Dr. S. Anthony Rahul Golden
M.Com., M.Phil., NET., Ph.D., MBA.,SET., NET., M.A., M.Sc. (Psy)., M.A., PGDBA.,

Asst. Professor of Commerce., Loyola College (Autonomous), Chennai - 34
Mobile No- 91+9176313545
https://yesrahul.blogspot.com/

Unit I: Financial Services Industry covers:

Financial Services Industry
Emergence and Development
Fund-based and Non-fund-based Activities
Modern Activities
New Financial Products and Services
Innovative Financial Instruments
Challenges Ahead

FINANCIAL SERVICES INDUSTRY

Introduction

Every individual, business organization, and government requires money at different stages. Some people have surplus money (savers), while others require money (borrowers). The financial system acts as a bridge between these two groups. The institutions that facilitate this transfer of funds are collectively known as the Financial Services Industry.

Financial services have become one of the fastest-growing sectors in every economy. In India, particularly after the economic reforms of 1991 (Liberalization, Privatization and Globalization—LPG), the financial services sector witnessed tremendous expansion. Today, financial services are no longer limited to banking alone. They include merchant banking, insurance, mutual funds, venture capital, leasing, factoring, stock broking, digital payments, fintech, wealth management, online trading, and many more.

A strong financial services sector contributes to:

Economic growth
Industrial development
Employment generation
Capital formation
Wealth creation
Financial inclusion
International trade

Thus, the financial services industry is often described as the backbone or nervous system of a country's economy.

Meaning

Financial services refer to all activities involved in mobilizing savings from individuals and institutions and channeling them into productive investments.

Simply stated,

Financial Services = Mobilization of Savings + Allocation of Funds + Financial Advisory Services

The main objective is to ensure that idle money is transformed into productive investments, thereby promoting economic development.

Definitions

According to Golden,

Financial Services Industry is the collection of organizations which intermediate and facilitate financial transactions of individual and institutional investors through efficient allocation of resources.

Imagine there are three people.

Mr. Arun has ₹20 lakh saved for his retirement.

Ms. Priya wants ₹20 lakh to start a textile business.

Neither knows each other.

A commercial bank collects money from Arun and lends it to Priya.

Thus,

Savings → Bank → Business Investment

The bank earns profit, the investor receives interest, the entrepreneur gets funds, employment is created, and the economy grows.

This entire process represents financial services.

Objectives of Financial Services

The major objectives are:

Mobilization of public savings
Efficient allocation of resources
Promoting industrial development
Providing liquidity
Reducing investment risk
Supporting entrepreneurship
Assisting capital market development
Facilitating economic growth
Increasing financial inclusion
Improving wealth creation

Importance of Financial Services

Financial services are important because they:

1. Promote Economic Growth

Every economy requires continuous investment.

Without financial services:

Industries cannot obtain capital.
Entrepreneurs cannot start businesses.
Infrastructure cannot be developed.

2. Encourage Savings

Banks, mutual funds, insurance companies and pension funds encourage people to save money.

Example

Fixed Deposit
Recurring Deposit
SIP in Mutual Funds

3. Capital Formation

Savings become investments.

Investment creates

factories
roads
ports
schools
hospitals

which increase national income.

4. Employment Generation

Financial institutions create direct employment.

Example

Banks
Insurance companies
Stock exchanges
Mutual fund companies
NBFCs
FinTech companies

Indirect employment is also generated through financed businesses.

5. Facilitates International Trade

Banks provide

Letter of Credit
Bank Guarantee
Foreign Exchange
Trade Finance

Without these services, international trade becomes difficult.

6. Supports Entrepreneurship

Financial institutions finance startups through

Venture Capital
Angel Investors
Merchant Banking
SME Loans

Example

Many Indian startups such as Flipkart, Ola and Zomato initially depended upon venture capital funding.

Classification of Financial Services Industry

The study material classifies financial services into two major groups:

I. Capital Market Intermediaries

These provide long-term finance.

Examples

Merchant Banks
Investment Banks
Mutual Funds
Insurance Companies
Venture Capital Firms

II. Money Market Intermediaries

They provide short-term finance.

Examples

Commercial Banks
Co-operative Banks
Regional Rural Banks
NBFCs

Major Institutions Providing Financial Services

Commercial Banks

Examples

State Bank of India
Indian Bank
Canara Bank
HDFC Bank
ICICI Bank

Functions

Deposits
Loans
Internet Banking
Mobile Banking
Credit Cards

Non-Banking Financial Companies (NBFCs)

Examples

Bajaj Finance
Muthoot Finance
Shriram Finance

They cannot accept demand deposits like commercial banks but provide various financing services.

Investment Banks

Functions

IPO Management
Corporate Finance
Mergers and Acquisitions
Portfolio Advisory

Evolution of Financial Services in India

The study material divides the evolution into three phases.

Phase I (1960–1980)

Merchant Banking Era

Major developments

Merchant Banking introduced
Insurance expansion
Leasing services introduced
Equipment financing started

Example

LIC and UTI played significant roles.

Phase II (1980–1990)

Investment Companies Era

New services introduced

Mutual Funds
Factoring
Credit Rating
Venture Capital
Bills Discounting

This period focused on value-added financial services.

Phase III (1991 onwards)

Modern Financial Services Era

After LPG reforms,

India witnessed

Demat Accounts
Online Trading
Depositories
Electronic Settlement
Book Building
FIIs
Private Mutual Funds

Today, this phase has further expanded into:

UPI
Mobile Banking
Robo Advisory
AI-Based Investment
Blockchain
Digital Lending

Present Trends in Financial Services

The source highlights several developments such as dynamism, the emergence of the primary equity market, credit rating, globalization, and liberalization.

In addition, today's classroom discussion can include:

Digital banking
Artificial Intelligence
Machine Learning
FinTech
InsurTech
Blockchain
Cryptocurrency regulations
Open Banking
Embedded Finance
Digital Rupee (CBDC)

Nature and Characteristics of Financial Services

According to the study material, financial services possess the following characteristics:

Customer-oriented
Intangible
Dynamic
Technology-driven
Market-based
Continuous innovation
Highly regulated
Information intensive
Trust-based
Risk-oriented

Functions of Financial Services Institutions

Major functions include:

Mobilization of savings
Capital formation
Investment management
Risk management
Corporate advisory
Merchant banking
Factoring and forfaiting
Leasing
Venture capital
Mutual fund services
Housing finance
Credit rating
Securitization
Wealth management

Constituents of Financial Services

The financial services industry consists of four major components:

Financial Instruments
Market Players
Specialized Institutions
Regulatory Bodies

Financial Instruments

Money Market Instruments (Short-term):

Treasury Bills
Commercial Paper
Certificates of Deposit
Bills of Exchange

Capital Market Instruments (Long-term):

Equity Shares
Preference Shares
Debentures
Government Securities
Zero Coupon Bonds
Derivatives

Market Players

Commercial Banks
Finance Companies
Stock Brokers
Underwriters
Consultants
Market Makers

Specialized Institutions

Depositories
Credit Rating Agencies
Venture Capital Firms
Factors
Acceptance Houses

Regulatory Bodies

Reserve Bank of India (RBI)
Securities and Exchange Board of India (SEBI)
Other statutory regulators

Factors Affecting Access to Financial Services

The study material lists numerous barriers that affect access to financial services.

Common classroom examples include:

Low income
Limited financial literacy
Lack of legal identity
Distance from banking facilities
High service charges
Complex documentation
Gender disparities
Digital divide
Social and cultural barriers

Scope of Financial Services

The source categorizes the scope into traditional (fund-based and non-fund-based) and modern activities.

Traditional Fund-Based Activities

Leasing
Hire Purchase
Factoring
Forfaiting
Housing Finance
Insurance
Venture Capital
Money Market Investments

Traditional Non-Fund-Based Activities

Issue Management
Placement of Securities
Working Capital Arrangement
Government Approvals
Financial Consultancy

Modern Activities

Project Advisory
Mergers & Acquisitions
Corporate Restructuring
Portfolio Management
Debenture Trusteeship
Capital Market Services
Registration & Transfer Services

Modern Financial Products

Examples suitable for classroom discussion:

Exchange Traded Funds (ETF)
Sovereign Gold Bonds
REITs
InvITs
Digital Rupee
Buy Now Pay Later (BNPL)
Green Bonds
ESG-linked Funds
Infrastructure Investment Trusts

Innovative Financial Instruments

Examples include:

Derivatives
Futures
Options
Swaps
Convertible Debentures
Zero Coupon Bonds
Commercial Papers
Asset-Backed Securities
Mortgage-Backed Securities
Structured Products

Challenges Before Financial Services Industry

Major challenges include:

Cybersecurity threats
Digital fraud
Regulatory compliance
AI-related risks
Climate finance requirements
Global economic uncertainty
Financial inclusion gaps
Data privacy concerns
Competition from FinTech
Cryptocurrency regulation
Rising customer expectations
ESG compliance

Classroom Case Study

Case: Digital Banking Revolution in India

A small vegetable vendor previously accepted only cash payments. After adopting UPI QR codes, customers could pay instantly using mobile phones. The vendor no longer handled large amounts of cash, received immediate payment confirmations, and could access formal credit based on digital transaction history.

Discussion Questions:

Which financial service is being used?
How has digital technology improved financial inclusion?
What are the benefits to the customer and the vendor?
What risks (e.g., cyber fraud, connectivity issues) should be considered?

The Financial Services Industry is a crucial component of the economy, acting as an intermediary between savers and investors. It mobilizes savings, facilitates investments, supports entrepreneurship, promotes economic growth, and improves financial inclusion. Since the LPG reforms, India has transformed from a traditional banking system to a technology-driven financial ecosystem with innovations such as digital payments, online trading, mutual funds, fintech, and AI-based financial services. The sector continues to evolve while addressing challenges such as cybersecurity, regulatory compliance, and financial inclusion.

Dr. S. Anthony Rahul Golden
M.Com., M.Phil., NET., Ph.D., MBA.,SET., NET., M.A., M.Sc. (Psy)., M.A., PGDBA.,

Asst. Professor of Commerce., Loyola College (Autonomous), Chennai - 34
Mobile No- 91+9176313545
https://yesrahul.blogspot.com/

https://orcid.org/0000-0001-8071-4801
https://vidwan.inflibnet.ac.in/profile/339311
https://www.researchgate.net/profile/Anthony-Golden-S
https://scholar.google.com/citations?hl=en&user=faw7X-UAAAAJ

Anthony Rahul Golden, S. - Author details - Scopus Preview

NEW FINANCIAL PRODUCTS AND SERVICES, INNOVATIVE FINANCIAL INSTRUMENTS & CHALLENGES AHEAD

1. NEW FINANCIAL PRODUCTS AND SERVICES

Financial services have continuously changed according to the changing requirements of customers, businesses, investors and financial markets.

In the traditional financial system, the major services were:

Deposits
Loans
Advances
Bill discounting
Insurance
Basic investment services

However, with the development of financial markets, globalisation, competition, liberalisation and technology, customers began demanding more specialised, flexible and innovative financial solutions.

As a result, financial institutions started introducing new financial products and services.

Simple meaning

New Financial Products are newly developed or modified financial instruments designed to satisfy changing financial requirements.

New Financial Services are new or improved financial activities offered by financial institutions and intermediaries to provide greater convenience, efficiency, flexibility or risk management.

FINANCIAL PRODUCTS & SERVICES EMERGE

New financial products and services emerged because of several factors.

1. Changing customer requirements

Customers became more financially aware and wanted:

better returns,
greater convenience,
flexibility,
liquidity,
safety,
tax efficiency,
risk protection.

2. Increasing competition

Financial institutions faced competition from:

banks,
NBFCs,
mutual funds,
insurance companies,
investment institutions,
fintech businesses.

Therefore, institutions had to innovate.

3. Globalisation

International financial markets became increasingly interconnected.

This created demand for:

foreign exchange products,
international investment,
cross-border finance,
hedging products,
sophisticated financial instruments.

4. Technological development

Technology transformed the delivery of financial services.

Traditional:

Branch → Paper → Physical transaction

gradually moved towards:

Internet → Mobile → Digital transaction

5. Risk management requirements

Businesses increasingly required instruments to manage:

interest-rate risk,
foreign-exchange risk,
commodity-price risk,
market risk.

6. Liberalisation

Financial-sector reforms increased competition and encouraged the development of new products.

The uploaded material identifies liberalisation, globalisation, competition and technological development as important forces shaping the financial-services industry.

FEATURES OF NEW FINANCIAL PRODUCTS

New financial products generally aim to provide:

Flexibility

Products can be designed according to different customer requirements.

Liquidity

They may enable customers to access funds more easily.

Risk management

Some products help customers reduce or transfer financial risk.

Better investment opportunities

Investors can choose from a wider range of instruments.

Convenience

Technology allows customers to access services quickly.

Customisation

Financial products can increasingly be structured according to specific requirements.

4. IMPORTANT NEW FINANCIAL PRODUCTS AND SERVICES

For MBA students, the following categories are important:

Mutual Funds
Venture Capital
Credit Rating
Factoring
Forfaiting
Leasing
Hire Purchase
Portfolio Management
Merchant Banking
Securitisation
Derivatives
Financial Advisory Services

Some of these were already emerging as specialised financial services in the development phases described in the prescribed material.

5. MUTUAL FUNDS

A mutual fund collects money from a large number of investors and invests the pooled money in a portfolio of financial assets according to its stated investment objective.

Suppose: 10,000 investors invest ₹10,000 each. Total: ₹10 crore

The fund manager invests the pooled money across eligible securities according to the scheme's mandate.

