OBJECTIVE, SCOPE AND LIMITATION OF THE STUDY
The main objective of the training was to get exposure of working in a financial industry and to get first hand knowledge of working in a corporate sector and to know the functioning of the merchant banking department and especially SME IPO.
The scope of the study was limited to SME IPO and understanding its process and to do market research for SMEs which can be targeted for converting to SME IPO.
Time was a constraint as 8 weeks time was not sufficient to understand the working of the Merchant Banking Department and to get in-depth knowledge of SME IPO.
Chapter 2- INDUSTRY AND COMPANY ORIENTATION
FINANCIAL SERVICES INDUSTRY OVERVIEW
The term financial services means services provided by banking and non-banking finance companies established under the Reserve Bank of India Act,1934, regulated by the Reserve Bank of India; insurance companies established under the Insurance Regulatory and Development Authority Act,1999, regulated by the Insurance Regulatory and Development Authority, and other entities established under the Securities and Exchange Board of India Act,1992, regulated by the Securities and Exchange Board of India. The financial service sector in India has grown rapidly in the last decade. Its growth has in fact been higher than the growth in agriculture and manufacturing sector. India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). The Indian financial system comprises of financial institutions, financial markets, financial instruments and financial services. The major players in this market are IDFC, IL&FS, IDBI, ICICI, L&T etc. At present, the growth of Indian financial sector is nearly 8.5% per year. India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020. The financial service sector in India has grown rapidly in the last decade. Its growth has in fact been higher than the growth in agriculture and manufacturing sector.
The present financial system in India can be classified as follows:
Reserve Bank of India
Development financial institutions
Public sector financial institutions
Non-banking finance corporations
Asset reconstruction companies
Capital market intermediaries
Credit information companies
SEGMENTS OF THE FINANCIAL SERVICE SECTOR
MERCHANT BANKING OVERVIEW
According to SEBI: Any person who is engaged in the business of Issue Management either by making arrangements regarding selling, buying or subscribing to securities as Manager, Consultant, Adviser Of Rendering Corporate Advisory Service in relation to such Issue Management. Merchant Banking is a traditional term for an Investment Bank and a service oriented function which transfers capital from those who own to those who can use it. SEBI has said that Merchant Bankers should be more involved in market making process as share brokers do not have the requisite expertise and also said that any member of the stock exchange along with one merchant banker registered with SEBI could act as market maker.
SEBI has divided Merchant Bankers into four categories which are as follows-
CATEGORIES ACTIVITIES NETWORTH
Category I To carry on the activity of issue management and act as advisor, consultant, manager, underwriter, portfolio manager. Rs. 1 crore
Category II To act as advisor, consultant, co- manager, underwriter, portfolio manager. Rs. 50 lakhs
Category III To act as underwriter, advisor or consultant to an issue. Rs. 20 lakhs
Category IV To act only as advisor or consultant to an issue. Nil
Merchant Banking is basically a regulatory nature service guided by SEBI and is involved in Capital Market Activities. So in this dynamic environment public money is playing an important role in financing a large number of projects in public and private sectors and Merchant Banker plays a significant role in managing and meeting the growing needs of corporates and individual investors.
The inception of Tipsons dates back to 1993. Tipsons, a SEBI registered organization has embedded itself as a national level financial conglomerate by making its presence in most of the financial services segments including Merchant Banking, Fixed Income Services, Investment Banking, Equity Broking, Commodity Broking, Currency & Interest Rate Derivatives, Wealth Management etc. Today, Tipsons is privileged with having a SEBI registered Category – I Merchant Banker and association & membership of Six national level exchanges and has access to the majority of international exchanges. Tipsons has expanded its horizons to diversify its presence with 9 offices in 8 states across India.
To be a leading financial services company in India through value creation for our clients by providing them outstanding results which increases their enterprise value.
We are dedicated to deliver high returns to the clients by providing them with innovative solutions to all their financial needs and enable them to grow.
Tipsons Financial Services Pvt. Ltd- is the flagship company which has commenced operations in the year 1993. It is registered with SEBI & member of OTCEI (Over the Counter Exchange of India). Over the years, Tipsons has proved its leadership in the Indian fixed income market by providing intermediation services to Banks, Institutions, Insurance Companies, Mutual Funds, Provident Funds, Corporates, and Charitable & Religious trusts, etc.
