Finance Mgmt q.p

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Each Question carry 10 marks

Why do you think financial markets are required. What are your views on proper regulation of th

Well-functioning money markets, foreign exchange markets, and

secondary markets for securities are important factors in the transmission

of monetary policy to the economy as well as a key foundation

for long-term economic growth and stability. However, in recent

months, severe fi nancial tensions following the global credit crisis

have shaken this important foundation in Iceland. For the future,

it is important that market participants continue to address these

issues in an appropriate way. The development and growth of a

well-functioning swap and derivatives market will continue to play

a central role in improving risk management and fi nancial stability

and, ultimately, price stability and overall economic stability.1

Money and interest rate swap markets

Competitive and liquid money markets allow market participants to

access short-term funding or investment possibilities and manage

liquidity risk. Furthermore, they support the transmission of monetary

policy to the real economy, provide information on market

participants’ assessment of future interest rates, and enhance price

formation for fi nancial assets. In recent months, trading volume in

the interbank market for domestic currency – where commercial and

savings banks make short-term loan agreements with each other –

has been very low. The disappearance of external funding liquidity

through FX swaps led to an evaporation of domestic market liquidity

under stress.2 Turnover fell from 80 in March to 12.7 in

April and diminished further to 9.5 in May (see Chart 1). Tensions

in money markets have been widespread across the world, and

interbank market rates in developed countries have soared, refl ecting

higher credit risk.


2. Discuss the evolution of Financial services

in India. What are the problems faced by financial services industry in India?

With recent growth rates among large countries second only to China’s, India has

experienced nothing short of an economic transformation since the liberalization process

began in the early 1990’s. In the last few years, with a soaring stock market, significant

foreign portfolio inflows including the largest private equity inflows in Asia, and a

rapidly developing derivatives market, the Indian financial system has been witnessing an

exciting era of transformation. The banking sector has seen major changes with

deregulation of interest rates and the emergence of strong domestic private players as

well as foreign banks. At the same time, there is some evidence of credit constraints for

India’s SME firms that rely heavily on trade credit. Corporate governance norms in India

have strengthened rapidly in the past few years. Family businesses, however, still

dominate the landscape and investor protection, while excellent on paper, appears to be

less effective owing to an overburdened legal system and corruption. In the last few years

microfinance has contributed in a big way to financial inclusion and is now attracting

venture capital and for-profit companies – both domestic and foreign.

One of the major economic developments of this decade has been the recent takeoff

of India, with growth rates averaging in excess of 8% for the last four years, a stock

market that has risen over three-fold in as many years with a rising inflow of foreign

investment. In 2006, total equity issuance reached $19.2bn in India, up 22 per cent.

Merger and acquisition volume was a record $27.8bn, up 38 per cent, driven by a 371 per

cent increase in outbound acquisitions exceeding for the first time inbound deal volumes.

Debt issuance reached an all-time high of $13.7bn, up 28 per cent from a year earlier.

Indian companies were also among the world's most active issuers of depositary receipts

in the first half of 2006, accounting for one in three new issues globally, according to the

Bank of New York.

The questions and challenges that India faces in the first decade of the new

millennium are therefore fundamentally different from those that it has wrestled with for

decades after independence. Liberalization and globalization have breathed new life into

the foreign exchange markets while simultaneously besetting them with new challenges.

Commodity trading, particularly trade in commodity futures, have practically started

from scratch to attain scale and attention. The banking industry has moved from an era of

rigid controls and government interference to a more market-governed system. New

private banks have made their presence felt in a very strong way and several foreign

banks have entered the country. Over the years, microfinance has emerged as an

important element of the Indian financial system increasing its outreach and providing

much-needed financial services to millions of poor Indian households.

1.1 The Indian Economy -- A Brief History

The second most populated country in the world (1.11 billion), India currently has

the fourth largest economy in PPP terms, and is closing in at the heels of the third largest

economy, Japan (Table 1.1). At independence from the British in 1947, India inherited

one of the world’s poorest economies (the manufacturing sector accounted for only one



tenth of the national product), but also one with arguably the best formal financial

markets in the developing world, with four functioning stock exchanges (the oldest one

predating the Tokyo Stock Exchange) and clearly defined rules governing listing, trading

and settlements; a well-developed equity culture if only among the urban rich; a banking

system with clear lending norms and recovery procedures; and better corporate laws than

most other erstwhile colonies. The 1956 Indian Companies Act, as well as other

corporate laws and laws protecting the investors’ rights, were built on this foundation.

After independence, a decades-long turn towards socialism put in place a regime

and culture of licensing, protection and widespread red-tape breeding corruption. In

1990-91 India faced a severe balance of payments crisis ushering in an era of reforms

comprising deregulation, liberalization of the external sector and partial privatization of

some of the state sector enterprises. For about three decades after independence, India

grew at an average rate of 3.5% (infamously labeled “the Hindu rate of growth”) and then

accelerated to an average of about 5.6% since the 1980’s. The growth surge actually

started in the mid-1970s except for a disastrous single year, 1979-80. As we have seen in

Table 1.1, the annual GDP growth rate (based on inflation adjusted, constant prices) of

5.9% during 1990-2005 is the second highest among the world’s largest economies,

behind only China’s 10.1%.

