower would float.
• Semi Floating Rate : It is a combination of both.
Example :5/1 year would mean the interest rate is
fixed for the first 5 years and then would adjust
each year.
Types of Interest
Loan Repayment Methods
Repayment
Methods
EMI Fixed
Principal
Step - up
Step - DownBalloon
Hybrid
Bullet /
Lump sum
Random • EMI( equated monthly installments) : Monthly mode for the
loan. The interest portion in each EMI is more than the
principal portion . By this the banks ensure they get the
interest portion of their loans first and in case of any default
they will have the collateral to fall back on.
• Fixed Principal is the amount of principal is kept constant
during each installment. The interest portion keeps varying.
• Step- up is the total commitment (principal + interest) gets
stepped up in stages . Suppose “X” is the amount of the first 6
installments , then “1.2X” will be the installment for months 7
to 12. Then the installment would be “1.5X” for months 12 to
18. Useful to those who are expecting a steady rise in their
income at fixed intervals.
• Step- Down is exactly opposite to Step – up.
Loan Repayment Methods. Contd.,
• Balloon : under this the borrower and the banker
agree on the total period within which the loan
would be cleared in full. And the borrower keeps
paying a notional amount every time till the last
installment . The last repayment would be huge in
comparison to other installments.
• Bullet/ Lump sum is the method where the
borrower gets a certain time for repaying the loan ,
till due date , borrower keeps paying only the
interest portion and on the final due date ,
borrower repays the entire principal in one shot.
• Random is the method where the borrower repays
randomly .
• Hybrid is a repayment pattern that is a hybrid of
any two or more of the above methods to suit the
borrowers convenience.
Loan Repayment Methods. Contd.,
Working Capital Loans
• The term working capital refers to
the capital required for day-to-day
operations of a business
enterprise.
• It is represented by excess of
current assets over current
liabilities.
• The need for working capital
arises as there is always a time
gap between sale of goods and
receipt of cash. This time gap is
technically termed as “operating
cycle” of the business.
Working Capital Loans. Contd.,
• The operating cycle of a manufacturing
concern is shown below:
Accounts
receivable
Cash
Raw
materials
Work – In –
Process
Finished
Goods
1.
2.
3. 4.
5. • Allow other companies to
share the loan
• Gives advantages to other
institutes like
– Preferred creditor access
– Country risk exposure
• IFC may charge a fees for
this service
Syndicated Loans –‘B’LOANS
IFC Loan Syndication
• Agreement with borrower: loan funded by IFC
and participant banks
• Benefits: participant banks receive
head2right Reduced risk
head2right Exemption from country-risk provisioning
head2right Immunity from taxation
head2right Extensive emerging-market experience
head2right Detailed preinvestment appraisal
head2right Sound due diligence and ongoing
supervision
• Rent
• Lessor
• Lessee
• Lease termination
• Different Types of Lease
Leasing
• Fund Financial Intermediaries who in turn,
finance others
• Chief beneficiaries of this funding are SMEs
• Micro-finance institutions
• Leasing companies
• Venture capital
• Helps reduce transaction costs
• Credit Guarantee by IFC promising full
and timely payment of debt to other
institutions
• Both local currency and foreign
currency
• Cross border access to markets
becomes easier by eliminating
sovereign risk
Partial Credit Guarantees
• Securitization through guarantees
Risk Sharing Facilities
• Securitization is a form of financing which
involves the pooling and true sale of financial
assets and issuance of securities that are
repaid from the cash flows generated by such
assets. This type of transaction allows
financing to be based primarily on the risks of
the asset pool rather than solely on the risk of
the institution that originated the assets
• The most common assets include: mortgages,
credit cards, auto and consumer loans,
corporate debt, and future revenues.
Introduction to Project Financing:
Project financing can be defined as
financing of an economic unit , based
on an assessment of such unit’s
capacity to service the loan and
interest thereon.
Under project financing , the lender
primarily depends upon the ability of
the project to perform and generate
returns to service the loans. The
creation of asset security is only a
standby to be enforced in extreme
circumstances , since in most cases
the lenders cannot recover their
entire dues through sale of assets .
Therefore project financers make
money only if the project makes
money. Hence the level of risk is
more in project financing.
