Essentials of Financial Services 3e

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Author(s): Dr. S. Gurusamy

Published by Vijay Nicole Imprints Private Limited

Publication Date: Mon Mar 06 07:48:49 UTC 2023 Available in all formats

ISBN: 9789393161963

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Designed to address the syllabi requirements of undergraduate students of commerce and management of various universities, this book provides a through foundation to the subject of financial services.

Salient Features:

-> Easy to understand style, simplifed and clear concepts.

->Authoriative coverage on topics such as Merchant banking, New Issues market, Capital Market & Stock Exchange.

-> Dedicated chapters on leasing, Hire Purchase, Consumer Finance, Venture Capital, etc.

->New Coverage of Pension Funds, Insurance, NBFC, Forfaiting and SEBI guidelines on Mutual Funds.

-> Pedagogical Features include

End-of-chapter review questions

A Wealth of objective type questions namely MCQs, Fill in the blanks& True or False to reinforce and add value to learning

Cover
Title Page
Copyright Page
Contents
Preface
Chapter 1 Financial Services – An Overview
- Financial Services—Concept
  - Financial Services—Objectives/Functions
- Financial Services—Characteristics
- Financial Services Market—Concept
- Financial Services Market—Constituents
- Growth of Financial Services in India
- Merchant Banking Era
  - Investment Companies Era
  - Modern Services Era
  - Depository Era
  - Legislative Era
  - Foreign Institutional Investors (FIIs) Era
- Financial Services Sector—Problems
- Review Questions
Chapter 2 Financial Services Environment
- The Forces
  - Employment and Unemployment
  - Inflation and Deflation
  - Trade Cycles
  - Stagflation
  - Economic Growth
  - Exchange Rate and Balance of Payments
  - Deregulatory Measures
  - Technological Changes
  - Enhanced Competition
  - Global Portfolio Preferences
- Players in Financial Markets
  - Households
  - Business Firms
  - Financial Firms
  - Governments
  - External Agencies
- Interest Rate Determination
  - Meaning
  - Features
  - Determining the Rate of Interest
- Macroeconomic Aggregates in India
  - Real Sector Policies
  - Fiscal Policies
  - Agriculture Policy
  - Policy on Manufacturing, Infrastructure and Services
  - Trade Policies
  - Export and Import (EXIM) Policy
  - Policies for External Capital Flows
  - Fiscal Policy
  - Tax Measures
  - Structural Reforms
- Goods and Services Tax (GST)
- Demonetization
- Review Questions
Chapter 3 Merchant Banking
- Definition
  - Merchant Bankers
- Functions
  - Corporate Counselling
  - Project Counselling
  - Pre-investment Studies
  - Capital Restructuring Services
  - Credit Syndication
  - Issue Management and Underwriting
  - Portfolio Management
  - Working Capital Finance
  - Acceptance Credit and Bill Discounting
  - Mergers and Acquisition
  - Venture Financing
  - Lease Financing
  - Foreign Currency Financing
  - Brokering Fixed Deposits
  - Mutual Funds
  - Relief to Sick Industries
  - Project Appraisal
- Merchant Bankers’ Code of Conduct
- SEBI Guidelines
  - Operational Guidelines
- Review Questions
Chapter 4 Public Issue Management
- Meaning
- Functions
- Categories of Securities Issue
  - Public Issue of Securities
  - Rights Issue
  - Private Placement
- Mechanics of Public Issue Management
- Issue Manager
  - Requirements
  - Categories of Issue Managers
- Role of Issue Manager
- Activities Involved in Public Issue Management
  - Pre Issue Activities
  - Post Issue Activities
- Marketing of Issue
  - Need
  - Steps
- Public Issue Proposal — Factors
- Pricing of Issues
  - CCI Model
  - Safety Net Scheme
- Law Relating to Issue Management
  - SEBI Rules and Regulations
- Review Questions
Chapter 5 New Issues Market (NIM)
- NIM and Secondary Markets—An Interface
- Services of NIM
  - Transfer Function
- NIM Vs Secondary Market
- Methods of Marketing Securities
  - Pure Prospectus Method
  - Offer for Sale Method
  - Private Placement Method
  - Initial Public Offer (IPO) Method
  - Rights Issue Method
  - Bonus Issue Method
  - SEBI Guidelines
  - Rights Issue Vs Bonus Issue
- Book-building Method