Main advantages

Professional management
Diversification
Accessibility to small investors
Liquidity in applicable schemes
Variety of investment options

Simple diagram


Investor 1 ─┐
Investor 2 ─┤
Investor 3 ─┤
Investor 4 ─┤
             ↓
       MUTUAL FUND
             ↓
       Fund Manager
             ↓
 ┌───────────┼───────────┐
 ↓           ↓           ↓
Equity      Debt      Other Assets

The source material identifies mutual funds as an important development during the second phase of the financial-services industry.

6. VENTURE CAPITAL

Venture capital is a form of investment provided to businesses with high growth potential, usually involving significant business risk.

It is particularly relevant to:

startups,
technology businesses,
innovative businesses,
high-growth enterprises.

Example

A startup develops an innovative medical technology product.

It requires ₹10 crore for:

research,
product development,
marketing,
expansion.

A venture capitalist may provide capital in exchange for an equity interest.

Key concept

Venture Capital = Capital for Growth + Innovation + Higher Risk

The prescribed material includes venture capital among the financial services that developed during the second phase.

7. CREDIT RATING

Meaning

Credit rating provides an assessment of the creditworthiness or relative risk associated with a debt instrument or issuer, based on the methodology and information used by the rating agency.

Why is it needed?

Suppose Company A issues bonds worth ₹100 crore.

An investor asks:

"How risky is this investment?"

A credit rating provides an independent assessment that assists investors in evaluating credit risk.

Importance

Helps investors assess risk
Supports informed investment decisions
Helps issuers access debt markets
Improves information availability

The source material specifically identifies credit rating as a major development and explains its role in indicating the relative safety/risk of debt instruments.

8. FACTORING

Factoring is a financial service in which a business obtains finance and/or receivables-management services against eligible trade receivables.

Example

ABC Ltd sells goods worth:

₹50 lakh

on 90-day credit.

But ABC needs working capital immediately.

It can use factoring to obtain liquidity against eligible receivables.


Credit Sales
     ↓
Receivables
     ↓
Factor
     ↓
Finance / Receivables Service
     ↓
Improved Liquidity

Main benefit

Working-capital improvement.

9. FORFAITING

Forfaiting is a financing mechanism generally associated with international trade in which an exporter obtains finance by assigning eligible medium- or long-term export receivables, usually without recourse under the agreed arrangement.

Example

An Indian exporter sells machinery to an overseas buyer on deferred payment terms.

Instead of waiting several years for payment, the exporter may use forfaiting to obtain immediate finance against eligible export receivables.

Main benefit

It can provide:

immediate liquidity,
reduced receivables exposure,
better cash-flow management.

10. LEASING

Leasing is a financial arrangement in which the owner of an asset provides another party the right to use the asset for an agreed period in return for rentals.

The source material discusses:

Financial lease
Operating lease
Sale and leaseback
Cross-border lease

Example

A company requires equipment costing ₹1 crore.

Instead of purchasing it immediately, it may obtain the right to use it through a lease and make periodic rental payments.

11. PORTFOLIO MANAGEMENT

Portfolio management refers to professional management of a collection of investments according to the client's:

investment objective,
risk tolerance,
time horizon,
financial requirements.

Example

An investor has ₹50 lakh.

Instead of investing everything in one company, the investment may be diversified across different permitted asset classes.

Main principle

Risk should be managed through appropriate diversification and asset allocation.

12. MERCHANT BANKING AS A FINANCIAL SERVICE

Merchant banking is an important specialised financial service.

Merchant bankers may provide:

issue management,
corporate advisory,
capital raising,
underwriting-related services,
mergers and acquisitions advisory,
restructuring services.

The prescribed material identifies merchant banking as one of the earliest specialised financial services in India's financial-services development.

13. SECURITISATION

Meaning

Securitisation involves converting a pool of financial assets or receivables into securities that can be issued to investors, subject to the applicable legal and regulatory framework.

Simple example

A financial institution has a large portfolio of eligible housing loans.

Instead of holding all those receivables until maturity, it may structure a pool of assets and issue securities backed by the cash flows from those assets.


Loans / Receivables
        ↓
Asset Pool
        ↓
Securitisation Structure
        ↓
Securities
        ↓
Investors

Benefits

Liquidity
Risk distribution
Better balance-sheet management
Access to capital-market funding

14. INNOVATIVE FINANCIAL INSTRUMENTS

Meaning

Innovative financial instruments are financial instruments that are developed or structured to meet specialised financing, investment or risk-management requirements.

They arise because traditional instruments may not adequately address modern financial problems.

Traditional instruments

Equity shares
Preference shares
Debentures
Bonds

Innovative instruments

Zero-coupon bonds
Deep-discount bonds
Floating-rate instruments
Derivatives
Swaps
Futures
Options
Securitised instruments

The prescribed study material specifically identifies zero-coupon bonds, deep-discount bonds and derivatives among capital-market instruments and innovative financial instruments.

15. ZERO-COUPON BONDS

Meaning

A zero-coupon bond does not normally make periodic coupon payments. Instead, it is issued at a price below its face/redemption value and provides the investor with the difference at maturity.

Example

Face value = ₹10,000

Issue price = ₹7,500

Maturity value = ₹10,000

Potential gross difference:

₹2,500

The investor does not receive periodic interest payments; the return is reflected in the difference between purchase price and redemption value.

16. DEEP-DISCOUNT BONDS

A deep-discount bond is issued at a substantial discount to its face value and redeemed at a higher value at maturity.

Example

Issue price:

₹4,000

Redemption value:

₹10,000

The investor's return arises mainly from the appreciation from the issue price to the redemption value.

The study material specifically includes deep-discount bonds under capital-market instruments.

17. FLOATING-RATE INSTRUMENTS

A floating-rate instrument has an interest rate that changes periodically according to a specified benchmark or reference rate plus/minus a spread, depending on the terms.

Why is it useful?

It can help borrowers and investors manage changing interest-rate environments.

Example

Interest rate:

Benchmark rate + 2%

If the benchmark changes, the applicable interest rate may also change according to the instrument's terms.

18. DERIVATIVES

Meaning

A derivative is a financial contract whose value is derived from the value or performance of an underlying asset, rate, index or other reference variable.

Underlying assets may include:

shares,
commodities,
currencies,
interest rates,
market indices.

Major types

Futures
Options
Forwards
Swaps

19. FUTURES

A futures contract is a standardised agreement traded on an organised exchange to buy or sell an underlying asset or reference value at a specified price and future date, subject to exchange rules.

Example

An investor expects the price of an index to rise.

Instead of purchasing all the underlying shares, the investor may take a futures position.

Uses

Hedging
Price discovery
Trading/speculation

20. OPTIONS

An option gives the buyer a right but not an obligation to buy or sell the underlying asset at a specified price according to the contract terms.

Two major types

Call Option → Right to buy

Put Option → Right to sell

Easy memory

CALL = BUY

PUT = SELL

The option buyer normally pays a premium for this right.

21. SWAPS

A swap is a contractual arrangement in which parties exchange specified cash flows according to agreed terms.

A common example is an interest-rate swap, where parties may exchange fixed-rate and floating-rate cash flows.

Example

Company A has floating-rate borrowing.

Company B has fixed-rate borrowing.

Depending on their requirements, they may enter into a swap arrangement through which the respective interest-rate exposures are exchanged according to agreed terms.

Purpose

Swaps are primarily used for:

risk management,
interest-rate management,
currency-risk management.

22. INNOVATIVE INSTRUMENTS – WHY ARE THEY REQUIRED?

Innovative instruments emerged because businesses and investors required:

1. Better risk management

To manage:

currency risk,
interest-rate risk,
commodity-price risk,
market risk.

2. Greater flexibility

Financial structures can be designed according to specific needs.

3. Alternative sources of finance

Companies can access financing beyond traditional bank loans.

4. Investment diversification

Investors receive more choices.

5. Liquidity management

Some instruments facilitate better management of cash flows and financial assets.

23. NEW FINANCIAL SERVICES – TECHNOLOGY DIMENSION

Financial services have also undergone significant technological transformation.

The study material identifies developments such as:

online trading,
paperless trading,
dematerialisation,
depositories,
book building.

Traditional model


Customer
   ↓
Physical Branch
   ↓
Paper Form
   ↓
Manual Processing
   ↓
Transaction

Technology-enabled model


Customer
   ↓
Internet / Mobile
   ↓
Digital Platform
   ↓
Electronic Processing
   ↓
Transaction

This has increased speed, accessibility and convenience, while also creating new risks.

24. CHALLENGES AHEAD

Meaning

The financial services industry has expanded rapidly, but its development has also created several challenges.

The study material concludes that financial institutions need to respond to intense competition, technological changes, regulatory developments, changing customer expectations and the need for greater efficiency.

25. MAJOR CHALLENGES FACING THE FINANCIAL SERVICES INDUSTRY

25.1 Increasing Competition

Financial institutions face competition from:

commercial banks,
NBFCs,
mutual funds,
insurance companies,
investment institutions,
fintech companies,
global financial institutions.

Result

Institutions must continuously improve:

service quality,
product design,
pricing,
technology,
customer experience.

26. TECHNOLOGICAL CHALLENGE

Technology has become both an opportunity and a challenge.

Opportunities

Faster transactions
Digital payments
Online investment
Automated services
Data analytics
Artificial intelligence

Challenges

Cybersecurity
Data privacy
System failures
Fraud
Technology costs
Digital exclusion

Important MBA concept

Technology reduces transaction costs but increases technology-related risks.

27. REGULATORY CHALLENGES

Financial services are highly regulated because financial institutions deal with public money and systemic risks.

Institutions need to comply with:

prudential requirements,
investor-protection rules,
disclosure requirements,
reporting requirements,
customer-protection requirements,
anti-money-laundering requirements,
market-conduct requirements.

Challenge

The institution must balance:

Innovation ↔ Regulation

Too little regulation may increase risk.

Too much regulation may restrict innovation.

Therefore:

Effective regulation should protect the system without unnecessarily preventing useful innovation.

CUSTOMER EXPECTATION CHALLENGE

Today's customers expect:

24×7 access,
quick service,
transparency,
convenience,
personalised products,
competitive pricing.

Therefore, financial institutions must continuously understand customer behaviour.

29. RISK MANAGEMENT CHALLENGE

Modern financial products can be complex.

Complexity can create:

market risk,
credit risk,
liquidity risk,
operational risk,
legal risk,
reputational risk,
model risk.

Therefore, financial institutions require strong:

Risk identification → Risk measurement → Risk monitoring → Risk control

GLOBALISATION CHALLENGE

Global financial integration creates opportunities for international expansion but also exposes institutions to international risks.

Examples:

Currency fluctuations
Global interest rates
International financial crises
Geopolitical uncertainty
Cross-border regulatory requirements

The study material identifies globalisation as an important factor that changed the financial-services environment.

31. CYBERSECURITY CHALLENGE

As financial transactions increasingly move online, cybersecurity becomes critical.

Potential threats include:

phishing,
identity theft,
malware,
account takeover,
data breaches,
payment fraud.

Therefore

Financial institutions need:

strong authentication,
encryption,
monitoring,
incident-response systems,
customer awareness,
continuous technology upgrades.

32. FINANCIAL INCLUSION CHALLENGE

Modern financial services must reach not only urban and technologically advanced customers but also:

rural populations,
low-income groups,
small businesses,
first-time users.

Objective

Financial innovation should not create financial exclusion.

Technology should therefore be used to increase accessibility rather than simply increase sophistication.

33. PRODUCT COMPLEXITY

Innovative financial instruments can sometimes be difficult for ordinary investors to understand.

For example:

A simple fixed deposit is easy to understand.

A complex derivative-linked product may involve:

multiple variables,
market conditions,
embedded risks,
complex payoff structures.

Therefore, financial institutions must ensure:

Product suitability + Transparency + Proper disclosure + Customer understanding

34. CHANGING REGULATORY ENVIRONMENT

Financial institutions must continuously adapt to changes in:

banking regulations,
securities regulations,
taxation,
accounting standards,
international standards,
digital-finance regulation.

Therefore:

Regulatory compliance has become a strategic function rather than merely an administrative function.

35. HUMAN RESOURCE CHALLENGE

Modern financial services require professionals with knowledge of:

finance,
accounting,
economics,
law,
technology,
data analytics,
risk management.

Therefore, continuous employee training is necessary.

Modern financial professional


Finance Knowledge
       +
Technology
       +
Analytics
       +
Regulation
       +
Risk Management
       ↓
Modern Financial Professional

36. BALANCING INNOVATION AND RISK

One of the biggest challenges is:

How can financial institutions innovate without creating excessive risk?

This is an important MBA-level discussion.

Innovation without control

May lead to:

excessive risk,
fraud,
mis-selling,
market instability.

Regulation without innovation

May lead to:

reduced competition,
poor customer experience,
inefficient services.

Therefore:


Innovation
     ↕
Risk Management
     ↕
Regulation
     ↕
Customer Protection

must work together.

37. COMPLETE UNIT-I FLOW


FINANCIAL SERVICES INDUSTRY
             ↓
        EMERGENCE
             ↓
        DEVELOPMENT
             ↓
   FUND-BASED ACTIVITIES
             ↓
 NON-FUND-BASED ACTIVITIES
             ↓
      MODERN ACTIVITIES
             ↓
NEW FINANCIAL PRODUCTS
       AND SERVICES
             ↓
INNOVATIVE FINANCIAL
     INSTRUMENTS
             ↓
 DERIVATIVES / SECURITISATION
             ↓
      CHALLENGES
             ↓
Competition
Technology
Regulation
Risk
Globalisation
Cybersecurity
Customer Expectations
Financial Inclusion

38. MBA CLASSROOM CASE STUDY

Case: ABC Export Company

ABC Ltd. exports machinery worth ₹50 crore.

The company faces three problems:

Problem 1 – Working Capital

Foreign buyers will pay after six months.

Possible solution: Factoring/appropriate receivables financing.

Problem 2 – Currency Risk

The company will receive US dollars after six months.

