UNIT 1

Global Financial Market

Due to growth in international business over the last 30 years, various international financial markets
have been developed. Financial managers of MNCs must understand the various international
financial markets that are available so that they can use those markets to facilitate their international
business transactions.

The following international financial markets:

1 Foreign exchange market
2 Eurocurrency market
3 Euro credit market
4 Eurobond market
5 International stock markets

1 Foreign exchange market

The foreign exchange market allows currencies to be exchanged in order to facilitate international
trade or financial transactions. MNCs rely on the foreign exchange market to exchange their home
currency for a foreign currency that they need to purchase imports or use for direct foreign
investment. Alternatively, they may need the foreign exchange market to exchange a foreign currency
that they receive into their home currency. The system for establishing exchange rates has changed
over time.

2 Eurocurrency market

Financial markets exist in every country to ensure that funds are transferred efficiently from surplus
units (savers) to deficit units (borrowers). These markets are overseen by various regulators that
attempt to enhance the markets’ safety and efficiency. The financial institutions that serve these
financial markets exist primarily to provide information and expertise. The surplus units typically do
not know who needs to borrow funds at any particular point in time. Furthermore, they often cannot
adequately evaluate the credit risk of any potential borrowers or establish the documentation
necessary when providing loans. Financial institutions specialize in collecting funds from surplus
units and then repackaging and transferring the funds to deficit units.
 3 Euro credit market

Eurocredit market. Comprises banks that accept deposits and provide loans in large
denominations and in a variety of currencies. The banks that constitute this market are the
same banks that constitute the Eurocurrency market; the difference is that Eurocredit loans
are longer-term than so-called Eurocurrency loans.

4 Eurobond market

The Eurobond market is made up of investors, banks, borrowers, and trading agents that

buy, sell, and transfer Eurobonds. Eurobonds are a special kind of bond issued by
European governments and companies, but often denominated in non-European currencies
such as dollars and yen. They are also issued by international bodies such as the World
Bank. The creation of the unified European currency, the euro, has stimulated strong interest
in euro-denominated bonds as well; however, some observers warn that new European
Union tax harmonization policies may lessen the bonds' appeal.

5 International stock markets

MNCs and domestic firms commonly obtain long-term funding by issuing stock locally. Yet, MNCs
can also attract funds from foreign investors by issuing stock in international markets. The stock
offering may be more easily digested when it is issued in several markets. In addition, the issuance of
stock in a foreign country can enhance the firm’s image and name recognition there.

The recent conversion of many European countries to a single currency (the euro) has resulted in
more stock offerings in Europe by U.S.- and European-based MNCs. In the past, an MNC needed a
different currency in every country where it conducted business and therefore borrowed currencies
from local banks in those countries. Now, it can use the euro to finance its operations across several
European countries and may be able to obtain all the financing it needs with one stock offering in
which the stock is denominated in Euros. The MNCs can then use a portion of the revenue (in euros)
to pay dividends to shareholders who have purchased the stock.
 MOTIVES FOR USING INTERNATIONAL FINANCIAL MARKET

Several barriers prevent the markets for real or financial assets from becoming completely integrated;
these barriers include tax differentials, tariffs, quotas, labor immobility, cultural differences, financial
reporting differences, and significant costs of communicating information across countries.
Nevertheless, the barriers can also create unique opportunities for specific geographic markets that
will attract foreign creditors and investors. For example, barriers such as tariffs, quotas, and labor
immobility can cause a given country’s economic conditions to be distinctly different from others.
Investors and creditors may want to do business in that country to capitalize on favorable conditions
unique to that country. The existence of imperfect markets has precipitated the internationalization of
financial markets.

Motives for Investing in Foreign Markets

Investors invest in foreign markets for one or more of the following motives:

1 Economic condition. Investors may expect firms in a particular foreign country to achieve more
favorable performance than those in the investor’s home country. For example, the loosening of
restrictions in Eastern European countries created favorable economic conditions there. Such
conditions attracted foreign investors and creditors.

2 Exchange rate expectations. Some investors purchase financial securities denominated in a

currency that is expected to appreciate against their own. The performance of such an investment is
highly dependent on the currency movement over the investment horizon.