  - Advantages of Book-Building
  - Stock Option or Employees Stock Option Scheme (ESOP)
  - Bought-Out Deals
  - Bought-Out Deals Vs Private Placements
- Review Questions
Chapter 6 Underwriting of Securities
- Meaning
- Types
  - Firm Underwriting
  - Sub-Underwriting
  - Joint Underwriting
  - Syndicate Underwriting
- Underwriter
- Underwriting Agreement
- Benefits/Functions
- Mechanics of Underwriting
- Indian Scenario
- Underwriting Agencies
  - Private Agencies
  - Investment Companies
  - Commercial Banks
  - Development Finance Institutions (DFIs)
- Obstacles
- SEBI Guidelines
- Variants of Underwriting
  - Offer for Sale
  - Bought-Out Deals (BODs)
  - Private Placement
  - Grey Market
- Review Questions
Chapter 7 Capital Market
- Meaning
- Money Market
- Characteristics
- Functions
  - Allocation Function
  - Liquidity Function
  - Other Functions
- Indian Capital Market — Evolution and Growth
  - Infrastructure Stage
  - New Issues Stage
  - The SEBI Stage
  - Structural Transformation
- Constituents of Indian Capital Market
  - Gilt-Edged Market
  - Industrial Securities Market
  - Primary Market
  - Modes of Raising Capital
  - Secondary Market
- New Financial Institutions
  - Venture Fund Institutions
  - Mutual Funds
  - Factoring Institutions
  - Credit Rating Institutions
  - Over-The-Counter Exchange of India (OTCEI)
  - National Stock Exchange of India Limited (NSEI)
  - National Clearance and Depository System (NCDS)
  - National Securities Depositories Limited (NSDL)
  - Stock Holding Corporation of India Limited (SHCIL)
  - New Financial Instruments
  - Commercial Paper (CP)
  - Certificate of Deposit (CD)
  - Secured Premium Notes (SPN) with Attached Warrant
  - Non-Convertible Debenture (NCD) with Detachable Equity Warrants
  - Zero Coupon Bonds
  - Zero Interest Fully Convertible Debentures (FCD)
  - Deep Discount Bonds
  - Stock Invest
  - Equity Shares with Detachable Warrants
  - Equipref Shares
  - Preference Shares with Warrants Attached
  - Euro Issues
  - Non-Voting Right Shares
  - Other Innovative Instruments
- Measures of Investor Protection
- SCRA
- Review Questions
Chapter 8 Stock Exchange
- History of Stock Exchanges
- Meaning
- Definition
- Functions/Services/Features/Role
- Stock Exchange and Commodity Exchange Distinguished
- Stock Exchange Traders
  - Remisiers
  - Authorized Clerks
  - Brokers and Jobbers
  - Tarawaniwalas
  - Dealers
- Weaknesses
- Regulation of Stock Exchanges
  - Regulatory Structure
- Steps in Stock Trading
- Mechanics of Settlement
  - Types
  - Counter Party Default
  - Settlement Guarantee Mechanism
- Depository
  - Need
- Stock Trading System
  - Auction Trading System
  - Dealer Trading System
  - Hybrid Trading
  - Margin Trading
- Specialists
  - Functions of Specialists
  - Market-Makers
  - Broker-Dealer
- Recent Developments
  - Over-The-Counter Market System
  - National Stock Market System (NSMS)
  - National Stock Exchange (NSE)
  - Stock Holding Corporation of India Limited (SHCIL)
  - National Clearance and Depository System (NCDS)
  - Securities Trading Corporation of India (STCI)
  - Corporatization and Demutualization
- Review Questions
Chapter 9 SEBI - Function and Working
- Genesis
- Features of the SEBI Bill
- Objectives
- Management
- Powers and Functions
  - Under the SEBI Act
  - Under the SCRA
  - Registration of Intermediaries
  - Directions from Government
  - Power to Make Rules
  - Power to Make Regulations
  - Power to Adjudicate
- Regulatory Role
- Role and Relevance
  - Credible Regulatory Structure
  - Market Surveillance
  - Disclosure Standards
  - Best Governing Practices
  - Building Investor Confidence
- Global Outlook
- Review Questions
Chapter 10 Leasing
- Meaning
- Characteristics of Lease
- Types of Lease
  - Financial Lease
  - Operating Lease
  - Cross-border Leasing
  - Japanese Cross-border Leasing
  - International Leasing
- Financial Lease Vs Operating Lease
- Test for Financial Lease
- Myths About Leasing
- Participants
  - Lessors
  - Lessees
  - Lease Brokers
  - Lease Financiers
  - Leasing Process
- Services of Lessor
  - Comprehensive Package
- Advantages of Leasing
  - Advantages to Lessor