If the rupee appreciates, the rupee value of its receipts may fall.

Possible solution: Appropriate foreign-exchange hedging instruments.

Problem 3 – Expansion

The company needs ₹100 crore for a new manufacturing facility.

Possible solution:

Equity issue
Debt financing
Merchant banking
Project advisory

Thus, a single company may require:

Traditional Financial Services + New Financial Products + Innovative Instruments

This is why MBA students should study financial services as an integrated system rather than as isolated products.

39. QUICK BULLETIN FOR STUDENTS

NEW FINANCIAL PRODUCTS & SERVICES

Why developed?

Changing customer needs + competition + liberalisation + globalisation + technology + risk management.

Examples:

Mutual Funds
Venture Capital
Credit Rating
Factoring
Forfaiting
Leasing
Portfolio Management
Merchant Banking
Securitisation

INNOVATIVE FINANCIAL INSTRUMENTS

Zero-Coupon Bond → No periodic coupon; return mainly through difference between purchase price and redemption value.

Deep-Discount Bond → Issued at substantial discount and redeemed at higher value.

Floating-Rate Instrument → Interest rate changes according to specified benchmark/terms.

Derivative → Value derived from an underlying asset/rate/index.

Futures → Standardised future contract.

Options → Right, not obligation.

Call → Right to buy.

Put → Right to sell.

Swap → Exchange of specified cash flows.

CHALLENGES AHEAD

Competition
Technology
Cybersecurity
Regulation
Globalisation
Risk Management
Customer Expectations
Financial Inclusion
Product Complexity
Skilled Human Resources

Central challenge:

INNOVATION ↔ RISK ↔ REGULATION ↔ CUSTOMER PROTECTIONEXAMINATION-ORIENTED QUESTIONS

2 Marks

What are new financial products?
What is an innovative financial instrument?
Define securitisation.
What is a zero-coupon bond?
What is a deep-discount bond?
What is a derivative?
What is a futures contract?
What is an option?
What is a swap?
What is venture capital?

5 Marks

Explain the need for new financial products and services.
Explain the importance of mutual funds.
Explain venture capital as a modern financial service.
Explain credit rating.
Explain factoring and forfaiting.
Explain zero-coupon and deep-discount bonds.
Explain the major types of derivatives.
Explain the major challenges faced by the financial services industry.

10/15 Marks

Explain the emergence and development of new financial products and services in India.
Discuss the various innovative financial instruments and explain their significance.
Explain derivatives and their major types with suitable examples.
Discuss the challenges faced by the financial services industry in the modern era.
Explain how technological development, liberalisation and globalisation have influenced financial services.
Discuss the importance of innovative financial instruments in modern financial markets.
"Financial innovation creates both opportunities and risks." Discuss.

UNIT II – MERCHANT BANKING

Issues Management and Issue Management Intermediaries

Merchant Banking – Issue Management Intermediaries – Merchant Bankers/Lead Managers – Underwriters – Bankers to an Issue – Brokers – Registrars to an Issue and Share Transfer Agents – Debenture Trustees.

Merchant banking is one of the most important specialised areas of financial services. It developed because companies increasingly required professional assistance for raising capital, managing securities issues, restructuring businesses and undertaking corporate financial decisions.

Anthony Rahul Golden defines... Merchant banking means providing specialised financial and advisory services to companies, particularly in connection with raising capital and major corporate transactions.

A merchant banker acts as a professional intermediary between:

Company → Capital Market → Investors

For example, if a company wants to raise ₹500 crore through a public issue, it has to deal with several activities:

determining the issue structure,
preparing documentation,
complying with regulatory requirements,
appointing intermediaries,
marketing the issue,
coordinating with investors,
arranging underwriting,
coordinating with bankers,
ensuring allotment and listing.

A merchant banker/lead manager plays a central coordinating role in this process.

ISSUE MANAGEMENT

Issue management refers to the process of planning, organising, coordinating and managing the issue of securities by a company to investors.

Securities may include:

Equity shares
Preference shares
Debentures
Bonds
Other permitted securities

Issue Management is the systematic process through which a company raises capital from investors with the assistance of professional intermediaries.

COMPANIES NEED ISSUE MANAGEMENT

Suppose ABC Ltd. requires ₹200 crore for expansion.

It decides to raise the money from the public.

The company cannot simply announce:

"Give us ₹200 crore."

A public issue involves a complex process.

The company has to consider:

How much capital should be raised?
What type of security should be issued?
What should be the issue structure?
What disclosures are required?
What regulatory requirements apply?
Who will manage the issue?
Who will underwrite the issue?
Who will collect applications?
Who will maintain investor records?
How will securities be allotted?
How will the securities be listed?

Therefore, professional issue management becomes necessary.

ISSUE MANAGEMENT – BASIC PROCESS

The process can be understood as:

Company Requires Capital
          ↓
Decides to Raise Funds
          ↓
Appoints Lead Manager / Merchant Banker
          ↓
Issue Planning & Structuring
          ↓
Preparation of Offer Documents
          ↓
Appointment of Intermediaries
          ↓
Regulatory Compliance
          ↓
Marketing / Investor Communication
          ↓
Opening of Issue
          ↓
Applications & Funds
          ↓
Collection / Processing
          ↓
Allotment
          ↓
Refund / Release of Funds
          ↓
Listing of Securities

The lead manager coordinates many of these activities.

ISSUE MANAGEMENT INTERMEDIARIES

A securities issue normally involves several specialised intermediaries.

The important intermediaries covered in this syllabus are:

Merchant Bankers / Lead Managers
Underwriters
Bankers to an Issue
Brokers
Registrars to an Issue
Share Transfer Agents
Debenture Trustees

Each intermediary has a different role.

One intermediary does not perform every function.

Instead, issue management works through a network of specialised intermediaries.

MERCHANT BANKERS / LEAD MANAGERS

A merchant banker is a professional financial intermediary providing specialised corporate-finance and advisory services. In issue management, the merchant banker may function as the Lead Manager, subject to the applicable regulatory framework.

Lead Manager = The main professional coordinator of a securities issue.

LEAD MANAGER - IMPORTANCE

Imagine a company is organising a large wedding.

The family members may perform different tasks:

catering,
decoration,
invitations,
transportation,
photography.

But someone has to coordinate everything.

Similarly, in a securities issue:

Banker → handles banking-related collection/payment functions
Registrar → handles issue records and processing
Underwriter → provides underwriting support
Broker → assists with market/investor interface
Trustee → protects debenture holders where applicable

The Lead Manager coordinates the overall issue-management process.

FUNCTIONS OF MERCHANT BANKER / LEAD MANAGER

8.1 Pre-Issue Activities

The lead manager performs important activities before the issue opens.

These may include:

examining the company's financial position,
understanding the purpose of the issue,
advising on issue structure,
coordinating due diligence,
assisting in preparation of offer documents,
coordinating with regulatory authorities,
assisting in appointment of intermediaries,
coordinating with stock exchanges and other institutions,
assisting with issue marketing and investor communication.

ISSUE STRUCTURING

One of the important responsibilities of a merchant banker is advising the company regarding the appropriate structure of the issue.

The company may need to decide:

size of issue,
type of security,
pricing mechanism,
timing,
investor categories,
method of raising capital.

ABC Ltd. requires ₹300 crore.

The merchant banker may advise the company regarding whether the capital should be raised through:

Equity → Debt → Combination of instruments

The final structure depends on the company's requirements and applicable regulatory conditions.

DUE DILIGENCE

Due diligence involves systematic examination and verification of relevant information relating to the company and the proposed issue.

The merchant banker must examine matters such as:

financial information,
business operations,
management,
legal matters,
material contracts,
disclosures,
risks.

Why is due diligence important?

Because investors make decisions based on information provided in the issue documents.

Therefore: Accurate information → Better investor decision-making → Greater market confidence

OFFER DOCUMENTATION

A securities issue requires appropriate documentation and disclosures under the applicable regulatory framework. The merchant banker coordinates the preparation and review of the relevant offer documents. The objective is to ensure that investors receive material information necessary for making informed decisions.

Information may include:

company profile,
business activities,
financial information,
risk factors,
objects of the issue,
management details,
capital structure,
legal information,
material developments.

COORDINATION WITH INTERMEDIARIES

The lead manager coordinates with:

underwriters,
bankers,
brokers,
registrars,
stock exchanges,
legal advisers,
auditors,
other relevant intermediaries.

Thus, the lead manager acts as the central coordinating point.

POST-ISSUE ACTIVITIES

The merchant banker/lead manager's responsibility does not necessarily end when the issue closes.

Post-issue activities may include coordination regarding:

application processing,
basis of allotment,
refunds/unblocking of funds as applicable,
issue-related reports,
listing,
resolution of investor complaints,
completion of regulatory requirements.

MERCHANT BANKER – SUMMARY

Merchant Banker / Lead Manager
Before Issue
Planning → Structuring → Due Diligence → Documentation → Regulatory Coordination
During Issue
Coordination → Marketing → Intermediary Management → Monitoring
After Issue
Allotment Coordination → Refund/Unblocking → Listing → Compliance → Investor Grievance Coordination

UNDERWRITERS

An underwriter is an intermediary who undertakes, subject to the terms of the underwriting arrangement and applicable regulations, to subscribe to securities that are not subscribed by investors.

Simple example

Suppose:

Company issues securities worth:

₹100 crore

Public subscription:

₹85 crore

Unsubscribed portion:

₹15 crore

If the issue has been appropriately underwritten, the underwriter may be required to take up the agreed unsubscribed portion according to the underwriting commitment.

UNDERWRITING REQUIRED

The company wants confidence that its planned issue will receive the required subscription.

Therefore: Underwriting provides a form of subscription support and confidence in the capital-raising process.

Underwriting does not mean that the company is guaranteed a profit.

It relates to the commitment concerning subscription of securities under the applicable underwriting arrangement.

FUNCTIONS OF UNDERWRITERS

1. Subscription support

Provides support against the risk of inadequate subscription, according to the underwriting agreement.

2. Investor confidence

Underwriting can enhance confidence in the issue.

3. Issue success

It helps companies reduce the risk associated with insufficient subscription.

4. Market support

Underwriting contributes to the orderly process of raising capital.

EXAMPLE OF UNDERWRITING

ABC Ltd. issues:

10 lakh shares × ₹100 = ₹10 crore

Suppose only:

8 lakh shares

are subscribed.

Unsubscribed amount:

2 lakh shares × ₹100 = ₹2 crore

If an underwriter has a valid commitment covering the relevant shortfall, the underwriter may be required to subscribe according to the terms.

Memory point

Underwriter = Subscription Risk Support

BANKERS TO AN ISSUE

Bankers to an issue are banking intermediaries appointed to perform specified banking functions relating to a securities issue.

Their role is different from that of the lead manager.

Lead Manager

Manages and coordinates the issue.

Banker to Issue

Performs banking-related functions connected with the issue.

FUNCTIONS OF BANKERS TO AN ISSUE

Depending on the issue structure and applicable framework, bankers may facilitate:

collection of application monies,
handling of issue-related accounts,
processing of payment-related transactions,
transfer of funds,
refunds/unblocking as applicable,
other banking services connected with the issue.

Example

An investor applies for shares and pays the required application amount through the designated banking mechanism.

The banker facilitates the relevant financial transaction.

BROKERS

A broker acts as an intermediary between buyers and sellers in the securities market.

In the context of issue management, brokers may assist with:

distribution/marketing of securities,
reaching investors,
facilitating market-related activities,
investor interaction.

Simple concept

Company / Issue
      ↓
   Broker
      ↓
Investors

Brokers therefore help connect securities offerings and the investor community, subject to the applicable issue and market framework.

FUNCTIONS OF BROKERS

1. Investor reach

They help securities reach potential investors.

2. Market information

Brokers possess knowledge of market conditions and investor behaviour.

3. Investor interaction

They may communicate information about the issue to prospective investors.

4. Secondary-market services

After listing, brokers also facilitate buying and selling of securities in the secondary market according to applicable rules.

REGISTRARS TO AN ISSUE

Registrar to an Issue is an intermediary responsible for processing applications and maintaining records connected with a securities issue.

The registrar performs an important record-management and processing function.

FUNCTIONS OF REGISTRAR TO AN ISSUE

Important functions include:

receiving and processing application data,
maintaining investor records,
reconciling application information,
coordinating with banks and other intermediaries,
assisting in determining the basis of allotment,
processing allotment information,
processing refunds/unblocking as applicable,
addressing investor queries/grievances related to the issue,
maintaining relevant records.

Example

Suppose an issue receives:

5 lakh applications.

It is not practical for the company to manually manage every application.

The registrar uses specialised systems to process:

application details,
investor information,
payment information,
allotment data.

SHARE TRANSFER AGENTS

A Share Transfer Agent (STA) performs activities relating to maintaining records of security holders and processing specified investor/service requests, subject to the applicable framework.

Important functions

maintaining investor records,
processing transfer-related requests where applicable,
processing transmission requests,
updating investor information,
handling corporate-action related records,
responding to investor service requests,
maintaining records of security holders.

REGISTRAR TO ISSUE VS SHARE TRANSFER AGENT

Students frequently confuse these two.

Basis	Registrar to an Issue	Share Transfer Agent
Main focus	Securities issue	Ongoing security-holder services
Major activity	Application and allotment processing	Maintenance and servicing of holder records
Stage	Mainly issue stage	Post-issue / continuing servicing
Example	Processing IPO applications	Processing eligible investor service/transfer requests
Record keeping	Issue-related records	Security-holder records

Easy memory

Registrar to Issue = Issue Stage

Share Transfer Agent = Investor Service Stage

An entity may perform both functions if appropriately authorised/registered under the applicable regulatory framework.

DEBENTURE TRUSTEES

A Debenture Trustee is a trustee appointed to protect the interests of debenture holders/security holders in accordance with the trust deed and applicable regulations.

