Unit 4: Financial services

• Pricing: fixed price or book building (price band with a cap not more than 120% of the floor; investors bid; price discovered).
• Investor categories (book built issues): QIBs up to 50%, non-institutional investors at least 15%, retail individual investors at least 35% (for profitable companies).
• Obligations of the lead manager: due diligence certificate, ensure disclosures as per SEBI ICDR Regulations, 2018; monitor post-issue activities (refunds, allotment, listing); ensure minimum subscription of 90%.
• Green-shoe option: stabilising agent may over-allot up to 15% to stabilise post-listing prices.

Credit rating is an opinion of a rating agency about the relative ability and willingness of an issuer to meet its debt obligations in full and on time, expressed through symbols.

• Advantages: helps investors judge risk; lowers borrowing cost for good issuers; wider investor base; regulators and banks use ratings (capital adequacy).
• Limitations: ratings are opinions, not guarantees; conflict of interest (issuer pays); rating lag (IL&FS 2018 was AAA until shortly before default); rating shopping.

• SEBI (Credit Rating Agencies) Regulations, 1999 govern CRAs; registered CRAs include CRISIL (1987), ICRA (1991), CARE (1993), India Ratings & Research (Fitch), Acuité, Brickwork (registration cancelled 2022), Infomerics.

• Methodology factors: business risk (industry, market position, operations), financial risk (leverage, interest cover, cash flows, liquidity), management risk (track record, governance), project risk, support from parent/government.

• Stock broker: a member of a recognised stock exchange registered with SEBI (Stock Brokers) Regulations, 1992, who buys and sells securities on behalf of clients.

• Regulation: registration, net worth and deposit norms, KYC, segregation of client funds and securities, margin collection, upfront margins, contract notes within 24 hours, investor grievance redressal (SCORES), Investor Protection Fund; SEBI's ASBA-like "blocking of funds" for secondary market trades (UPI block mechanism).

A lease is a contract in which the owner (lessor) gives the right to use an asset to another (lessee) for a period in return for periodic payments (lease rentals), while ownership remains with the lessor.

Hire purchase (HP) is an agreement under which goods are let on hire with an option to purchase; ownership passes to the hirer on payment of the last instalment.

• Characteristics: down payment, periodic instalments (part principal, part interest), hirer is a bailee until the final payment, hirer may return goods and stop payments, the hire vendor can repossess on default.

• Financial guarantee: a contract under which the guarantor pays the beneficiary if the principal debtor fails to meet a financial obligation — bank guarantees, credit guarantees, guarantees by DFIs and government.
• Types: financial guarantees (loan repayment), performance guarantees (contract execution), deferred payment guarantees, bid bonds, advance payment guarantees.
• Institutions: banks (non-fund-based business), CGTMSE (credit guarantees for MSME loans), NCGTC (credit guarantee schemes for start-ups, education, ECLGS), ECGC (export credit), surety bonds by insurers (IRDAI 2022).
• Accounting: Ind AS 109 — financial guarantee contracts measured at the higher of ECL allowance and amortised premium; contingent liability disclosure under AS 29.