UNIT V

LONG TERM SOURCES OF FINANCE

INDIAN CAPITAL MARKET - NEW ISSUES MARKET - SECONDARY MARKET

LONG TERM FINANCE:

• Shares,
• Debentures and term loans,
• Lease, hire purchase,
• Venture capital financing,
• Private Equity.
INDIAN FINANCIAL SYSTEM
The Indian financial system is a complex network of financial
institutions, markets, instruments, and services that facilitate the
flow of funds between savers and investors
What is Financial Market ?
A financial market is a market for
creation and exchange of financial assets.
You can buy or sell financial assets,
Debt Market Money Market
Equity Market Capital Market
Primary Market Secondary Market
Cash or Spot Market
Forward or Future Market
Exchange or traded market
Over the counter market
Functions of Financial Market
Financial markets playa pivotal role in allocating
resources in an economy by performing three
important functions:

1. Financial markets facilitate price discovery.

The continual interaction among numerous buyers

and sellers who throng financial markets helps in
establishing the prices of financial assets.

Well-organized financial markets seem to be

remarkably efficient in price discovery.

That is why financial economists say, "If you want

to know what the value of a financial asset is simply
 2. Financial markets provide liquidity to
financial assets. Investors can readily sell their
financial assets through the mechanism of financial
markets.

In the absence of financial markets which provide

such liquidity, the motivation of investors to hold
financial assets will be considerably diminished.

Thanks to negotiability and transferability of

securities through the financial markets, it is possible
for companies (and other entities) to raise long-term
funds from investors with short-term and medium-term
horizons.

While one investor is substituted by another when

a security is transacted, the company is assured of
long- term availability of funds.
3. Financial markets considerably reduce
the cost of transacting.

The two major costs associated with

transacting are search costs and
information costs. Search costs comprise
explicit costs such as the expenses
incurred on advertising when one wants
to buy or sell an asset and implicit costs
such as the effort and time one has to put
in to locate a customer.

Information costs refer to costs

incurred in evaluating the investment
 Classification of financial markets
1. Classifyfinancial markets by the type
of financial claim.

The debt market is the financial market

for fixed (debt instruments) and the
equity market is the financial market
for residual claims (Equity
instruments).
2. Classifying financial markets by the maturity of claims.

The market short-term financial claim is referred to as

the money market and the market for long-term financial
claims is called the capital market.

Traditionally the cut-off between short-term and long-

term financial claims has been one year-though this dividing
line is arbitrary, it is widely accepted.

Since short-term financial claims are almost invariably

debt claims, the money market is the market for short-term
debt instruments. The capital market is the market for long-
term debt instruments and equity instruments.
 3. Third way to classify financial markets is
based on whether the claims represent new issues or
outstanding issues.
The market where issuers sell new claims is
referred to as the primary market and the market
where investors trade outstanding securities is called
the secondary market.
4. Fourth way to classify financial markets is by the timing
of delivery.

A cash or spot market is one where the delivery occurs

immediately and a forward or futures market is one where the
delivery occurs at a pre-determined time in future.
5. A fifth way to classify financial markets is by the
nature of its organizational structure.

An exchange-traded market is characterized by a

centralized organization with standardized procedures.
An over-the-counter market is a decentralized market
with customized procedures..
 Debt market
Financial claim Equity market

Money market
Maturity of claims
Capital market

seasoning of claims Primary market

Secondary market

cash or spot market

Timing of delivery
Forward or Future Market

exchange-traded market
organizational structure over-the-counter market
 DEBT MARKET

Definition:

The debt market is the market where fixed income securities of various
types and features are issued and traded.
 Issued By:
• Central and State governments
• Municipal corporations
• Govt. bodies
• Commercial entities like financial institutions,
banks, public sector units, public ltd.
 Debt Instruments:
Segment Issuer Instruments

Zero Coupon Bonds,

Government Central Government Capital Index Bonds,
Treasury Bills.
Government Agencies / Govt. Guaranteed Bonds,
Public Sector
Statutory Bodies Debentures
PSU Bonds, Debenture,
Public Sector Units
Commercial Paper
Debentures, Bonds,
Commercial Paper,
Floating Rate Bonds,
Private Corporate
Zero Coupon Bonds,
Inter-Corporate
Deposits
Certificate of Deposits,
Banks
Bonds
Certificate of Deposits,
Financial Institutions
Bonds
 Treasury Bills
Treasury Bills are the instruments of short term
borrowing by the Central/State govt. They are
promissory notes issued at discount and for a fixed
period. These were first issued in India in 1917.

Treasury Bills are the most marketable money

market security. Their popularity is mainly due to
their simplicity. Essentially, T-bills are a way for
the U.S. government to raise money from the
public.
T-bills are short-term securities that mature in one year
or less from their issue date. They are issued with three-
month, six-month and one-year maturities. T-bills are
purchased for a price that is less than their face value;
when they mature, the government pays the holder the
full par value.

Effectively, your interest is the difference between

the purchase price of the security and what you get at
maturity. For example, if you bought a 90-day T-bill at
Rs98,000 and held it until maturity, you would
earn Rs2000 on your investment. This differs from
coupon bonds, which pay interest semi-annually.
• Certificate Of Deposit:
CD A savings certificate entitling the
bearer to receive interest. A CD
bears a maturity date, a specified
fixed interest rate and can be issued
in any denomination. CDs are
generally issued by commercial
banks and are insured by the FDIC.
The term of a CD generally ranges
from one month to five years.
 The inter-corporate
deposits:
• The inter-corporate deposits: are referred to as
the deposits that are made by one company
with another company. The inter-corporate
deposits are usually made for six months. The
three types of inter-corporate deposits are -
three-month deposits, six-month deposits and
call deposits.

• The three-month deposits are the most popular

among the three types of deposits.
 Government of India announces issue of
Floating Rate Bonds, 2009

Floating Rate Bonds, 2009

The Government of Government of India announces issue of
India has announced sale of "Floating Rate Bonds, 2009"
for
an aggregate amount of Rs 3,000 crore (nominal) by auction.
The Floating Rate Bonds will be of 8-years tenure and will
be issued at par. (i.e.
at Rs100.00). The Bonds will carry an interest rate, which is
calculated by adding a
'spread' to a variable base rate.
 Commercial paper
an alternative to bank borrowing,
corporations may issue commercial paper
which are basically short term, unsecured
notes issued in the open market for immediate
financing needs. The majority of commercial
paper issuances are done through large
corporations with solid credit ratings;
 Benefits of Govt. Securities:
• Safety
• Fixed income
• Convenience
• Simplicity
• Liquidity
• Diversification (few months to 30 yrs)
 Participants of
financial market
Insurance Companies
Issue contracts to provide a future payment if a certain event happens
Use the fees from these contracts to invest in equities, debt and property

Finance Companies(short to medium term debt capital)

Get funds by issuing debentures and borrowing from the general public
Provide short-to-medium-term funds to business, particularly leasing finance

Banks
Are the largest providers of funds to business
Get most of their funds from deposits
Provide a wide range of debt securities to business

Merchant Banks
Get funds by short-term borrowing
Lend mainly to corporations in such things as foreign currency and commercial bills
Companies
Often have surplus funds from operations
Invest funds on money market, commercial bills and sometimes buy shares in
businesses

Superannuation/Mutual Funds
Get funds from the savings of people preparing for retirement
Invest funds on money market, commercial bills and sometimes buy shares in
businesses

Government
(Reserve Bank of Australia) Acts for the government to ensure gaps in the supply of
funds are filled
Works through the authorized dealers

1. Supply side vs. demand side

2. Investor vs. Speculator
3. Institutional investor vs Retail investor
Primary market

The primary market is that part of the capital markets

that deals with the issuance of new securities.