This becomes particularly important when a company raises funds through debt securities.

DEBENTURE TRUSTEES REQUIRED

Suppose a company raises:

₹500 crore through debentures

from:

10,000 investors.

It would be difficult for every investor individually to monitor whether the company is complying with the terms of the issue.

Therefore, a trustee acts on behalf of the investors/debenture holders within the scope of the trust arrangement.

Basic structure

Company
   ↓
Issues Debentures
   ↓
Investors / Debenture Holders
   ↑
   │
Debenture Trustee
   │
Protects / Represents
Investor Interests

FUNCTIONS OF DEBENTURE TRUSTEE

The functions depend on the trust deed and applicable regulatory framework, but generally include:

1. Protection of debenture holders

The trustee acts to safeguard the interests of security holders.

2. Monitoring compliance

The trustee monitors compliance with relevant terms and conditions.

3. Monitoring security

Where securities are secured, the trustee monitors matters relating to the security created for the debenture holders.

4. Monitoring covenants

The trustee monitors compliance with relevant covenants and obligations.

5. Communication

The trustee communicates relevant information to debenture holders.

6. Action in case of default

Where there is a default, the trustee may take appropriate action according to the trust deed and applicable regulations.

DEBENTURE TRUSTEE – EXAMPLE

XYZ Ltd. raises:

₹100 crore

through secured debentures.

The debenture holders expect:

timely interest payment,
repayment of principal,
maintenance of security,
compliance with issue conditions.

The debenture trustee monitors relevant obligations and represents the interests of the debenture holders within the applicable framework.

COMPLETE ISSUE MANAGEMENT STRUCTURE

This is an important diagram for students to understand.

                 COMPANY
                    │
                    ↓
          MERCHANT BANKER /
             LEAD MANAGER
                    │
       ┌────────────┼─────────────┐
       ↓            ↓             ↓
  UNDERWRITER    BANKER        REGISTRAR
       │         TO ISSUE       TO ISSUE
       │            │             │
       ↓            ↓             ↓
 Subscription    Banking       Applications
   Support       Functions      & Records
       │            │             │
       └────────────┼─────────────┘
                    ↓
                 INVESTORS
                    │
          ┌─────────┴─────────┐
          ↓                   ↓
       BROKERS          SHARE TRANSFER
                            AGENTS
                             
                    +
                    
             DEBENTURE TRUSTEE
                    │
                    ↓
             DEBENTURE HOLDERS

COMPARISON OF ALL ISSUE MANAGEMENT INTERMEDIARIES

Intermediary	Main Responsibility
Merchant Banker / Lead Manager	Overall issue management and coordination
Underwriter	Subscription support according to underwriting commitment
Banker to Issue	Banking-related issue functions
Broker	Investor/market intermediary functions
Registrar to Issue	Application processing, allotment and issue records
Share Transfer Agent	Security-holder records and investor servicing
Debenture Trustee	Protection/representation of debenture holders

One-line memory method

Lead Manager – Manages
Underwriter – Underwrites
Banker – Banks
Broker – Connects
Registrar – Records the Issue
STA – Services Investors
Trustee – Protects Debenture Holders

HOW AN IPO MOVES FROM COMPANY TO INVESTOR

A simple classroom illustration:

Stage 1 – Company decides to raise capital

ABC Ltd. needs ₹500 crore.

↓

Stage 2 – Lead Manager appointed

Merchant banker assists in planning and managing the issue.

↓

Stage 3 – Due diligence and documentation

Relevant information is reviewed and offer documents are prepared.

↓

Stage 4 – Other intermediaries appointed

Underwriters, where applicable
Bankers
Registrar
Brokers/other intermediaries

↓

Stage 5 – Issue opens

Investors submit applications through the prescribed mechanisms.

↓

Stage 6 – Application processing

Registrar processes application information.

↓

Stage 7 – Funds

Banking intermediaries handle issue-related banking functions.

↓

Stage 8 – Allotment

Allotment is completed according to the applicable rules and basis.

↓

Stage 9 – Listing

Securities are admitted/listed as applicable.

↓

Stage 10 – Post-issue servicing

Share Transfer Agent and other intermediaries provide continuing investor services.

IF IT IS A DEBENTURE ISSUE

The structure changes slightly.

Company
   ↓
Lead Manager
   ↓
Debenture Issue
   ↓
Investors
   ↑
   │
Debenture Trustee
   │
Protection / Monitoring

The key additional intermediary is:

Debenture Trustee

because debt investors require appropriate representation and monitoring of the terms of the issue.

FUNDAMENTAL DIFFERENCE: EQUITY ISSUE VS DEBENTURE ISSUE

Basis	Equity Issue	Debenture Issue
Investor status	Shareholder	Debenture holder
Return	Dividend, if declared	Interest/coupon according to terms
Ownership	Represents ownership interest	Represents debt claim
Trustee	Generally not a debenture trustee issue	Debenture trustee may be appointed as required
Risk	Equity holders generally bear greater residual risk	Debt holders have contractual claims according to terms
Repayment	Equity does not normally have a fixed maturity	Debentures generally have defined repayment terms

CLASSROOM CASE STUDY

ABC Ltd. – ₹500 Crore Public Issue

ABC Ltd. wants to raise ₹500 crore for expansion.

Step 1

ABC appoints a Merchant Banker/Lead Manager.

The lead manager coordinates the issue.

Step 2

Due diligence is conducted.

Step 3

Offer documentation is prepared.

Step 4

An Underwriter provides underwriting support according to the agreed commitment.

Step 5

Bankers to the Issue handle designated banking functions.

Step 6

The Registrar to the Issue processes applications and maintains issue records.

Step 7

Brokers assist in reaching investors and performing relevant market intermediary functions.

Step 8

After securities are issued, the Share Transfer Agent handles continuing investor records and servicing functions.

Step 9

If ABC raises money through debentures, a Debenture Trustee acts for the protection/representation of debenture holders according to the applicable framework.

Therefore: Issue management is a coordinated team effort.

LEAD MANAGER IS NOT UNDERWRITER

Students often make this mistake in examinations.

Lead Manager

Mainly:

Planning + Coordination + Management

Underwriter

Mainly:

Subscription Commitment/Support

Therefore:

Lead Manager manages the issue.

Underwriter supports the subscription of the issue according to the underwriting commitment.

REGISTRAR IS NOT THE BANKER

Banker

Handles:

Money / Banking Transactions

Registrar

Handles:

Applications / Records / Allotment Processing

Remember:

Banker → Money

Registrar → Records

TRUSTEE IS NOT A LEAD MANAGER

Lead Manager

Works primarily for: Issue management and coordination

Debenture Trustee

Works to: Protect/represent debenture holders' interests according to the trust arrangement and applicable regulations

MERCHANT BANKING – ISSUE MANAGEMENT

Merchant Banker / Lead Manager → Main issue manager and coordinator.
Underwriter → Provides subscription support according to underwriting commitment.
Banker to an Issue → Performs banking-related functions.
Broker → Acts as market/investor intermediary.
Registrar to an Issue → Processes applications and issue-related records.
Share Transfer Agent → Maintains security-holder records and provides continuing investor services.
Debenture Trustee → Protects/represents debenture holders according to the trust arrangement and applicable regulations.
MEMORY TRICK
M – Manages
U – Underwrites
B – Banks
B – Brokers
R – Records
S – Services
T – Trusts/Protects

QUESTIONS

Define Merchant Banking.
What is Issue Management?
Who is a Lead Manager?
What is underwriting?
Who is a Banker to an Issue?
What is the role of a Registrar to an Issue?
What is a Share Transfer Agent?
Who is a Debenture Trustee?

5 Marks

Explain the functions of a Merchant Banker.
Explain the role of Underwriters in issue management.
Explain the functions of Bankers to an Issue.
Explain the role of Registrars to an Issue.
Explain the functions of Share Transfer Agents.
Explain the role of Debenture Trustees.

10/15 Marks

Explain the various intermediaries involved in issue management.
Discuss the role and functions of Merchant Bankers/Lead Managers in issue management.
Explain the role of Underwriters, Bankers, Brokers and Registrars in the issue of securities.
Explain the role and responsibilities of Debenture Trustees in protecting the interests of debenture holders.
Describe the complete process of issue management with the role of different intermediaries.
Distinguish between Merchant Banker, Underwriter, Banker to Issue, Broker, Registrar and Debenture Trustee.

                  MERCHANT BANKING
                         │
                         ↓
                  ISSUE MANAGEMENT
                         │
        ┌────────────────┼────────────────┐
        ↓                ↓                ↓
   PRE-ISSUE          ISSUE STAGE      POST-ISSUE
        │                │                │
        ↓                ↓                ↓
  Lead Manager       Banker           Registrar
  Due Diligence     Underwriter       Allotment
  Documentation     Broker            Listing
  Structuring                         Investor Service
        │
        └─────────────────────────────────────
                         │
                         ↓
              DEBENTURE ISSUE
                         │
                         ↓
                DEBENTURE TRUSTEE
                         │
                         ↓
              PROTECTION OF HOLDERS

Portfolio Managers and Issue Management

PORTFOLIO MANAGERS

Portfolio management is an important financial service through which investments in securities are professionally managed on behalf of clients according to their investment objectives, risk-bearing capacity and financial requirements. A portfolio represents a collection of investments rather than a single security. The basic purpose of portfolio management is to achieve an appropriate combination of return, risk, liquidity and safety through suitable selection and management of investments.

In the context of merchant banking and financial services, portfolio management represents one of the modern activities of financial-service institutions. The study material specifically identifies portfolio management of large public-sector undertakings among modern financial-service activities.

Simple example

Suppose an investor has ₹50 lakh to invest. Instead of putting the entire amount into one company's shares, a professional portfolio manager may construct a diversified portfolio containing appropriate combinations of equity, debt and other permitted investments based on the client's objectives and risk profile.

Thus:

Portfolio Management = Selection + Investment + Monitoring + Review + Risk Management

OBJECTIVES PORTFOLIO MANAGEMENT

The primary objective of portfolio management is to provide an appropriate balance between risk and return. An investor generally wants maximum possible return, but higher return normally involves greater risk. Therefore, the portfolio manager attempts to construct a portfolio that is consistent with the client's objectives and risk tolerance.

Another important objective is diversification. Investment in different securities and asset categories can reduce the concentration risk associated with depending upon a single security. Portfolio management also aims at maintaining adequate liquidity, protecting capital where appropriate, generating regular income when required and achieving long-term appreciation.

The portfolio manager continuously studies market conditions, economic developments, industry conditions and security-specific factors and reviews the portfolio whenever necessary.

3. FUNCTIONS OF A PORTFOLIO MANAGER

A portfolio manager performs several connected functions. The first function is to understand the client's investment objectives and risk profile. The manager must know whether the client wants capital appreciation, regular income, preservation of capital, liquidity or a combination of these objectives.

The next function is investment analysis and security selection. The portfolio manager evaluates available investment opportunities and selects securities suitable for the portfolio. The manager also decides the appropriate allocation among different securities and asset categories.

After constructing the portfolio, the manager undertakes continuous monitoring and review. Market conditions change continuously, and therefore a portfolio that was appropriate at one point may require modification later.

The manager also performs portfolio rebalancing, where necessary, to bring the portfolio back in line with the client's investment objectives and agreed asset allocation.

4. TYPES OF PORTFOLIO MANAGEMENT

Portfolio management can broadly be understood through discretionary and non-discretionary arrangements.

Discretionary Portfolio Management

Under discretionary portfolio management, the portfolio manager takes investment decisions on behalf of the client within the agreed mandate. The client gives the manager authority to manage the portfolio according to specified objectives and conditions.

Non-Discretionary Portfolio Management

Under non-discretionary portfolio management, the portfolio manager provides investment advice and recommendations, but the investment decision remains with the client.

Easy distinction

Discretionary → Manager decides within mandate

Non-discretionary → Client decides after receiving advice

5. IMPORTANCE OF PORTFOLIO MANAGEMENT

Portfolio management is particularly useful for investors who do not have sufficient time, technical knowledge or market expertise to continuously monitor investments. Professional management can provide systematic investment analysis, diversification and regular monitoring.

For corporate and institutional investors, portfolio management becomes even more important because the amount invested may be substantial and the consequences of poor investment decisions may be significant.

6. ISSUE MANAGEMENT

Meaning

Issue management is one of the central activities of merchant banking. It refers to the systematic process of managing a company's issue of securities to raise funds from investors.

The prescribed material explains that the role of a merchant banker in issue management is broadly divided into pre-issue management and post-issue management.

Basic idea


Company needs funds
        ↓
Decision to raise capital
        ↓
Merchant Banker / Lead Manager
        ↓
Issue Planning
        ↓
Documentation & Compliance
        ↓
Issue to Investors
        ↓
Allotment
        ↓
Listing / Post-Issue Activities

7. ISSUE MANAGEMENT ACTIVITIES / PROCEDURES

Issue management can be divided into three broad stages:

1. Pre-Issue Stage

2. Issue Stage

3. Post-Issue Stage

This classification is extremely useful for examination purposes.

8. PRE-ISSUE ACTIVITIES

Pre-issue management begins when the company decides to raise funds through the securities market.

The merchant banker/lead manager first studies the company's financial position, business objectives, capital requirements and proposed issue. The appropriate issue structure is considered, and the necessary professional and regulatory processes are initiated.

The prescribed notes identify several pre-issue responsibilities of merchant bankers, including obtaining required approvals, drafting the prospectus, arranging underwriting, preparing application forms and advertisements, selecting registrars, brokers and bankers, arranging press conferences and selecting collection centres.

