FINANCIAL SERVICES

Prepared By
M. Jeganraj
Assistant Professor
Department of B.Com CA
JHA AGARSEN COLLEGE

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 Financial Services
What are financial services?
 Services provided by the finance industry
 The products and services offered by financial institutions for the facilitation of various
financial transactions and other related activities
 It is also called financial intermediation
 It includes all activities involved in the transformation of saving into investment.

Definition of Financial Services

As per section 65(10) of the Finance Act, 1994, “banking and financial services” means the
following services provided by a banking company or a financial institution including a non
banking financial company, namely;
A. Financial leasing services - equipment leasing and hire-purchase
B. Credit card services
C. Merchant banking services
D. Securities and foreign exchange (FOREX) broking
E. Asset management - portfolio management, fund management, pension fund
management,  custodial depository and trust services
F. Advisory and other auxiliary financial services - investment and portfolio research and
advice, advice on mergers and acquisition and advice on corporate restructuring and
strategy
G. Provision and transfer of information and data processing

Financial services can be defined as the products and services offered by institutions like banks
of various kinds for the facilitation of various financial transactions and other related activities
in the world of finance like loans, insurance, credit cards, investment opportunities and money
management as well as providing information on the stock market and other issues like market
trends

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 Characteristics or Nature of Financial Services

1. Intangibility

2. Inseparability

Nature of Financial 3. Perishability

Services 4. Variability

5. Dominance of Human Element

6. Information Based

1. Intangibility
 Financial services are intangible. Therefore, they cannot be standardized or
reproduced in the same form.

2. Inseparability
 Both production and supply of financial services have to be performed
simultaneously. Hence, there should be perfect understanding between the
financial service institutions and its customers.

3. Perishability
 Like other services, financial services also require a match between demand and
supply. Services cannot be stored. They have to be supplied when customers
need them.

4. Variability
 In order to cater a variety of financial and related needs of different customers in
different areas, financial service organizations have to offer a wide range of
products and services. This means the financial services have to be tailor-made
to the requirements of customers.

5. Dominance of Human Element

 Financial services are dominated by human element. Thus, financial services are
labour intensive. It requires competent and skilled personnel to market the
quality financial products.

6. Information Based

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  Financial service industry is an information based industry. It involves creation,
dissemination and use of information. Information is an essential component in
the production of financial services.
Objectives of Financial Services

Fund Raising

Economic Funds
Growth Deployment
Objectives
of
Financial
Services

Specialized
Regulation
Services

1. Fund Raising
 Financial services help to raise the required funds from a host of investors,
individuals, institutions, and corporate using various instruments.

2. Funds Deployment
 Arrays of financial services are available in the financial markets which help the
players to ensure an effective deployment of the funds raised.

3. Specialized Services
 They are specialized services catering the needs of different corporate like mutual
funds, book building, etc.

4. Regulation
 Agencies such as SEBI, RBI, Department of banking and insurance of the government
of India, through a plethora of legislations, regulate the functioning of financial
service institutions.

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 5. Economic Growth
 Financial services contribute, in good measure by mobilizing savings, to speeding up
the process of economic growth and development

Functions / Importance of Financial Services

Vibrant Capital Market

Expands activities of financial markets

Benefits of Government

Economic Development

Economic Growth

Functions / Ensures Greater Yield

Importance of
Financial
Services Maximizes Returns

Minimizes Risks

Promotes Savings

Promotes Investments

Balanced Regional Development

Promotion of Domestic & Foreign Trade

1. Promoting Investment
 The presence of financial services creates more demand for products and the producer,
in order to meet the demand from the consumer goes for more investment.

2. Promoting Savings
 Financial services such as mutual funds provide full opportunity for different types of
saving.

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3. Minimizing the Risks
 The risks of both financial services as well as producers are minimized by the presence
of insurance companies.
4. Maximizing the Returns
 The presence of financial services enables businessmen to maximize their returns. This is
possible due to the availability of credit at a reasonable rate.

5. Ensures Greater Yield

 The financial services enable the producer to not only earn more profits but also
maximize their wealth.

6. Economic Growth
 The development of all the sectors is essential for the development of the economy.
This brings in a balanced growth of the economy as a result of which employment
opportunities are improved.

7. Economic Development
 Financial services enable the consumers to obtain different types of products and
services by which they can improve their standard of living.

8. Benefit to Government
 The presence of financial services enables the government to raise both short-term and
long-term funds to meet both revenue and capital expenditure.