Companies, governments or public sector institutions

can obtain funding through the sale of a new stock or
bond issue. This is typically done through a syndicate of
securities dealers.
In the case of a new stock issue, this sale is an initial
public offering (IPO). Dealers earn a commission that is
built into the price of the security offering, though it can
be found in the prospectus.
Features of primary markets are:

This is the market for new long term equity capital.

The primary market is the market where the securities
are sold for the first time. Therefore it is also called the
new issue market (NIM).

• In a primary issue, the securities are issued by the

company directly to investors.

• The company receives the money and issues new

security certificates to the investors.

• Primary issues are used by companies for the purpose

of setting up new business or for expanding or
modernizing the existing business.

• The primary market performs the crucial function of

The new issue market does not include certain other
sources of new long term external finance, such as
loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting
private capital into public capital; this is known as "going
public." .

The financial assets sold can only be redeemed by the

original holder.

Methods of issuing securities in the primary market are:

• Initial public offering

• Rights issue (for existing companies)

 Relationship between the primary and
secondary market

The new issue market cannot function without the

secondary market. The secondary market or the stock
market provides liquidity for the issued securities. The
issued securities are traded in the secondary market
offering liquidity to the stocks at a fair price.

The Stock exchanges through their listing

requirements, exercise control over the primary market.
The company seeking for listing on the respective stock
exchange has to comply with all the rules and regulations
given by the stock exchange.
The primary market provides a direct link
between tile prospective investors and the
company. By providing liquidity and safety, the
stock markets encourage the public to subscribe
to the new issues. The marketability and the
capital appreciation provided in the stock
market are the major factors that attract the
investing public towards the stock market. Thus,
it provides an indirect link between the saves
and the company
The various regulatory bodies related
with The public issue are:

• Securities Exchange Board of India

• Registrar of companies

• Reserve Bank of India (if the project involves foreign

investment)

• Stock Exchanges where the issue is going to be

listed

• Industrial licensing authorities

• Pollution control authorities

(clearance for the project has to be stated in
Role of Primary Market
Primary markets are markets dealing in the issue
of new securities. These can be initial public offerings
(IPO's) for public companies, government bonds or other
private and public sector funding programs.

The primary market provides the channel for sale

of new securities.

In a primary market, the security is sold directly to

the investor from the company or organization itself. As
in the case with IPO's, it is a purchase between the
company and the investor.
Primary market provides opportunity to issuers
of securities; Government as well as corporate,
to raise resources to meet their requirements of
investment and/or discharge some obligation.

They may issue the securities at face value, or at

a discount/premium and these securities may
take a variety of forms such as equity, debt etc.
They may issue the securities in domestic market
and/or international market.

In the case of municipal bonds, it is the purchase

of the debenture directly from the municipality.
Primary markets are a vital part of the capital
markets and underlying strength of the economy.
IPO India

IPO in India means the new offer of a

company's shares to the public in the country's
capital markets. Initial Public Offer (IPO) in India
is done through various methods like method of
book building, method of fixed price or a mixture
of both.

A short note on Initial Public Offer (IPO) in India:

Initial Public Offering (IPO) in India means

the selling of the shares of a company, for the first
time, to the public in the country's capital
markets. This is done by giving to the public,
shares that are either owned by the promoters of
 During an Initial Public Offer (IPO) the shares are
given to the public at a discount on the intrinsic value of
the shares and this is the reason that the investors buy
shares during the Initial Public Offering (IPO) in order to
make profits for themselves.

IPO in India is done through various methods like

book building method, fixed price method, or a mixture
of both. The method of book building has been
introduced in the country in 1999 and it helps the
company to find out the demand and price of its shares.
A merchant banker is nominated as a book runner by the
Issuer of the IPO. The company that is issuing the Initial
Public Offering (IPO) decides the number of shares that
it will issue and also fixes the price band of the shares.
All these information are mentioned in the
company's red herring prospectus. During the
company's Initial Public Offering (IPO) in India,
an electronic book is opened for at least five
days.

During this period of time, bidding takes place

which means that people who are interested in
buying the shares of the company make an offer
within the fixed price band. Once the book
building is closed then the issuer as well as the
book runner of the Initial Public Offering (IPO)
evaluate the offers and then determine a fixed
price. The offers for shares that fall below the
fixed price are rejected. The successful bidders
are then allotted the shares.
Methods of floating new issues

• Through Prospectus
• Bought out deals/ Offer for sales
• Private placements
• Right issues
• Book Building
IPO Through Prospectus

Seeking listing on a stock exchange is also called

'going public' or 'flotation'. The purpose of seeking listing
is generally to raise funds for the company's business
expansion or growth.

The company seeking listing will therefore offer

part of its securities to be subscribed by the public, as
part of the listing exercise. This offer is called an Initial
Public Offering (IPO).
COMPANY OFFERING Public
PROMOTERS

What Is A Prospectus?
What Is A Prospectus?

A prospectus is essentially an invitation or

offer to the public to subscribe for or buy the
securities of a company.

A prospectus must contain all relevant

information about the company making the IPO,
and must be filed with the relevant authorities.

Therefore the information that is disclosed

in the prospectus relates to the terms on which
the invitation or offer is made. It is important for
an investor to read and understand these terms
in the prospectus in order to be able to assess for
himself / herself the risks or merits in investing
There are three steps involved for the
issue, circulation or distribution of the IPO
prospectus.