Project Appraisal by IFC
• Technical Feasibility
• Managerial competency
• Financial and commercial
viability
• Environmental viability
• Social viability
• Availability of basic
infrastructure
• Licensing requirements
• Technology and
technical process
• Availability of raw
material etc.
Project Appraisal by IFC-
Technical
• Production
• Finance
• Marketing
• Personnel
Project Appraisal by IFC-
Managerial
1. Market
2. Size & location
3. Total demand for the product
4. Sources of raw material & labour
5. Availability of land and plant layout
6. Amount of investment required
Project Appraisal by IFC-
Commercial
Who are the customers ?
Where are they located ? Financial Restructuring
“Financial Restructuring” as the
term denotes is the art of restating
the financial position of a company
as reflected by its financial sheet.
In order to achieve such
restatement, a complex financial
and legal process is involved as it
concerns several conflicting
interests.
Debt restructuring refers to the
restructuring of the borrowing
obligations of the company.
Rationale for Debt Restructuring
Scenario 1 : A healthy company would want to
restructure its debt portfolio by substituting
existing high cost debt with fresh low cost
borrowings.
Scenario 2 : A company without any liquidity
problems would want to restructure its debt
portfolio to reduce the cost of borrowing
and to improve the working capital position.
Scenario 3 : A company that is insolvent
would need a wholesale restructuring of its
debt portfolio to rehabilitate it and make it
solvent.
Development banking services in Debt
Restructuring
1. The first stage would be to formulate a
viability plan for the company. For this
purpose the banker has to understand the
business model, present financial position,
existing borrowings and their cost, future
business opportunities etc.
2. The next step would be to float the ‘Debt
Restructuring Scheme’ . The DRS has to
comply with statutory norms and
applicable guidelines .The banker has to
use his expert knowledge and prior
experience in formulating the same.
3. The next step would be to present the DRS
to lenders and represent the client in
discussions and negotiations with the
consortium of lenders .
4. After the proposed DRS is approved in
principle , it is to be ratified by the
approving authorities in each lender’s
organization.
5. Debt restructuring services would involve
a lot of compliance and legal work for
which the investment banker works
closely with other professionals such as
the CFO, auditor, company secretary and
legal advisor of the borrowing company.
Development banking services in Debt
Restructuring
Case study in Debt Restructuring
Arvind Mills Limited:
The biggest restructuring in the
Indian Corporate history was accomplished in 2001 in
the case of Arvind Mills ltd, an Ahmedabad based
denim manufacturer which claims to be the world’s
third largest capacity. The entire capacity was built
up between 1987 and 1997 during which time the
company leveraged its balance sheet heavily with a
mix of domestic loans and external borrowings from
other countries. Arvind’s troubles started with the
decline in denim prices in 1998- 1999 and since it was
a global commodity , Arvind had no control on the
price trends.
What made Arvind restructuring a
landmark was the sheer number of lenders
in the reckoning – a staggering figure of 85 domestic and
international lenders, with a cumulative exposure of a whopping
Rs.2700 crore. The mammoth task of making 85 lenders agree to a
common plan was the most challenging element in the whole
process.
The debt restructuring plan was spearheaded by two entities – KSA
Techno pack and Jardine Fleming Singapore Securities , which
being one of the lenders , headed the steering committee of
lenders that drew up the restructuring plan.
The debt restructuring plan provided for writing off 40% of the
total debt commitments of Arvind. The plan basically consisted of
paying up 60% of the total dues over a staggered phase with
reduction in interest rate. The restructuring helped Arvind come
back into profit of Rs.10 crore for the 1st qtr of FY 2002-03.
Case study in Debt Restructuring. Contd.,
A project must be :
• In the private sector
• Financially, economically, environmentally, and
socially sound
• 25 percent maximum IFC's share of project cost
• Investment size
head2right$1 million to $100 million in standard
projects
head2rightInvestments in local financial institutions
often support on-lending to small and
medium enterprises
IFC Investment Guidelines
Asset Classification system
• Inferior asset quality is a major cause of bank
failures. It may be caused by imprudent lending or
by a downturn in the economy. Asset quality and
adequacy of provisions are therefore the major
areas to which banking supervisors should pay
particular attention.