3. a)'Stock exchanges in India have not served their purpose.' Do you agree? Validate your arguments. In early 1990s, Indian economic policy made a radical shift by dismantling the entire edifice of micro management and controls. Industrial Licensing was abolished and foreign investment allowed in most sectors. Restrictions on large business houses were abolished and the MRTP Act radically changed. Restrictions on foreign trade were lowered to meet the new WTO norms. Simultaneously, the banking and capital markets were deregulated. The Indian firms were allowed to tap international capital markets and many listed themselves on the western stock exchanges. Foreign institutional investors were allowed to enter the Indian capital markets which substantially increased its size and depth. With the abolition of the restrictions on mergers and takeovers (including hostile takeovers) changed the entire landscape of Indian business. The Indian business conglomerates had so far been shaped by the industrial licensing policy and their success in lobbying for these licenses. Often the capacity in the same industry (eg. cement) was fragmented between numerous firms controlled by the same business house. Many units lacked global economies of scale as well as technology. The deregulation substantially increased the competitive pressures on Indian business, especially with the entry of multinational companies in areas earlier exclusively reserved for local firms and public sector. Access to bank credit and development finance became difficult and costlier. Credit rating became a pre condition. All this called for radical re structuring of the business portfolio in the Indian business houses. The first decade was spent in evaluating the business portfolios, selecting which to divest while improving the scale and competitive positions of others. Entry of multinational competitions now required Indian firms to have world class technology, product features and services along with global economies of scale. They were also required to erect strategic entry barriers and enhance their brands and distribution networks. This led to large scale mergers between groups companies (controlled by the same business house) to achieve scale and synergy. In addition there were acquisition from outside the group to enhance product scope, brands or


The financial sector reforms and the changing nature of banking and capital markets generated pressures that had a direct bearing on corporate governance and policies. Credit ratings and access to markets required more transparent disclosures and financial scale to tap the new segments opening up. The capital markets also generated pressures to reduce intra groups investment as financial analysts and FIIs

disapproved of such cross investments and diversion of funds. This was accompanied an aggressive entry by foreign firms into the Indian market. The foreign firms, almost without exception ejected their joint venture partners to more closely integrate their Indian affiliates in their global operations. Those foreign firms entering India for the first time became aggressive buyers of local firms with entrenched positions, distribution networks and capacity to speed their entry into India. The sharp devaluation of the rupee also made Indian corporate assets relatively cheap. This changing competitive scenario required a strategic response from the Indian business houses. They needed to consolidate their control in light of new rules permitting hostile takeovers. Divestiture of weaker or poorly performing units was necessary to protect many firms from hostile takeovers. The advantage to foreign firms with integrated global operations needed to be neutralized and the most successful houses embarked on a strategy of takeover and expansion in other countries.


A much talked about regulatory dilemma is that of balancing the rights of minority shareholders against the principle of shareholder democracy. On closer examination, this regulatory dilemma is not as serious as it might appear at first sight. In many ways, the very term shareholder democracy represents a

misguided analogy between political governance and corporate governance. Unlike political governance, corporate governance is primarily contractual in nature, and corporate governance is at bottom a matter of enforcing the spirit of this contractual relationship.

It is important to bear in mind that the relation between the company and its shareholders and the relation between the shareholders inter-se is primarily contractual in nature. The memorandum and articles of association of the company constitute the core of this contract and the corporate law provides the framework within which the contracts operate. The essence of this contractual relationship is that each shareholder is entitled to a share in the profits and assets of the company in proportion to his

shareholding. Flowing from this is the fact that the Board and the management of the company have a fiduciary responsibility towards each and every shareholder and not just towards the majority or dominant shareholder.

Shareholder democracy is not the essence of the corporate form of business at all. Shares are first and foremost ownership rights - rights to profits and assets. In some cases (non voting shares for example) that is all there is to it. In other cases, shares also carry some secondary rights including the control rights - rights to appoint the Board and approve certain major decisions. The term shareholder democracy focuses on the secondary and less important part of shareholder rights. Corporate governance ought to be concerned more about ownership rights. If a shareholder’s ownership rights have been trampled upon, it is no answer to say that his control rights have been fully respected.



The past few years have witnessed a silent revolution in Indian corporate governance where managements have woken up to the power of minority shareholders who vote with their wallets. In response to this power, the more progressive companies are voluntarily accepting tougher accounting standards and more stringent disclosure norms than are mandated by law. They are also adopting more healthy governance practices. It is evident that these tendencies would be strengthened by a variety of forces that are acting today and would become stronger in years to come. The reasons due to which corporate governance has seen improvements are as follows

1. Deregulation: Economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive companies will need to invest continuously on a large scale.

2. Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.

3. Institutionalization: Simultaneously, the increasing institutionalization of the capital markets has tremendously enhanced the disciplining power of the market.

4. Globalization: Globalization of our financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets.

5. Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from black money transactions. This makes the worst forms of misgovernance less attractive than in the past.


The corporate governance framework should ensure the equitable treatment of all shareholders, including minority shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

The main challenges in ensuring equitable treatment of minority shareholders include:

1. Ensuring that the Board adopts a shareholders’ perspective when making decisions and ensuring minority shareholders’ interests are protected;

2. Improvements to the corporate governance;

3. Concerns of stakeholders at large vs shareholders of the Company;

4. Improving communications and interactions between minority shareholders, Board members and management;

All these concerns of minority shareholders will be met substantially if a corporate house is able to ensure that the basic rights of the minority are met. These basic rights with their constituents are mentioned below:

I. Equitable Treatment.

1. Same voting rights for shareholders within each class.

2. Ability to obtain information about voting rights attached to all classes before share acquisition.


4. Vote by custodians or nominees in agreement with beneficial owner.

5. AGM processes and procedures to allow for equitable treatment.

6. Avoidance of undue difficulties and expenses in relation to voting.

II. The right to seek information

1. Right to know about the price sensitive information of the company,

2. Fairness to all shareholders irrespective of each individual’s shareholdings.

3. Right to inspect the Register of Members, Directors, Charges, Debenture Holders, etc and get copy thereof.

4. Right to receive Notice of General Meetings (the AGM or the EGM).

5. Rights to receive annual report and audited accounts.

6. Right to receive quarterly and annual accounts.

7. Right to inspect the Minutes of General Meetings.


III. The right to voice opinion

1. Right to attend general meetings.

2. Right to requisition for a general meeting.

3. Right to get the court to direct the company to call a general meeting.

4. Right to appoint proxies to attend and vote at a general meeting.

5. Right to be heard and make proposals at shareholders’ meeting.

6. Right to vote and elect directors and fix their remuneration.

7. Right to nominate director.

8. Right to appoint auditors and fix their remuneration.

9. Right to receive dividends, if declared.

IV. Disclosure and Transparency


2. Financial and operating results

3. Company objectives

4. Major share ownership and voting rights

5. Board members, key executives and their remuneration

6. Material foreseeable risk factors

7. Material issues regarding employees and other stakeholders

8. Governance structures and policies

V. The right to seek redress

1. Common law derivative action

2. Redress mechanism under the Companies Act



Company Law

The primary protection to minority shareholders is laid down in the companies law. Some of these provisions are the regulatory equivalent of an atom bomb - they are drastic remedies suitable only for the gravest cases of misgovernance.