• Firstly, the company seeking listing on Stock

Exchange must have its prospectus cleared by the
exchanges concerned;

• Secondly, the prospectus must be submitted to the

Securities Commission for Getting and clearance;

• Thirdly, the prospectus must be sent to the Registrar

of Companies (ROC) for lodgment and registration.
THE SILENT FEATURES OF A IPO
PROSPECTUS
• General Information ( Name , Address, Name of the
stock Exchange, Opening and closing dates of issue. Lead Managers

details, Rating details)

• Capital structure ( Issued, Subscribed and paid up

capital, size, Preferential allotment to promoters, Promoters
contribution)

• Terms of Present issue ( Authority for the issue,

terms of payment, time schedule for allotment, issue of share certificates,
applying norms, mode of payment, Spl. tax benefits )

• Particulars of the Issue ( Object of the issue,

Project cost, Means of financing)

• Company, Management & Project

( history, object and current business, promoters, management, products,
kinds of product, opportunities for product, and future prospectus for
 THE SILENT FEATURES OF A IPO
PROSPECTUS
• Details regarding other companies under
same management ( Which have issues any share with in
last 3 years)

• Details of out standing litigations related

to company

• Management perception of risk factors in

the project

• Justification of the issue premium

(performance, future projections, NAV)

• Financial information ( Financial details for the past 5

years, balance sheet details, P&L account details, changes in accounting
policy)
 Bought out deals/ Offer for sales
In bought out deals the company promoters
who place their shares with an investment
banker and latterly this banker will offer to the
public
COMPANY OFFERINGS
PROMOTERS
OFFER
INVESTMENT
BANKERS

Holding period
70 days – Min PUBLIC
More than a year - Max
Advantages of Bought out deals/ Offer for sales

• helps to promote the funds with

out loss of time
• cost of rising funds will be
minimized
• helps for new entrepreneurs.
 Private placements
In Private placements the company
promoters who place their shares with a small
number of financial institutions, corporate
bodies, and high net worth individuals.
Latterly they will sell it to the investors at
their suitable price.
In this method there is no need of
underwrtting agreements.
The issue and its related terms will be
discussed between the buyer and seller.
 Advantages of Private placements

• Cost effective method of fund rising

• Time effective
• helps for new entrepreneurs.
• very very easy for accessing capital
funds for listed and non listed companies
 Rights issue

According to sec 81 of companies act 1956

A company can increase its share capital by
further allotment after two years from the date
of its formation or after one year of its first
allotment, which ever is earlier.
Conditions to satisfy for issue the Rights issue.
• right shares must be offers to existing share
holders in a proportion to their share capital
in the company
• A notice to be issued for how many no. shares
are going to be issued.
• Mention the procedure for Renounce their for
others
•Mention the procedure for disposing
unsubscribed shares
 Book Building
Book building is a mechanism through which the initial public offerings (IPOs)
take place in the U.S. Similar mechanisms are used in the primary market offerings of
GDRs also. In this process the price determination is based on orders placed and
investors have an opportunity to place orders at different prices as practiced in
international offerings.

The recommendations Book-building involves firm allotment of the instrument

given by Malegam to a syndicate created by the lead managers who sell
Committee paved way for the issue at an acceptable price to the public.
the introduction of the
book building process in Originally the option of book building process was
the capital market in Oct available to companies issuing more than Rs 100 cr.
1995
The restriction on the minimum size was removed and
SEBI gave permission to adopt the book building
Nirma by offering a method to issue of any size.
maximum of 100 - Lakh
equity shares through this In the prospectus, the company has to specify the
process is set to be first placement portion under book building process. The
company to adopt the securities available to the public are separately known
mechanism. as net offer to the public.
 Among the lead managers or the syndicate
members of the issue or the merchant bankers a member
is nominated by the issuer company as a book runner and
his name is mentioned in the draft prospectus.

The book runner has to circulate the copy of the draft

prospectus to be filed with SEBI among the institutional
buyers who are eligible for firm allotment.

The draft prospectus should indicate the price band

within which the securities are being offered for
subscription.
The offers are sent to the book runners.

He maintains a record of the names and number of

securities offered and the price offered by the
institutional buyer within the placement portion.

Underwriters Should also intimate the orders received by

him within the placement portion and the price for which
the order is received to the Book runners.

The price is finalized by the book runner and the issuer

company.

The issue price for the placement portion and offer to the
public should be the same.

Underwriting agreement is entered into after the fixation

of the price.
the book runner collects the application forms along with
the application money from the institutional buyers and
the underwriters.

The book runner and there intermediaries involved in the

book building process should maintain records of the
book building process. The SEBI has the right to inspect
the records.
Pricings of New Issues
Issue of the capital prior to May 27, 1992 was governed
by the Controller of Capital Issues Act 1947.

Under the act, the premium was fixed as per the

valuation guidelines issued. The guidelines provided for
fixation of a. Price on the basis of the net asset value per
share on the expanded equity base taking into account,
the share capital and the profit earning capacity.

The repealing of the Capital Issue Control Act resulted in

an era of free pricing of securities. Issuers and merchant
bankers fixed the offer prices. Pricing of the public issue
has to be carried out according to the guidelines issued
by SEBI.
At premium are permitted to price their
Companies issues at
premium in the case of the following
• First issue of new companies set up by existing companies with
the track record.

• First issue of existing private/closely held or other existing

unlisted companies with three-year track record of consistent
profitability.

• First public issue by existing private/closely held or other

existing unlisted companies without three-year track record but
promoted by existing companies with a five-year track record of
consistent profitability.

• Existing private/closely held or other existing unlisted company

with three-year track record of consistent profitability, seeking
disinvestment by offers to public without issuing fresh capital
(disinvestment).

• Public issue b1 existing listed companies with the last three

AT Par
value

In certain cases companies are not permitted to fix their

issue prices at premium. The price should be at par. They
are for first public issue by existing private, closely held
or other existing unlisted companies without three year
track record of consistent profitability and

Existing private/closely held and other unlisted

companies without three-year track record of consistent
profitability seeking disinvestment offer to public without
issuing fresh capital (disinvestment).
Factors to be Considered by the Investors

• Promoters' credibility
• Efficiency of the Management
• Project details
• Product
• Financial data
• Litigation. Pending litigations
• Risk factors
• Auditor's report
• Statutory clearance
• Investor Service
 Investor’s protection in the Primary Market

• Provision of all the relevant information,

• Provision of accurate information and

• Transparent allotment procedures without any bias

To provide the above mentioned factors several steps

have been taken. They are project appraisal,
underwriting, clearance of the issue document by the
stock exchange and SEBI's scrutiny of the issue
document
Factors to be considered to make the
investors protection effective

•Investors' awareness
•Strict norms for premium
fixation
•Safety nets
• Punitive action
 Indian Stock Exchanges
India Stock Exchanges are a structured
marketplace for the proper conduct of trading in
company stocks and other securities. There are 23
recognized stock exchanges in India, including the Over
the Counter Exchange of India for providing trading
access to small and new companies.

The main services of the India Stock Exchanges all

over the country are to provide nation-wide services to
investors and to facilitate the issue and redemption of
securities and other financial instruments.

The introduction of the concept of the stock

exchanges in India came with the breaking of the
American Civil War and the idea materialized first in
1874 with the foundation of the Bombay Stock Exchange
at the Dalal Street in Mumbai.
 Currently, in
all the India Stock
Exchanges the
trading system is
computerized for
more efficient and
transparent
trading. There has
been a significant
boom in the
degree of
development and
volume of trading
in the stock
exchanges .
 The list of listed stock exchanges
in India
Ahmedabad Stock Exchange Association Ltd.
•Bangalore Stock Exchange
•Bhubaneshwar Stock Exchange Association.
•Calcutta Stock Exchange
•Cochin Stock Exchnage Ltd.
•Coimbatore Stock Exchange
•Delhi Stock Exchange Association
•Guwahati Stock Exchange Ltd.
•Hyderabad Stock Exchange Ltd.
•Jaipur Stock Exchange Ltd
•Kanara Stock Exchange Ltd
•Ludhiana Stock Exchange Association Ltd
•Madras Stock Exchange
•Madhya Pradesh Stock Exchange Ltd.
•Mangalore Stock Exchange Limited
•Meerut Stock Exchange Ltd.
•Mumbai Stock Exchange
•National Stock Exchange India
•OTC Exchange of India
•Pune Stock Exchange Ltd.
•Uttar pradesh Stock Exchange Association
•Vado dara Stock Exchange Ltd.
 FUNCTIONS OF STOCK EXCHANGE.

