Q. 1) Describe the important functions of CRISIL or ICRA Answer: This answer is available in Parab sirs notes Credit Rating.pdf.

. Additional info is given below: a) A credit rating is technically an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. It is an informed indication of the likelihood of default of an issuer on a debt instrument, relative to the respective likelihoods of default of other issuers in the market. It is therefore an independent, easy-to-use measure of relative credit risk. Given the universal reliance on rating, and hence the power of the opinion, credit rating is expected to increase the efficiency of the market by reducing information asymmetry and lowering costs for both borrowers and lenders. b) In other words, a rating indicates the probability of default of the rated instrument and therefore provides a benchmark for measuring and pricing credit risk. c) Rating related products and activities CRAs in India rate a large number of financial products: 1. Bonds/ debentures- [the main product] 2. Commercial paper 3. Structured finance products 4. Bank loans 5. Fixed deposits and bank certificate of deposits 6. Mutual fund debt schemes 7. Initial Public Offers (IPOs) d) CRAs also undertake customised credit research of a number of borrowers in a credit portfolio, for the use of the lender. CRAs use their understanding of companies business and operations and their expertise in building frameworks for relative evaluation, which are then applied to arrive at performance grading. For example developer gradings are carried out to assess the ability of the developers to execute projects on a timely basis and promised quality. e) Non-rating related activities CRAs often undertake a variety of non rating related activities. These include the following: 1. Economy and Company Research: Some Indian CRAs have set up research arms to complement their rating activities. These arms carry out research on the economy, industries and specific companies, and make the same available to external subscribers for a fee. In addition, they disseminate opinions on the performance of the economy or specific industries, available through releases to the media. The research would also be used internally by the rating agencies for arriving at their rating opinions. SEBI permits CRAs to carry out this activity subject to relevant firewalls.

2. Risk consulting: With the application of Basel II regulations for banks, there is considerable demand for tools and products that will allow banks to compute their capital adequacy ratios under the revised guidelines. The risk consulting groups of credit rating agencies would leverage the agencies understanding of credit risk to develop and provide the tools and data that banks would require. The products in this area include tools for internal ratings, operational risk evaluation, and overall capital calculation. 3. Advisory services: CRAs offer various kinds of advisory services, usually through dedicated advisory arms. Most of this is in the nature of developing policy frameworks, bid process management, public private partnership consulting, and creating an enabling environment for business in India and globally. 4. Knowledge Process Outsourcing: Some Indian CRAs (CRISIL and ICRA) have KPO arms that leverage their analytical skills and other process and manpower capabilities. These arms provide services to the CRAs affiliates in developed markets, and also to other clients outside India.

Q. 8) What are the benefits to an investor because of the existence of financial intermediaries? Which are the important financial intermediaries in India? Answer: The financial system is a key factor when it comes to explaining and understanding the development of the worlds economy throughout the years. With this purpose, funds are to be efficiently transferred between deficit and surplus units that are brought together in order to achieve higher production and efficiency for the economy as a whole. The channelling of funds between the two groups mentioned can only happen accurately in the presence of particular participants and via main routes such as financial intermediaries (FIs). These institutions are engaged in bringing the two parties together by borrowing funds from lenders and lending them to borrowers so that both parties find the transaction more favourable than if they traded directly with each other. Financial intermediaries pool resources from various small investors so that they can be able to later lend those funds.