I. Protection of minority shareholders

Company law provides that a company can be wound up if the Court is of the opinion that it is just and equitable to do so. This is, of course, the ultimate resort for a shareholder to enforce his ownership rights. Rather than let the value of his shareholding be frittered away by the enrichment of the dominant

shareholder, he approaches the court to wind up the company and give him his share of the assets of the company. In most realistic situations, this is hardly a meaningful remedy as the break-up value of a company when it is wound up is far less than its value as a “going concern”. It is well known that winding up and other bankruptcy procedures usually lead only to the enrichment of the lawyers and other

intermediaries involved.

Company law also provides for another remedy if the minority shareholders can show that the company’s affairs are being conducted in a manner prejudicial to the interests of the company or its shareholders to such an extent as to make it just and equitable to wind it up. Instead of approaching the Court, they can approach the Company Law Tribunal). The Company Law Tribunal which is a quasi-judicial body can make suitable orders if it is satisfied that it is just and equitable to wind up the company on these grounds, but that such winding up would unfairly prejudice the members. In particular, the Tribunal may regulate the conduct of the company’s affairs in future, order the buyout of the minority shareholders by the other shareholders or by the company itself, set aside or modify certain contracts entered into by the company, or appoint a receiver. The Tribunal could also provide for some directors of the company to be appointed by the Central Government, or by proportional representation. The Tribunal normally entertains such complaints only from a group of shareholders who are at least one hundred in number or constitute 10% of the shareholders by number or by value.


Another safeguard in the company law is the requirement that certain major decisions have to be

approved by a special majority of 75% or 90% of the shareholders by value. This may not be an effective safeguard where the dominant shareholders hold a large majority of the shares so that they need to get the approval of only a small chunk of minority shareholders to reach the 75% level. Even otherwise, it may not be a sufficient safeguard if the process of conducting shareholder meetings is not conducive to broader participation by a large section of the shareholding public. The Indian system does not allow for postal ballots. Effective participation by small shareholders is possible only if there is a cost effective way of waging a proxy campaign. This would enable dissenting shareholders to collect proxies from others and prevent measures which are prejudicial to the minority shareholders.

III. Information disclosure and audit

Company law provides for regular accounting information to be supplied to the shareholders along with a report by the auditors. It also requires that when shareholder approval is sought for various decisions, the company must provide all material facts relating to these resolutions including the interest of directors and their relatives in the matter. Disclosure does not by itself provide the means to block the dominant shareholders, but it is a prerequisite for the minority shareholders to be able to exercise any of the other means available to them. Disclosure is also a vital element in the ability of the capital market to exercise its discipline on the issuers of capital.

IV. Voting Rights

(i) Ten percent: The approval of at least 10% of the shareholders is required for the requisition of an extraordinary general meeting for an application to the Company Law Board (CLT) for relief, if there is oppression or mismanagement (as defined in the Companies Act, 1956 by the majority shareholders.

(ii) Fifty-one percent: The approval of a minimum of 50% of the shareholders is required for an ordinary resolution, including for alteration of the share capital; declaration of dividend; election, removal, and remuneration of directors; approval of annual accounts; appointment of external auditors; appointment of other officers; and other routine matters relating to the conduct of a company.

(iii) Seventy-five percent: At least 75% of the shareholders must approve a matter before it is passed as a special resolution, including for capital increases, alteration in the memorandum and articles of the company, changing the registered office address of the company from one state to another, change in the name of the company, buy-back of shares, proposed mergers or liquidation. Therefore, a minority shareholder with more than 25% voting rights would have the ability to block special resolutions.


V. Qualified Minority

Minority shareholders with qualified minority may initiate action against decisions of the majority in a court of law. According to section 399 of the act, a qualified minority consists of at least one hundred shareholders or one tenth of the total number of shareholders, whichever is less, or any shareholder(s) holding one-tenth of the issued share capital of the company fully paid-up. Moreover, minority

shareholders who hold more than 25% of the shares will have the ability to obstruct special resolutions, seek intervention of the CLT and, therefore, impede the functioning of the company at some level.

VI. Company Law Tribunal (CLT)

The Indian company law shields minorities’ interest by providing an adequate platform at CLT to raise grievances in case of oppression or mismanagement by the majority shareholders of a company. In circumstances when the minority is forced to exit the company by way of offering a nominal value for the shares held by them, the minority shareholders can approach the CLT to seek appropriate relief. The latter, if satisfied, has the power to intervene in the decisions of the majority shareholders. The CLT can order the majority shareholders to purchase the shares of the minority shareholders at a fair price. Further, if the minority shareholders wish to continue to be stakeholders in the company and do not want to sell their shares, they can obtain an injunction from CLT prohibiting the majority shareholders or acquirer from taking any action that may be averse to their interest.

VII. Minority Representation

It is important for Corporations to ensure that board membership reflects the interest of minority shareholders. In this regard, the Independent Directors (IDs) have an important role to play in ensuring minority shareholders’ interests are protected. The IDs also need to be easily accessible for minority shareholders to convey or raise their concerns. Minority shareholders can also nominate candidates for the ID position.

Securities Law

Historically, most matters relating to the rights of shareholders were governed by the company law. Over the last few decades, in many countries, the responsibility for protection of investors has shifted to the


securities law and the securities regulators at least in case of large listed companies. In India, the

Securities and Exchange Board of India (SEBI) was set up as a statutory authority in 1992, and has taken a number of initiatives in the area of investor protection.

I. Information disclosure

As discussed above, the company law itself mandates certain standards of information disclosure both in prospectuses and in annual accounts. SEBI has added substantially to these requirements in an attempt to make these documents more meaningful. Some of these disclosures are important in the context of dealing with the dominant shareholder. One of the most valuable is the information on the performance of other companies in the same group, particularly those companies which have accessed the capital markets in the recent past. This information enables investors to make a judgement about the past conduct of the dominant shareholder and factor that into any future dealings with him.