3 International diversification. Investors may achieve benefits from internationally diversifying

their asset portfolio. When an investor’s entire portfolio does not depend solely on a single country’s
economy, cross-border differences in economic conditions can allow for risk-reduction benefits. A
stock portfolio representing firms across European countries is less risky than a stock portfolio
representing fimrs in any single European country. Furthermore, access to foreign markets allows
investors to spread their funds across a more diverse group of industries than may be available
domestically. This is especially true for investors residing in countries where firms are concentrated in
a relatively small number of industries.
 UNIT 2

Methods of Raising Funds in Primary Market

 Methods of raising capital through primary market are: ↓

1. Public issue,
2. Rights issue,
3. Private placement.

4. Electronic Initial Public Issue (e-IPOs)

Different methods of raising capital in primary market are: ↓

1. Public Issue
Here prospectus is issued, and a public appeal is made to subscribe the new shares / debentures
issued by the company. Shares are allocated in response to application received. Some companies
sell shares directly to the public while some take help of share brokers. The company appoints an
advertising agency to advertise about the issue of shares.
2. Rights Issue
Rights issue means new shares are offered to the existing shareholders on the pro-rata basis. When
company wants to raise additional capital, securities are first offered to the existing shareholders. If
the shareholders do not want to buy shares, then the company can sell the shares to the outside
public.
3. Private Placement
Private Placement of shares means the company sells its shares to a small group of investors. It can
sell to banks, insurance companies, financial institutions, etc. It is an economical and quick method of
selling securities. The company does not sell its shares to the public.

4  Electronic Initial Public Issue (e-IPOs):

Under this method, companies issue their securities through the
electronic medium (i.e. internet). The company issuing securities
through this medium enters into a contract with a Stock Exchange.

SEBI registered broker have to be appointed for the objective of

accepting applications. This broker regularly sends information
about it to the company.
2.1.3 Free Pricing

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Benefits of Listing

Listing in business language means allowing the securities of a company to trade on the
stock exchanges. In order to trade its securities over stock exchanges and to raise the
funds companies will go for listing. The primary objective of listing is to provide liquidity
and marketability with free flow of trade to be happened on the stock exchange

Benefits of listing :
(1) Distinct Advertising value :
When the company go for listing then the name of the company will be heard by the
public through the print , electronic media as a new initial public offer. It brings a kind
of publicity to the company. If the founding promoters are of great reputation and
value then the company will definitely Penetration into the stock market’s
stakeholders.It helps the company to gain national importance and wide spread
recognition.

(2) Access to foreign investment :

Listing is an indication that the company is ready to comply with the rules and
regulations imposed by the stock exchanges, which encourages the Institutional
investors especially foreign investors. This makes the company to grab the attention
nation wide.

(3) Flexible fund raising :

The company can can raise the funds from the public when ever required. There’s a
significant difference in demand for the securities of listed and non listed company.
Listing adds value to a company which may help it for easy further fund raising.

(4) Liquidity :
Listing makes the securities of a company highly liquid, so that it can be traded on
the stock exchange freely without any exchange obstacles.

(5)Additional value :
Now a days banks and financial institutions consider the listed securities as collateral
security against any loans to be granted. Hence no need for searching alternative collateral
like gold , land documents, property documents etc.

4.1 NON- FUND BASED FINANCIAL SERVICES

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Advantages and Disadvantages of Credit Rating

Advantages of Credit Rating

Credit rating offers various types of benefits:
1. Information Service
Credit rating information allows for the communication of the relative ranking of the default
loss probability for a given fixed-income investment in comparison with other related
instruments.

The credit rating system allows for the recognition of risk perception by the common
investor vis a vis debt instruments and makes the investors familiar with the risk
profile of debt instruments.

2. Systematic Risk Evaluation

For the efficient allocation of resources, a systematic risk evaluation is an essential
requirement.

Credit rating helps the corporate issuer of a debt instrument to offer every

prospective investor the opportunity to undertake a detailed risk evaluation.

It helps a heterogeneous group of investors to arrive at a meaningful and consistent

conclusion regarding the relative credit quality of the instrument, especially when they do not
possess the requisite skills of credit evaluation.

3. Professional Competency
A credit rating agency, equipped with the required skills, competencies, and
credibility, provides a professional service, making it possible to use well researched
and scientifically analyzed opinions regarding the relative ranking of different debt
instruments according to their credit quality.

4. Easy to Understand
Credit ratings are symbolic and are therefore easy to understand, The rating seeks
to establish a link between risk and return.Investors use the rating to assess the risk
level of the instrument by making a comparison of the offered rate of return with the
expected rate of return (for the particular level of risk) with a view to opting for
the risk-return preferences.