  - Advantages to Lessee
- Limitations of Lease Financing
- Review Questions
Chapter 11 Accounting for Lease
- Meaning of Lease
- Financial Lease
- Operating Lease
- Accounting and Reporting for Financial Lease – Books of the Lessor
- Adjustment in Balance Sheet
- Important Computations
- Accounting and Reporting for Financial Lease – Books of the Lessee
- Accounting and Reporting for Operating Lease – Books of the Lessor
  - Implicit Rate of Interest
- Review Questions
Chapter 12 Hire Purchase
- Meaning
- Rights of Hirer
  - Right of Protection
  - Right of Notice
  - Right of Repossession
  - Right of Statement
  - Right to Excess Amount
- Rate of Interest
  - Add-on Rate of Interest
  - Flat Rate of Interest
  - Effective Rate of Interest
- Lease Financing Vs Hire Purchase Financing
- Accounting for Hire purchase
- Methods of Interest Calculation
  - Effective Rate of Interest (ERI)
  - Sum-of-Years Digits Method
  - Straight-Line Method
- Method of Reporting
  - Disclosure in Hirer Books
  - Disclosure in Hire Vendor Books
- Lease Vs Hire Purchase Evaluation
  - Solution
- Review Questions
Chapter 13 Factoring and Forfaiting
- Meaning
- Definition
- Mechanism
- Characteristics
- Factoring and Off-balance Sheet Financing
- Types of Factoring
  - Domestic Factoring
  - Export Factoring
  - Cross-border Factoring
  - Modus Operandi
  - Full-Service Factoring
  - With Recourse Factoring
  - Without Recourse Factoring
  - Advance and Maturity Factoring
  - Bank Participation Factoring
  - Collection/Maturing Factoring
- Advantages of Factoring
- Disadvantages of Factoring
- Factoring—Players
  - The Buyer
  - The Seller
  - The Factor
- Functions of a Factor
  - Sales Ledger Administration
  - Provision of Collection Facility
  - Financing Trade Debts
  - Credit Control and Protection
  - Advisory Services
- Factoring Cost
  - Commission
  - Interest Charges
- Line of Credit—Methods
  - Objective Method
  - Subjective Method
  - Factoring Vs Bills Discounting
- RBI Guidelines for Factoring
  - Prior Approval
  - Subsidiaries
  - Exclusive Business
  - Investment Limit
  - RBI Clearance
  - Reporting
- Factoring—Indian Scenario
- Operational Profile of Indian Factoring
  - Domestic Factoring
  - Export Factoring
- Operational Problems in Indian Factoring
- Forfaiting
  - Definition
  - Characteristics
  - Modus Operandi
  - Advantages of Forfaiting
- Factoring Vs Forfaiting
- Forfaiting – Indian Scenario
- Review Questions
Chapter 14 Consumer Finance
- Meaning
- Types
- Mechanics of Consumer Financing
- Sources of Consumer Finance
  - Traders
  - Commercial Banks
  - Credit Card Institutions
  - Non-Banking Finance Companies (NBFCs)
  - Credit Unions
  - Middlemen
  - Other Sources
- Modes of Consumer Finance
- Demand for Consumer Finance—Factors
- Consumer Financing—Practice in India
  - Products Covered
  - Terms of Finance
- Pricing of Consumer Finance
- Marketing Consumer Finance
- Consumer Finance Insurance
- Consumer Credit Scoring
  - Dunham Greenberg Formula
  - Specific Fixed Formula
  - Machinery Risk Formula
- Case for Consumer Finance
- Case against Consumer Finance
- Boom in Consumer Financing
- Hire Purchase System (HPS)
  - Definition
  - Characteristics
- Advantages of Hire Purchase System
  - Disadvantages of Hire Purchase System
  - Hire Purchase Cost
  - Eligibility
- Instalment Credit System (ICS)
  - Definition
  - Features
- Hire Purchase System Vs Instalment Credit System
- Review Questions
Chapter 15 Venture Capital
- Meaning
- Definition
- Rationale
- Features
- Methods of Evaluation
  - Conventional Method
  - First Chicago Method
  - Revenue Multiplier Method
- Origin and Growth of Venture Capital
  - USA
  - UK
  - Europe
  - Japan and Asia
  - Taiwan
  - Israel
  - India
- Venture Capital and Other Funds
  - Venture Capital and Development Capital
  - Venture Capital, Seed Capital and Risk Capital
  - Venture Capital and National Equity Fund for Small Entrepreneur
  - Stages of Venture Capital Financing Seed Capital
  - Start-up Financing
  - Early-stage Financing
  - Follow-on Financing
  - Expansion Financing
  - Replacement Financing
  - Turnaround Financing
  - Management Buy-Outs (MBOs)