II. Insider trading

Securities regulators around the world have framed various regulations to deal with the problem of insider trading. Most instances of insider trading have nothing to do with the dominant shareholder. Many of them involve small trades by junior employees who come to know of price sensitive information. In a few instances, insider trading may be indulged in by directors and other senior employees.

III. Take-overs

The take-over regulations in India require that a slice of the cake be shared with other shareholders. The acquirer of a controlling block of shares must make an open offer to the public for at least 20% of the issued share capital of the target company at a price not below what he paid of the controlling block. Of course, if more than 20% of the shareholders want to sell at that price, the acquirer is bound to accept only 20% on a pro-rata basis. This impact is further strengthened when the minority shareholders are large institutions (both domestic and foreign) who, in a sense, act as the gatekeepers to the capital market. When they vote with their wallets and their pens, they have an even more profound effect on the ability of the companies to tap the capital markets.



Indian jurisprudence has taken a balanced view by ensuring that the minority interest is protected while maintaining the privileges that the majority enjoy.

In Reckitt Benckiser (India) Ltd,[1] the primary objection of the respondent was that the proposed reduction of capital was discriminatory and mala fide and an attempt to throw out the public shareholders so that the entire control of the company rests with the promoter by acquiring 100% equity. The Delhi High Court observed that “no doubt the effect of reduction of capital is to extinguish the public

shareholding but if the objectors do not want to part with their equities, the company shall not insist upon the same. If some of the minority members have no objection to part with their shares at the offered rates, the share capital held by them is reduced. The objectors cannot have any grievance as far as others are concerned as their rights are protected.”

In another case, Sandvik Asia Ltd. case,[2] the counsel for minority shareholders argued that the majority has the right to reduce the capital; however, it should be fair and equitable. In the instant case, minority shareholders were not given any option under the proposal. They were given a cut-off date and told to accept the offer or leave the company after being paid the offered amount. This, according to the court, was highly inequitable and unfair as minority shareholders had no choice but to leave the company and the majority shareholders cannot bulldoze the minority in this manner.

Defining the rights and their execution as available to the minority shareholders the Supreme Court in the case of Sri Ramdas Motor Transport Ltd. and Ors. Vs. Tadi Adhinarayana Reddy and Ors held that under Section 397 of the Companies Act any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order under that section. The

Company Law Board has wide powers to make such orders as it may think fit to bring an end to the matters complained of. A shareholder has very effective remedies under the Companies Act for

prevention of oppression and mismanagement. When such remedies are available, the High Court should not readily entertain a petition under Article 226.[3]

However the Apex court has also seen to it that the majority shareholders are not deprived of their democratic rights due to minority activism. This was ensured in the case of Shanti Prasad Jain Vs.


Kalinga Tubes Ltd.[4] Where in a case of a fight between two groups of business magnates for control of a certain company the appellant chairman of company alleged that affairs of company were conducted in manner oppressive to him and his group of members. The appellant contended that allotment of new shares to outsiders was for defeating rights of existing shareholders and amounting to oppression. Apex Court held, High Court right in holding that no case for action under Section 397 as mere fact of allotment does not constitute oppression. The court clarified that potent facts should be there to justify mismanagement or oppression.

The Bombay High Court has also tried to strike a fine balance between the majority and minority rights. In Re: Mather and Platt Fire Systems Limited, A Company incorporated under the Companies' Act, 1956 Vs. Respondent[5] the court has implemented the equality principle and at the same time ensured that individual rights do not infringe genuine majority rights. The court in this case held that “where the same terms of compromise are offered to a class of members or creditors, no separate meeting of a sub class among them is required. The true test is that a class consists of persons whose rights are similar in terms of the compromise”

Deciding on the scope of Company Court to sanction scheme of amalgamation under sections 391, 392, 393, 394A, 433 and 643 of Companies Act, 1956. The apex court held that such power is limited. It said that the Court can intervene in a matter only when it is not just and fair or prejudicial to interest of share holders. Court cannot intervene if the scheme is sanctioned by majority of shareholders and is lawful. Court can only go through scheme and examine whether it has complied requirements under Section 391 (2) and was passed by requisite majority or not. Where the scheme passed by company with majority is just and fair and no minority interest is affected then individual personal interest of minority share holders is of no concern unless it is affecting class interest of such equity shareholders.[6]

The high court of Delhi has also toed the fine line in the field of minority rights protection. In Re: Siel Ltd. Vs. Respondent[7] the court enunciated the principles reduction of share capital which can be summarized as under:

(i) The question of reduction of share capital is treated as a matter of domestic concern, i.e., it is the decision of the majority which prevails.

(ii) If majority by special resolution decides to reduce share capital of the company, it has also right to decide as to how this reduction should be carried into effect.

(iii) While reducing the share capital company can decide to extinguish some of its shares without dealing in the same manner as with all other shares of the same class. Consequently, it is purely a domestic matter


and is to be decided as to whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent.


The corporate governance code in India needs a revamp and the CII has suggested that some changes should be made in the code.[8] These changes are derived from recommendations given by the ADB. In specific, the ADB recommendations encompassed the following:

1. Appointment of independent directors and external audit sub‐committees and mandating their functions and responsibilities to public investors;

2. Introducing mandatory provisions to allow cumulative voting of directors;

3. Ensuring that the company laws provide shareholders the right to raise derivative or class action suits against management;

4. Introducing measures to prevent, detect and penalize insider dealings involving controlling shareholders;

5. Introducing innovative voting rules that grant minority shareholders with the swing votes or that reward them for voting/participating in corporate decisions;

6. Requiring minimum majority percentages that exceed the percentage of votes controlled by controlling shareholders;


8. Granting veto powers in favour of minority shareholders over corporate decisions that are potentially detrimental to their welfare (e.g., clear cases of self dealing)


1. Disclosure Of Holding Of Majority Shareholders

The beneficiary ownership structure of an enterprise is of great importance in an investment decision, especially with regard to the equitable treatment of shareholders. In order to make an informed decision about the company, investors need access to information regarding its ownership structure. It is

recommended that this disclosure includes the concentration of shareholdings, for example the holdings of the top twenty largest shareholders. This information is of particular interest to minority shareholders. In some countries (e.g. Germany) disclosure is required when certain thresholds of ownership are passed.