5. Low Cost
The credit rating, as provided by a professional credit agency, is of significance not
just for the individuals/small investor, but also for an organized institutional investor.It
provides a low-cost supplement to them in the house appraisal system.

6. Efficient Portfolio Management

large investors may use the credit rating for portfolio diversification by selecting
appropriate instruments from a broad spectrum of investment options.

Such investors could use the information provided by rating agencies, by carefully
watching upgrades and downgrades and altering their portfolio mix by operating in
the secondary market.

7. Index of Faith
Credit rating acts as an ideal index of faith placed by the market in the issuers.This
eventually also acts as a guide for investment decisions.

8. Wider Investor Base

Credit rating offers the advantage of a wider investor base as compared to unrated
securities.Rating arms a large section of investors with specific skills to analyze
every investment opportunity and helps them make a very considered decision about
their investment.

9. Benchmark
The opinion of a credit rating agency enjoys wide investor confidence.This could
enable the issuers of highly-rated instruments to access the market even in
adverse market conditions.

The differential in pricing could lead to significant cost savings for highly-rated
instruments.

10. Efficient Practice

Credit rating serves as an effective tool for merchant bankers and other capital
market intermediaries in the process of planning, pricing, underwriting, and
placement of issues.

11. Effective Monitoring

Stock exchange intermediaries like brokers and dealers could use ratings as input
for monitoring their risk exposure.Regulators in some countries specify capital
adequacy rules linked to the credit rating of securities in a portfolio.Merchant
bankers also use credit rating for proper packaging issues through asset
securitization/structured obligations.
12. To Regulators
Credit rating has facilitated regulatory authorities around the world to issue
mandatory rating requirements.

13. Other Benefits

The investor community, in general, also benefits from the other services offered
by credit rating agencies, namely, research in the form of industry reports,
corporate reports, seminars, and open assess to the analysis of the agencies.

Importance of Credit Rating

Here are the benefits of credit rating:

For The Money Lenders

1. Better Investment Decision: No bank or money lender companies would like to

give money to a risky customer. With credit rating, they get an idea about the
credit worthiness of an individual or company (who is borrowing the money) and
the risk factor attached with them. By evaluating this, they can make a better
investment decision.
2. Safety Assured: High credit rating means an assurance about the safety of the
money and that it will be paid back with interest on time.

For Borrowers

1. Easy Loan Approval: With high credit rating, you will be seen as low/no risk
customer. Therefore, banks will approve your loan application easily.
2. Considerate Rate of Interest: You must be aware of the fact every bank offers
loan at a particular range of interest rates. One of the major factors that
determine the rate of interest on the loan you take is your credit history. Higher
the credit rating, lower will the rate of interest.
How do Credit Ratings Work in India?
As a matter of fact, every credit rating agency has their algorithm to evaluate the credit
rating. However, the major factors are credit history, credit type and duration, credit
utilization, credit exposure, etc. Every month, these credit rating agencies collect credit
information from partner banks and other financial institutions. Once the request for
credit rating has been made, these agencies dig out the information and prepare a report
based on such factors. Based on that report, they grade every individual or company
and give them a credit rating. This rating is used by banks, financial institutions and
investors to make a decision of investing money, buying bonds or giving loan or credit
card. The better is the rating, more are the chances of getting money at payable interest
rates.

Credit Rating Agencies in India

The following are the details of the 7 credit rating agencies currently registered to
operate in India:

Credit Rating Information Services of India (CRISIL)

Limited
Credit Rating Information Services of India Limited is the first credit rating agency of the
country which was established in 1987. It calculates the credit worthiness of companies
based on their strengths, market share, market reputation and board. It also rates
companies, banks and organizations, helping investors make a better decision before
investing in companies’ bonds. Besides India, it is also operational in countries including
USA, UK, Hong Kong, Poland, Argentina and China. It offers 8 types of credit rating
which are as follows:

 AAA, AA, A – Good Credit Rating

 BBB, BB – Average Credit Rating
 B, C, D – Low Credit Rating

Investment Information and Credit Rating Agency of

India (ICRA) Limited

Investment Information and Credit Rating Agency of India was established in 1991 and
is headquartered in Mumbai. It offers comprehensive ratings to corporates via a
transparent rating system. Its rating system includes symbols which vary with the
financial instruments. Here are the types of credit ratings offered by ICRA:

 Bank Loan Credit Rating

 Corporate Debt Rating
  Corporate Governance Rating
 Financial Sector Rating
 Issuer Rating
 Infrastructure Sector Rating
 Insurance Sector Rating
 Mutual Fund Rating
 Public Finance Rating
 Project Finance Rating
 Structured Finance Rating
 SME Rating

Credit Analysis and Research Limited (CARE)

Credit Analysis and Research Limited (CARE) is operational from April 1993 and offers a
range of credit rating services in areas like debt, bank loan, corporate governance,
recovery, financial sector and more. Its rating scale includes two categories – long term
debt instruments and short term debt ratings. It has its head office in Mumbai and
regional offices in New Delhi, Kolkata, Pune, Jaipur, Chandigarh, Bengaluru,
Ahmedabad, Chennai, Hyderabad and Coimbatore.