Major pre-issue activities

Issue planning → Due diligence → Issue structuring → Documentation → Regulatory compliance → Appointment of intermediaries → Underwriting → Advertising → Investor communication

9. ISSUE STAGE

During the issue period, the securities are offered to investors according to the terms and procedures applicable to the issue.

The intermediaries perform their respective functions. Investors submit applications and make the required payment through the prescribed mechanism. The registrar processes the application information, banking intermediaries handle issue-related banking functions and other intermediaries perform their respective responsibilities.

The merchant banker coordinates the activities to ensure that the issue proceeds in an orderly manner.

10. POST-ISSUE ACTIVITIES

Post-issue management begins after the issue closes. It includes activities associated with processing applications, determining allotment, handling refunds or release of funds as applicable, completing listing-related formalities and addressing investor-related matters.

Thus, issue management does not end merely when the issue is closed.

Issue Management = Pre-Issue + Issue + Post-Issue

11. ELIGIBILITY NORMS

Meaning

Eligibility norms are the conditions that a company or intermediary must satisfy before undertaking a particular securities-market activity or issue.

The purpose of eligibility requirements is to ensure that only entities satisfying prescribed standards can access the capital market or perform regulated intermediary functions.

For an issuing company, eligibility considerations may relate to:

legal status,

financial position,

disclosure requirements,

compliance record,

capital structure,

regulatory requirements,

applicable listing requirements.

For intermediaries, eligibility involves meeting the requirements prescribed by the relevant regulator and obtaining the necessary registration or authorisation.

Important principle

Eligibility norms protect investors and maintain the credibility of the capital market.

The study material identifies SEBI as the authority responsible for monitoring, directing, regulating and controlling the financial market.

Note for students: Specific eligibility percentages and regulatory thresholds can change through amendments. Therefore, for examination purposes, understand the concept from the university notes, while current practical application should always be checked against the latest applicable SEBI framework.

12. PRICING OF ISSUES

Meaning

Pricing of an issue refers to determining the price at which securities are offered to investors.

Pricing is extremely important because the price affects:

investor interest,

amount of capital raised,

demand for securities,

valuation of the company,

success of the issue.

Example

Suppose a company issues:

10 lakh shares

If the issue price is ₹100:

Issue proceeds = ₹10 crore

If the issue price is ₹150:

Issue proceeds = ₹15 crore

However, pricing must be consistent with applicable rules and the valuation and market conditions.

13. FACTORS AFFECTING ISSUE PRICING

The pricing decision may consider:

Company fundamentals

The financial performance and position of the company are important.

Earnings

Past and expected earnings influence investor perception.

Net worth and assets

The company's asset base and financial strength may influence valuation.

Industry prospects

A company operating in a high-growth industry may receive different valuation expectations from one operating in a declining industry.

Market conditions

Bullish and bearish market conditions can affect investor demand.

Demand for securities

Investor demand is an important factor, particularly in book-built issues.

Future growth prospects

Expected future performance can influence the price investors are willing to pay.

14. FIXED PRICE METHOD AND BOOK BUILDING

There are two important approaches students should understand.

Fixed Price Method

The issue price is determined in advance and communicated to investors.

Book Building Method

A price band is generally provided and investors submit bids within the permitted range. The demand received from investors is used in determining the final issue price according to the applicable framework.

The university material identifies book building as an important post-liberalisation development in Indian financial services and notes that it became popular because it benefits both investors and issuing companies.

15. PROMOTERS' CONTRIBUTION

Meaning

Promoters' contribution refers to the contribution made by the promoters towards the company's capital in accordance with the applicable securities regulations.

The concept is important because it demonstrates that promoters have a meaningful financial stake in the company.

Why is promoters' contribution important?

It can:

demonstrate promoter commitment,

align promoter and investor interests,

provide confidence to investors,

reduce the possibility of promoters having little financial stake in the enterprise.

Example

If a company is raising capital from the public, the promoters may be required to contribute a specified portion of the post-issue capital, subject to the applicable regulations and exemptions.

Important: Students should avoid memorising an isolated percentage unless it is specifically prescribed in the current university material, because regulatory requirements can change.

16. ISSUE OF INDIAN DEPOSITORY RECEIPTS – IDR

Meaning

An Indian Depository Receipt (IDR) is a rupee-denominated instrument created by a domestic depository in India against the underlying equity shares of a foreign company, enabling eligible investors in India to obtain exposure to the foreign issuer through the Indian securities market, subject to applicable regulations.

Simple understanding

A foreign company wants to access Indian investors.

Instead of directly issuing its ordinary foreign shares in India, the structure involves:


Foreign Company
       ↓
Underlying Equity Shares
       ↓
Indian Depository
       ↓
Indian Depository Receipts
       ↓
Indian Investors

17. PURPOSE OF IDRs

IDRs provide a mechanism through which a foreign company can access investors in the Indian market, subject to eligibility and regulatory requirements.

For Indian investors, IDRs can provide an avenue for gaining exposure to a foreign company through an Indian market instrument.

Thus, IDRs facilitate:

Foreign Company → Indian Capital Market → Indian Investors

18. FEATURES OF IDRs

Important features include:

underlying securities are shares of a foreign company;

the receipt is issued through a domestic depository structure;

it is denominated in Indian rupees;

it provides an avenue for foreign companies to access Indian investors;

it is subject to applicable regulatory requirements.

19. ISSUE ADVERTISEMENT

Meaning

Issue advertisement refers to communication made to inform potential investors about a securities issue.

An issue advertisement should provide relevant information in accordance with the applicable regulatory framework and should not mislead investors.

The university material specifically identifies the preparation and processing of newspaper advertisements as part of pre-issue management activities of merchant bankers.

20. OBJECTIVES OF ISSUE ADVERTISEMENT

The major objectives are to:

create awareness about the issue,

communicate important issue information,

inform investors about opening and closing dates,

communicate relevant terms,

explain how investors can participate,

support investor decision-making.

Important principle

Issue advertisement is not merely promotion; it is also an important investor-information mechanism.

21. IMPORTANT CONTENT OF ISSUE ADVERTISEMENT

Depending on the applicable rules and nature of the issue, an advertisement may contain information relating to:

name of issuing company,

type of securities,

issue size,

price or price band,

issue opening and closing dates,

eligibility/categories of investors,

application procedure,

risk-related disclosures,

contact information,

relevant regulatory disclosures.

The advertisement must follow the applicable regulatory requirements.

22. ISSUE OF DEBT INSTRUMENTS

Meaning

Debt instruments are securities through which an issuer raises borrowed funds from investors and agrees to make payments according to specified terms.

Examples include:

Debentures

Bonds

Other permitted debt securities

Unlike equity shareholders, debt investors generally do not become owners merely because they hold debt securities. They have contractual rights according to the terms of the instrument.

23. FEATURES OF DEBT INSTRUMENTS

A debt instrument normally specifies:

principal amount,

interest/coupon terms,

maturity,

repayment terms,

security, where applicable,

covenants,

other terms and conditions.

Example

A company issues:

₹100 crore 5-year debentures

at a specified coupon rate.

The company receives funds from investors and has obligations according to the terms of the debenture.

24. SECURED AND UNSECURED DEBT

Secured Debt

The debt is backed by specified security according to the terms of the issue.

Unsecured Debt

There is no specific asset security backing the debt.

Therefore, investors need to carefully assess:

Creditworthiness + Security + Coupon + Maturity + Risk

25. ROLE OF DEBENTURE TRUSTEE

Where required, a debenture trustee plays an important role in protecting the interests of debenture holders and monitoring compliance with relevant terms.

This connects the present topic with the earlier syllabus topic of Debenture Trustees.

Memory point

Equity issue → Shareholder interest

Debt issue → Debenture-holder interest

26. BOOK BUILDING

Meaning

Book building is a mechanism used for price discovery in which investors submit bids within a specified price range and the demand received is considered in determining the issue price, subject to the applicable regulatory framework.

It is an important development in India's primary market.

The university material specifically states that the book-building method of stock issues emerged during the modern/post-liberalisation phase and became popular because it benefits both investors and issuing companies.

27. BOOK BUILDING – HOW IT WORKS

Suppose ABC Ltd. wants to issue shares.

The company provides a price band:

₹90 – ₹100

Investors submit bids at different prices.

For example:

Bid Price Demand
₹90 2 lakh shares
₹95 3 lakh shares
₹98 4 lakh shares
₹100 5 lakh shares

The demand information helps the issuer and issue managers determine an appropriate final price according to the applicable rules and process.

Bid Price	Demand
₹90	2 lakh shares
₹95	3 lakh shares
₹98	4 lakh shares
₹100	5 lakh shares

28. ADVANTAGES OF BOOK BUILDING

Book building can provide:

Better price discovery

The issue price can reflect investor demand.

Market orientation

Pricing is linked more closely to actual demand.

Transparency

Investor bids provide information about demand within the prescribed process.

Flexibility

Investors can bid at different prices within the permitted range.

Better allocation of capital

It can help the issuer arrive at a market-based issue price.

29. FIXED PRICE VS BOOK BUILDING

Basis Fixed Price Book Building
Price Determined in advance Discovered through bidding process
Investor bidding Generally not based on price discovery Investors bid within price band
Demand information Limited before issue Demand is observed during bidding
Price discovery Relatively limited Market-oriented
Flexibility Lower Higher

Basis	Fixed Price	Book Building
Price	Determined in advance	Discovered through bidding process
Investor bidding	Generally not based on price discovery	Investors bid within price band
Demand information	Limited before issue	Demand is observed during bidding
Price discovery	Relatively limited	Market-oriented
Flexibility	Lower	Higher

Easy memory

Fixed Price = Price first

Book Building = Demand first, price discovery through bids

30. GREEN SHOE OPTION

Meaning

The Green Shoe Option is a mechanism that permits an issuer to retain an additional allotment/over-allotment capacity, subject to applicable regulations, in order to help stabilise the post-listing price of securities.

It is associated with the concept of over-allotment and price stabilisation.

31. WHY IS GREEN SHOE OPTION USED?

When a new issue is listed, the market price may fluctuate significantly.

The Green Shoe mechanism can help stabilise the price by providing an additional supply of securities under the prescribed arrangement.

Basic concept


Normal Issue
     +
Additional permitted allotment
     ↓
Over-allotment mechanism
     ↓
Price stabilisation

32. SIMPLE EXAMPLE OF GREEN SHOE OPTION

Suppose a company makes a public issue of:

10 crore shares

Under an applicable Green Shoe arrangement, additional shares may be made available through the permitted over-allotment mechanism.

If the market experiences excessive upward pressure after listing, the stabilisation mechanism can operate according to the prescribed rules.

Important

Students should remember:

Green Shoe Option = Over-allotment + Price Stabilisation

It does not mean that the company simply increases the issue whenever it wishes.

33. IPO THROUGH STOCK EXCHANGE ONLINE SYSTEM

Meaning

An Initial Public Offer (IPO) is the process through which a company offers its shares to the public for the first time and seeks listing on a stock exchange, subject to applicable requirements.

The online IPO system uses electronic stock-exchange infrastructure to facilitate the issue process.

This is part of the technological transformation of the Indian capital market.

The university material specifically identifies online trading, paperless trading and dematerialisation as important developments in the modern financial-services era.

34. ADVANTAGES OF ONLINE IPO SYSTEM

The online system can provide:

faster processing,

electronic applications,

reduced paperwork,

improved transparency,

better monitoring,

wider investor access,

faster information processing.

Traditional system


Paper Application
       ↓
Physical Processing
       ↓
Manual Records
       ↓
Allotment

Online system


Electronic Application
       ↓
Electronic Processing
       ↓
Electronic Records
       ↓
Allotment / Listing

35. PREFERENTIAL ISSUE

Meaning

A preferential issue is an issue of securities by a company to a selected group of persons/investors on a preferential basis, rather than offering them broadly to the public, subject to applicable legal and regulatory requirements.

It is different from a public issue because the securities are offered to identified persons rather than being offered generally to the investing public.

36. PURPOSE OF PREFERENTIAL ISSUE

A company may use a preferential issue to raise capital from selected investors or to make strategic allotments, subject to applicable regulations.

For example, a company may want to bring in a strategic investor who can provide:

capital,

technology,

expertise,

business relationships.

Simple example

ABC Ltd. wants ₹50 crore.

Instead of approaching the entire public, it may make an eligible preferential issue to identified investors according to the applicable regulatory framework.

37. IMPORTANT FEATURES OF PREFERENTIAL ISSUE

A preferential issue generally involves:

identified/select investors,

specified securities,

compliance with applicable rules,

prescribed pricing requirements,

required disclosures,

shareholder and other approvals where applicable.

Key distinction

Public Issue → Broad investor participation

Preferential Issue → Selected investors

38. QUALIFIED INSTITUTIONAL PLACEMENT – QIP

Meaning

A Qualified Institutional Placement (QIP) is a capital-raising mechanism through which an eligible listed company issues specified securities to Qualified Institutional Buyers (QIBs) in accordance with the applicable securities regulations.

It is designed primarily to enable eligible listed companies to raise capital from sophisticated institutional investors through a relatively streamlined institutional placement mechanism.

39. WHO ARE QIBs?

Qualified Institutional Buyers are institutional investors recognised as such under the applicable securities regulations.

Examples can include eligible:

mutual funds,

insurance companies,

pension funds,

foreign portfolio investors,

financial institutions,

banks and other specified institutional investors,

subject to the applicable regulatory definitions and conditions.

40. PURPOSE OF QIP

The major purpose of QIP is to enable eligible listed companies to raise capital efficiently from institutional investors.

It can be used for:

expansion,

working capital,

acquisitions,

debt reduction,

general corporate purposes,

other permitted purposes.

41. ADVANTAGES OF QIP

QIP provides several potential advantages.

Faster capital mobilisation

It can provide an efficient mechanism for raising capital from institutional investors.

Institutional participation

The company can access sophisticated investors.