2. Disclosure Of The Control Structure

Disclosure should be made of the control structure and of how shareholders or other members of the organization can exercise their control rights through voting or other means. Any arrangement under which some shareholders may have a degree of control disproportionate to their equity ownership, whether through differential voting rights, appointment of directors or other mechanisms, should be disclosed. Any specific structures or procedures which are in place to protect the interests of minority shareholders should be disclosed.

3. Good Practices For Compliance

Where there is a local code on corporate governance, enterprises should follow a “comply or explain” rule whereby they disclose the extent to which they followed the local code’s recommendations and explain any deviations. Where there is no local code on corporate governance, companies should follow

recognized international good practices. The use of “comply or explain” mechanisms in many countries allows investors and other stakeholders greater access to information about the corporation and is to be encouraged. In relation to this “comply or explain” rule, some countries now require companies with


foreign listings to disclose the extent to which the local governance practices differ from the foreign listing standards.

4. Financial Institutions As Gate Keepers

It is unfortunate that the domestic financial institutions have played too passive a role so far and have so far failed to exercise their true powers both as large minority shareholders and as potential gatekeepers. The experience of the last few years suggests that a more pro-active role is possible only when these institutions are fully privatized and are driven by their bottom lines rather than by their political bosses. “The apparent failure of government controlled FIs [financial institutions] to monitor companies in their dual capacity as major creditors and major shareholders has much to do with a pervasive anti-incentive structure. ... The long term solution requires questioning the very basis of majority government ownership of the FIs. The other possibility is that the government persuades these institutions to divest their

shareholdings in corporate India to more transparent private sector institutions.

5. Debt Holder Vigilance

Another aspect of the capital markets is the powerful disciplining power of debt. Unlike the shareholder who is a residual claimant, the debt holder has contractual rights to receive his interest and principal; he has both the incentive and the ability to monitor the actions of the company. Many serious instances of corporate misgovernance reduce the future earnings stream of the company or the value of its assets. They thereby reduce the ability of the company to service its debt in accordance with contractual obligations. Most debt contracts therefore involve covenants that make it less easy for the dominant shareholder to indulge in gross abuses. The ability of debt holders to monitor the company is quite high because

typically they are large institutions with a strong gate keeping role. In India, the ability of debt holders to enforce their rights against recalcitrant debtors has been hampered by an inefficient legal system. It is difficult for creditors to foreclose mortgages, seize collateral or obtain decrees. Moreover, the corporate bankruptcy laws work against the creditors by allowing the debtor to remain in possession of the assets for a long period while compromises or other arrangements are worked out.

6. Well Functioning Capital Market

In a well functioning capital market, there is a strong incentive for corporate managements themselves to voluntarily adopt transparent processes and subject themselves to external monitoring to reassure

potential investors. What makes capital market discipline so much more attractive than regulatory intervention is that unlike the regulator, the market is very good at micro level judgements and decisions. In fact the market is taking micro decisions all the time. It is its success in doing so that makes it such an


efficient allocator of capital. Unlike the regulator, the market is not bound by broad rules and can exercise business judgement. It therefore makes sense for the regulator to pass on as much of the burden of

ensuring corporate governance to the markets as possible. The regulator can then concentrate on making the markets more efficient at performing this function.

7. International Accounting Standards

In the last few years, we have seen Indian companies voluntarily accepting international accounting standards though they are not legally binding. They have voluntarily gone for greater disclosures and more transparent governance practices than are mandated by law. They have sought to cultivate an image of being honest with their investors and of being concerned about shareholder value maximization.


The problem in the Indian corporate sector (be it the public sector, the multinationals or the Indian private sector) is that of disciplining the dominant shareholder and protecting the minority shareholders. A board which is accountable to the owners would only be one which is accountable to the dominant shareholder; it would not make the governance problem any easier to solve. Clearly, the problem of corporate

governance abuses by the dominant shareholder can be solved only by forces outside the company itself. This paper has discussed the role of two such forces – the regulator (the company law administration as well as the securities regulator) and the capital market.

Corporate governance abuses perpetrated by a dominant shareholder pose a difficult regulatory dilemma in that regulatory intervention would often imply a micro-management of routine business decisions. The regulator is forced to confine himself to broad proscriptions which leave little room for discretionary action. Many corporate governance problems are ill suited to this style of regulation.

The capital market on the other hand lacks the coercive power of the regulator. What it has however is the ability to make business judgements and to distinguish between what is in the best interests of the

company as a whole as against what is merely in the best interests of the dominant shareholders. The only effective sanction that the market can impose against an offender is to restrict his ability to raise money from the market once again. Denial of market access is a very powerful sanction except where the company is cash rich and has little future needs for funds.


During your journey of life, you need to make numerous plans and take important decisions. Some of these decisions have strong financial implications and can alter the course of your life and when it comes to investing your hard earned money, you need to partner with someone you trust, one who will make your money work hard. The idea of Portfolio management is to overcome the pace of change in business landscape and provide investment avenues to stay ahead of the risk return curve and generate positive returns consistently over a period of time.

During times of intense market volatility, it can be difficult to know what, if anything, you should do. Staying calm, keeping your sense of perspective, taking a rational look at your investments, and seeking the advice of a professional are all smart strategies you can follow.

The desire to grow money is a natural instinct. But as simple as the desire is, the process to do so is just as complex. It is believed that growing and protecting the wealth of an investor is an art.

Growing money depends on the natural instinct and experience of a financial manager. Nowadays they use their combined talents and experience to build up your mutual funds portfolio of

investments with an endeavor to bring out the best in it.

Portfolio Management Services (PMS) is a sophisticated investment vehicle that offers a customized investing into stocks, fixed income products, cash, other structured products and mutual funds units etc. to meet specific investment objectives. Though, PMS is managed by a professional financial managers, it has potential to address the personal preferences tailored into the investment portfolio giving the freedom and flexibility required for achieving the financial goals.