India Ratings and Research Pvt. Ltd.

Formerly known as Fitch Ratings India Pvt. Ltd., evaluates the credibility of corporate
issuers, managed funds, financial institutions, project finance companies, urban local
bodies and structured finance companies. It has its headquarters in Mumbai and other
branch offices in Delhi, Ahmedabad, Chennai, Hyderabad, Bengaluru, Kolkata and
Pune.

Acuité Ratings & Research (earlier SMERA Ratings

Ltd.)
Originally, known as Small Medium Enterprises Rating Agency Of India Limited, this
credit rating agency is now known as Acuité Ratings & Research. This agency has two
divisions – SME Ratings and Bond Ratings. It was established in 2011 and is a hub of
financial professionals. It offers credit ratings in the following format:

 AAA, AA, A – Low Credit Risk

 BBB, BB – Moderate Credit Risk
 B, C – High Credit Risk
 D- Defaulted

Brickwork Ratings India Private Limited

Headquartered in Bangalore, this credit rating agency is responsible for rating bank
loans, municipal corporation, capital market instruments and SMEs. Other than this, it is
also responsible to grade real estate investments, hospitals, NGOs, MFI, etc. It offers
various rating systems depending upon the different financial instruments. It has Canara
Bank as its promoter and strategic partner.

Infometrics Valuation and Rating Pvt Ltd

This is a SEBI-registered, and RBI-accredited credit rating agency that was founded by
former bankers, finance professionals and administrative services personnel. It assesses
and calculates credit ratings for banks,  NBFCs, large corporates and SMUs (small and
medium scale units). It aims to play a key role in serving the financial markets by
minimizing the information asymmetry among different lenders and investors and
facilitating borrowers to several fundraising opportunities.

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Forfeiting Mechanism:
In order to illustrate how forfeiting takes place in practice, the following is a typical forfeiting
transaction where the buyer and the seller of goods are located in different countries.

Introduction

Forfeiting and factoring are services in international market given to an exporter or seller.
Its main objective is to provide smooth cash flow to the sellers. The basic difference
between the forfeiting and factoring is that forfeiting is a long term receivables (over 90
days up to 5 years) while factoring is a shorttermed receivables (within 90 days) and is
more related to receivables against commodity sales.

Definition of Forfeiting

The terms forfeiting is originated from a old French word ‘forfait’, which means to
surrender ones right on something to someone else. In international trade, forfeiting may
be defined as the purchasing of an exporter’s receivables at a discount price by paying
cash. By buying these receivables, the forfeiter frees the exporter from credit and the risk
of not receiving the payment from the importer.

How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract.
Then the exporter approaches the forfeiter to ascertain the terms of forfeiting. After
collecting the details about the importer, and other necessary documents, forfeiter
estimates risk involved in it and then quotes the discount rate.
The exporter then quotes a contract price to the overseas buyer by loading the discount
rate and commitment fee on the sales price of the goods to be exported and sign a
contract with the forfeiter. Export takes place against documents guaranteed by the
importer’s bank and discounts the bill with the forfeiter and presents the same to the
importer for payment on due date.

Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be

reflected in the following documents associated with an export transaction in the manner
suggested below:

 Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately
instead, these could be built into the FOB price, stated on the invoice.
 Shipping Bill and GR form : Details of the forfeiting costs are to be included along
with the other details, such FOB price, commission insurance, normally included in
the "Analysis of Export Value "on the shipping bill. The claim for duty drawback, if
any is to be certified only with reference to the FOB value of the exports stated on
the shipping bill.

Forfeiting

The forfeiting typically involves the following cost elements:

1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to
execute a specific forfeiting transaction at a firm discount rate with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved
and deducted by the forfaiter from the amount paid to the exporter against the availised
promissory notes or bills of exchange.
 