• Maintains active trading

• Fixation of prices
• Ensures a safe and fair dealing
• Aids In financing the industry .
• Dissemination of information
• Performance inducer
• Self-regulating organization
REGULATORY FRAME WORK

• Ministry of finance

• The Securities and Exchange Board of

India

• MCA

• RBI
Ministry of finance
The Stock Exchange Division of the Ministry of Finance
has powers related to the application of the provision of
the SCR Act and licensing of dealers in the other area.

According to SEBI Act, the Ministry of Finance has the

appellate and supervisory powers over the SEBI. It has
power to grant recognition to the stock exchanges and
regulation of their operations.

Ministry of Finance has the power to approve the

appointments of executive chiefs and nominations of the
public representatives in the Governing Boards of the
stock exchanges. It has the responsibility of preventing
undesirable speculation.
The Securities and Exchange Board of India
(SEBI) is the regulatory authority in India
established under Section 3 of SEBI Act, 1992.
SEBI Act, 1992 provides for establishment of
Securities and Exchange Board of India (SEBI)
with statutory powers for (a) protecting the
interests of investors in securities (b)
promoting the development of the securities
market and (c) regulating the securities
market. Its regulatory jurisdiction extends over
corporate in the issuance of capital and transfer
of securities, in addition to all intermediaries and
persons associated with securities market.
SEBI has been obligated to perform the aforesaid
functions by such measures as it thinks fit. In particular,
it has powers for

•Regulating the business in stock exchanges and any

other securities markets
•Registering and regulating the working of stock brokers,
sub-brokers etc.
•Promoting and regulating self-regulatory organizations

•Prohibiting fraudulent and unfair trade practices Calling

for information from, undertaking inspection, conducting
inquiries and audits of the stock exchanges,
intermediaries, self - regulatory organizations, mutual
funds and other persons associated with the securities
market.
DISTINCTION BETWEEN PRIMARY MARKET AND SECONDARY
MARKET
Function : While the main function of primary market is
to raise long-term funds through fresh issue of securities,
the main function of secondary market is to provide
continuous and ready market for the existing long-term
securities
Participants: While the major players in the primary
market are financial institutions, mutual funds,
underwriters and individual investors, the major players in
secondary market are all of these and the stockbrokers
who are members
Determination ofofprices:
the stock exchange
In case .
of primary market, the
prices are determined by the management with due
compliance with SEBI requirement for new issue of
securities. But in case of secondary market, the price of
the securities is determined by forces of demand and
supply of the market and keeps on fluctuating.
 OBJECTIVES OF THE STCK
EXCHANGE

 To safeguard the interests of the

investing public.
 To establish and promote just practices
in securities transactions.
 To promote, develop, and maintain well
regulated market for dealing in
securities.
 To promote industrial development of
the country.
BOMBAY STOCK EXCHANGE

 The origin of BSE dates back to 1875.

 It was organised under the name THE NATIVE

STOCK AND SHARE BROKERS ASSOCIATION.

 It was started as a voluntary organisation.

 This was also a non profit association.

 SECURITIES TRADED
 The securities traded in BSE are
classified into 3 groups :
 A group ,B group and B1 group.
 A group contains the companies with
large outstanding shares, good track
record etc.
 Carry forward for a period of 90 days in
allowed for A group.
 SECURITIES TRADED
 Liquid securities come under B1 group
and it comprises of 746 companies.

 The remaining shares are placed under

B group.

 All the settlements are carried out

through the Clearing House.
 PROTECTION AGAINST
DEFAULT
 To protect the investors and trading
members against the default of another
member, several funds have been set
up by the SE:

 Customers Protection Fund

 Trade Guarantee Fund
 Brokers Contingency Fund
 PROTECTION AGAINST
DEFAULT
 Customers Protection Fund:
Set up with the objective of providing
insurance to investors in case of
default by a member.
The investor is indemnified upto a limit
of Rs 300000.
 PROTECTION AGAINST
DEFAULT
 Trade Guarantee Fund:
BSE created the TGF in 1997.Objectives are:
 To ensure timely completion of settlement of
contracts and thus protecting the interest of the
investors.
 To inculcate confidence in the minds of
secondary market operators.
 To promote the development and regulate
the securities of secondary market.
 PROTECTION AGAINST
DEFAULT
 Brokers Contingency Fund:
This fund is established by the SE in July
1997 to provide refund to the members who
is affected.
 Every existing active member has to
contribute an initial non refundable
contribution of 1000/- to the fund.
 NATIONAL STOCK
EXCHANGE

 The NSE became operational on 3rd

november 1994 in Mumbai.

 Recommendations will be given by the

PHERWANI COMMITTEE.

 This committee has pointed out some

defects in the INDIAN STOCK MARKET.
 THE DEFECTS ARE

 Lack of infrastructural facilities.

 Outdated trading system.
 Lack of transparency in operations.
 Outdated settlement system.
 Lack of cohesion among the various SE.
 OBJECTIVES OF NSE
 To establish a nation wide trading facility
for equity ,debt instruments, etc.
 To provide a fair ,efficient and
transparent securities market using
electronic communication network.
 To enable shorter settlement cycle.
 To meet current international standards
of securities market.
 MEMBERSHIP

 Membership is based on the factors such as

capital adequacy, track record, education,
experience, etc.
 Admission is a 2stage process- A written
examination and an interview.
 Candidates are interviewed by experienced
people from the industry.
 Only corporate members are admitted on Debt
Market segment where as individuals and firms
are eligible for Capital Market Segment.
 MEMBERSHIP
 Persons eligible to become trading
members are body corporate, companies,
institutions including subsidiaries of
banks.
 The whole time director should possess
atleast 2 years experience in activities
related to banking or financial services.
 The applicant must possess a minimum a
networth of 2 crores.
ADVANTAGES OF NSE

 Wider accessibility

 Screen based trading

 Non disclosure of identity of trading members

 Transparent transactions

 Effective settlement system

 ADVANTAGES OF NSE
 Wider Accessibility:
NSE ensures wider accessibility through
satellite linked trading facility.
Computer terminals and links with VSAT
help to contact the counterparts in other
parts of the country.

 Screen based Trading:

The basic advantage of NSE is
computer based trading. So every data is
stored in the computer. At present BSE
and other SE have introduced computer
based trading.
 ADVANTAGES OF NSE
 Non disclosure of identity of trading
members:
 While placing the orders, there is no
need to disclose the identity of the
members on the screen.
 It depends upon the wish of the
trading member. So without any fear,
any member can place large size orders.
 ADVANTAGES OF NSE
 Transparent transactions:
The major adv of NSE is transparency
in transactions. The enquiry facilities
offered in the terminals help the investor
to find out the price and depth of the
market security.
 This information enables him to take
healthy decisions regarding his
investment.
 ADVANTAGES OF NSE

 Effective settlement system:

All monetary benefits, dividend,
interests are debited/credited in the
clearing account of the clearing
members.