True Value share Brokers Pvt. Ltd- Established in 1995, it is registered with SEBI and member of NSE – Cash & Derivatives, BSE – Wholesale Debt Market, Cash and Derivatives and Currency Derivatives & Interest Rate Futures (IRF) Segment of NSE & MCX–SX.
True Value Commodities Pvt. Ltd- is a member of two largest national level online commodity exchanges of India - National Commodity & Derivatives Exchange of India (NCDEX) & Multi Commodity Exchange of India Ltd. (MCX)
TIPSONS CONSULTANCY SERVICES PVT. LTD.
TCSPL is a SEBI registered Category I Merchant Banker, Issue Manager & Underwriter, assisting various Corporates in raising resources by Debt, Equity and other financial instruments incorporated in 2010.
• Issue Advisory, management & underwriting in both Debt & Equity market segments including IPO, FPO, Rights Issue, QIPs, ADR/GDR/IDR/FCCB issues.
Private Placement of Debt securities
• Private placement of debt market securities like Bonds, NCDs etc. which mainly include advising on timing of Issue & Road map preparation, preparation of Information Memorandum, Placement of securities and assisting in allotment, demat & listing.
Venture & Private Equity Placement
• Advising & arranging for venture / seed finance & private equity placements which mainly include preparation of Teasers & Information Memorandum, Identifying appropriate investors, Assisting in Valuation & Due diligence and Deal closure formalities.
ESOP Advisory & Management
• Formulation of ESOP scheme, mode of ESOPs, fair valuation of shares & Issuing Valuation Report and assist in getting RBI/Stock exchange approvals & employee data management under ESOPs.
• Wide range of services including Fair Valuation of shares & securities, special purpose valuation like ESOPs, Takeover, Delisting, Valuation of Mergers & Acquisitions, M&A Fairness opinions etc.
Amalgamations, Mergers & Acquisitions
• Services include advice on pre-merger stage, preparation of scheme & getting High Court approvals, Deal negotiation & structuring and assist in all post merger formalities.
Corporate Action / Transaction Advisory Services
• Management of Takeover / Buy-back offers, Listing & delisting of shares, Joint venture advisory and corporates restructuring.
Perquisite Tax (ESOP, Units & Sweat Equity) Valuations
• OLA Cabs
• Clear Point
• E infochips
• Imperia Health Pvt. Ltd.
• IPE Global
• Lauras Labs
• PAN INDIA
• Quick Heal
• Sonata Finance Pvt. Ltd
• ESAF Microfinance
• Sparkle Clean Tech Pvt. Ltd
• Utkarsh Micro Finance Pvt. Ltd
M&A Fairness Opinion and ESOP Certifications (Listed Companies)
• Jyoti Ltd
• Vaibhav Global Limited
PORTER's FIVE FORCE ANALYSIS
• Competitive rivalry between big players is intense in the industry.
• Financial services companies often compete on the basis of offering lower financing rates, higher deposit rates and investment services.
Threats Of New Entrants
• Stringent regulatory norms prevent new entrants.
• Customers prefer to invest their money with a reputed financial services company offering a wide range of services.
• Low threat of substitutes.
• Less number of substitutes available for financial products.
Bargaining Power Of Suppliers
• Low bargaining power of suppliers as the industry is highly regulated by RBI.
Bargaining Power Of Customers
• Medium bargaining power of customers. Although customers do not have much bargaining power, they can easily switch to another company based on the terms and quality of services provided.
ORGANIZATION FRAMEWORK (7s)
Tally, Saag Infotech for Company Laws are some of the softwares that are being used. MCA, NSE, BSE and other sources are used for searching of clients and servicing them.
Our aim is to grow, succeed and innovate by offering an array of financial solutions in different dimensions of our business. We intend to deliver quality by crafting customized solutions and thereby achieve higher level of clientele satisfaction. Our suite of services is customizable and flexible depending on the unique needs of every client.
An experienced team of over 100 qualified and experienced professionals including CAs, CSs, MBAs, CFAs, Engineers, etc., with deep market insights which enables the company to foresee the future market trends and take initiatives to leverage the market opportunities for providing the best financial and strategic solutions.
The executives always motivated the staff to complete the efficiently and effectively and the members of the organization were friendly and ready to help each other if needed and managed the work efficiently.
All the current team members are capable enough to do the task assigned to them. Effective communication and technical skills are required to meet the daily working of the organization.
Faith is the state of mind of being ultimately concerned
• Success is an outcome of individual excellence and collective performance.