Benefits to Exporter

 100 per cent financing : Without recourse and not occupying exporter's credit line
That is to say once the exporter obtains the financed fund, he will be exempted
from the responsibility to repay the debt.
  Improved cash flow : Receivables become current cash in flow and its is beneficial
to the exporters to improve financial status and liquidation ability so as to heighten
further the funds raising capability.
 Reduced administration cost : By using forfeiting , the exporter will spare from the
management of the receivables. The relative costs, as a result, are reduced greatly.
 Advance tax refund: Through forfeiting the exporter can make the verification of
export and get tax refund in advance just after financing.
 Risk reduction : forfeiting business enables the exporter to transfer various risk
resulted from deferred payments, such as interest rate risk, currency risk, credit risk,
and political risk to the forfeiting bank.
 Increased trade opportunity : With forfeiting, the export is able to grant credit to
his buyers freely, and thus, be more competitive in the market.

Benefits to Banks

Forfeiting provides the banks following benefits:

 Banks can offer a novel product range to clients, which enable the client to gain
100% finance, as against 8085% in case of other discounting products.
 Bank gain fee based income.
 Lower credit administration and credit follow up.

Definition of Factoring
Definition of factoring is very simple and can be defined as the conversion of credit sales
into cash. Here, a financial institution which is usually a bank buys the accounts receivable
of a company usually a client and then pays up to 80% of the amount immediately on
agreement. The remaining amount is paid to the client when the customer pays the debt.
Examples includes factoring against goods purchased, factoring against medical
insurance, factoring for construction services etc.
Characteristics of Factoring
1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of offbalance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.
Different Types of Factoring
1. Disclosed
2. Undisclosed
1. Disclosed Factoring
In disclosed factoring, client’s customers are aware of the factoring agreement.
Disclosed factoring is of two types:
Recourse factoring: The client collects the money from the customer but in case customer
don’t pay the amount on maturity then the client is responsible to pay the amount to the
factor. It is offered at a low rate of interest and is in very common use.
Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts
from the customer. Balance amount is paid to client at the end of the credit period or
when the customer pays the factor whichever comes first. The advantage of nonrecourse
factoring is that continuous factoring will eliminate the need for credit and collection
departments in the organization.
2. Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement.
In this case, Client has to pay the amount to the factor irrespective of whether customer
has paid or not.

Mechanism of Factoring:
The mechanism of factoring is summed tip as below:
(i) An agreement is entered into between the selling firm and the
factor firm. The agreement provides the basis and the scope of the
understanding reached between the two for rendering factor
services.

(ii) The sales documents should contain the instructions to make

payments directly to the factor who is assigned the job of collection
of receivables.

(iii) When the payment is received by the factor, the account of the
selling firm is credited by the factor after deducting its fees, charges,
interest etc. as agreed.

(iv) The factor may provide advance finance to the selling firm if the
conditions of the agreement so require.
The mechanism of factoring has been shown in the
following figure:

Differences between Factoring Vs. Forfeiting

 BASIS FOR
FACTORING FORFAITING
COMPARISON

Meaning Factoring is an arrangement Forfaiting implies a

that converts your transaction in which the
receivables into ready cash forfaiter purchases claims
and you don't need to wait from the exporter in
for the payment of return for cash payment.
receivables at a future date.

Maturity of Involves account receivables Involves account

receivables of short maturities. receivables of medium to
long term maturities.

Goods Trade receivables on Trade receivables on

ordinary goods. capital goods.

Finance up to 80-90% 100%

Type Recourse or Non-recourse Non-recourse

Cost Cost of factoring borne by Cost of forfaiting borne by

the seller (client). the overseas buyer.

Negotiable Does not deals in negotiable Involves dealing in

Instrument instrument. negotiable instrument.

Secondary market No Yes

What is Factoring and Forfating ?

Factoring also known as account receivables factoring or debtor
financing , is a method in which a company (client) sell its account
receivables (debt) to a bank or financial institution (called factor) at a
certain discount.

There are three parties involved in factoring contract –

1. Debtor (Buyer of Goods) – One who has purchase goods or

services on credit and has to pay for same once the credit period
gets over.
2. Client (Seller of Goods) – who has supplied goods or services to
the customer on credit terms.
3. Factor (Financier) – who purchase the account receivables from
client (seller of goods) and collect the money from debtor of his
clients.

In other words, Factoring is a mechanism in which an exporter

(seller) transfer his rights to receive payment against goods exported or
services rendered to the importer, in exchange for instant cash payment
from a forfaiter.