 This reduces the problems in

settlement.
 The governing board
The Governing Board of the stock exchange
consists of elected member directors, government
nominees and public representatives.
Rules, byelaws and regulations of the stock
exchange the substantial powers to the Executive
Director for maintaining efficient and smooth day to day
functioning of the stock exchange
The governing body of the stock exchange consists
of 13 members of which

(a) 6 members of the s exchange are elected by the

members of the stock exchange
(b) Central government nominates not more three
members
(c) The board nominates three public representatives
(d) SEBI nominates persons not exceeding three and
(e) The stock exchange appoints one Executive Director
general meeting. The retired member can offer himself
for election if he is not elected for two consecutive years.
If a member serves in the governing body for two years
consecutively, he should refrain from offering himself for
another two year.

The members of the governing body elect the

President and vice-president. It needs no approval from
the Central Government or the Board. The office tenure
for the president and Vice President is one year. They can
offer themselves for re-election, if they have not held
office for two consecutive years. In that case they can
offer themselves for re-election after a gap of one-year
period
Members of the Stock Exchange
Securities Contract Regulation Act of 1956 has
provided uniform regulation for the admission of
members in the stock exchanges.

The qualifications for becoming a member of a

recognized stock exchange are given below
•The minimum age prescribed for the members is 21
years.
•He/she should be an Indian citizen.
•He should be neither a bankrupt nor compounded with
the creditors.
•He should not be convicted for fraud or dishonesty.
•He should not be engaged in any other business
connected with a company.
•He should not be a defaulter of any other stock
exchange.
•The minimum required educational qualification is a
 • ABroker
The member broker registered with the recognized
stock exchange has to apply to the SEBI for
registration.
• Likewise a sub-broker even though he is registered
with the stock exchange should apply to SEBI for
registration.
• Usually the agreement between the broker and the
sub broker is carried out on a non-judicial stamp
paper of Rs. 10.
• The agreement generally specifies the authority and
responsibility of the broker and sub broker.
• The broker has to abide by the code of conduct laid
 Broker and the Investor

• The broker should provide adequate information

regarding the stocks.
• The broker should be capable of giving short term and
long term investment suggestions to the investors.
• The broker should be able to confirm the purchase and
sale of the securities quickly.
• He should be able to provide price quotes quickly,
which is now possible with the computer network.
• The broker should be noted for his integrity. He should
have a good name in the society.
• The broker should have adequate experience in the
market to take correct decision.
• The broker should have contact with other stock
exchanges to execute the orders profitably.
• The broker should also offer incidental service like
arranging for financing the clients' transaction
TYPES OF ORDERS

Limit orders
Orders are limited by a fixed price. 'Buy Reliance
Petroleum at Rs 50. Here, the order has clearly indicated
the price at which it has to be bought and the investor is
not willing to give more than Rs 50.

Best rate order

Here, the buyer or seller gives the freedom to the
broker to execute the order at the best. Possible rate
quoted on that particular date for buying. It may be the
lowest rate for buying and the highest rate r- for selling.
Discretionary order
The investor gives the range of price for purchase and sale.
The broker can use his discretion to buy within the specified limit.
Generally the approximate price is fixed. The order stands as this
'Buy BRC 100 shares around Rs 40'.

Stop loss order

The orders are given to limit the loss due to unfavorable price
movements in the market. A particular limit is given for waiting. If
the price falls below the limit, the broker is authorized to sell the
shares to prevent further loss.

Ex. Sell BRC Ltd at Rs 25, stop loss at Rs 22.

Buying and selling shares
To buy and sell shares the investor has to locate a
registered broker or sub broker who can render prompt and
efficient service to him.
Then orders to buy or sell the specified number of
shares of a company of the investor's choice are placed with
the broker.

After receiving the order, the broker tries to execute the

order in his computer terminal. Once matching order is found,
the order is-executed.
The broker delivers the contract note to the investor. It
gives details regarding: the name of the company, number of
shares bought, price, brokerage, and date of delivery of
shares.
In the physical trading form, once the broker gets the
share certificate through the clearinghouses he delivers the
share certificate along with transfer deed to the investor. The
investor has to fill the transfer deed and stamp it.
Settlement system
Fixed settlement system
Till 2002 fixed period settlement system of
transactions existed in the stock market.
Under this settlement cycle, the investor can
buy shares and effectively not have to find the cash
to pay for them for one to seven days

BSE had a settlement cycle of Monday to

Friday and NSE from Wednesday to Tuesday. BSE
addition, the facility of carry forward. Transactions
can be carried forward for a 15 day period to a
 On NSE, fresh accounts which opened between
and/or Tuesday had to be squared by a counter
transaction or by delivery of cash/shares.

Intra-settlement speculation led to increase in

trading volumes and price formulation. There was a
possibility of shifting positions across stock
exchanges due to the differences in settlement
opening and closing dates... There was a scope for
arbitration
Rolling settlement

Rolling settlement system, under rolling settlement

system, the settlement takes place "n' days (us1 1, 2, 3 or
5) after the trading day.

The rolling settlement cycle is noted by 'T +n'

i.e. the settlement period is "n' days after the trading day.
A rolling period which offers a large number of days
negates the advantages of the system. Generally 1onger
settlement periods are shortened gradually.
 SEBI made RS compulsory for trading in 10
securities selected on the basis of the criteria that they
were compulsory demat list and had daily turnover of
about Rs. 1 crore or more. Then it was extended to "A"
Stocks in Modified Carry Forward Scheme, Automated
Lending and Borrowing Mechanism (ALBM) and
Borrowing and Lending Securities Scheme (BLESS) with
effect from Dec 31, 2001.

SEBI had introduced T +5 rolling settlement in

equity market from July 2001 and subsequently
shortened the cycle to T+3 from April 2002. After the
T+3rolling settlement experience it was further reduced
to T+2 ~ reduce the risk in the market and to protect the
 India Stock Market Outlook April 2024
In March 2024, the Indian stock market witnessed a mixed performance
across various sectors, with some facing notable challenges while others
showed resilience amid adversity.
Despite a downturn in certain sectors such as banking, energy, and telecom,
there are signs indicating potential for recovery and growth in the near
future.
Analyzing the factors contributing to the performance of various sectors
provides insights into the dynamics shaping their trajectories in the coming
months.
Indian Equity Market: Sector-Wise Performance So Far
In February 2024, the Indian equity market exhibited diverse performances
across various sectors:
1. BSE Oil & Gas Index: The surge of 6.7% underscored investor optimism
towards the energy sector, fueled by rising crude oil prices and expectations
of increased demand.
2. BSE Auto Index: With a gain of 6.4%, the automobile sector demonstrated
resilience, buoyed by strong sales figures from leading manufacturers like
Maruti Suzuki and Hyundai India.
3. BSE Realty: The robust performance of the real estate sector, reflected in
a 6.3% jump, hinted at renewed investor interest driven by favorable
government policies and improving market sentiment.
4. BSE FMCG Index: Despite challenges, the FMCG sector experienced a
decline of 2.2%, signaling concerns over rising input costs and competitive
Sector Performance
A breakdown of how various sectors performed:

Best Performing Sectors: The technology, capital goods, retail, consumer

discretionary, healthcare, and basic materials sectors emerged as
frontrunners, propelled by factors such as technological advancements,
infrastructure development, and consumer spending trends.