• When a gifted team dedicates itself to unselfish faith and combines instinct with boldness and effort it is ready to climb.
• Skill is stronger than strength.
• Deliberation is the work of many persons, action of one alone.
• In business you don't get what you wish you get what we negotiate.
We believe that innovation is driven by people and technology, working together. Tipsons is characterised by the inventiveness of its people. We recognise and reward new ideas, approaches and applications and strive to set new standards of innovation, best practice and process.
Chapter-3 TRAINING ACTIVITIES
Internship at Tipsons was combination of both research and task oriented project. The work assigned to me by my company mentor was study of SME IPO and do market research for the same.
At first I studied about SME IPO that what is it, what are its benefit and various criteria and understanding its process.
Small And Medium Enterprises In India
The micro, small and medium enterprises are the backbone of economic development in India. They are the incubators for talent, innovation and entrepreneurial spirit, which is essential for the country's development. Indian SME sector contributes 45% of the industrial output, 40% of the country's total exports, employs over 60 million people, creates 1.3 million jobs every year and produces more than 8,000 quality products for the domestic and international markets. With approximately 30 million SMEs in India, around 12 million people are expected to join the workforce in the next three years with the sector growing at a rate of 8% a year.
SMEs are considered as remedy for several economic woes like unemployment, poverty, income inequalities and regional imbalances.
According to new THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006 the MSME Definitions are as follows
Micro Enterprise - A micro enterprise is, where the investment in plant and machinery does not exceed twenty five lakh rupees
Small Enterprise - A small enterprise is, where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five core rupees
Medium Enterprise - A medium enterprise, where the investment in plant and Machinery is more than five crore rupees but does not exceed ten crore rupees.
It had also helped in industrialization of rural and backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income.Urban area with around 857,000 enterprises accounted for 54.77% of the total working enterprises in Registered MSME sector whereas in rural areas around 707,000 enterprises (45.23% of the working enterprises) are located.
Therefore the most important contribution of SMEs in India is the balanced economic development.
Fund Raising Techniques For SME's
1. Alternative Debt: Alternative forms of debt differ from traditional lending, in that investors in the capital market, rather than banks, provide the financing for SMEs. These include “direct” tools for raising funds from investors in the capital market, such as corporate bonds, and “indirect” tools, such as securitised debt and covered bonds. With alternative debt, the SME does not access capital markets directly, but rather receives bank loans, whose extension is supported by activities by the banking institutions in the capital market. They are of a low risk/return type
• Corporate Bonds
• Securitised Debt
• Covered Bonds
• Private Placements
• Crowd funding (debt)
2. Hybrid Instruments: A single financial security that combines two or more different financial instruments. Hybrid securities, often referred to as \"hybrids,\" generally combine both debt and equity characteristics. They are of a medium risk/return type
• Subordinated Loans/Bonds
• Silent Participations
• Participating Loans
• Profit Participation Rights
• Convertible Bonds
• Bonds with Warrants
• Mezzanine Finance
3. Equity Instruments: Equity financing is the method of raising capital by selling company stock to investors. In return for the investment, the shareholders receive ownership interests in the company. They are of a high risk/return type
• Private Equity
• Venture Capital
• Business Angels
• Specialised Platforms for Public Listing of SMEs
• Crowd funding (equity)
4. Asset-Based Financing: Asset-based financing is loan secured by collateral (assets). The loan, or line of credit, is secured by inventory, accounts receivable and/or other balance-sheet assets. They are of a low risk/return type
• Asset-based lending
• Purchase Order Finance
• Warehouse Receipts
Despite the benefits associated with public listing, the SMEs were not able to access the capital markets through extant Stock Exchanges due to several factors such as stringent regulatory, disclosure and financial requirements and the like. The creation of a separate stock exchange for SMEs has been on the policy makers' agenda for quite some time, and finally in March, 2012, SME Exchange was launched. A dedicated stock exchange for SMEs would allow them accessing capital markets easily, quickly and at lesser costs.
The need of a dedicated SME Exchange can be attributed to several factors including the following:
• A dedicated SME exchange will provide SMEs with equity financing opportunities to grow their business
• Listing the company would facilitate expansion of the investors base, which in turn help company get secondary market for equity financing, including private placement.
• With the availability of equity financing options, the debt burden can be set lower resulting in a healthier balance sheet and lowered financing cost SME sector will grow better on two pillars of financial system, i.e., banking for debt capital and Capital Market for equity capital.