9. Expands Activities of Financial Institutions

 Mutual funds, factoring, credit cards, hire purchase finance are some of the services
which get financed by financial institutions.

10. Capital Market

 The financial services ensure that all the companies are able to acquire adequate funds
to boost production and to reap more profits eventually.

11. Promotion of Domestic and Foreign Trade

 Banking and insurance services further contribute to step up such promotional activities

12. Balanced Regional Development

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 The government monitors the growth of economy and regions that remain backward
economically are given fiscal and monetary benefits through tax and cheaper credit by
which more investment is promoted.

Players in Financial Services Sector

Banks
Finance Hire
Companies Purchase
  Financier

Asset
Liability Leasing
Managem Companies
ent  
Company 

Players in
Financial
Housing Services
Finance Sector
Factoring
Companies
 

Credit Underwrit
Rating ers And
Companies Merchant
  Bankers 

Mutual Book-
Funds  Builders 

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1. Banks: Financial service sector comes under the tertiary sector in which banks play a major
role.

2. Hire Purchase Financier: It is also a player in the financial service sector as he enables the
consumer to buy the product on credit basis.

3. Leasing Companies through financial and operating lease ensure the acquiring of assets by
producers on a long-term basis at a reasonable charge.

4. Factoring: enables the seller to obtain 80% value of sales from the financial companies
undertaking factoring services.

5. Underwriters and Merchant Bankers are additional players who promote not only
companies but also ensure dynamic activity in the capital market.

6. Book-Builders help companies in allotting shares to different categories of investors.

7. Mutual Funds ensure investment by the public and also ensure tax relief to the investor.

8. Credit Cards, another important player in the financial services, ensure the circulation of
plastic money and enable purchase on credit by the consumer.
9. Credit Rating Companies play an important role by giving different credit ratings to
companies to mobilize public deposits.

10. Housing Finance Companies and insurance companies also promote investment in the
economy as they also form a part of the players in the financial services.

11. Asset Liability Management Company enables mutual funds to undertake proper

investment in different types of companies.

12. Finance Companies in general and also as a part of non-banking finance companies provide
additional funds to the above players so that there is more activity in the economy.

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 Types of Financial Services

Types of Financial Services

Fund Based Services Fee Based Services

Issue Management
Leasing
Portfolio Management
Hire Purchase
Corporate Counseling
Factoring
Merchant Banking
Forfeiting
Credit Rating
Mutual Funds
Stock Broking
Bill Discounting
Capital Restructuring
Credit Financing
Bank Guarantee
Housing Finance
Letter of Credit
Venture Capital
Debt Restructuring

Leasing
 An arrangement between the lessor (owner of the asset) and the lessee (user of the
asset) whereby the lessor purchases an asset for the lessee and allows him to use it in
exchange for periodical payments called lease rentals or minimum lease payments
(MLP). 

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 A. Lessor: The party who is the owner of the equipment permitting the use of the
same by the other party on payment of a periodical amount.
B. Lessee: The party who acquires the right to use equipment for which he pays
periodically.

1. Hire Purchase
 It is known as installment plan 
 It is an arrangement whereby a customer agrees to a agreement to get an asset by
paying an initial installment
o Down Payment / Initial Payment: A certain sum of money is paid at the time of
taking delivery known as ‘down payment’ or ‘initial payment’

2. Factoring
 A type of debtor finance in which a business sells its accounts receivable (i.e., invoices)
to a third party (called a factor) at a discount.
 The firm (client) gets advances in return for receivables, from a financial institution
(factor).

3. Forfeiting
 Forfeiting is a means of financing that allow exporters to receive immediate cash by
selling their medium and long-term receivables
 The importer's bank guarantees the amount

4. Mutual Funds
 Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds.
 Mutual funds give small or individual investors access to diversified, professionally
managed portfolios at a low price.

5. Bill Discounting
 Bill discounting refers to a method of working capital finance for the seller of goods.
 It refers to a fee charged by the bank from the seller of the goods to release funds
before the end of the credit period.

6. Credit Financing
 An agreement between a buyer and a seller in which the buyer receives the good or
service in advance and makes payment later, often over time and usually with interest.

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7. Housing Finance
 Housing finance is what allows for the production and consumption of housing
 A type of seller financing in which a firm extends customers a loan, allowing them to
purchase its goods or services

8. Venture Capital
 A type of financing that is provided by firms or funds to small, early-stage, emerging
firms
 It is capital that is invested in projects that have a high risk of failure
Unit – II: Merchant Banking and Public Issue Management

Public Issue Management

Concept of Public Issue Management

 The management of issues for raising funds through various types of instruments by

companies is known as issue management.
 The management of securities of the corporate sector offered to the public on a regular
basis and existing shareholders on a right basis is known as public issue management.