Worst Performing Sectors: Conversely, the consumer non-cyclical,

utilities, conglomerates, energy, financial, and transportation sectors faced
challenges, reflecting sector-specific headwinds and market fluctuations.
Global Equity Markets
In the global arena, the performance of key indices shed light on broader
market trends:

U.S. Markets: The Dow Jones index rose by 2.1%, indicating overall positive
sentiment, while the tech-heavy Nasdaq index surged higher, signaling
investor confidence in technology stocks.

How Indian Stock Market is Expected to Perform in March

In March 2024, certain sectors in the Indian stock market experienced a
downturn, facing challenges that led to underperformance compared to
broader indices. However, there are indications suggesting potential for
these sectors to rebound in the near future. This report analyzes the factors
contributing to the underperformance of the banking, energy, and telecom
 TO BUY OR LEASE : A CRUCIAL DECISION

A Limited company is contemplating to have an access to a machine for a

period of 5 years. The company can have the use of machine for the
stipulated period through leasing arrangement or the requisite amount can
be borrowed at 14% to buy the machine. The firm is in the 50% tax bracket.

In the case of leasing, the firm would be required to pay at the end-of-year
lease rent of Rs.1,20,000 for 5 years. All maintenance, insurance and other
costs are to be borne by the lessee.

In the case of purchase of the machine (which costs Rs.3,43,300), the firm
would have 14% five-year loan to be paid in 5 equal annual instalments,
each instalment becoming due at the end of each year. The machine would
be depreciated on a straight line basis, with no salvage value.

Advise the company which option it should go for, assuming lease rents are
paid (a)
 LEASING & HIRE PURCHASE
• Financing of Capital assets of a firm requires long-term funds of
substantial magnitude. HOW TO AVOID
THOSE
• Several sources have been tapped to raise such funds, e.g. equity, OBLICATIONS
debt instruments and development finance in the form of term AND RISK
loans.
LEASING & HIRE
• All these sources have their distinctive advantages and PURCHASE
disadvantages to the borrowers and the lenders or investors. of capital assets
are two such
• Raising long-term funds for acquiring capital assets through debt methods through
instruments or long-term debts, imposes several obligations on the which helps to
borrowers, who have to bear some degree of risk also. avoid the need for
raising the funds
LEASING : DEFINITION
• Two parties are involved
A lease is a contract whereby the in Leasing .Leasing
owner of an asset (the lessor) grants to Company (Lesser ) and
another person (the lessee) exclusive Lessee.
right to use the asset for an agreed • Legal ownership gives
period of time, in return for the owner right to use the
payment of a rent (called lease rental). asset , alternative to
buying .
Capital assets like land, buildings, • Although several
equipments, machinery, vehicles are financing options are
the usual assets which are generally available for present day
acquired on lease basis. business ,leasing has a
role in industrial
financing used as an
The lessor remains the owner of the alternative to debt
asset, but the possession and economic financing.
• Leasing
• In 20th century 1980 Finance Corporation Ltd.
originated as
a big industry • Banks began offering leasing facilities in 1994.
in the U.S & • Post liberalization saw remarkable change in Indian
U.K and leaving with increase in foreign investment.
spread to
other • Entry of GE Capital ,foreign financial firms & Banks are
countries in in to leasing.
20th century.

• Leasing
concept first
originated in
Chennai in
1973. in the
name of First
Leasing
Company
Main Elements of Leasing
The essential features of a leasing contract are as follows:
• A Valid Contract of Leasing: A leasing arrangement is undertaken by entering into a
valid contract between the lessor and the lessee.
• Delivery of Goods: The movable property, generally termed as ‘goods’ must be
delivered by the lessor to the lessee. Delivery of the goods may be either actual delivery
or constructive delivery.
• Purpose: Goods are delivered to the lessee with the specific purpose of using them for
his specified lawful activity throughout the lease period.
• Consideration: The lessee undertakes to pay to lessor regularly lease rental, as
consideration for the use of the goods.
• Return of the Goods: The goods must be returned to the lessor exactly in the same
form, after the lease period is over.
• Ownership: The lessor, after handing over possession of the leased asset, remains
owner of the asset throughout the lease period and even thereafter.
• Methodology: The prospective lessee identifies the equipment to be leased and its
supplier and enters into a lease arrangement with a leasing company.
BENEFITS OF LEASING
Several benefits are derived by the lessee by acquiring the assets on lease basis, as compared to buying the same. The benefits are
as follows:

• Convenience in case of short-term need:

• No Risk of Technological Obsolescence:

• Efficient Maintenance Services:

• Low Administrative and Transactions Costs

• Debt-Equity Ratio remains unchanged:

TYPES OF LEASE AGREEMENTS
 Operating lease
• Lease is for a short period
• Lessee has a limited right to use only the asset.
• Lesser is responsible for maintains & upkeep of the asset.
• No option to buy the asset.
• As risk is higher the lease rentals would be high.
• An operating lease is very different from a financial lease in
almost all the aspects.

• Example : Computer ,hardware ,trucks &automobiles.

• Atypical example of Financial lease is given below:
• Cherry Limited wants to acquire a generator manufactured by a
particular company with certain specifications, which costs Rs
10,00,000.
• Dimpy Ltd prepared to give it on lease rentals of Rs 25,000.
• Cherry Ltd negotiates all commercial terms ,such as warranty and
after sale services. With the supplier ,including the technical
specifications.
• Financing company Z ltd provides finance to Dimpy Ltd for the
acquisition of Generator.
• Dimpy ltd places its order as per the requirements of Cherry ltd and
acquires the asset.
• The asset is leased for 60 months.
• If the asset is expected to last for more than five years, the lessee
(cherry 0 will be given an option of renewal option. Say next five years.
at a nominal rent of 200 Rs p.m
• Alternatively ask them to buy for Rs 6,000
DIFFERENCE BETWEEN FINANCIAL & OPERATING
LEASE
Nature of difference Financial Lease Operating Lease
Duration Long –term & non-cancellable Short-term & cancellable.
lease, for economic life.
Option The lessee is given an option to No option is given to buy
Buy
Maintenance Lessee bears all maintenance Lesser is responsible for
such as insurance ,repairs upkeep & maintenance.
Revocation Financial Lease can not be Operational lease is revocable.
revoked.
Obsolescence Risk The Lessee bears the The Lesser bears the
obsolescence risk Obsolescence risk
 SALE & LEASE BACK
This is another type of lease arrangement
The lessee who already owns the assets, sells the
same to the lessor, and thereafter takes the same asset from him on lease basis. This
is called ‘Sale and Lease Back arrangement’.