Different ways in which PMS can be managed :

Discretionary PMS: This service gives the flexibility and freedom to financial manager to operate on behalf of the investor fully. The financial manager can choose the investment avenue and may decide the appropriate time for the transaction. Further, he implements the investment decisions. Non-Discretionary PMS: Under this service, the financial manager recommends the investment ideas. Appropriate time to execute the transaction is left up to the investor. However the execution is done by the financial manager.

Advisory PMS: Under this category of services, the financial manager only suggests the investment ideas. The choice as well as the execution of the investment decisions rest solely with the investor. PMS is provided by qualified and professional financial managers with the objective to deliver consistent long term performance while controlling risk. It is important to recognize that portfolios need to be constantly monitored and periodic changes should be made to optimize the results. - The financial manager employs a qualified research team to establish the investor's investment strategy and providing the information to the investment manager. This also helps in reducing the investment related risks up to significant extent.

- He gives the investor a customized service. He takes care of all the administrative aspects of the investor's portfolio with a periodic reporting on the overall status of the portfolio and performance. The financial manager provides various types of reports to his investors on a regular basis. These reports are related to the transactions made on their behalf, current holdings of the investment portfolio and realized profits and losses to name a few.

- The financial manager has fair amount of flexibility in terms of investing patterns and procedures. He can create a reasonable concentration in the investor portfolios by investing disproportionate


amounts in favour of compelling opportunities.

– PMS provides comprehensive communications and performance reporting. Investors will get regular statements and updates from the financial manager. The account statements will give

investor a complete picture regarding the securities held on his behalf. These reports help investor in understanding and measuring their tax liabilities. All kinds of direct taxes (Income Tax) have to be borne and paid by the investor.

– PMS gives selected investors the benefit of tailor made investment advice designed to achieve their financial objectives.

– In PMS, investor may gain direct personalised access to the professional financial managers who actively manage his investment portfolio.

4. Who is a "merchant banker". Enumerate the services provided by a merchant banker. Critically analyze the regulatory framework for merchant bankers in India.

A merchant bank is a financial institution which provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they lend to.

Today, according to the US Federal Deposit Insurance Corporation (acronym FDIC), "the term merchant banking is generally understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies."[1] Bothcommercial

banks and investment banks may engage in merchant banking activities. Historically, merchant banks' original purpose was to facilitate and/or finance production and trade of commodities, hence the name "merchant". Few banks today restrict their activities to such a narrow scope. erchant banks are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants. As

the Lombardy merchants and bankers grew in stature based on the strength of

the Lombard plains cereal crops, many displaced Jews fleeing Spanish persecution were attracted to the trade. They brought with them ancient practices from the Middle and Far East silk routes. Originally intended for the finance of long trading journeys, these methods were applied to finance the production and trading of grain.

In France during the 17th and 18th century a merchant banker or ‘le merchant banquer’ was not jus considered a trader but they received the status of being an Entrepreneur par excellence. Merchant banks in the United Kingdom came into existence in the early 19th century. The oldest merchant bank being the Barings bank

The Jews could not hold land in Italy, so they entered the great trading piazzas and halls of Lombardy, alongside the local traders, and set up their benches to trade in crops. They had one great advantage over the locals. Christians were strictly forbidden the sin of usury, defined as lending at interest

(Islam makes similar condemnations of usury). The Jewish newcomers, on the other hand, could lend to farmers against crops in the field, a high-risk loan at what would have been considered usurious rates by the Church; but the Jews were not subject to the Church's dictates.[citation needed] In this way they could secure the grain-sale rights against the eventual harvest. They then began to advance payment against the future delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price. This two-handed trade was time-consuming and soon there arose a class of merchants who were trading grain debt instead of grain.


The Jewish trader performed both financing (credit) and underwriting (insurance) functions. Financing took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop and manufacture (through seeding, growing, weeding, and harvesting) his annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a merchant wholesaler. In addition, traders performed the merchant function by making arrangements to supply the buyer of the crop through alternative sources—grain stores or alternate markets, for instance— in the event of crop failure. He could also keep the farmer (or other commodity producer) in business during a droughtor other crop failure, through the issuance of a crop (or commodity) insurance against the hazard of failure of his crop.

Merchant banking progressed from financing trade on one's own behalf to settling trades for others and then to holding deposits for settlement of "billette" or notes written by the people who were still brokering the actual grain. And so the merchant's "benches" (bank is derived from the Italian for bench, banco, as in a counter) in the great grain markets became centers for holding money against a bill (billette, a note, a letter of formal exchange, later a bill of exchange and later still a cheque).

These deposited funds were intended to be held for the settlement of grain trades, but often were used for the bench's own trades in the meantime. The term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders' deposits. Being "broke" has the same connotation.

A sensible manner of discounting interest to the depositors against what could be earned by employing their money in the trade of the bench soon developed; in short, selling an "interest" to them in a specific trade, thus overcoming the usury objection. Once again this merely developed what was an ancient method of financing long-distance transport of goods.

The medieval Italian markets were disrupted by wars and in any case were limited by the fractured nature of the Italian states. And so the next generation of bankers arose from migrant Jewish merchants in the great wheat-growing areas of Germany and Poland. Many of these merchants were from the same families who had been part of the development of the banking process in Italy. They also had links with family members who had, centuries before, fled Spain for both Italy and England. As non-agricultural wealth expanded, many families ofgoldsmiths (another business not prohibited to Jews) also gradually moved into banking. This course of events set the stage for the rise of Jewish family banking firms whose names still resonate today, such as Warburgs and Rothschilds.

The rise of Protestantism, however, freed many European Christians from Rome's dictates against usury. In the late 18th century, protestant merchant families began to move into banking, especially in trading countries such as the United Kingdom (Barings), Germany (Schroders) and the Netherlands (Hope & Co.) At the same time, new types of financial activities broadened the scope of banking far beyond its origins. The merchant-banking families dealt in everything from underwritingbonds to originating foreign loans. For instance, bullion trading and bond issuance were two of the specialties of the Rothschilds. In 1803, Barings teamed with Hope & Co. to facilitate the Louisiana Purchase.