• Banks should therefore carefully monitor their
assets through periodic on-site examinations and
through annual audit by external auditors. A
standard asset classification will also help banks in
ensuring that the asset does not go bad.
Asset Classification framework
Loans and advances can be classified into the following
categories:
1. Performing loans where borrowers are regular in meeting
commitments and full repayment of interest and principal
is not in doubt.
2. Special mention Loans where borrowers are experiencing
difficulties which may threaten the institution’s position .
Ultimate loss is not expected at this stage , but could occur
if adverse conditions persist. They are subject to special
monitoring.
3. Substandard loans where borrowers are displaying a
definable weakness which is likely to jeopardize
repayment. The banks here rely heavily on security . Some
loss is possible , particularly of interest.
4. Doubtful – Collection of loan in full is
improbable and the bank expects to
sustain a loss of principal and/or interest ,
taking into account the market value of
the collateral.
5. Loss – Loans which are considered
uncollectible after exhausting all
collection efforts such as realization of
collateral and legal proceeding etc.
• Ratings serve as benchmark to the risk involved in a particular
instrument for investors. A good rating can help a company
raise money at a relatively lower cost and from large pool of
individuals , leading to broader investor base.
• Till recently ratings were mostly concentrating in debentures,
FD’s and other short term investments. The changing
economic development has thrown open new areas like
individual rating, mutual fund rating, country risk rating etc.
• There are three factors to be considered while conducting a
rating : 1. Performance of the Industry sector
2. Performance of the Company
3. Performance of the stock market of the country.
Credit Rating Agencies . Contd.,
Credit Rating Agencies in India:
Credit Rating Information Services
of India Ltd (CRISIL)-Unit of
Standard & Poor Company
&
Investment Information & Credit
Rating Agency of India Ltd (ICRA) –
An associate of Moody’s Investors
Service
CRISIL debenture rating symbols :
AAA – Highest Safety BBB – Moderate Safety
AA – High safety BB – Inadequate Safety
A – Adequate Safety B – High Risk
C – Substantial Risk D – Default
(CRISIL rating may apply ‘+’ or ‘-’ for rating from AA to C to reflect comparative
standing within the category)
CRISIL fixed deposit rating symbols :
FAAA – Highest Safety FB – Inadequate Safety
FAA – High Safety FC – High Risk
FA – Adequate Safety FD - Default
Credit Rating Agencies . Contd.,
CRISIL ratings for short –term instruments :
P1 – Indicates that the degree of safety regarding timely payment
on the instrument is very strong
P2 – Strong however the relative degree of safety lower than P1
P3 – Inadequate Safety
P4 – High Risk
P5 – Default
International Credit Rating Agency :
Standard & Poor is the world’s foremost provider of independent
credit rating , risk evaluation and country specific risk rating.
They supply investors with the independent bench marks they
need to feel more confident about their investment and
financial decision.
Credit Rating Agencies . Contd.,
Thank You • Introduction:
The economy of a country functions on the
fundamental mechanism of savings and investment
of financial capital into economic activities that
help in the creation of economic wealth. Economic
wealth in turn creates a conducive atmosphere .
Savings by themselves do not create economic
wealth unless they are channelized into productive
uses that create it .
Therefore two things are paramount for sustained
economic activity – (a) adequate domestic savings
in the economy and more importantly (b) the
movement of such capital saved to productive
investments in the economy.
Overview of the Financial Markets
• Derivatives market : Specialized instruments
meant for trading exclusively on a futuristic basis
and help in speculation on the price movements of
the shares such as the “Futures & Options “. The
derivatives market is also known as F&O segment.
Futures contracts are basically standardized
forward contracts for buying or selling a particular
underlying asset (Usually a share ,commodity or
currency) at an agreed price on a particular date.
Options is ‘a right to buy or sell an underlying asset
on or before a specified date at an agreed price’.
Therefore the option owner has the choice to buy
or sell depending on the option purchased without
being obliged to do so.
Capital Market. Contd.,
Capital Markets. Contd.,
Securities Market
Capital Market
(market for long term securities
In equity and debt)
Money Market (market for
short term debt products such as Govt
Paper , inter bank products, corporate debt.