Under this arrangement, the lessee immediately recovers the value of his already
owned assets from the lessor.

Thereafter, the lessee makes payment of the lease rentals periodically as usual.
Such a lease arrangement enhances the liquid resources of the lessee immediately,
which can be utilised otherwise to meet his working capital requirements or to
purchase another asset on cash payment basis. This type of lease is an alternative to
a mortgage of the assets.
Leveraged Lease

IF the lessor defaults in making repayment of the debt, the creditor cannot
claim the same from the lessee. He will have recourse to the lessor only.

Leveraged lease is just opposite to the above. In such case, the creditor
remains entitled to have recourse to the lessee, i.e., he can recover his claims from
the lessee also. The lease rental is assigned to the creditor. The lessee is required to
pay the lease rental directly to the creditor of the lessor.

Generally this transaction is undertaken through a trustee, who receives the lease
rental and appropriates it as debt service component to the creditor and the balance
amount to the lessor.
Domestic Lease and International Lease

This classification is based on the domicile of the parties to a lease contract.

• If all the parties, viz. equipment supplier, lessor and the lessee are residing in
the same country, the lease is called domestic lease.
• If they are residing in different countries, it is called international lease.
• If the lessor and the lessee are domiciled in the same country and equipment is
imported from another country, it is called import lease.
• If the lessor and lessee are domiciled in different countries, the lease is called
cross-border lease. In such cases, the equipment supplier may be the resident
of any country.
• In case of international lease, there are two additional risks, i.e., country risk
and currency risk.
 MAIN CLAUSES IN THE LEASE AGREEMENT

• Nature of the Lease • Right to Inspect

• Description of the Equipment:

• Damage to Equipment:
Asset
• Duration of Lease • Prohibition of Sub-

Period leasing:

• Lease Rentals • Default by Lessee and

• Delivery and Re- Remedies

• Insurance:
delivery
• Right to Use • Other Charges:
 TO BUY OR LEASE : A CRUCIAL DECISION

A Limited company is contemplating to have an access to a machine for a

period of 5 years. The company can have the use of machine for the
stipulated period through leasing arrangement or the requisite amount can
be borrowed at 14% to buy the machine. The firm is in the 50% tax bracket.

In the case of leasing, the firm would be required to pay at the end-of-year
lease rent of Rs.1,20,000 for 5 years. All maintenance, insurance and other
costs are to be borne by the lessee.

In the case of purchase of the machine (which costs Rs.3,43,300), the firm
would have 14% five-year loan to be paid in 5 equal annual instalments,
each instalment becoming due at the end of each year. The machine would
be depreciated on a straight line basis, with no salvage value.

Advise the company which option it should go for, assuming lease rents are
paid (a)
 HIRE PURCHASE
Hire purchase is another method of acquiring a capital asset for use, without paying
its price immediately.

Under hire purchase arrangement goods are let on hire, the hirer (user) is allowed to
pay the purchase price in instalments and enjoys an option to purchase the goods
after all the instalments have been paid.

Thus the ownership in the asset is passed on to the hirer on payment of the last
instalment.
The amount and number of instalments is fixed at the time of delivering the asset to
the hirer.

If the hirer makes default in making payment of any instalment, the seller is entitled
to recover the asset from the hirer.
Difference between Hire Purchase and Leasing:
 CHOICE BETWEEN LEASING AND HIRE PURCHASE

Before discussing the procedure for choosing between leasing and hire purchase options, the following differences between them,
from the point of view of the lessee (hirer), may be noted:
Nidhi Finance offers a hire-purchase proposal to one of its customers,
Synthetic Chemicals, which requires an equipment costing Rs.10 lakhs
on the following terms

i) a flat interest rate of 15 per cent, and

ii) a hire-purchase period of 36 months.
Given this information, the total interest burden and the monthly hire-
purchase instalment would be as follows
 Private Equity - An Overview

Private Equity – Broadly Defined

• Technically refers to any type of equity investment in an asset
in which the equity is not freely tradable on a public market.
• Less liquid
• Long Term in nature
 Private Equity – Categories and Players
• Angel
– Early Stage: Seed, Start-up

• Professional Venture Capital

– Early Stage, Expansion, Later Stage

• Private Equity
– Later Stage, Buyout, Special Situations

• Hedge Funds
– All Stages
The Private Equity Market
 Key Player Overlap

Angel
Venture Capital

Private Equity Hedge Funds

VENTURE CAPITAL
 Meaning
Venture capital means funds made available for startup firms and small
businesses with exceptional growth potential.

Venture capital is money provided by professionals who alongside management

invest in young, rapidly growing companies that have the potential to develop
into significant economic contributors.
Venture Capitalists generally:

• Finance new and rapidly growing companies

• Purchase equity securities

• Assist in the development of new products or services

• Add value to the company through active participation.

The SEBI has defined Venture Capital Fund in its
Regulation 1996 as ‘a fund established in the form of
a company or trust which raises money through loans,
donations, issue of securities or units as the case may
be and makes or proposes to make investments in
accordance with the regulations’.
Characteristics
• Long time horizon

• Lack of liquidity

• High risk

• Equity participation

• Participation in management
Advantages
• It injects long term equity finance which provides a solid
capital base for future growth.

• The venture capitalist is a business partner, sharing both the

risks and rewards. Venture capitalists are rewarded by business
success and the capital gain.

• The venture capitalist is able to provide practical advice and

assistance to the company based on past experience with
other companies which were in similar situations.
Advantages (Cont.)
 The venture capitalist also has a network of contacts in many areas that can add
value to the company.

 The venture capitalist may be capable of providing additional rounds of funding

should it be required to finance growth.

 Venture capitalists are experienced in the process of preparing a company for

an initial public offering (IPO) of its shares onto the stock exchanges or overseas
stock exchange such as NASDAQ.
They can also facilitate a trade sale.
Stages of financing
1. Seed Money:
Low level financing needed to prove a new idea.
2. Start-up:
Early stage firms that need funding for expenses associated with
marketing and product development.
3. First-Round:
Early sales and manufacturing funds.
4. Second-Round:
Working capital for early stage companies that are selling product, but
not yet turning a profit .
5. Third-Round:
Also called Mezzanine financing, this is expansion money for a newly
profitable company
6. Fourth-Round:
Also called bridge financing, it is intended to finance the "going
public" process
Risk in each stage
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed
For supporting a
Seed Money 7-10 Extreme concept or idea or
R&D for product
development

Initializing
Start Up 5-9 Very High operations or
developing
prototypes

Start commercials
First Stage 3-7 High production and
marketing
Financial Stage Period (Funds Risk Perception Activity to be
locked in years) financed

Expand market and

Second Stage 3-5 Sufficiently high growing working
capital need

Market expansion,
acquisition &
Third Stage 1-3 Medium product
development for
profit making
company