Primary role of FIs: Intermediation transforming assets

The function of transforming assets or liabilities into other assets or liabilities Liabilities deposits Assets loans Intermediation can be of two forms: a) maturity intermediation: If net borrowers and net lenders have different optimal time horizons, FIs can service both sectors by matching their asset and liability maturities through on- and off-balance sheet hedging activities and flexible access to the financial markets. For example, the FI can offer the relatively short-term liabilities desired by households and also satisfy the demand for long-term loans such as home mortgages. By investing in a portfolio of long-and short-term assets that have variable- and fixed-rate components, the FI can reduce maturity risk exposure by utilizing liabilities that have similar variable- and fixed-rate characteristics, or by using futures, options, swaps, and other derivative products. b) denomination intermediation: Denomination intermediation is the process whereby small investors are able to purchase pieces of assets that normally are sold only in large denominations. Individual savers often invest small amounts in mutual funds. The mutual funds pool these small amounts and purchase negotiable CDs which can only be sold in minimum increments of $100,000, but which often are sold in million dollar packages. Similarly, commercial paper often is sold only in minimum amounts of $250,000. Therefore small investors can benefit in the returns and low risk which these assets typically offer. Risks faced by investors: 1) Monitoring risk: Monitoring the activities of borrowers requires extensive time, expense, and expertise. As a result, investors would prefer to leave this activity to others, and by definition, the resulting lack of monitoring would increase the riskiness of investing in corporate debt and equity markets. FIs collect and process information more efficiently than individual investors. This provides inherent monitoring of the investments. 2) Liquidity risk: Liquidity risk occurs when savers are not able to sell their securities on demand. Commercial banks, for example, offer deposits that can be withdrawn at any time. Yet the banks make long-term loans or invest in illiquid assets because they are able to diversify their portfolios and better monitor the performance of firms that have borrowed or issued securities. Thus individual investors are able to realize the benefits of investing in primary assets without accepting the liquidity risk of direct investment. 3)Price risk (transaction costs): The price risk of transactions on the secondary market increases without the information flows and services generated by high volume. By pooling the assets of many small investors, FIs can gain economies of scale in transaction costs. This benefit occurs whether the FI is lending to a corporate or retail customer, or purchasing assets in the money and capital markets. In either case, operating activities that are designed to deal in large volumes typically are more efficient than those activities designed for small volumes. 4)Diversification risk: It is difficult for individual investors to diversify risk when they invest on their own. By diversifying the asset base, FIs provide secondary securities (issued by them to investors) with lower price-risk conditions than primary securities (securities bought directly from corporations, equity, etc.). Money placed in any financial institution will result in a

claim on a more diversified portfolio. Banks lend money to many different types of corporate, consumer, and government customers; and insurance companies have investments in many different types of assets. Investment in a mutual fund may generate the greatest diversification benefit because of the funds investment in a wide array of stocks and fixed income securities. Financial intermediaries in India are: (u can explain each ones role in detail)

Commercial Banks (deposits, advances); Merchant (Investment) Banks; (Issue Management, Underwriting, Portfolio Management, Stock Broking, Syndicated Credit, Mergers and Acquisitions, Capital Restructuring) Broking Firms (trading, raising capital); Insurance Companies; Mutual Funds.

Long-term sources of finance: Long-term financing can be raised from the following sources: Share capital or equity share (IPO/Rights issue/ private placement) Preference shares Retained earnings Debentures/Bonds of different types Term Loans /Debt Syndication Venture capital funding Asset securitization ECB

a)

Revival program for Sick industrial unit

Framework With 'Industries' being a subject on the Union List, the legislative frame-work within which the State Government has been required to design initiatives in this field are mainly 'The Companies Act 1956', 'The Sick Industrial Companies (Special Provisions) Act 1985' and The Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. All these statutes are Central legislation. Implications All these legislations have given priority to the secured creditors mainly Banks and Financial Institutions attached to any sick/weak industrial units in recovering their secured debt by inter alia, seeking winding-up of the Company or by taking possession of the secured assets of the borrower Company with right to transfer the same by way of lease, assignment or sale. Whenever, any industrial unit turns weak or sick and makes any default in repayment of its secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, they fail to get any financial support from the Banks/Financial Institutions concerned. This puts the sick units into threats of permanent closure. Activities The efforts of State Government have been to evolve a coherent policy for the benefit of all concerned. To discharge its responsibilities, the Department is required to undertake, interalia, the following activities towards this objective during the period: Preliminary enquiry in respect of sickness and closure of a unit; To facilitate the formulation of proposals for rehabilitation and reconstruction of sick and closed industrial units with reference also to direction of the Board for Industrial & Financial Reconstruction (BIFR), under SICA; To deal with civil rules and other cases arising at various Counts of law viz. Debt Recovery Tribunal (DRT), Hon'ble High Court/Supreme Court in connection with the implementation of various industrial rehabilitation schemes; arrange the appointment of Government Counsel to represent the interest of the State and keep a watch on developments in each case; To consider proposals under various Incentive Schemes of the State Government announced from time to time with a view to provide support to the revival/rehabilitation of eligible 'closed', 'sick' or 'weak' industrial units; To encourage measures for the operation of closed/sick industrial units by workers through Co-operative Societies, if feasible and where promoters are unwilling to make investments in their revival/rehabilitation effort.