  - Management Buy-Ins
  - Mezzanine Finance
- Analyzing Venture Capital Proposals—Criteria
  - Fundamental Analysis
  - Financial Analysis
  - Portfolio Analysis
  - Divestment Analysis
- Buy-Outs
  - Advantages
  - Precautions
  - Types
  - Management Buy-Outs
  - Shareholder Buy-Outs
  - Receivership Buy-Outs
- Financial Sources
- Investment Nurturing
  - Definition
  - Objectives
  - Elements
- Styles of Venture Financing
  - Hands-on Nurturing
  - Hands-off Nurturing
  - Hands-Holding Nurturing
- Nurturing Methods
  - Personal Discussions
  - Plant Visits
  - Feedback
  - Periodic Reports
  - Commissioned Studies
- Compensation
- Forms of Organization
  - Limited Partnership
  - Investment Company
  - Investment Trust
  - Offshore Investment Company
  - Offshore Unit Trust
  - Small Business Investment Company
- Exit Mechanism
  - Methods of Exit
- Review Questions
Chapter 16 Mutual Funds
- Definition
  - Features/Role/Benefits
- Products/Schemes
  - Operational Classification
  - Return-Based Classification
  - Investment-Based Classification
- Mechanics of Mutual Fund Operations
- Mutual Funds in India
- Managing Mutual Funds in India
  - The Sponsor
  - The Trustees
  - The Custodians
  - Asset Management Company (AMC)
- SEBI requirements of AMC
  - Track Record
  - Reputation
  - Expertise
  - Operational Autonomy
  - Contribution
- Functions of AMC
  - Registrars and Transfer Agents
  - Fund Accountants
  - Lead Managers
  - Investment Advisors
  - Legal Advisors
  - Auditors
  - Underwriters
- Working Mechanism of AMC
  - Creating Fund Manager
  - Research and Planning
  - Creating Dealers
- Portfolio Management Process in Mutual Funds
  - Setting Investment Goal
  - Identifying Specific Securities
  - Portfolio Designing
  - Portfolio Revision
- Operational Efficiency of Mutual Funds
  - Net Return
  - Net Asset Value (NAV)
  - Load
  - Disclosures
  - Voting Right to Investors
  - Investors’ Protection
- Evaluating Mutual Funds
  - Treynor Model
  - Sharpe Model
- Mutual Fund Holders’ Account
  - Regular Account
  - Accumulation Account
  - Withdrawal Account
- Causes for Poor Performance of Mutual Funds
- Review Questions
Chapter 17 Credit Rating
- Impetus
- Origin
- Definition
- Features
- Advantages
  - To Investors
  - To Issuers
  - To Intermediaries
  - To Regulators
- Credit Rating System—Growth Factors
  - Credibility and Independence
  - Capital Market Mechanism
  - Disclosure Requirements
  - Credit Education
  - Creation of Debt Market
- Global Credit Rating Agencies
  - Moody’s Investors Service (Moody’s)
  - Standard and Poor’s Corporation (S&P)
  - Duff and Phelps Credit Rating Co (DCR)
  - Japan Credit Rating Agency (JCR)
  - IBCA Limited
  - Thomson Bank Watch
- Domestic Credit Rating Agencies
- CRISIL
- ICRA
- CARE
- Credit Rating Symbols
  - CRISIL (Credit Rating and Information Services of India Limited)
  - CRISIL Fixed Deposit Rating Symbols
- CRISIL Ratings for Short-Term Instruments
- Credit Rating Process
- Rating Framework—Major Factors
  - Business Factors
  - Financial Factors
- Equity Grading
  - The Need
  - Equity Grading by ICRA—Methodology
  - Equity Grading Process by ICRA
  - Credit Rating—Drawbacks
- Review Questions
Chapter 18 Insurance - An Overview
- Definition
- Basic Principles of Insurance
- Reinsurance
- Life Insurance
  - Meaning
  - Policies
- General Insurance
  - Meaning
  - Types
  - Fire Insurance
  - Marine Insurance
  - Policies
  - Other Insurances
  - Liability Insurance
- Concept of Insurance Services
- Health Insurance
  - Meaning
  - Health Insurance Policy
  - Health Insurance Plan
  - Employer Sponsored Plans
  - Government Sponsored Plans
  - Need for Health Insurance
- Motor Insurance
  - Meaning
  - Nature
  - Property Accident Aspect
  - Personal Accident Aspect
- Rural Insurance
  - Meaning
  - Potential
  - Delivery Channels
- Annuity
  - Definition
  - Features
  - Types
  - Fixed Annuity
  - Types of Fixed Annuity
  - Variable Annuity
  - Equity-Indexed Annuity
- Review Questions
Chapter 19 Insurance - Regulatory Framework
- The Insurance Act
- Insurance Regulatory and Development Authority of India (IRDAI)
  - Composition
  - Duties