Lower dependence on retail investors

The issue is directed to qualified institutional investors rather than the general public.

Market credibility

Participation by institutional investors may enhance market confidence, although it does not guarantee investment success.

42. PREFERENTIAL ISSUE VS QIP

This is an important examination question.

Basis Preferential Issue QIP
Investors Identified/select investors Qualified Institutional Buyers
Nature Preferential allotment Institutional placement
Target group Selected persons/investors satisfying requirements Eligible institutional investors
Purpose Strategic/selected capital raising Institutional capital mobilisation
Public offer No No
Regulation Subject to applicable preferential issue rules Subject to applicable QIP rules

Basis	Preferential Issue	QIP
Investors	Identified/select investors	Qualified Institutional Buyers
Nature	Preferential allotment	Institutional placement
Target group	Selected persons/investors satisfying requirements	Eligible institutional investors
Purpose	Strategic/selected capital raising	Institutional capital mobilisation
Public offer	No	No
Regulation	Subject to applicable preferential issue rules	Subject to applicable QIP rules

Easy memory

Preferential Issue → Selected Investors

QIP → Qualified Institutional Investors

COMPLETE CAPITAL-RAISING MAP

Students can understand the entire topic through this structure:


                 COMPANY
                    │
              NEEDS CAPITAL
                    │
          ┌─────────┴─────────┐
          ↓                   ↓
     PUBLIC ISSUE       PRIVATE/SELECTIVE
          │                   │
          ↓                   ↓
       IPO                 Preferential
          │                   │
          ↓                   ↓
   Book Building             QIP
          │
          ↓
  Stock Exchange Listing

Along with:


Issue Management
       ↓
Lead Manager
       ↓
Underwriter
       ↓
Banker to Issue
       ↓
Registrar
       ↓
Broker
       ↓
Investors

And for debt:


Company
   ↓
Debt Issue
   ↓
Investors
   ↓
Debenture Trustee

INTEGRATED EXAMPLE

Case: ABC Infrastructure Ltd.

ABC Infrastructure Ltd. requires ₹1,000 crore for a new infrastructure project.

The company first approaches a merchant banker.

Stage 1 – Issue Management

The merchant banker studies the company's financial position and capital requirement and assists in structuring the issue.

Stage 2 – Due Diligence

Relevant financial, legal and operational information is examined.

Stage 3 – Pricing

The company decides the appropriate pricing mechanism in accordance with the applicable regulatory framework.

Stage 4 – Book Building

If the issue follows the book-building route, investors submit bids within the prescribed price band.

Stage 5 – Issue Advertisement

The issue is communicated to investors through permitted channels and disclosures.

Stage 6 – IPO

The company offers its shares to the public and seeks listing.

Stage 7 – Green Shoe

If a permitted Green Shoe mechanism is used, the over-allotment/stabilisation process operates according to applicable rules.

Stage 8 – Post-Issue

Applications are processed, allotment is completed and listing-related formalities are undertaken.

Alternative

If ABC is an eligible listed company and wants to raise funds from institutional investors, it may consider a QIP.

If it wants to issue securities to identified investors on a preferential basis, it may consider a preferential issue, subject to eligibility and applicable requirements.

This example shows that:

Merchant banking connects corporate financing requirements with appropriate capital-market mechanisms.

45. IMPORTANT CONCEPTUAL DISTINCTIONS

Portfolio Manager vs Merchant Banker

Portfolio Manager

→ Manages investment portfolios for clients.

Merchant Banker

→ Provides issue management and corporate-finance/advisory services.

Public Issue vs Preferential Issue

Public Issue

→ Securities offered to the public under the applicable framework.

Preferential Issue

→ Securities issued to identified/select investors under the applicable framework.

Preferential Issue vs QIP

Preferential

→ Selected investors.

QIP

→ Qualified Institutional Buyers.

Fixed Price vs Book Building

Fixed Price

→ Price determined before the issue.

Book Building

→ Price discovery through investor bids within the prescribed range.

Equity vs Debt

Equity

→ Ownership interest.

Debt

→ Borrowed capital with contractual repayment/interest obligations according to terms.

Registrar vs Portfolio Manager

Registrar

→ Issue processing and investor/security-holder records.

Portfolio Manager

→ Investment management.

46. QUICK BULLETIN – FOR CLASSROOM REVISION

MERCHANT BANKING – UNIT II

PORTFOLIO MANAGER
→ Professionally manages investment portfolios.

ISSUE MANAGEMENT
→ Pre-Issue + Issue + Post-Issue.

ELIGIBILITY NORMS
→ Conditions to be satisfied by issuers/intermediaries.

PRICING OF ISSUE
→ Determining the price at which securities are offered.

PROMOTERS' CONTRIBUTION
→ Promoters' required financial contribution under applicable regulations.

IDR
→ Instrument representing underlying shares of a foreign company for access to Indian investors through the Indian securities market.

ISSUE ADVERTISEMENT
→ Communicates important issue information to investors.

DEBT INSTRUMENT
→ Security representing borrowed funds with specified terms.

BOOK BUILDING
→ Demand-based price discovery through investor bids.

GREEN SHOE OPTION
→ Permitted over-allotment mechanism associated with price stabilisation.

ONLINE IPO
→ Electronic mechanism supporting IPO application/processing and market infrastructure.

PREFERENTIAL ISSUE
→ Issue to identified/select investors.

QIP
→ Institutional capital raising from Qualified Institutional Buyers.

47. MEMORY CHART


P  → Portfolio Manager
I  → Issue Management
E  → Eligibility Norms
P  → Pricing
P  → Promoters' Contribution
I  → IDR
A  → Advertisement
D  → Debt Instruments
B  → Book Building
G  → Green Shoe
O  → Online IPO
P  → Preferential Issue
Q  → QIP

Easy sequence:

P – I – E – P – P – I – A – D – B – G – O – P – Q

48. IMPORTANT EXAMINATION QUESTIONS

Short Answer – 2 Marks

What is portfolio management?

Who is a portfolio manager?

What is issue management?

What are pre-issue activities?

What is meant by pricing of an issue?

What is promoters' contribution?

What is an Indian Depository Receipt?

What is book building?

What is the Green Shoe Option?

What is a preferential issue?

What is QIP?

Who are Qualified Institutional Buyers?

5-Mark Questions

Explain the functions of portfolio managers.

Explain pre-issue and post-issue management.

Explain the factors affecting pricing of an issue.

Explain the importance of promoters' contribution.

Explain IDR and its significance.

Explain the importance of issue advertisements.

Explain the features of debt instruments.

Explain the book-building process.

Explain the Green Shoe Option.

Explain preferential issues and QIP.

10/15-Mark Questions

Explain the various activities and procedures involved in issue management.

Discuss the role and functions of portfolio managers in financial services.

Explain the pricing of issues and discuss the book-building mechanism.

Explain the issue of Indian Depository Receipts and discuss its significance.

Explain the Green Shoe Option and its role in price stabilisation.

Explain the various methods of raising capital through the securities market.

Distinguish between public issue, preferential issue and Qualified Institutional Placement.

Explain the complete issue-management process from pre-issue activities to post-issue activities.

Discuss the role of merchant bankers in managing public issue.

UNIT III – MERCHANT BANKING AND FINANCIAL SERVICES

Factoring, Forfeiting, Housing Finance, ALM and Securitisation

The Unit can be understood through three connected areas:

Trade Receivables Finance
→ Factoring
→ Forfeiting
→ Bills Discounting

Real Estate and Housing Finance
→ Real Estate Industry
→ Housing Finance
→ Housing Finance System
→ National Housing Bank
→ Refinance to HFCs

Risk and Asset-Based Financial Services
→ Asset Liability Management
→ Securitisation
→ Mortgage-Based Securitisation
→ Reverse Mortgage Loan
→ Securitisation of Standard Assets

The University's Unit III specifically includes all these areas.

LESSON 3.1 – FACTORING AND FORFEITING SERVICES

1. Factoring

Factoring is a financial service through which a business converts its trade receivables or book debts into immediate liquidity by assigning or selling those receivables to a factor. The factor is a financial institution or specialised intermediary that may provide finance, collect receivables, maintain the sales ledger and, depending on the arrangement, assume credit risk. Thus, factoring as a continuing relationship between a financial institution called the factor and a business concern called the client, under which the factor purchases the client's book debts with or without recourse and performs collection and related functions.

Suppose ABC Traders sells goods worth ₹10 lakh to a large retailer on 90-day credit. ABC Traders has made the sale, but it cannot use the ₹10 lakh immediately because payment will come only after 90 days. ABC Traders approaches a factor. The factor may provide an advance against the receivable, collect the amount from the retailer when it becomes due and subsequently settle the balance with ABC Traders after deducting applicable finance charges and service fees.

Thus, factoring converts: Credit Sale → Receivable → Immediate Finance + Collection Service

Characteristics of Factoring

Factoring normally involves an arrangement between a business concern and a factor. The business assigns its receivables to the factor, and the factor may provide finance and/or collection services. The factor may maintain the client's sales ledger and monitor the payment behaviour of customers. Factoring may be undertaken with recourse or without recourse, depending on the agreement. The University's material also highlights that factoring is generally associated with short-term trade receivables and working-capital requirements. The important idea for students is that factoring is more than merely borrowing money against an invoice. It can combine financing, collection, ledger administration and credit-risk management.

Modus Operandi of Factoring

The University's material presents a three-party arrangement consisting of the Firm, Debtor and Factor.

Step 1 – Credit Sale

The firm sells goods or provides services to its customer on credit.

Step 2 – Invoice

The firm raises an invoice on the customer. Depending on the arrangement, the customer may be informed that the receivable has been assigned to the factor.

Step 3 – Assignment to Factor

The firm submits the invoice and supporting documents to the factor.

Step 4 – Advance

The factor provides an advance against the receivable according to the agreed terms.

Step 5 – Collection

The factor follows up with the customer and collects the amount on the due date.

Step 6 – Payment by Debtor

The debtor pays the factor.

Step 7 – Balance Settlement

After deducting the applicable finance cost, commission and other charges, the factor settles the remaining amount with the client.

The University material illustrates an advance that could historically be around 80–90% of invoice value; this percentage should not be treated as a universal current regulatory percentage, because actual arrangements depend on the factor, receivable quality and contractual terms.

Flow for students

Seller → Goods/Services → Buyer

Seller → Invoice → Factor

Factor → Advance → Seller

Buyer → Payment → Factor

Factor → Balance after charges → Seller

Functions of Factoring

Factoring performs several functions simultaneously.

Financing Function

The most visible function is providing immediate liquidity against receivables. A business does not have to wait until the credit period expires to obtain working capital.

Collection Function

The factor may undertake collection of receivables from customers. This reduces the administrative burden on the business.

Sales Ledger Administration

The factor may maintain records of invoices, collections, outstanding amounts and customer payment behaviour.

Credit Control

The factor may examine the creditworthiness of customers and monitor their payment patterns.

Risk-Bearing Function

Under non-recourse factoring, the factor may assume the specified credit risk of customer default, subject to the contractual conditions.

Advisory Function

The factor may provide information regarding customer payment behaviour and receivables management.

Thus, factoring can be viewed as:

Finance + Collection + Ledger Management + Credit Control + Risk Management

Types of Factoring

The Pondicherry University material identifies several forms of factoring arrangements, including domestic factoring, export factoring, full-service factoring, maturity factoring, advance factoring, agency discounting and bank participation factoring.

A. Domestic Factoring

Domestic factoring arises when the seller, buyer and factor are located within the domestic market.

It may take the form of:

Disclosed Factoring

The buyer is informed that the receivable has been assigned to the factor and payment is generally made to the factor.

Undisclosed Factoring

The buyer may not be informed about the factoring arrangement. The factor may collect the receivable through an arrangement that does not openly disclose the factor's involvement.

Invoice Discounting

Finance is provided against invoices/receivables, generally with the invoice or receivable serving as the basis for financing.

B. Recourse Factoring

Under recourse factoring, if the debtor fails to pay because of the specified credit risk, the client may remain responsible to the factor according to the agreement.

Example

A manufacturer assigns ₹20 lakh receivables to a factor. If a customer fails to pay because of insolvency and the arrangement is with recourse, the factor may recover the relevant amount from the manufacturer.

Non-Recourse Factoring

Under non-recourse factoring, the factor assumes the specified credit risk of the debtor, subject to the terms and exclusions of the agreement.

Example

A company assigns ₹50 lakh of eligible receivables under a non-recourse arrangement. If an eligible customer defaults because of financial inability to pay, the factor bears the agreed credit loss rather than recovering that loss from the client.

Key difference

Recourse = Credit risk remains substantially with seller.

Non-recourse = Specified credit risk transferred to factor.

Export Factoring

Export factoring is used in international trade. The exporter sells goods to an overseas buyer on credit and the factoring arrangement helps the exporter obtain finance and collection support.

The University material describes export factoring as a situation in which a factor in the exporter's country assists in collecting export proceeds from the importer.

Example

An Indian textile exporter sells ₹2 crore of garments to a buyer in Germany with 120-day credit. Instead of waiting four months, the exporter may use an export factoring arrangement to obtain liquidity and collection assistance.

Full-Service Factoring

Full-service factoring combines several services such as finance, sales-ledger administration, collection, debt protection and advisory services. The University material associates full-service factoring with without-recourse arrangements and protection against specified bad-debt risk.

It is particularly useful for businesses that want to outsource receivables administration rather than merely obtain finance.

Maturity Factoring

Under maturity factoring, the factor generally provides collection and related services but does not necessarily provide an advance before the receivable's maturity. Payment is made according to the agreed maturity/collection arrangement.

Thus:

Advance Factoring → Finance before maturity

Maturity Factoring → Payment/settlement at maturity or collection

Advance Factoring

Under advance factoring, the factor provides an advance against eligible receivables. The University material describes this as an arrangement where the factor makes an advance against the factored receivables.