Factoring is prevalent in business in various ways. For example, Credit Card.

Factoring is often more short term than forfaiting and is applicable where
receivables are due within around 90 days.

Factoring Process
Factoring Process
1 – Client concludes a credit sale with the customer

2 – Client sells the account receivable to the factor (financier) and notify the
same to customer

3 – Factor makes a part payment (advance) against the account receivable

purchased after adjusting the discount or commission and interest on
advance.

4 – Factor maintains the customer’s account and follows up the payment

5 – Debtor makes the payment due to the factor

6 – Factor makes the final payment to the client when the account receivable
is collected or on a guaranteed payment date.
Factoring may be recourse or non recourse.

In recourse factoring, Factor buys the account receivable from client with
an agreement that the client will buy them back if they remain uncollected
from debtor.

Whereas in Non Recourse factoring, Client sells the account receivables to

Factor without any obligation of buying them back if they remain unpaid by
the debtor. As Factors have to bear any losses arising on account of
irrecoverable debts, factor charges higher commission in this type of
factoring.

Forfaiting

In Forfaiting, Exporter sell their medium and long term account receivables
at a discount and obtain cash from the forfaiter on non recourse basis. In
Forfaiting, there is no risk for exporter of importer becoming insolvent as
there is 100 percent finance of contract value. Forfaiting is generally
evidenced by a legally enforceable and transferable payment obligation such
as bills of exchange, promissory note, a letter of credit.

Forfaiting is a specialized form of factoring which is undertaken on export

transactions on a non recourse basis.

The major parties involved in a transaction of Forfaiting are : An exporter, an

importer, a domestic bank, a foreign bank and a primary forfaiter.

Forfaiting Process 

Exporter sells the goods to importer on deffered payment basis. Importer

issues series of promissory notes undertaking to pay the exporter in
installments with interest.
Importer approaches its banker (Avalling Bank) for adding the bank gurantee
on the promissory note that the payment will be made on each maturity
date. The promissory notes are now avallised and sent to exporter.

Forfaiting Process

Avalled notes are sold to forfaiter (usually exporter’s bank) as a discount at a

non recourse basis and exporter obtain finance from forfaiter.

Forfaiter hold till maturity date and obtain payment from importer’s bank /
avalling bank or sell it in the secondary market or sell it to a group of
investors.
Key Differences Between Factoring and Forfaiting

The major differences between factoring and forfaiting are described below:
1. Factoring refers to a financial arrangement whereby the business sells
its trade receivables to the factor (bank) and receives the cash payment.
Forfaiting is a form of export financing in which the exporter sells the claim
of trade receivables to the forfaiter and gets an immediate cash payment.
2. Factoring deals in the receivable that falls due within 90 days. On the
other hand, Forfaiting deals in the accounts receivables whose maturity
ranges from medium to long term.
3. Factoring involves the sale of receivables on ordinary goods.
Conversely, the sale of receivables on capital goods are made in forfaiting.
4. Factoring provides 80-90% finance while forfaiting provides 100%
financing of the value of export.
5. Factoring can be recourse or non-recourse. On the other hand, forfaiting
is always non-recourse.
6. Factoring cost is incurred by the seller or client. Forfaiting cost is
incurred by the overseas buyer.
7. Forfaiting involves dealing with negotiable instruments like bills of
exchange and promissory note which is not in the case of Factoring.
8. In factoring, there is no secondary market, whereas in the forfaiting
secondary market exists, which increases the liquidity in forfaiting.

-------------------------------

Definition of Merchant Banking

Merchant banking can be defined as a skill-oriented

professional service provided by merchant banks to their
clients, concerning their financial needs, for adequate
consideration, in the form of fee.
The Notification of the Ministry of Finance defines merchant banker as;

“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 or rendering corporate advisory services in relation to such issue
management.”

The Amendment Regulation specifies that issue management consists of a prospectus

and other information relating to the issue, determining the financial structure, tie-up of
financiers and final allotment and refund of the subscriptions, underwriting
and portfolio management services.

4.4.2 Features of Measurement Banking

CHARACTERISTICS OF MERCHANT BANKING

 High proportion of decision makers as a percentage of total

staff.

 Quick decision process.

 High density of information.

 Intense contact with the environment.

 Loose organizational structure

 Concentration of short and medium term engagements

 Emphasis on fee and commission income.

 Innovative instead of repetitive operations

 Sophisticated services on a national and international

level.
 Low rate of profit distribution.

 High liquidity ratio