  - Powers and Functions
  - Constitution
  - Composition of Authority
  - Tenure of Office
  - Administrative Powers
  - Meeting of Authority
  - Grants by Central Government
  - The Fund
  - Accounts and Audit
  - Powers of Central Government
  - Superceding Powers
- Insurance Advisory Committee
- Power to Make Regulations
- Major Amendments to Insurance Act
  - The First Schedule
  - Capital Requirements
  - Divesting Excess Shareholding
  - Conditions of Investment
  - Rural or Social Sector
  - Investigation and Inspection
- Insurance Agents, Intermediaries and Surveyors
  - Insurance Agents
  - Issue of Licence to Intermediary
  - Surveyors
- Review questions
Chapter 20 Pension Plan
- Concept of Pension
  - Meaning
  - Definition
- Pension Fund
- Pension System
  - Meaning
  - Types
- Objectives/Features of Pension Fund
  - Insurance Against Infirmness
  - Socio-economic Justification
  - Employee’s Right
  - Balance of Interest
- Types of Pension Fund
  - Based on Generic
  - Features/Benefits
  - Limitations
  - Features/Benefits
  - Drawbacks
  - Defined Benefit Plan Vs Defined Contribution Plan
  - Based on Funding Nature
  - Based on Sponsors
  - Private Pension Fund
  - Public Pension Fund
  - Taft Hartley Pension Plan
  - Individual Pension Plan
- Other Categories
  - Voluntary Pension Fund
  - Mandatory Pension Fund
  - Income Smoothing Pension Fund
  - Redistributive Pension Fund
  - Insured Pension Fund
  - Non-Insured Pension Fund
  - Qualified Pension Fund
  - Hybrid Pension Fund
  - Cash Balance Pension Fund
  - Features
- Functions/Benefits of Pension Fund
  - Peaceful Retired Living
  - Income Opportunity
  - Cushion Against Volatile Income
  - Fair Determination of Income
  - Low Risk Option
  - Professional Management
  - Tax Advantage
  - Planned Retirement
  - Voluntary Offer
  - Confidence
  - Regular Income
  - Less Risk
  - Protection Against Longevity Risk
  - Financial ‘Myopia’
  - Poverty Alleviation
  - Social Solidarity
- Pension Fund-Growth Factors
  - Growth in Income
  - Longer Life Expectancy
  - Tax Advantage
- Pension Fund Vs Mutual Fund
- Chilean Model
- Pension Investment Policy
  - Investment Factors
  - Investment Constraints
  - Investment Pattern
- Pension Structure
  - Pillar I
  - Pillar II
  - Pillar III
  - Multi-Pillar System
- Pension Risks
- Social Security
  - Models
  - Theories
- Pension Financing
  - Financing Mode
  - Actuarial Valuations
- Projecting Pensions
  - Present Value Technique
- Review Questions
Chapter 21 Non-Banking Financial Companies (NBFCs)
- Meaning
- NBFC Entities
- Registration
- Principle Business of NBFCs
  - NBFCs Registered with RBI
  - NBFCs not Registered with RBI
- Structure of NBFCs
- Supervision of NBFCs
  - ALM System for NBFCs
  - Regulatory Framework – As Regards NBFCs Registered with RBI
  - The Need
  - Banks & NBFCs – A Regulatory Interface
- Regulations Governing NBFCs
- RBI Measures on NBFCs
  - Depositor Protection
  - Web Project
  - Entry into Insurance Business
  - Rationalization of Returns
  - Focus on Large NBFCs
  - Residuary Non-Banking Companies (RNBCs)
- Review Questions
Chapter 22 Securitization and SARFAESI Act, 2002
- Securitization
  - Meaning
- Receivable-Generating Assets
- Securitized Assets
- Cash Flow from Securitized Assets
- Parties and participants in Securitization
- Securitization Process
- Types of Securitization
- Benefits of securitization
  - Benefits to Originator
  - Benefits to Investors
- Limitations of securitization
- SARFAESI Act, 2002
  - Definition
  - Purpose
  - CERSAI
  - The Background
- Recovery Mechanism
- Major Provisions
- Review Questions
Index

Dr. S. Gurusamy holds a doctorate in Financial Services. He specializes in the areas of financial management, financial institutions/markets/services, banking and insurance. He has over 30 years of teaching and research experience. He is former Professor and Head, Department of Commerce, University of Madras, Chennai.

Essentials of

Financial Services

Third Edition

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Essentials of Financial Services, 3e

ISBN: 978-81-8209-459-8

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