Fourth Stage 1-3 Low Facilitating public

issue
VC investment process
Deal origination

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan
Methods of Venture Financing
The financing pattern of the deal is the most important element.
Following are the various methods of venture financing:
• Equity
• Conditional loan
• Income note
• Participating debentures
• Quasi equity
Exit route
• Initial public offer(IPOs)
• Trade sale
• Promoter buy back
• Acquisition by another company
1. Providing Strategic Direction:

One of the key roles venture capitalists (VCs) play in nurturing

startups is providing strategic direction. VCs have extensive
experience and knowledge in the business world, and they use
this expertise to guide startups in making crucial decisions. For
example, a VC may help a startup identify target markets, refine
their business model, or pivot their strategy based on market
trends. This mentorship and guidance can be invaluable for
startups, especially those led by first-time entrepreneurs who
may lack the necessary experience.
2. connecting Startups with industry Experts:

In addition to providing strategic direction, VCs often have

extensive networks within the industry. They can leverage these
connections to introduce startups to industry experts, potential
customers, or even other investors. By facilitating these
connections, VCs help startups gain valuable insights, establish
partnerships, and increase their chances of success. For
instance, a VC may introduce a startup to a seasoned
entrepreneur who can serve as a mentor or connect them with
key industry players who can provide valuable feedback and
guidance.
3. Assisting with Talent Acquisition:

Building a strong team is crucial for the success of any startup.

VCs recognize this and often assist startups in talent acquisition.
They can help identify and attract top talent, including executives,
advisors, and key employees. Additionally, VCs can provide
guidance on structuring compensation packages, equity
allocation, and other HR-related matters. By lending their
expertise in talent acquisition, VCs help startups assemble a
skilled and motivated team, enhancing their chances of achieving
their goals.
4. Offering Operational Support:

Many VCs go beyond providing financial support and actively

offer operational support to startups. This can include assisting
with financial management, operational processes, and even
marketing strategies. For example, a VC may provide guidance on
optimizing supply chains, implementing cost-saving measures, or
enhancing customer acquisition strategies. By offering practical
advice and support, VCs help startups navigate operational
challenges and improve their overall efficiency.
5. Case Study: Airbnb and Sequoia Capital:

A notable example of how venture capitalists shape startups is the

partnership between Airbnb and Sequoia Capital. In 2009,
Sequoia Capital invested $585,000 in Airbnb, and since then, they
have played a significant role in the company's growth. Sequoia
Capital not only provided financial support but also offered
strategic guidance, helping Airbnb expand its global presence and
refine its business model. This mentorship and guidance were
instrumental in transforming Airbnb from a small startup to a
global hospitality giant valued at over $100 billion.
Tips for Startups Seeking Venture Capital:

- Research potential venture capitalists thoroughly and seek those with relevant industry
expertise and a track record of successful investments.

- Clearly articulate your business goals and how venture capitalists can add value to your
startup.

- Be open to feedback and actively seek mentorship and guidance from your venture
capitalist partners.

- leverage the network and connections of your venture capitalist to gain industry insights
and establish valuable partnerships.

- Regularly communicate with your venture capitalist, providing updates on your progress
and seeking their advice on key decisions.

In conclusion, mentorship and guidance from venture capitalists are invaluable for startups.
From providing strategic direction to offering operational support, venture capitalists help
shape startups and increase their chances of success. By leveraging their experience,
networks, and expertise, venture capitalists play a crucial role in nurturing startups and
helping them navigate the challenges of scaling and growth.
 DEVELPOMENT OF
VENTURE CAPITAL IN
INDIA
• The concept of venture capital was formally introduced in India in 1987 by IDBI.

• The government levied a 5 per cent cess on all know-how import payments to
create the venture fund.

• ICICI started VC activity in the same year

• Later on ICICI floated a separate VC

company - TDICI
Venture capital funds in
India
VCFs in India can be categorized into following five
groups:

1) Those promoted by the Central Government

controlled development finance institutions. For
example:
- ICICI Venture Funds Ltd.
- IFCI Venture Capital Funds Ltd (IVCF)
- SIDBI Venture Capital Ltd (SVCL)
2) Those promoted by State Government controlled
development finance institutions.
For example:
- Punjab Infotech Venture Fund
- Gujarat Venture Finance Ltd (GVFL)
- Kerala Venture Capital Fund Pvt Ltd.

3) Those promoted by public banks.

For example:
- Canbank Venture Capital Fund
- SBI Capital Market Ltd
4)Those promoted by private sector
companies.
For example:
- IL&FS Trust Company Ltd
- Infinity Venture India Fund

5)Those established as an overseas venture capital fund.

For example:
- Walden International Investment Group
- HSBC Private Equity
management Mauritius Ltd
 How does the Venture Capital
work?
 Venture capital firms typically source the majority of their funding from large
investment institutions.

 Investment institutions expect very high ROI

 VC’s invest in companies with high potential where they are able to exit through
either an IPO or a merger/acquisition.

 Their primary ROI comes from capital gains although they also receive some
return through dividend.
Venture capital industry wise
segmentation
Percentage
9.03 6.94
IT & ITES
3.36 7.73
Energy
Manufacturing
12.92
11.5 Media & Ent.
BFSI
Shipping & logistics
4.32
Eng. & Const.
11.43
Telecom
Health care
4.82
Others
27.95

Percentage calculated on the total VC investment- 14,234 USB (fig. of 2007)

 Critical factors for the success of
venture capital
 The regulatory, tax and legal environment should play an enabling role as
internationally venture funds have evolved in an atmosphere of structural flexibility,
fiscal neutrality and operational adaptability.
 Resource raising, investment, management and exit should be as simple and flexible as
needed and driven by global trends.
 Venture capital should become an institutionalized industry that protects investors and
investee firms, operating in an environment suitable for raising the large amounts of risk
capital needed and for spurring innovation through start-up firms in a wide range of
high growth areas.
In view of increasing global integration and mobility of capital it is important that Indian
venture capital funds as well as venture finance enterprises are able to have global
exposure and investment opportunities

Infrastructure in the form of incubators and R&D need to be promoted using government
support and private management as has successfully been done by countries such as the
US, Israel and Taiwan. This is necessary for faster conversion of R&D and technological
innovation into commercial products.
Growth of VC/PE in India
16000 450

14234
14000 400
387

350
12000

299 300
10000 280

250
8000 7500
200
6390
6000 170
146 150

4000 110
100
78 71
2200
56
2000 1650
1160 50
937
591 470
0 0
2000 2001 2002 2003 2004 2005 2006 2007 1st half of
2008
Value of deals No of deals
Traditional Private Equity – Primary Activity

• Professional pools of capital that buy all the

publicly traded equity of target companies = “Go
Private”

• Usually done with borrowed money

– High degree of leverage

• Aka : Leveraged Buyout

 The Basic Value Creation Formula
Fundamental Ideas
1) Re-focuses acquired businesses resulting in lower costs and
improved efficiency.

2) Value is created through basic finance that says debt can

increase firm value if you can afford it!
• Exploits corporate aversion to debt (Henry McVey,
Morgan Stanley).

3) Regulatory Arbitrage – Sarbanes-Oxley