Activities Involved In Public Issue Management

Several activities that have to be performed by the issue manager in order to raise money from
the capital market

1. Signing of Mou: Signing of MoU between the client company and the merchant banker-
issue management 
2. Obtaining Appraisal Note: An appraisal note containing he details of the proposed capital
outlay of the project and the sources of funding
3. Optimum Capital Structure: The level of capital that would maximize the shareholders
value and minimize the overall cost of capital has to be determined
4. Convening Meeting: A meeting of the board of directors of the issuing company is
convened. 
5. Appointment Financial Intermediary: Financial intermediaries such as Underwriters,
Registrars, etc. have to be appointed
6. Preparing Documents: As part of the issue management procedure the documents to be
prepared
7. Due Diligence Certificate: The lead manager issue a due diligence certificate which certifies
that the company has scrupulously followed all legal requirements 

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8. Finalization of Collection Centers: In order to collect the issue application forms from the
prospective investors to lead manager finalizes the collection centers.
9. Filing with Roc: The offer document completed in all respects after incorporating SEBI
observation is filled with Registrar of Companies (RoC) to obtain acknowledgement.
10. Launching The Issue: The process of marketing the issue starts once legal formalities are
completed and statutory permission for issue of capital is obtained.
11. Promoters’ Contribution: A certificate to the effect that the required contribution of the
promoters has been raised before opening the issue, has to be obtained from a Chartered
Accountant, and duly filed with SEBI.
12. Issue Closure: An announcement regarding the closure of the issue should be made in the
newspaper.

Categories of Securities Issue

1. Public Issue: When capital funds are raised through the issue of prospectus it is called
public issue of securities.
2. Right Issue: When shares are issued to the existing shareholders of the company on a
privileged basis is called Right issue.
3. Private Placement: When the issuing company sells securities directly to the investors
especially institutional investors is called private placement.

Mechanics of Public Issue Management

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 Categories of Merchant Banks / Categories of Issue Managers
Merchant bankers are classified into four categories according to the SEBI (Merchant Banking)
Regulations 1992. These are as follows:
a) Category – I: To carry on any activity relating to issue management and act as adviser,
consultant manager, underwriter and portfolio manager for capital issues.
b) Category – II: To act as adviser, consultant, co-manager, underwriter and portfolio manager
for capital issues.
c) Category – III: To act as underwriter, adviser, and consultant to an issue.
d) Category – IV: To act only as adviser or consultant to an issue.

Issue Manager

 Any financial institution/intermediary which can carry out the activities connected with
the issue management is registered with SEBI and can follow its regulations and
guidelines are capable of venturing into issue management.
 It is an important activity of merchant bankers.

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 Role of Issue Manager / Role of Merchant Bankers in Managing Public Issue
1) Easy Floatation: An issue manager acts as an indispensable pilot facilitating a public / rights
issue. This is made possible with the help of a repository of special skills possessed by him to
execute the management of issue.

2) Financial Consultant: An issue manager essentially acts a financial architect, by providing

advice relating to capital structuring, capital gearing and financial planning for the company.

3) Underwriting: An issue manager allows for underwriting the issues of securities made by
corporate enterprises. This ensures due subscription of the issue.

4) Market Makers: Merchant bankers, as issue managers often act as the market makers for
the issues lead managed by them. They invest, continue to old and provide, buy and sell quotes
for the listed scrips of the company.

5) Due Diligence: The issue manager has to comply with SEBI guidelines. The merchant banker
will carry out activities with due diligence and furnish a Due Diligence Certificate to SEBI. The
detailed diligence guidelines that are prescribed by the Association of Merchant Bankers of
India (AMBI) have to be strictly observed. SEBI has also prescribed a code of conduct for
merchant bankers.

6) Coordination: The issue manager is required to co-ordinate with a large number of

institutions and agencies while managing an issue in order to make it successful.

7) Liaison with SEBI: The issue manager, as a part of merchant banking activities, should
register with SEBI. While managing issues, constant interaction with the SEBI is required by way
of filing of offer documents, etc. In addition, they should file a number of reports relating to the
issues being managed.