In the 19th century, the rise of trade and industry in the US led to powerful new private merchant banks, culminating in J.P. Morgan & Co. During the 20th century, however, the financial world began to outgrow the resources of family-owned and other forms of private-equity banking. Corporations came to dominate the banking business. For the same reasons, merchant banking activities became just one area of interest for modern banks.


5. Why do companies go for leasing of assets? Explain the financial considerations affecting the buy or lease decision of a company.

1. Purchasing Power. Equipment lease financing allows the lessee to acquire more and/or higher-end equipment.

2. Balance Sheet Management. Certain types of leases help the lessee better manage the

balance sheet and improve the overall financial picture, by conserving operating capital and freeing up working capital and bank credit lines for inventory, expansion and emergencies. See Operating vs Capital Lease

3. 100 Percent Financing. With equipment leasing, there is no down payment. The term of the lease can be matched with the useful life of the equipment.

4. Asset Management. A lease provides the use of equipment for specific periods of time at fixed payments. It assumes and manages the risks of equipment ownership. At the end of the lease, the lessor disposes of the equipment.

5. Service Additions.Many lessees choose to structure their leases to include installation, maintenance and other services, if needed.

6. Tax Treatment. Leasing offers the option of deducting 100 percent of the lease payment as a business expense. See Operating vs Capital Lease

7. Upgraded Technology.Leasing provides companies with the ability to keep pace with technology. The lessee can upgrade or add equipment to meet ever-changing needs.

8. Specialized Assistance. Lessors are specialists in equipment leasing and financing, and understand capital equipment markets.

9. Flexibility.There are a variety of leasing products available, allowing the lessee to customize a program to address needs and requirements - cash flow, budget, transaction structure, cyclical fluctuations, etc.

10. Proven Equipment-Financing Option. Over 30 percent of all capital equipment in the United States is acquired through leasing. In fact, eight out of 10 companies lease their equipment.

6. Describe the structure of housing finance industry in India. Critically examine the role played by national housing bank in promoting the housing finance in India.

The housing finance market has recorded Robust growth in the last five years, clocking a CAGR of about 40% between FY 1999 and FY 2004. Residential mortgage debt as a % of GDP was a mere 0.58% in 1994 which has moved upto 2.21% in FY 04. Falling interest rates in housing loans 17% (1996) to 7.5% (2004) combined with increasing loan tenures, increasing loan to value ratio and rise in the installment to income ratio are precipitating high growth rates in the housing finance market.

Structure of the housing finance Industry

Traditionally housing finance was dominated by a handful of private sector institutions. These Housing Finance Companies commended 70% market share in FY 1999, which has subsequently fallen to 50% in FY 2004 as a direct result of policy changes that permitted the entry of this bank into this industry. banks now control 40% of this market


and continue to show explosive growth.

Reveals the impressive growth of 39.33% shown by commercial banks.


The housing sector is witnessed varying standards and practices among the lending community, be it in origination and documentation or monitoring and supervision. Variation in standards across the industry imposes systematic risks, which can be a potential threat.

Aggressive approach may lead to defaults

Growing competition coupled with reduction in risk weights on housing loans has led the lending institutions to adopt aggressive practices including very high loan has led the lending institutions to adopt aggressive practices including very high loan to value loans, softening of collateral requirements, competitive pricing etc. with such an aggressive approach being followed may lead to increase in the default rates.

Cost of funds

The prevailing interest rate war has resulted in constant downward revision of interest rates. Further, the spreads are increasingly becoming thin as the lending rates are fast nearing the cost of funds. while during 1993-94, the interest rate on housing loans were in the range of 17-18% the same right now are in the range of 7%-8.5%. this may lead to erosion of profitability in the long run.

Security Deficit due to norms

Many primary lending institutions are making terms and conditions of sanction flexible and liberal, thus enabling the borrowers to avail the loans even more than value of security for long tenure of 20 to 25 years. The large quantum of institutional finance in the property transactions may lead to the problem of security deficit. Logically, the RBI has stipulated higher risk weightage of 75% as against 50% in November 2004.

Due diligence Issues

Increasingly, there have been instances of dilution in due diligence on the part of lenders. Sometimes, loans are sanctioned without strictly complying with laid down rules, systems and procedures. This situation arises primarily out of fierce competitive pressures. It is observed that the growing customer expectations force the PLIs to compromise due to diligence, field verification process and appraisal norms, in a rush to sanction the loan at the earliest.

Lack of Uniformity of norms amongst industry players

While banks and HFCs are the prominent players, HFCs face few constraints. The regulatory norms stipulate 10% capital adequacy for banks whereas the same is 12% for HFCs. Further, banks have access to lower cost retail funds compared to HFCs. Uniformity in norms and hence a level playing field has to be ensured for a healthy housing finance system. These are newer challenges which need to be addressed and resolved in times to come. Industry Fragmentation

The fragmented nature of the housing finance industry is a major impediment for its further growth. Despite this, the industry has managed to grow mainly due to consistent decline in interest rates, tax incentives given by the government and changing income profile of the Indian middle class population.

Conflicting Interests

While the private housing finance institutions are required to abide by the guidelines of the NHB, the general financial institutions, which include the commercial banks, follow the guidelines set by the RBI. Today, both these sections are competing with each other for the same housing pie but their functioning and lending practices seem to bear no similarity.


Asset liability mismatch is one of the biggest risks housing finance institutions are confronted with. Funding of longterm loans with short term deposits, leads to a mismatch between assets and liabilities that can be overcome by adopting appropriate asset liability management (ALM) techniques.

FDI Constraints

FDI guidelines for real estate development have come under a lot of flay. Guidelines requirements such as a minimum capitalization of US$10 million for a wholly owned subsidiary and US$5 million for joint ventures with Indian partners, development of a minimum area of acres, a minimum lock in period of 3 years from completion of minimum capitalization before repatriation of original investment, act as constraints to foreign investors.