Example

A company has ₹10 lakh eligible receivables. Under the agreed arrangement, the factor provides ₹7 lakh immediately. The remaining amount is settled after collection and deduction of applicable charges.

Factoring in India – Updated Perspective

Factoring has developed as a working-capital financial service in India. The older Pondicherry University material discusses factoring as an emerging financial service and notes its usefulness particularly for smaller businesses that face difficulty in collecting trade receivables.

An important current update is that factoring is now supported by a formal regulatory framework. The Factoring Regulation Act, 2011 was introduced to regulate factors and assignments of receivables, and the RBI issued the Registration of Factors (Reserve Bank) Regulations, 2022. (Reserve Bank of India)

Advantages of Factoring

Factoring can improve the liquidity position of a business because receivables are converted into immediate or earlier cash flows. It can reduce the administrative burden of collection, improve working-capital management and provide information about customer creditworthiness. For growing businesses, it can allow sales on credit without waiting for the entire credit period before obtaining liquidity. for Example

A small manufacturing unit receives ₹1 crore of orders but has only ₹20 lakh of working capital. If customers pay after 90 days, the company may face difficulty funding production. Factoring can provide liquidity against eligible receivables and thereby support continued operations.

Forfeiting

Forfeiting is a specialised form of receivables financing mainly associated with international trade, particularly exports of capital goods, commodities and services involving medium- or long-term credit.

The exporter sells eligible export receivables, generally evidenced by bills of exchange or promissory notes, to a forfaiter at a discount, normally without recourse to the exporter under the arrangement.

The University material describes forfaiting as a mechanism for financing international trade receivables, particularly where the importer requires credit and the exporter wants immediate payment.

Parties in Forfaiting

The University material identifies four important parties:

Exporter
Importer
Importer's Bank/Guarantor
Forfaiter

An Indian engineering company exports machinery to a foreign buyer for ₹10 crore, but the buyer wants three years to pay. The exporter does not want to wait three years. A forfaiter purchases the eligible receivables at a discount, giving the exporter immediate funds.

Modus Operandi of Forfaiting

The process starts when the exporter and importer negotiate the export contract. The importer may arrange a bank guarantee or other acceptable support for the payment obligations. The exporter approaches a forfaiter and obtains a quotation for the discount rate and other charges.

After the goods are supplied, the importer provides the agreed bills/promissory notes. The exporter transfers these instruments to the forfaiter at a discount and receives immediate funds. The forfaiter subsequently collects the amount from the importer at maturity or may deal with the instruments in the permitted market.

The University material presents this sequence in detail.

Flow

Exporter → Export Contract → Importer

Importer → Bank Guarantee

Exporter → Bills/Promissory Notes → Forfaiter

Forfaiter → Immediate Discounted Payment → Exporter

Importer → Payment at Maturity → Forfaiter

Benefits of Forfaiting

Forfaiting gives the exporter immediate liquidity, converts deferred export sales into immediate cash, reduces the burden of receivables administration and can transfer specified credit, political, currency and interest-rate risks according to the arrangement. The University material highlights these benefits.

Factoring vs Forfaiting

Basis	Factoring	Forfaiting
Main area	Domestic and international trade	Mainly international trade
Receivables	Generally short-term trade receivables	Often medium/longer-term export receivables
Instruments	Invoices/book debts	Bills of exchange/promissory notes and similar receivables
Recourse	May be with or without recourse	Commonly without recourse
Service	Finance + collection + ledger etc.	Primarily receivables financing
Customers	Often continuing relationship	Often transaction/project specific
Typical users	Manufacturers, traders, service businesses	Exporters, especially capital-goods exporters

Bills Discounting

Bills discounting is a short-term financing arrangement under which a bank or financial institution provides funds against a bill before its maturity, after deducting an appropriate discount/finance charge.

Suppose a company holds a bill of ₹5 lakh due after 90 days. Rather than waiting for 90 days, it approaches a bank. The bank discounts the bill and provides funds immediately after deducting the applicable charge. On maturity, the bank collects the amount from the drawee according to the arrangement.

The University material explains that bills discounting and factoring both provide short-term finance against receivables, but their structures differ.

Bills Discounting vs Factoring

Bills Discounting: Usually individual bills are financed.

Factoring: The arrangement may cover a portfolio/book of receivables and may include collection and ledger services.

LESSON 3.2 – REAL ESTATE INDUSTRY AND HOUSING FINANCE

Real Estate Industry

The real estate industry includes activities connected with land, residential buildings, commercial buildings, industrial property, infrastructure-related property and property development.

It has strong connections with banking and financial services because real estate projects generally require substantial long-term capital.

Real estate finance may be required for:

land acquisition;
residential construction;
commercial buildings;
industrial projects;
infrastructure;
housing purchases;
renovation and extension.

The University material connects growth in real estate finance with increasing housing demand and affordability.

Importance of Real Estate Finance

Real estate finance supports the construction and development of physical assets and generates demand for numerous related industries such as cement, steel, bricks, electrical products, sanitary products, construction equipment and professional services.

For example, when a ₹100-crore residential project is financed, the economic activity extends beyond the developer and lender to architects, engineers, contractors, material suppliers, transport operators and workers.

Therefore:

Housing Finance → Construction → Employment → Industrial Demand → Economic Activity

Housing Finance

Housing finance refers to finance provided for activities such as purchase, construction, extension, repair or improvement of residential property, subject to the applicable lending framework.

A housing loan is generally a long-term loan because repayment may extend over several years.

Example

A salaried employee wants to purchase a flat costing ₹60 lakh. She contributes ₹15 lakh from her own resources and obtains a housing loan of ₹45 lakh from a bank or eligible housing finance institution. The house/property normally serves as security for the loan.

Features of Housing Finance

Housing finance is generally characterised by a long repayment period, substantial loan size, mortgage/security arrangements and repayment through instalments such as EMIs.

The lender normally assesses the borrower's income, repayment capacity, credit history, property title, property value, loan-to-value considerations and other applicable lending parameters.

The University material also highlights that housing finance promotes home ownership, construction activity, employment and demand for construction-related materials.

Housing Finance System in India

The University's diagram presents the housing-finance system as involving several categories of institutions, including Housing Finance Companies, banks, financial institutions, cooperative institutions, development institutions and other specialised organisations.

A simplified modern representation is:

Borrower

↓

Bank / HFC / Other Eligible Lender

↓

Housing Loan

↓

Mortgage/Security

↓

EMI / Repayment

At the institutional level, the system also involves refinancing and broader housing-sector support through National Housing Bank (NHB).

National Housing Bank – NHB

The National Housing Bank (NHB) was established on 9 July 1988 under the National Housing Bank Act, 1987. The Pondicherry University material describes NHB as an apex institution established to promote and support housing finance institutions and the development of the housing-finance system.

Important current update

Students should be careful with the older University wording that describes NHB as the regulatory authority for HFCs. Since the amendment to the National Housing Bank Act in 2019, regulation of Housing Finance Companies has been transferred to the Reserve Bank of India. RBI records that HFC regulation was transferred from NHB to RBI with effect from August 9, 2019. (Reserve Bank of India)

Therefore, for examination purposes:

NHB = specialised housing-sector development and financing institution.

RBI = current regulator of Housing Finance Companies.

Functions of National Housing Bank

NHB's important activities include supporting the development of the housing-finance system, providing refinance to eligible lending institutions, promoting housing finance, undertaking housing-sector development activities and supporting mechanisms connected with housing finance.

The University material identifies activities such as refinance, project finance, mortgage-backed securitisation, mortgage credit support and other housing-finance initiatives.

The current NHB website continues to identify financing and refinance as major activities, including refinance assistance to eligible primary lending institutions. (National Housing Bank -)

Refinance Scheme for Housing Finance Companies

Refinance means obtaining funds from a higher-level financial institution against eligible lending undertaken by a primary lending institution.

In housing finance, an HFC may provide housing loans to individuals. Instead of depending entirely on its own resources, the HFC may obtain eligible refinance assistance from NHB.

Simple example

Suppose an HFC provides ₹500 crore of eligible housing loans to borrowers. Subject to NHB's applicable scheme and eligibility requirements, the HFC may obtain refinance assistance. This provides additional liquidity that can support further housing lending.

Basic flow

NHB → Refinance → HFC

HFC → Housing Loans → Individuals

Individuals → Repayment → HFC

HFC → Refinance repayment → NHB

The current NHB website confirms that refinance is extended to primary lending institutions for eligible housing loans, and it provides a current refinance framework and documentation for HFCs. (National Housing Bank -)

Important Update on Old NHB Refinance Schemes

The Pondicherry University material lists older schemes such as:

Liberalized Refinance Scheme;
Golden Jubilee Rural Housing Refinance Scheme;
Rural Housing Fund;
Energy Efficient Housing Refinance Scheme;
Special Refinance for Urban Low-Income Housing;
Solar-related refinance schemes.

These are historical University-study-material schemes and some contain dates and eligibility limits from the period when the material was prepared. They should not be taught as current scheme conditions without qualification.

NHB's current website provides updated refinance material and a 2026 Refinance Booklet for Primary Lending Institutions, while its HFC refinance page was updated in July 2025. (National Housing Bank -)

For MBA examination purposes, students should understand the purpose and mechanism of refinance, while numerical limits and scheme-specific conditions should be checked from the latest NHB notification.

LESSON 3.3 – ASSET LIABILITY MANAGEMENT AND SECURITISATION

Asset Liability Management – ALM

Asset Liability Management (ALM) is the process of managing an institution's assets and liabilities in terms of their maturity, interest-rate sensitivity, liquidity and associated risks, while maintaining an appropriate balance between profitability and safety.

The Pondicherry University material describes ALM as managing the maturity structure, rate structure and risk of asset and liability portfolios.

Suppose a bank receives deposits that can be withdrawn in the short term but provides housing loans for 20 years. The bank has to ensure that it has sufficient liquidity to meet withdrawals while earning an appropriate return from its long-term loans.

This is an ALM problem.

Objectives of ALM

The major objectives are to:

maintain adequate liquidity;
manage interest-rate risk;
manage currency risk where relevant;
coordinate assets and liabilities;
protect profitability;
maintain appropriate risk-return balance;
support long-term financial stability;
improve the institution's overall financial performance.

The University material specifically identifies interest-rate and currency-risk management, profitability and liquidity management among the objectives.

Importance of ALM

ALM is especially important for banks and financial institutions because their assets and liabilities may have different maturities and interest-rate characteristics.

For example:

Liabilities: Deposits – short, medium and long-term.

Assets: Housing loans – 10 to 30 years.

If interest rates change significantly, the cost of funds and income from loans may move differently. ALM helps the institution monitor and manage this mismatch.

Functions of ALM

ALM involves examining the interest-rate structure of assets and liabilities, analysing loan and investment portfolios, identifying liquidity and interest-rate risks, assessing credit and contingency risks, comparing actual performance with projections and maintaining stable earnings.

The University material identifies Net Interest Income (NII), Net Interest Margin (NIM) and Economic Equity Ratio among important parameters for ALM.

Fundamental Steps in ALM

The University material identifies five fundamental steps.

Step 1 – Assess Risk/Return Objectives

The institution first establishes its financial objectives and risk-bearing capacity.

Step 2 – Identify Risks

The institution identifies risks associated with assets and liabilities, including liquidity, interest-rate, foreign-exchange and other relevant risks.

Step 3 – Quantify Risk Exposure

The identified risks are measured using appropriate financial and risk-management techniques.

Step 4 – Formulate and Implement Strategies

Strategies such as diversification, hedging and portfolio management can be used to manage identified risks.

Step 5 – Monitor and Revise

Risk exposures are continuously monitored and strategies are revised whenever necessary.

This five-step sequence is explicitly provided in the Pondicherry University material.

Memory aid

A – I – Q – F – M

Assess → Identify → Quantify → Formulate → Monitor

Securitisation

Securitisation is the process of converting a pool of relatively illiquid financial assets or their associated cash flows into marketable securities or securitisation exposures.

The Pondicherry University material explains the basic idea as conversion of non-marketable assets into marketable securities and distinguishes asset-backed securitisation from future-flow securitisation.

Examples

Asset-backed securitisation:

Housing loans, vehicle loans, other receivables.

Future-flow securitisation:

Certain predictable future cash flows, subject to the applicable structure.

Why Securitisation is Needed

Suppose a bank has ₹1,000 crore of housing loans on its balance sheet. The borrowers will repay the loans over many years. Until those repayments arrive, a significant amount of the bank's funds remains tied up in the loan portfolio.

Through an eligible securitisation structure, a pool of assets can be transferred to a Special Purpose Entity and securities can be issued against the cash flows generated by that pool.

The bank receives funds and can potentially use those funds to originate additional eligible loans, subject to capital, liquidity, risk-management and regulatory requirements.

Therefore:

Loan Pool → Securitisation → Funds/Liquidity → Further Lending

Participants in Securitisation

The three primary participants identified in the University material are:

1. Originator

The bank or financial institution that originally holds the loans or receivables.

2. Special Purpose Entity – SPE/SPV

The entity to which the assets are transferred and which issues securities/exposures backed by the underlying pool.

3. Investors

Investors purchase the securitisation instruments and receive payments linked to the underlying cash flows.

The University material also identifies other participants such as obligors, rating agencies, servicers, trustees, credit enhancers and arrangers/structurers.

Modus Operandi of Securitisation

Step 1 – Creation of Assets

A bank or financial institution originates loans such as housing loans.

Step 2 – Pooling

Similar eligible loans are grouped together into a pool.

Step 3 – Transfer

The pool is transferred to an eligible Special Purpose Entity under the applicable framework.

Step 4 – Issuance

The SPV/SPE issues securitisation instruments against the pool.

Step 5 – Investment

Eligible investors purchase the securities.