Primary market
(through issuances)
Secondary market
(through stock exchange trading)
Equity market
1.Companies
2.Other corporate bodies
Debt market
1.Government Securities
2.Corporate Debt
Derivative market
1.Futures market
2.Options market Primary Equity Market. Contd.,
TYPES OF EQUITY ISSUES
Initial Public Offers Rights Issues Secondary Public Offers
Public
issue
Offer for
sale
Public
Issue
Offer for
sale
Composite
Issue Initial Public Offer (IPO) : An initial public offer as the name
suggests is a public issue being made for the first time by a
company to seek listing on a stock exchange . It implies that
prior to the IPO , the company was unlisted. There are two
methods of taking a company public – (1) through a public
issue of fresh shares to be issued by the company and (2) by
an offer of sale of the existing shares to be made by the
existing shareholders to the public. In a public issue , the
company receives the funds while in an offer for sale , the
seller receives the funds.
Rights issue : In a rights issue , the shares are issued to the
existing members of the company as appearing in its register
of members as of a particular date fixed for this purpose. This
date is known as the “Record Date”. Therefore a rights issue is
a restricted issue made only to the existing registered
shareholders and to nobody else.
Primary Equity Market. Contd.,
Secondary Public Offer :A secondary public offer or
follow-on public offer (FPO) is an issue made by a
company that has already gone public and has listed
its shares through an IPO. The different types of
FPO are : (1) Public issue (2) Offer for sale and (3)
Composite Issue. The distinction between a rights
issue and FPO is that while in the former case,
shares are offered only to the existing registered
shareholders , in the latter case , it is a public issue
made to the general public including the existing
shareholders. Therefore in a FPO there can be
investors who are subscribing to the company’s
shares for the very first time. A Composite issue is a
combination of rights and a public issue at the same
time and is also referred to as “ Rights Cum Public
Issue.
Primary Equity Market. Contd.,
Raising Private Equity
‘Private equity’ by definition is a financing
activity whereby equity investors identify
good investment options in well performing
companies. Private equity market is all
about investors who invest later (not in IPO),
invest more and expect superior market
returns.
Banking, cement, retail chain organizations,
pharmaceuticals and others have become
favorite hunting grounds for later stage
investments some of them in the nature of
acquisition financing.
Fund Based Loans . Contd.,
• Short Term loans – Usually for a short period
against security of movable assets like goods and
commodities, shares, fixed deposits etc.
• Term loans – Medium and long term loans usually
for more than one year against security of assets
like land, buildings, machinery etc.
• Bridge loans – Usually short term loans which are
granted to meet urgent and essential needs while
formalities for availing term loans are being
fulfilled.
• Composite loans – Loans granted for buying capital
assets and for working capital purposes.
1. Gilt edge securities : Securities issued by Central /
State governments and are owned by the government.
2. Book Building : In book building the issuer in
consultation with investment bank set a price band at
which the public issue will go through.
3. Market Capitalization : Current market price of the
share multiplied by the total number of shares issued
by the company.
4. Commercial Paper (CP) : A short term unsecured
promise to repay a fixed amount on a certain future
date and at a specific rate.
5. Depository: A depository is an organization where the
securities of a shareholder are held in electronic form
at the request of the shareholder through the medium
of Depository Participant (DP) ex: NSDL
Commonly used Banking Terms.
6. Blue Chips : Shares of well established , financially sound
companies with good future prospects.
7. Hedge : Protecting the price of a financial instrument or a
commodity at a date in the future. Forward contract is an
example of hedging.
8. Forward Contract : Arrangement with a bank to buy or sell
a certain amount of foreign currency at a pre-determined
rate and on a fixed date in the future.
9. Net Asset Value (NAV) : Term used by mutual funds to
indicate the net asset value of each unit of the fund. It
means the total market price of all the shares held by the
mutual fund. With every change in share prices the NAV of
mutual fund changes.
10. Underwriting : A guarantee wherein the undertaker
(banker) agrees to purchase a certain number of shares in
the event the issue is under subscribed
Commonly used Banking Terms. Contd.,
11. Venture Capital (VC) : implies an investment of long term
equity finance on high risk projects with high return
opportunities. It is investment in securities made directly
of new & unseasoned enterprises where there is a risk of
total loss and also expectation of high reward.