Reference from Gokhale Sirs PPT

Management of NPAs SICA , 1986 Narsimham committee recommendations Recovery of debt to banks & financial institutions act 1993 Securities & Reconstruction of Financial assets & enforcement of security interest act 2002. To help Banks / FIIs reduce NPAs Enforcement of security interest act , 2002 Secured creditor can enforce the security directly, without intervention of court or tribunal after giving 60 days notice. If borrower does not pay outstanding interest & principal within that time secured creditor can take possession of the assets, management of assets or appoint any other person to manage the assets. The power can be only be exercised if the asset is an NPA as per RBI guideline which defines NPA if interest & installment is overdue for a period exceeding 180 days. Presently these powers are only to public financial institutions & banks. Secured creditor can sell the assets & if dues are not fully recovered he can file application with DRT for balance amount. Banks / Institutions can also hand over possession to securitization or reconstruction company. Appeal can be filed by the borrower with the DRT only after the assets or management is taken over and not at the stage of receiving notice. Jurisdiction of civil courts is barred however writ can always be filed in the high court Protection of SICA will not be available once secured creditor takes steps for realization of assets. Any reference pending with the BIFR will abate. Provisions of Asset reconstruction combine the features of securitization and enforcement of security interest. Act effective from June 21,2002. Act is based on the recommendation of the Narsihman committee reports

b)

Procedure pertaining to IPOs / Book Building

What is an IPO To Refresh: An IPO stands for Initial Public Offering, wherein a company issues its shares to the public for the first time. Investors can place requests to buy these shares and once done, the share gets listed in a registerd stock exchange and the company uses the share issue proceeds for its development/growth. Before we take a look at the steps in an IPO process, lets take a look at the entry norms for an IPO. Entry Norms for an IPO: Not all companys can issue shares to the public. SEBI has provided a list of requirements that need to be met by a company if they wish to go public. A company that wishes to go public needs to meet all of the below mentioned criteria Entry Norms I or EN I:

1. Net Tangible assets of atleast Rs. 3 crores for 3 full years 2. Distributable profits in atleast 3 years 3. Net worth of atleast 1 crore in 3 years 4. If there was a change in name, atleast 50% of the revenue in the preceeding year should be from the new activity 5. The issue size should not exceed 5 times the pre-issue networth of the company To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the above mentioned rules, SEBI has provided 2 alternate routes to companys that do not satisfy the criteria for accessing the primary market. They are as follows: Entry Norms II or EN II: 1. Issue shall be only through the book building route with atleast 50% allotted mandatorily to Qualified Institutional Buyers (QIBs) 2. The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market-making for atleast 2 years Or Entry Norms III or EN III: 1. The Project is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which atleast 10% comes from the appraiser(s). 2. The minimum post issue face value capital shall be Rs. 10 crores or there shall be a compulsory market-making for atleast 2 years 3. In addition to the above mentioned 2 points, the company shall also satisfy the criteria of having atleast 1000 prospective allotees in future. Steps in an IPO Process: Let us now have a look at how an initial public offering process is initiated and reaches its conclusion. The entire process is regulated by the 'Securities and Exchange Board of India (SEBI)', to prevent the possibility of a fraud and safeguard investor interest. Selection of Investment Bank The first thing that company management must do when they have taken a unanimous decision to go public is to find an investment bank or a conglomerate of investment banks that will act as underwriters on behalf of the company. Underwriter's buy the shares of the company and resell them to the general public. The company must also hire lawyers that can guide them through the legal maze that an IPO setup can be. It must be ready with detailed financial records for intensive fiscal health scrutiny that SEBI would perform. Some companies may also opt to directly sell their shares through the stock market, but most prefer going through the underwriters. Step 1: Preparation of Registration Statement To begin an IPO process, the company involved must submit a registration statement to the SEBI, which includes a detailed report of its fiscal health and business plans. SEBI scrutinizes this report and does its own background check of the company. It must also see that

