(1) Those with minimum net worth of Rs. 1 crore are authorized to act as Lead Managers, Managers to the issue.
Minimum net worth of Rs. 50 lakh as co-managers to the issue
Minimum net worth of Rs. 25 lakh as consultant’s advisers to the issue
(2) The number of Lead Managers to the issue is restricted to 2 for issues less than Rs. 50 crore, 3 for less than Rs. 100 crore and 4 for above 100 crore.
(3) Prior permission from SEBI is needed for carrying out Merchant Banking activities.
Merchant banking facilities provide various benefits to the business houses. It also provides the bankers additional income by way of fees, commission and brokerage. It makes available a large float of funds and provides better corporate image to the bankers.
The expertise and advice on the lines of Merchant Banking need to be extended to small scale industries. It is also essential to try to develop ‘cultivators Market’ on par with the capital market. There is also a further need for trained personnel to handle new challenges in the field of innovative banking in this country”.
Merchant Banking activities are now being controlled by SEBI because it pertains to Capital Market Function. Accordingly SEBI licence is required to undertake merchant banking activity. Banks cannot act as Merchant Bankers now. They can carry on such activity only through a subsidiary.
In an economy where competition is tough, it is natural for the weaker units, small scale and medium scale sectors to be left behind. This has been the matter of concern for bankers, creditors, government and society in general. Delay in payments of sales bills leads to inadequate tie-up of working capital which results in industrial sickness.
Despite several measures taken by banks like inventory related finance against pledge of goods like loans and cash credits and receivables related finance, i.e., discounting bills of exchange, supply bills finance or overdraft against book debts, the problems continued.
In this context the policy makers thought of helping the small and medium scale sectors to recover their dues from buyers of its goods more quickly by establishing “Factoring Services” as an alternative.
The term ‘factor’ has its origin in the Latin word ‘Facere’ meaning’ to make or do’ i.e., to get things done ‘. During the 15th and 16th centuries, Factors were appointed by manufacturers in England, France and Spain to arrange for the sale and distribution of their goods and to collect the proceeds thereof. Factors never received title, but were responsible for the safe keeping of the goods as well as the proceeds of sale.
During the 19th and 20th centuries, the manufacturers retained their distribution function, but transferred the financing, credit and collection functions to the Factor. A’ Factor’ is an agent who finances the seller through the purchase of accounts receivables.
Though this form was prevalent earlier through travelling merchants, it became significant during 16th century in UK, France and Spain.
Characteristic Features of Factoring Services
Factoring Service has the following important features:
1. Factoring is different from bill discounting.
2. It is a financial service product.
3. Factor takes care of the collection of sales bills of clients.
4. It offers a continuous relationship between factor and his client.
5. It also includes a package of services like, collection and follow- up of each invoice, credit insurance, MIS support, etc.
6. It aims at replacing high cost market credit.
7. Lesser service charges.
8. It is classified as other current liability.
9. Its rate of interest is comparable to that of banks.
10. Its services are available to all sectors, viz., manufacturing Trading and services.
11. It substitutes sundry creditors.
“Factoring ” is a new financial service that is presently being developed in India. It is not just a single service, rather a portfolio of complimentary financial services available to clients i.e., sellers. The sellers are free to avail of any combination of services offered by the factoring organizations according to their individual requirements.
Factoring is a mechanism under which a financial organization called Factor purchases the accounts receivable of a party, called client and makes cash payment to the client immediately or from time to time after collecting the money from client’s debtor. For the services rendered and the risk assumed by the Factor, he collects fees known as factor age.
The International Institute for the Unification of Private Law in 1988 defined ” Factoring means an arrangement between a Factor and his Client which includes at least two of the following services to be provided by the Factor : (1) Finance, (2) Maintenance of Accounts, (3) Collection of Debts, and (4) Protection against Credit Risks”.
Place of operation of factoring service
To know about the operation of the factoring service, we should know about the place or state where the factor is operating. Let us see the background of this operation hereunder. Generally the credit sales are made an any one of the following ways.