• Therefore for accessing capital markets easily, a dedicated stock exchange is set up in the form of BSE SME and NSE Emerge in India
• SEBI Norms:
100% underwriting of Issue
3 year Market Making
Minimum Dilution of 25% - Post Issue Capital
• NSE Norms:
Minimum Post-Issue Paid up Capital Rs. 3 Cr.
Minimum Rs.3 Cr Net worth.
Minimum Rs.3 Cr Net Tangible Assets.
Profit Track Record of 2 Years out of preceding 3 financial years OR Rs. 5 Cr Net worth.
• BSE Norms:
Post-Issue Paid up Capital < Rs. 25 Cr
Track record of at least 3 years.
Positive cash accruals (EBDT) from operations For at least 2 financial years out of 3 financial year
Positive Net Worth
• Migration From SME Exchange To Main Board
Approval of Shareholders
Submission of Information Memorandum
Clean Track Record
Why Should SME's Get Listed
• Financial Benefits:
Access to capital & financing opportunities
Reduced Compliances & Costs
Avoid unlisted space discounting
Entry / Exit platform for PE / VC Investors
More Avenues for Fund Raising
New Option to raise fund through pledge of shares
Relaxed & quicker listing process
Improves credit rating thus lowers borrowing cost
• Taxation Benefits:
No Long-Term Capital Gains Tax on Sale/Transfer of Shares
Short Term Capital Gain Tax at reduced rate of 15%.
No tax on equity infusion in the company
No tax on ‘distress business' purchase
• Valuation Benefits:
Potential valuation can be unlocked
Permission of migration of company from SME to Main Board after 2 years
Benefit of enjoying greater Price Earning (P/E) multiple
Liquidity and Trading volume in listed SME's increases its enterprise value and market capitalization.
• Intangible Benefits:
Goodwill of the company increases
Credibility of the company increases
Brand Building & Visibility
• Regulatory Benefits:
Half Yearly compliance for a company listed on SME Board as compared to Quarterly compliance for the company listed on Main Board.
No need to publish financial results in newspapers as submission to SME's Exchange and uploading on website is sufficient.
Only Exchange approval is required for Public Issue Offer Document as SEBI approval is not mandatory
All the benefits available to the listed companies on the Main Board are available to the companies listed on SME Board too
After gaining knowledge about SME IPO my company mentor asked me to conduct a Market Research of GIDCs to know the potential market for the same.
As a part of Market Research I prepared a database of companies in Naroda GIDC and Vatva GIDC and gathered secondary data from the website of GIDC and other sites such as tradeindia, Indiamart, dp infomedia, etc. The database included Private Limited Companies, Firms and Partnership Firms and their contact details and website. Information regarding Charge and Paid-up Capital of PVT.LTD. companies were also included from MCA. Finally a database of 527 companies was made for Naroda. After that the database was bifercated into two categories one comprised of all the PVT. LTD. Companies and other comprised of the Proprietorship Firms and Partnership Firms. Out of the total of 527 companies, 133 were PVT. LTD. Companies and 394 were firms. Industry Mentor was planning to conduct a seminar on SME IPO in Naroda GIDC so then the database was divided between me and my colleague and calls were made in all the private limited companies and in case of firms only sizeable firms were called and it was decided on the basis of whether the firms had website or not and only the firms with website were contacted. While calling we asked them whether they were interested in the seminar and gave them a brief about SME IPO. After calling analysis of the database was done on the basis of calls that how many were interested of the lot and a separate list was made so that they can be approached further. Some of the sizeable companies and firms which were not interested were also added to the list on the basis of their website, charge and paid-up capital. As charge shows the maximum extent upto which a company has taken loan till now and paid-up capital shows the money that a company has received from the shareholders and is the existing capital of the company. On the basis of calls made out of 133 of private limited companies only 25 companies showed interest and of 394 firms 116 firms were with website and of 116 only 12 firms were interested. So we called in a total of 249 companies of which only 37 companies were interested. This was too less a number to conduct a seminar so our company mentor decided not to hold a seminar for now and approach the interested companies personally. So after adding the not interested sizeable companies a total of 64 companies were targeted to conduct a preliminary survey for SME IPO. So then our team conducted the survey in Naroda GIDC by getting the questionnaire filled and then analysed the companies on the basis of the basis of the questionnaire filled that which companies were interested of them which were capable of bringing an IPO.