Though Indian housing finance system has got its own share of problems, given the huge tapped housing

loanmarket, government support and favourable macroeconomic environment, reasonably resilient banking system, the industry has got excellent growth prospects. The present growth rate at about 40% +, appears to be sustainable in the foreseeable future.

The tenth plan has estimated the urban housing shortage at the level of 8.9 million dwelling units. The tital investment required for the above is estimated at the level of Rs 4,15,000 crore. And such a huge amount cannot be raised by the Central and State Governments alone. Rather active private sector participation is very much essential for achieving this goal, atleast partly.

Recommendations & Insights Greater Uniformity of standards


Thus, there is a need for following measures to help the market perform more

efficiently:-Adoption of uniform practice by the housing finance industry relating to matters like appraisal and documentation, prepayment of housing loans, conversion of fixed rate loans into floating rate loans etc.

Greater transparency in dealings with the borrowers to enable them to exercise informed choices about products and lending institutions.

Promotion of Securitisation

In the budget 2002-03, the FM announced that NHB would launch a mortgage credit guarantee company will work to achieve the following goals:

Generate a greater volume of mortgage lending in the Indian market Lower down payment requirements to as low as 5%

Broaden the eligibility for mortgages; and

Extend mortgage repayment periods upto 25 years.

These changes will facilitate capital market development by promoting securitization and increasing home ownership. Further, measures to promote residential mortgage backed securitization market in India can further strengthen our housing finance system and make it more competitive.

Central registry for housing mortgages

In order to address the issue of rising incidence of frauds in housing finance, section 20 of the SARFAESI Act introduced the provision of setting up a central registry to provide a statutory backing to the security interest created in favour of banks and financial institutions and enabling them to claim priority over other claimants while enforcing the securities. Introduction of such a registration system would be conducive to credit would become easy resulting in competition amongst lenders and better interest stared for the borrowers.

Reverse mortgages reverse mortgages are a financial tool to enable consumers and investors tap this source of funds for more productive usage. It is an arrangement wherein once the monthly installments, a lump sum amount or a line of credit. The present circumstances like higher life expectancy, growing nuclear families, house rich but cash poor populations suggest that the time is just right to introduce this instrument in India.


7. (a) What do you mean by "Factoring"? Describe its mechanism.

Factoring is a financial transaction whereby a business job sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the

accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower also, such as inventory, equipment, and real property,[1][2] i.e., matters beyond the credit worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan – it is the purchase of a financial

asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan.

It is different from forfaiting in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions,[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables.[1][2]

Factoring is a word often misused synonymously with invoice discounting[citation needed] - factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.[4]


The three parties directly involved are: the one who sells the receivable, the debtor (the account debtor, or customer of the seller), and the factor. Thereceivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash. The sale of the

receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.[1][2] Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does not pay the invoice amount due solely to his or its financial inability to pay. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. There are three principal parts to "advance" factoring transaction; (a) the advance, a percentage of the invoice face value that is paid to the seller at the time of sale, (b) the reserve, the remainder of the purchase price held until the payment by the account debtor is made and (c) the discount fee, the cost associated with the transaction which is

deducted from the reserve, along with other expenses, upon collection, before the reserve is disbursed to the factor's client. Sometimes the factor charges the seller (the factor's "client") both a discount fee, for the factor's assumption of credit risk and other services provided, as well as interest on the factor's advance, based on how long the advance, often treated as a loan (repaid by set-off against the factor's purchase obligation, when the account is collected), is outstanding.[5] The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this in pricing, when determining the purchase price to be paid to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.[2]

In the United States, under the Generally Accepted Accounting Principles receivables are

considered sold, under Statement of Financial Accounting Standards No. 140, when the buyer has "no recourse,".[6] Moreover, to treat the transaction as a sale under GAAP, the seller's monetary liability under any "recourse" provision must be readily estimated at the time of the sale. Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.

( b) Explain and comment on the salient features of Bills Rediscounting Schemes of the Reserve Bank of India.

8. a) Compare and contrast 'Leasing' and 'Hire Purchasing'. Why do companies go for leasing of assets? Briefly explain.

Hire purchase is a purchase of an asset in which customer

makes down payment and finance rest of the ammount


financial insti or bank.On rest of the unpaid amnt he



interest at a certain pre-described rate of


making complete payment the assest becomes the legal


of customer.

Lease on the other hand is an agreement of using asset


certain period and paying rent on it at a pre-described

rate of interest.It is a temorary acuiring of an asset


to use it.Generally Pvt schools are bulid on lease land.

Interest on lease is fully exemt from tax

b) Explain the different stages in which a venture capital firm finances the requirements of the companies which approach it for financing.

The requirements of funds vary with the life cycle stage of the enterprise. Even before a business plan is prepared the entrepreneur invests his time and resources in surveying the market, finding and understanding the target customers and their needs. At the seed stage the entrepreneur continue to fund the venture with his own or family funds. At this stage the funds are needed to solicit the consultant’s services in formulation of business plans, meeting potential customers and technology partners. Next the funds would be required for development of the product/process and producing prototypes, hiring key people and building up the managerial team. This is followed by funds for assembling the manufacturing and marketing facilities in that order. Finally the funds are needed to expand the business and attaint the critical mass for profit generation. Venture capitalists cater to the needs of the entrepreneurs at different stages of their enterprises. Depending upon the stage they finance, venture capitalists are called angel investors, venture capitalist or private equity supplier/investor.

Venture capital was started as early stage financing of relatively small but rapidly growing companies. However various reasons forced venture capitalists to be more and more involved in expansion financing to support the development of existing portfolio companies. With increasing demand of capital from newer business, Venture capitalists began to operate across a broader spectrum of investment interest. This diversity of opportunities enabled Venture capitalists to balance their activities in term of time involvement, risk acceptance and reward potential, while providing on going assistance to developing business.

Different venture capital firms have different attributes and aptitudes for different types of Venture capital investments. Hence there are different stages of entry for different Venture capitalists and they can identify and differentiate between types of Venture capital investments, each appropriate for the given stage of the investee company, These

are:-1. Early Stage Finance




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