registration statement fulfils all the mandatory requirements and satisfies all rules and regulations. Step 2: Getting the Prospectus Ready While awaiting the approval, the company, with assistance from the underwriters, must create a preliminary 'Red Herring' prospectus. It includes detailed financial records, future plans and the specification of expected share price range. This prospectus is meant for prospective investors who would be interested in buying the stock. It also has a legal warning about the IPO pending SEBI approval. Step 3: The Roadshow Once the prospectus is ready, underwriters and company officials go on countrywide 'roadshows', visiting the major trade hubs and promote the company's IPO among select few private buyers (Usually corporates or HNIs). They are fed with detailed information regarding company's future plans and growth potential. They get a feel of investor response through these tours and try to woo big investors. Step 4: SEBI Approval & Go Ahead Once SEBI is satisfied with the registration statement, it declares the statement to be effective, giving a go ahead for the IPO to happen and a date to be fixed for the same. Sometimes it asks for amendments to be made before giving its approval. The prospectus cannot be given to the public without the amendments suggested by SEBI. The company needs to select a stock exchange where it intends to sell its shares and get listed. Step 5: Deciding On Price Band & Share Number After the SEBI approval, the company, with assistance from the underwriters decide on the final price band of the shares and also decide the number of shares to be sold. There are two types of issues: Fixed Price and Book Building Fixed Price In a Fixed price issue the company decides the price of the share issue and the number of shares being sold. Ex: ABC Ltd public issue of 10 lakh shares of face value Rs. 10/- each at a premium of Rs. 55/- each is available to the public thereby generating Rs. 6.5 Crores. Book Building A Book building issue helps the company discover the price of the issue. The company decides a price band and it gives the investor an option to choose the price at which he/she wishes to bid for the company shares. Ex: ABC Ltd issue of 10 lakh shares of face value Rs. 10/- each at a price band of Rs. 60 to 70 is available to the public thereby generating upto Rs. 7 Crores. Here the amount generated through the issue would depend on the highest amount bid by most investors. Step 6: Available to Public for Purchase On the dates mentioned in the prospectus, the shares are available to public. Investors can fill out the IPO form and specify the price at which they wish to make the purchase and

submit the application. This open period usually lasts for 5 working days which is a SEBI requirement. Step 7: Issue Price Determination & Share Allotment Once the subscription period is over, members of the underwriting banks, share issuing company etc will meet and determine the price at which shares are to be allotted to the prospective investors. The price would be directly determined by the demand and the bid price quoted by investors. Once the price is finalized, shares are allotted to investors based on the bid amounts and the shares available. Note: In case of oversubscribed issues, shares are not allotted to all applicants. Step 8: Listing & Refund The last step is the listing in the stock exchange. Investors to whom shares were allotted would get the shares credited to their DEMAT accounts and for the remaining the money would be refunded. Difference between IPO in India and Abroad: 1. In India the book the book is built directly but in the west the underwriter takes the shares on his books and then allots shares to the investors 2. In India the book building process is transparent whereas in the US it is confidential 3. In India the book has to be open for a minimum of 5 business days and the period needs to be revised if the price band is revised whereas it can be opened and closed anytime abroad 4. Abroad, the price band is soft meaning the bidder can bid for a price outside the price band too whereas in india the band is fixed. 5. Retail investors in india have to put in a cheque or block an equivalent amount corresponding to the IPO bid in their DEMAT accounts but QIBs do not pay any margin. Whereas abroad, neither category needs to pay any margin. http://anandvijayakumar.blogspot.com/2010/11/ipo-process-explained.html