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 Marketing of Issue

Fixed Price Method-IPO

 Under fixed price, the company going public determines a fixed price at which its shares
are offered to investors.
 The investors know the share price before the company goes public. Demand from the
markets is only known once the issue is closed

Book Building
 A method of marketing the shares of a company whereby the quantum and the price of
the securities to be issued will be decided on the basis of the bids received from the
prospective shareholders by the lead merchant bankers is known as Book-Building
method.
 Under the book-building method, share prices are determined on the basis of real
demand for the shares at various price levels in the market. For discovering the price at
which issue should be made, bids are invited from prospective investors from which the
demand at various price levels is noted. The merchant bankers undertake full
responsibility for the same.

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 Recent Marketing Strategies for Public Issues

1. Marketing IPOs through Secondary Market ( e-IPO - The on-line IPO system)
The system uses the existing infrastructure of stock exchange (terminals, brokers and system) being
used for secondary market transactions for marketing IPOs through book building route
2. Green Shoe Option (Over Allotment of Securities)
The lead manager offers added securities to syndicate members/ brokers with the expectation that
they will put forth a strong sales effort.
3. Safety Net (Buy Back of Shares)
Safety net is the protection to investors against the fall in the market price of the IPO below its offer
price during a particular period of time. Promoters and merchant bankers provide standby
arrangement to buy shares from public if the market quotations go below the offer price during the
statutory period.
4. Target Marketing/ Branding the financial Instrument
Lead merchant bankers have been using the strategy of targeting the different segments of investors
in the market and branding the securities to create interest of the investors in the public issues.

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 Underwriting
What is underwriting?
 Underwriting is an act of guarantee by an organization for the sale of certain minimum
amount of shares and debentures issued by a Public Limited company.
 Underwriting of shares is a guarantee or insurance given by the underwriter to the
company that the shares offered to the public will be subscribed in full

Who is Underwriter?
 Underwriters are the person or institution underwriting the public issue of share.
 They ensure the company that in case the shares that are offered to the public are not
subscribed; the balance of shares will be taken up by them.

Types of Underwriting

1. Firm Underwriting
 An underwriting agreement in which underwriter takes up a certain number of
securities of firm himself.
 An underwriting firm is giving assurance to buy and sell the shares which are not
subscribed by the public in all or unsubscribed portion.

2. Sub-Underwriting
 It is an underwriting agreement under which an underwriter appoints several other sub-
underwriters to pass the risk linked with underwriting.
 When underwriter feels that it is beyond his capacity to assume the whole risk, he
appoints other underwriters with him. This is done to diffuse the risk associated with
underwriting of securities which is too high for single underwriter to assume.
 The sub-underwriter has no connection with customer and is liable only to underwriter
for the amount of securities they have underwritten

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3. Joint Underwriting
 Joint underwriting is one in which there are more than one underwriter appointed by
company for underwriting of its securities.
 This type of underwriting takes place when issue by company is too large and contains
large risk

4. Syndicate Underwriting
 Syndicate underwriting is an underwriting agreement in which several underwriters join
together for underwriting securities.
 Such agreement takes place when issue is too big that a single underwriter cannot
underwrite the whole amount. 

5. Complete Underwriting
 Complete underwriting is one in which whole issue of securities of company is
underwritten.
 Under such agreement, underwriter underwrites full amount of shares/debentures
issued by companies. 

6. Partial Underwriting
 Partial underwriting is one in which only a certain part of issue of securities of company
is underwritten.
 Under such agreement, underwriter underwrites partial amount of shares/debentures
issued by companies.
 In partial underwriting, securities are underwritten either by single underwriter or by
many underwriters who agrees to assume the risk to specified amount.

Types of Underwriters
A. Institutional underwriters
 They have got long term deposits and are in a position to enter into long term
investments.
 Example: IDBI, IFCI, UTI, SBI Capital Market

B. Non-Institutional underwriters
 Non institutional underwriters are brokers
 Example: Any Non-Banking Financial Companies.

Responsibilities of Underwriters

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1. An underwriter not only has to underwrite the securities but has to subscribe within 45 days
that part of shares which remain unsubscribed by the public.
2. His underwriting obligations should not exceed, at any time, 20 times of his net worth.
3. The underwriter cannot derive any other benefit except the underwriting commission which
is 5% for shares and 2½% for debentures.

Benefits of Underwriting / Merits of Underwriting / Advantages of Underwriting

1. Ensures success of the proposed issue of shares
2. Enables a company to get the required minimum subscription
3. Reputation of the underwriter acts as a confidence to investors
4. Large issues could be undertaken successfully
5. Companies with a long gestation period cannot raise capital without support of professional
underwriters
6. Technocrats could promote companies with their poor financial knowledge
7. New projects in the market could be taken boldly
8. Companies could be promoted in backward areas
9. Certain projects which are not financially viable in the initial stages could be promoted with
the support of institutional underwriters

Unit III

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 Money Market and Stock Exchange

What is Money Market?