12. Repurchase Agreement (REPO) : REPOs are forward deals
or agreements involving sale of a security with an
undertaking to buy-back the same security at a pre
determined price and time in future.
13. Quasi Equity financing : Money granted to a company by
the shareholders or some other party in the form of a loan
might be classified as quasi-equity provided the repayment
of such a loan is formally postponed to the benefit of other
creditors.
Commonly used Banking Terms. Contd.,
14. Equity Capital : represents ownership capital as
equity shareholders collectively own the
company
15. Debentures : A debenture is a long-term debt
instrument used by governments and large
companies to obtain funds. It is similar to a
bond. A debenture is usually unsecured
16. Dividend : A dividend is a portion of corporate
earnings paid out to shareholders. Most dividends
are paid quarterly
Commonly used Banking Terms. Contd.,
Overview of the Financial Markets. Contd.,
Capital
market
FE market
Equity market,debt &
Derivative market. Major
players are institutional &
high net worth investors
Foreign currency & exchange
transactions Major players are
banks.
Money
market Loan MarketDeals in short & long term
debt securities issued by
Govt. and business entities.
Major players are banks
Commercial & retail loans to
Corporate and non-corporate
Borrowers. Major players are
Financial institutions & banks
Insurance/
PF/Pension
Savings and
Investment marketBusiness of selling insurance
Products/retirement products
& deploying such funds in
Investments.Major players
are Government and private
Insurance companies
Mobilization of retail savings and
Providing investment options.
Major players are the government
Small savings, banks, financial
Institutions and mutual funds.
Financial Markets Capital Market
• Capital market provides long – term
capital to the industrial sector. Capital
market is a medium for mobilizing
finance out of the savings of the
community and making it available to
industry.
• Primary Market operations include new
issue of shares by new or existing
companies. No trading is done in
primary market and the investors apply
through applications .
• Secondary Market is where scripts are
traded. It is a market which provides
liquidity to the shares issued in the
primary market. Trading activities in the
secondary market are done through
recognized stock exchanges.
• Example of Underwriting :
• ABC ltd makes an issue of 10,000 shares of Rs.10 each
aggregating to Rs.1,00,000 . ‘X’ is the underwriter to the issue
to the full extent of Rs.1,00,000.
• In the first instance let us assume that the issue is fully
subscribed . In such a case ABC ltd gets its funds from the
investors and the underwriter has no obligation to take up any
shares. Here the underwriter have made an income on purely
fee-based service.
• In the second instance let us assume that the issue is
undersubscribed . Only 6000 shares have been subscribed by
investors. The underwriter will take up the under-
procurement and make the issue fully subscribed . This means
he takes up the remaining 4000 shares.
Primary Equity Market. Contd.,
Investment Portfolio Management
There are basically three concepts of investment :
1. Economic investment : Means an investment in
economic development (Ex : Roads and
infrastructure , Dams , better irrigation facilities
etc. )
2. Business investment : It refers to the investment
held in a private business. (Ex : If a man invests
Rs. 10000 in a newly opened shop , it means that
his investment in the shop is Rs.10000)
3. Financial investment: This refers to putting
money into shares of a particular company . ( Ex:
Purchasing 100 shares of a company @ share
price of Rs.100 per share. This implies that his
investment is Rs.10,000 in that company )
Investment Portfolio management . Contd.,
Investment & Speculation : “ An investment is a
successful speculation while speculation is an
unsuccessful investment.”
Good investment requires the ability and capability to
foresee the future events. Speculation involves a
higher level of risk and is more uncertain.
Investment Portfolio Management: It refers to the
various assets or investments of an investor which
are considered as a unit. It is a carefully blended
asset combination which provides safety for
investment , liquidity , reasonable return and risk
avoidance.
Factors affecting investment decisions:
1.Amount of investment : The amount of surplus
funds available will decide the quantum of
investment.
2.Objective of investment portfolio: An aggressive
organization may be prepared to take high risk
while an organization looking at investing the
provident fund of its employees will only look at
securities which can assure safety of funds and a
steady return.
3.Selection of investment: This involves selection of
amount to be invested in high risk – high return
securities and low risk-medium return securities.
Investment Portfolio management . Contd.,
4.Timing of Investment : Ideally securities should be
purchased at a time when the prices are at their
lowest and sold at a time when they reach the
highest peak. Buy the securities when the prices
start rising and sell them when they start falling.