ANALYSIS OF NARODA GIDC
• 18.79% of Private Limited Companies showed interest for the seminar and SME IPO.
• 10.34% of Firms showed interest for the seminar and SME IPO.
• A total of 14.89% of the companies showed interest while calling.
DURING THE VISIT
• A total of 28 companies of 64 showed interest in SME IPO during the survey i.e. 43.75% were interested.
• Some companies who showed interest during the calls were not interested during the visit and some companies who were not interested during the call showed interest during the visit.
• Some of the companies didn't show interest as they were busy with GST and some were not in need of fund right now.
• Mostly Chemical and pharmaceuticals company showed interest in SME IPO.
• Some companies were interested but their turnover was not fulfilling the criteria for SME IPO.
For Vatva GIDC a database of 197 companies of sizeable private limited companies was done. The database included same details as Naroda. After the database was ready calling was done in the companies to know whether they were interested for SME IPO. Then the analysis of the data was done and then fixed the appointment of the industry mentor with the Director of the company.
ANALYSIS OF VATVA GIDC
• 17 of 197 companies were interested i.e. 8.62% of the total companies.
• There is more scope in Vatva then Naroda as there are more sizeable companies in Vatva.
• More people were aware of SME IPO in Vatva than Naroda.
• While fixing the appointments industries in Vatva were more welcoming.
Alongwith conducting the market research I also read Prospectus of recently done IPO of Akash Infra-Projects Limited. Prospectus reflects the elements of IPO process that are not readily available to investors in SME. It shows the true and fair value of the company. The IPO of Akash Infra-Projects Limited was a fixed price issue the company was based in Gandhinagar and were builders of roads. They brought a public issue of 20,40,000 equity shares with a face value of Rs. 10 each the issue price was Rs 125 per share aggregating to Rs 2550.00 Lakhs.
The prospectus consists of the following
Risk Factors Dividend Policy
Summary of the Industry Restated Standalone Financial Statements
Summary of Business Restated Consolidates Financial Statements
Summary of Financial Information of the company Managements Discussion and Analysis of Financial Condition
General Information Outstanding Litigations
Capital Structure Government and Other Statutory Approvals
Objects of the Issue Other Regulatory and Statutory Disclosures
Basis for Issue Price Issue Structure
Basic Terms of the Issue Issue Procedure
Tax Benefits Statement Restrictions on Foreign Ownership of Indian Securities
Key Industry Regulations and Policies Main Provisions of Articles of Association
History and certain Corporate Matters Material Contracts and Documents for Inspection
Management Presentation of Financial, Industry and Market Data
Promoters and Promoter Group of Company Forward Looking Statements
Financial Information of Group Companies Definitions and Abbreviations used
• Called in CA and CS firms of Mumbai and Surat for taking appointment as our head of the department was visiting this cities and wanted to meet them for business development.
• Made a Presentation on SME IPO for the seminar.
FINDINGS AND LEARNINGS FROM THE STUDY
Follwing Findings were made from the training undergone in the summer internship.
• All the products of Merchant Banking are very complex as they are regulated by SEBI.
• The working of a Financial Services Company is very different from working of the finance department of any company.
• There is a large market and scope for SMEs for raising funds through various techniques.
• Lack of awareness regarding SME IPO.
• Conservative mindset of SME owners as they generally are hesitant to go for an IPO and don't want their shares to go public.
• Most of the Partnership firms are not ready for SME IPO.
Following Learnings were gained during the training period
• Got an exposure of the finance industry.
• Communication Skills and Technological skills enhanced during the course.
• Market Research gave me the exposure to field work.
• Visit to Naroda GIDC gave exposure to the industrial sector.
• Merchant Banking department was a whole new sector, so working in this department gave me knowledge regarding the various roles of the Merchant Banker.
• Got to know about the untapped SME Sector.
• Calling Directors of different Companies led to increase in the confidence in the internship period.
RECOMMENDATIONS AND SUGGESTIONS
Lack of proper Marketing Strategy and unavailability of skilled workforce for marketing created hindrance in the proper working of the company which can be improved by hiring a skilled marketing personnel.
The Financial Services Industry is very vast and is one of the important sector of Indian Economy and SME is one of the emerging player in the market. But due to immense competition the industry requires new strategies to survive and carry on its operations. They need to adopt new marketing strategies and tactics which helps them in capturing the opportunities.
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