Step 6 – Collection

Borrowers continue to make principal and interest payments.

Step 7 – Distribution

The cash flows are passed through according to the terms and priority structure of the securitisation.

Flow

Borrowers

↓ EMI

Originator

↓ Asset Transfer

SPV/SPE

↓ Securities

Investors

↑ Cash Flows

The University material describes the originator, SPV, investors and servicer in substantially this manner.

Mortgage-Based Securitisation

Mortgage-based securitisation involves securitising a pool of mortgage loans, particularly residential housing loans.

The mortgage loans generate periodic cash flows through principal and interest payments. These cash flows support the securities issued against the pool.

Example

Suppose an HFC has:

1,000 housing loans × average outstanding ₹20 lakh

These loans collectively represent a substantial pool of mortgage receivables. If eligible under the applicable framework, the loans can be pooled and securitised. Investors receive returns based on the cash flows generated by the underlying mortgage pool.

Mortgage-Based Securitisation – Classroom Example

Suppose Mr. A has a housing loan of ₹30 lakh. Hundreds or thousands of borrowers like Mr. A have housing loans from the same lender.

The lender pools eligible mortgage loans and transfers them under an appropriate securitisation structure. Investors then invest in securities backed by the cash flows from those mortgages.

Mr. A continues to make his EMI according to his loan agreement. Those cash flows ultimately support payments to investors according to the securitisation structure.

Key point

The investor does not simply purchase Mr. A's individual house. The investor obtains exposure to the cash flows generated by a pool of mortgage loans.

Reverse Mortgage Loan – RML

A Reverse Mortgage Loan (RML) is a housing-finance product designed primarily for senior homeowners who own a residential property but require additional income.

Unlike a normal housing loan, where the borrower receives money initially and repays the lender through EMIs, under a reverse mortgage the homeowner uses the value/equity in the house to receive payments from the lender while continuing to live in the property, subject to the applicable terms.

The Pondicherry University material explains RML as a scheme for senior citizens in which periodic payments are made against the mortgage of the house while ownership and occupation are retained.

RBI's consumer guidance similarly describes reverse mortgage as a mechanism for senior citizens who own a house but have inadequate income, allowing them to convert part of their home equity into a lump sum or periodic payments while retaining occupation subject to the scheme's conditions. (Reserve Bank of India)

Example of Reverse Mortgage

Suppose Mr. and Mrs. Kumar, both senior citizens, own a fully paid residential house worth ₹80 lakh. They have limited monthly income but need additional funds for living and medical expenses.

Instead of selling the house, they may obtain a reverse mortgage from an eligible lender, subject to applicable conditions. The lender provides periodic payments against the mortgage of the property.

They continue to occupy the house.

The basic difference is:

Normal Housing Loan

Lender → Money → Borrower

Borrower → EMI → Lender

Reverse Mortgage

Lender → Periodic/Lump-sum payment → Senior homeowner

House → Mortgage/security → Lender

Important Features of RML

The University material highlights that the borrower retains ownership and occupation of the residential property, does not ordinarily make regular monthly principal-and-interest repayments during the applicable period, and the amount depends on factors such as property value, borrower's age and interest rates.

The loan becomes repayable according to the applicable conditions, typically when the borrower permanently leaves the property or on death, with the outstanding amount dealt with through repayment or sale of the property according to the terms.

A key feature described in the University material is the no-negative-equity/non-recourse principle, subject to the terms and conditions of the product.

Normal Mortgage vs Reverse Mortgage

Normal Housing Loan	Reverse Mortgage
Usually used to acquire/build property	Uses existing home equity
Lender provides funds to borrower	Lender provides periodic/lump-sum funds against property
Borrower normally pays EMI	Senior borrower generally does not make regular EMI payments during the applicable period
Loan reduces through repayment	Outstanding balance may accumulate
Commonly used by home purchasers	Primarily designed for eligible senior homeowners

Securitisation of Standard Assets

This is an important updated regulatory topic.

A standard asset broadly refers to an exposure that has not been classified as a non-performing asset under the applicable regulatory framework. Securitisation of standard assets involves pooling eligible standard loans and transferring them through an appropriate securitisation structure so that investors obtain exposure to the resulting securitisation notes.

The RBI issued the Master Direction – Securitisation of Standard Assets Directions, 2021, applicable to specified regulated entities including scheduled commercial banks, All India Financial Institutions and NBFCs including HFCs. (System Health)

The RBI describes securitisation as a structure where a pool of assets is transferred by an originator to a Special Purpose Entity and the cash flows from the pool service securitisation exposures having different degrees of credit risk. (System Health)

Why Standard Assets are Securitised

Securitisation of standard assets can help eligible lenders:

obtain liquidity;
diversify credit risk;
manage balance-sheet exposures;
recycle capital/resources into fresh lending, subject to regulatory requirements;
provide investors with exposure to diversified pools of credit assets.

RBI has specifically recognised that prudentially structured securitisation can facilitate risk distribution and liquidity in the financial system. (System Health)

Standard Asset Securitisation – Example

Suppose a housing finance company has a pool of 5,000 performing housing loans with predictable repayment patterns.

The HFC may, subject to eligibility and regulatory requirements:

Step 1: Identify eligible standard housing loans.

Step 2: Pool the loans.

Step 3: Transfer the eligible pool to an SPE.

Step 4: SPE issues securitisation notes.

Step 5: Eligible investors purchase the notes.

Step 6: Borrowers continue paying their EMIs.

Step 7: The cash flows from the pool are distributed to investors according to the securitisation structure.

Thus, the lender can convert part of its existing loan portfolio into liquidity while investors obtain exposure to a diversified pool of underlying assets.

Important Current Regulatory Update

This is particularly important for your MBA teaching because the Pondicherry University material is an older study material.

Factoring

The older notes discuss factoring as an emerging financial service. Today, the Factoring Regulation Act, 2011 and RBI's 2022 registration regulations provide the formal regulatory framework. (Reserve Bank of India)

Housing Finance Companies

The older material presents NHB as the regulator of HFCs. That position is historical. Regulation of HFCs was transferred to RBI in 2019, and RBI subsequently issued the revised HFC regulatory framework. (Reserve Bank of India)

NHB

NHB continues to have an important role in housing-sector financing and refinance. Its current website lists refinance assistance and current refinance schemes/documentation for HFCs and other eligible primary lending institutions. (National Housing Bank -)

Securitisation

The older University material explains the basic economic mechanism of securitisation. The current regulatory framework should additionally be understood through the RBI Securitisation of Standard Assets Directions, 2021. (System Health)

Integrated Classroom Example

Consider ABC Housing Finance Ltd.

ABC provides ₹500 crore of housing loans to individual borrowers. These loans generate monthly EMI cash flows. ABC initially keeps the loans on its balance sheet.

At the same time, ABC requires additional liquidity to provide new housing loans.

First, ABC uses Asset Liability Management to ensure that its long-term housing loans are appropriately matched with its sources of funds and that liquidity and interest-rate risks are monitored.

ABC may then identify an eligible pool of standard housing loans.

The loans can, subject to the applicable regulatory framework, be transferred to an SPE through a securitisation structure.

The SPE issues securities to eligible investors. The borrowers continue to pay their EMIs. The cash flows generated by the underlying housing loans support payments to investors.

ABC receives liquidity and may use its available resources for further lending, subject to applicable capital, liquidity and risk requirements.

This one example connects:

Housing Finance → ALM → Standard Assets → Securitisation → Mortgage-Based Securities → Investors

COMPLETE UNIT III MEMORY MAP

FACTORING

Receivable → Factor → Immediate Liquidity

FORFAITING

Export Receivable → Forfaiter → Immediate Payment

BILLS DISCOUNTING

Bill → Bank → Discounted Cash

HOUSING FINANCE

Lender → Housing Loan → Borrower → EMI

NHB REFINANCE

NHB → Refinance → HFC/Eligible Lending Institution → Housing Loans

ALM

Assets + Liabilities → Maturity + Interest Rate + Liquidity + Risk Management

SECURITISATION

Loan Pool → SPE/SPV → Securities → Investors

MORTGAGE-BASED SECURITISATION

Housing Loans → Mortgage Pool → RMBS/Securitisation Notes → Investors

REVERSE MORTGAGE

Senior Homeowner + House Equity → Lender → Periodic Income

STANDARD-ASSET SECURITISATION

Performing/Standard Loan Pool → SPE → Securitisation Notes → Investors

Important Differences for MBA Examination

Factoring vs Bills Discounting

Factoring	Bills Discounting
May cover a portfolio/book of receivables	Usually based on individual bills
Can include collection and ledger services	Mainly financing through discounting
May be with or without recourse	Primarily a bill-financing transaction
Continuing relationship is common	Individual transactions are common
More comprehensive receivables service	More limited financing service

The University's own comparison identifies these differences in terms of individual transactions, customer notification, documentation and charging structure.

Factoring vs Forfaiting

Factoring → Mainly short-term trade receivables

Forfaiting → Mainly international export receivables with medium/longer-term credit

Factoring → May include collection/ledger services

Forfaiting → Primarily financing through purchase/discounting of export receivables

Questions

What is Factoring?
Who is a Factor?
What is Recourse Factoring?
What is Non-Recourse Factoring?
What is Export Factoring?
What is Forfaiting?
Who is a Forfaiter?
What is Bills Discounting?
What is Housing Finance?
What is Refinance?
What is National Housing Bank?
What is Asset Liability Management?
What is Securitisation?
Who is an Originator?
What is an SPV/SPE?
What is Mortgage-Based Securitisation?
What is RMBS?
What is Reverse Mortgage Loan?
What is a Standard Asset?
What is Securitisation of Standard Assets?

5 Mark Questions

Explain the modus operandi of Factoring.
Explain the different types of Factoring.
Explain the functions of Factoring.
Explain Export Factoring.
Explain the process of Forfaiting.
Explain the role of EXIM Bank in Forfaiting.
Distinguish between Factoring and Bills Discounting.
Explain the importance of Housing Finance.
Explain the Housing Finance System in India.
Explain the functions of National Housing Bank.
Explain Asset Liability Management.
Explain the five fundamental steps of ALM.
Explain the process of Securitisation.
Explain Mortgage-Based Securitisation.
Explain Reverse Mortgage Loan.
Explain Securitisation of Standard Assets.

15-Mark Questions

Explain the concept, modus operandi, functions and various types of Factoring with suitable examples.
Explain Forfaiting and describe its modus operandi. Distinguish between Factoring and Forfaiting.
Explain Factoring and Bills Discounting and distinguish between the two services.
Discuss the development and structure of the Housing Finance System in India.
Explain the role and functions of National Housing Bank in the Indian Housing Finance System.
Explain Asset Liability Management and discuss its objectives, functions and fundamental steps.
What is Securitisation? Explain its process, participants and importance with a suitable example.
Explain Mortgage-Based Securitisation and discuss the mechanism of Mortgage-Backed Securities.
What is Reverse Mortgage Loan? Explain its features, mechanism and benefits with a suitable example.
Explain Securitisation of Standard Assets with reference to the present Indian regulatory framework.
Discuss the relationship between Housing Finance, Asset Liability Management and Securitisation in the Indian financial system.

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Saturday, August 01, 2026

PLC Unit I, II & III Financial Services Industry MBA Notes - Dr. S. Anthony Rahul Golden kvsrahul@gmail.com 9176313545 UNIT II – MERCHANT BANKING

Meaning

Definitions

Imagine there are three people.

Objectives of Financial Services

Importance of Financial Services

1. Promote Economic Growth

2. Encourage Savings

3. Capital Formation

4. Employment Generation

5. Facilitates International Trade

6. Supports Entrepreneurship

Classification of Financial Services Industry

I. Capital Market Intermediaries

II. Money Market Intermediaries

Major Institutions Providing Financial Services

Commercial Banks

Non-Banking Financial Companies (NBFCs)

Investment Banks

Evolution of Financial Services in India

Phase I (1960–1980)

Merchant Banking Era

Phase II (1980–1990)

Investment Companies Era

Phase III (1991 onwards)

Modern Financial Services Era

Present Trends in Financial Services

Nature and Characteristics of Financial Services

Functions of Financial Services Institutions

Constituents of Financial Services

Financial Instruments

Market Players

Specialized Institutions

Regulatory Bodies

Factors Affecting Access to Financial Services

Scope of Financial Services

Traditional Fund-Based Activities

Traditional Non-Fund-Based Activities

Modern Activities

Modern Financial Products

Innovative Financial Instruments

Challenges Before Financial Services Industry

Classroom Case Study

NEW FINANCIAL PRODUCTS AND SERVICES, INNOVATIVE FINANCIAL INSTRUMENTS & CHALLENGES AHEAD

1. NEW FINANCIAL PRODUCTS AND SERVICES

Financial services have continuously changed according to the changing requirements of customers, businesses, investors and financial markets.

Simple meaning

FINANCIAL PRODUCTS & SERVICES EMERGE

1. Changing customer requirements

2. Increasing competition

3. Globalisation

4. Technological development

5. Risk management requirements

6. Liberalisation

FEATURES OF NEW FINANCIAL PRODUCTS

Flexibility

Liquidity

Risk management

Better investment opportunities

Convenience

Customisation

4. IMPORTANT NEW FINANCIAL PRODUCTS AND SERVICES

5. MUTUAL FUNDS

Main advantages

Simple diagram

6. VENTURE CAPITAL

Venture capital is a form of investment provided to businesses with high growth potential, usually involving significant business risk.

Example

Key concept

7. CREDIT RATING

Meaning

Why is it needed?

Importance

8. FACTORING

Example

Main benefit

9. FORFAITING

Forfaiting is a financing mechanism generally associated with international trade in which an exporter obtains finance by assigning eligible medium- or long-term export receivables, usually without recourse under the agreed arrangement.