 A market where short-term financial assets are traded
 The money market is a market which provides short-term funds
 The money market deals in short-term loans, generally for a period of less than or equal
to 365 days
 A section of the financial market where financial instruments with high liquidity and
short-term maturities are traded.

Money Market Instruments

1. Certificate of Deposit – Time deposit, commonly offered to consumers by banks and credit
unions.

2. Commercial Paper – Short term instruments promissory notes issued by company at

discount to face value and redeemed at face value

3. Treasury Bills – Short-term debt obligations of a national government that are issued to
mature in three to twelve months

4. Municipal Notes – In the U.S., short-term notes issued by municipalities in anticipation of

tax receipts or other revenues

5. Money Market Mutual Funds - it means it's a short term investment debt, operated by
professional institutions. In other words 'money market mutual funds are the investment
fund, here numbers of investors invest their money in mutual fund institutions and they
diversify the funds in various schemes.

6. Foreign Exchange Swaps – Exchanging a set of currencies in spot date and the reversal of
the exchange of currencies at a predetermined time in the future

7. Short-Lived Mortgage - and asset-backed securities

Main Features / Characteristics of Indian Money Market

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1. Dichotomy
 The Indian Money market is divided between two sectors, namely organized sector and
unorganized sector. There is very little cooperation and contact between them.

2. Seasonal Variations
 In Indian Money Market, based on the demand for funds, there are two seasons, the
busy season and slack season. 

3. Inter-Call Money Market

 The core of the Indian money market is the inter-bank call money market. It is the most
sensitive sector of the money market.

4. Biggest Place of Government Securities

 In the Indian money market, the predominant place is enjoyed by government and semi
government securities.

5. Absence of Acceptance and Discount Houses

 There is almost complete absence of acceptance and discount houses in the Indian
money market. This is due to the underdeveloped bill market in India.

6. Isolation from Foreign Money Market

 The Indian money market is isolated from foreign markets. There is hardly any
movement of funds between Indian Money Market and foreign markets.

7. Variety of Financial Institutions

 The Indian market is characterized by the presence of a large number of financial
institutions such as non-banking financial intermediaries, cooperative banks, Export-
Import banks. They cater to the financial needs of different sectors.

Functions of Money Market

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 Economic Development

Profitable Investment

Borrowings by the Government

Functions of Money
Importance for Central Bank
Market

Mobilization of Funds

Savings and Investment

Self-sufficiency of Commercial Banks

1. Economic Development
 Money market assures supply of funds; financing is done through discounting of the
trade bills, commercial banks, acceptance houses and brokers.

2. Profitable Investment
 The excess reserves of commercial banks invested in near money assets.

3. Borrowings by the Government

 Short term funds at very low interest

4. Importance for Central Bank

 If the money market is well developed, the central bank implements the monetary
policy successfully

5. Mobilization of Funds
 Helps in transferring funds from one sector to another

6. Savings and Investment

 Encouraging savings and investment by promoting liquidity and safety of financial
assets.

7. Self-sufficiency of Commercial Banks

 Commercial banks can meet their financial requirements by recalling some of their loans
Indian Capital Market

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What is Capital Market?
 It is the institutional arrangements for the trading of long-term funds
 A capital market is where the organized trading of securities and investments takes
place.
 Capital markets include both primary and secondary markets. 
 Capital Market is a place where buyers and sellers can interact and transact financial
securities like shares, debentures, debt instruments, bonds, derivative instruments like
the futures, options, swaps, ETFs.

Functions of Capital Market

1. Capital Formation: By championing savings and making them available to companies and
public authorities that need them

2. Economic Agent: The capital market offers access to a variety of financial instruments that
enable economic agents to pool, price and exchange risk.

3. It Encourages Saving In Financial Form - Through assets with attractive yields, liquidity and
risk characteristics

4. Converts Savings into Investment: Through the stock exchange, the market gives long term
leaders the opportunity to convert their holding into cash.

5. Improves Liquidity: It also offers companies which have securities the opportunity to obtain
cash without reducing their liquidity.

6. Mobilizing Long-Term Funds: The capital market plays an important role in mobilizing funds
and resources needed for development and offers the forum for implementing its policies
relating to stabilization, monetary controls and regulation of the banking system.

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