5.Identification of industries with growth
potential: This depends on the size and ranking of
the company, which type of industry it belongs to,
the top management of the company , growth
record of the company etc.
Investment Portfolio management . Contd.,
Government Advisory
Introduction to Disinvestment: Disinvestment essentially means
selling of shares held by the Government in Public Sector
Undertakings (PSUs). Countries the world over have been
privatizing their public enterprises . Great Britain has been
the front runner in this process and the rest of the world has
been encouraged by the success of disinvestment in Britain.
Rationale for Disinvestment : The public sector has played a
vital role in the development of the country’s economy. The
primary objective of setting up PSUs was to build
infrastructure for economic development and create
employment opportunities. Over the past 30-40 years the
public sector has been plagued by several problems that
resulted in many PSUs accumulating huge losses. The primary
objective for disinvestment is that it would help in releasing
huge amount of public resources locked in loss making PSUs
and the same could be utilized in public health, family
welfare, education and infrastructure.
Government Advisory. Contd.,
Disinvestment Methodologies : The common methods of
disinvestment world over have been the following :
1. Public Offering of Shares : Developed countries with
vibrant capital markets have followed the Initial Public
Offer (IPO) route to a greater extent. Great Britain has
depended on the IPO route for privatizing most of the
companies.
IPORailtrack1996
IPOBritish Telecom1984
IPOCable & Wireless1981
IPOBritish Petro 1977
Type of Sale CompanyYear
2. Strategic Sale: This method involves a direct sale or a
trade sale by means of auction or negotiation and does not
involve the public. A strategic sale along with management
control has been the preferred route for privatization .
Most of the recent cases of disinvestment in companies
such as Modern Foods, CMC, VSNL, IBP, ITDS Hotels, BALCO
and Maruti have been through strategic sale route.
Process flow and Role of Banker in Disinvestment:
The process of disinvestment is a long and complex affair
that involves participation of several parties apart from the
Government. The role of banker in this process is a very
critical one and often assumes great importance in complex
transactions.
Government Advisory. Contd.,
Role of Development bank in Disinvestment
1. Examine the financial affairs of the concerned PSU in detail
and suggest suitable measures to restructure the affairs of
the company prior to disinvestment.
2. Advise the government on the best method of
disinvestment.
3. Preparation and issue of advertisement in leading news
papers inviting Expression Of Interest (EOI) from interested
parties.
4. Shortlist the prospective bidders.
5. Preparation of Confidential Information Memorandum.
6. Preparation of draft share purchase agreement and share
holders agreement.
7. Undertake valuation of the PSU and arrive at the price.
8. Invite the final bids
9. Evaluation of final bids , help in negotiation and finalize
the terms of sale.
Case Study In Disinvestment
Bharat Aluminium Company Ltd (BALCO)
BALCO is a fully integrated aluminium company,
having its own captive mines, an alumina refinery &
a captive power plant and was set up in 1965. It
was using outdated technology and required a huge
infusion of funds to modernize the plant. Since the
government was unable to infuse funds and
considered BALCO as a non core investment, it has
decided to disinvest 51 % stake in BALCO to a
strategic investor. Jardine Fleming , a reputed
investment banker (now part of J P Morgan Chase
group) was appointed as advisor to the GOI . After
the bidding process it was decided to sell GOI’s 51%
stake to Sterlite Industries (part of Vedanta
Resources ), the highest bidder for a price of
Rs.552 crores. Financially the sale was beneficial to
the GOI.
Portfolio Managers –Roles & Responsibilities
Portfolio manager means any person who pursuant
to a contract or agreement with a client , advises
or undertakes on behalf of the client , the
management of the portfolio or the funds of the
clients.
1.Doing complete study of economic environment affecting the
capital market in the country.
2.Evaluate the price trends of different types of securities and
identify the blue chip companies where investments could be
made.
3.Keeping record of latest amendments in government guidelines
, stock exchange regulations, Central Bank regulations etc.
4.Studying the behavior pattern of the stocks in the stock market
and off loading them at the right time.
5.Carrying out investments in securities or sale or purchase of
securities on behalf of the client to attain maximum return at
lesser risk.
