unit-4 of Financial management services for BBS final year student of finance stream

1. Gamma Neutral

2. Let’s start with
the positive
energy…

4. Merger & Acquisition

5. Introduction
• Europe, hundreds of mergers and acquisition take
place every year.
• In India, too, mergers and acquisition have become
part of corporate strategy today
• While total M&A deal value was US$ 62 billion (971
deals) in 2010,
• It was US$ 54 billion (1026 deals) in 2011
• 1st 4 months of 2012 witnessed deal value of US$
23 billion (396 deals)

6. Introduction
• The terms ‘mergers, amalgamation, ‘acquisitions’ and
‘takeovers’ are often used interchangeably.
• However, there are differences.
• While merger means unification of two entities into one,
acquisition involves one entity buying out another and
absorbing the same.
• In India, in legal sense merger is known as
‘Amalgamation’.
• The amalgamations can be by merger of companies within
the provisions of the Companies Act, and acquisition
through takeovers. While takeovers are regulated by
SEBI

7. Introduction
• The term “amalgamation” is used when two or more
companies are amalgamated or where one is merged with
another or taken over by another.
• According to AS-14, “Accounting for Amalgamation”,
means an amalgamation pursuant to the provisions of the
Companies Act, 1956 or any other statute which may be
applicable to companies.

8. What is Amalgamation
• Merger of one or more companies into another company
• One company survives and the others lose their
existence
• The survivor is called the „Amalgamated‟ company and
others are called „Amalgamating‟ companies
• Amalgamated company takes over assets & liabilities of
amalgamating companies
• Consideration is paid in form of equity shares,
debentures, cash or a mix of all
• Two types of amalgamations,
• Merger of one with another, sometimes also referred to as absorption
• Merger of two or more companies to form a new company

9. Merger (Amalgamations)
. Merger
A + B = BA + B = C
A + B = A

10. Acquisition (Takeover)
• An acquisition is when both the acquiring and acquired
companies are still left standing as separate entities at
the end of the transaction
• Takeover is the purchase by one company of the
controlling interest of another company
• Takeovers may take form of
• Agreement with the majority of shareholders of the company‟s
management
• Purchase of shares carrying voting powers in the open market
• Both the companies (i.e., purchaser of shares as well as
the company of which the shares were being purchased)
remain as such as they were before the takeover

11. Acquisition
.
Acquisition
Friendly
takeover
A + B = A+ B
Hostile
takeover
A + B = A+ B

12. Differences between Amalgamation
and Takeover
• Major differences between Amalgamation and Takeover
1. The amalgamating company losses its existence, but
the taken-over company stays as it is
2. Amalgamation is governed by Companies Act, whereas
takeover is governed by SEBI guidelines
3. Accounting procedure of amalgamation & takeover is
totally different

13. Corporate takeovers
• Corporate takeovers were started by Swaraj Paul
when he tried to takeover Escorts.
• The other major takeovers are that of Ashok
Leyland by the Hindujas Shaw Wallace, Dunlop, and
Falcon Tyres by the Chabbria Group
• Ceat Tyres by the Goenkas
• Consolidated Coffee by Tata Tea.

14. Types of Merger
1. Horizontal Merger
2. Vertical Merger
3. Conglomerate Merger
4. Concentric Merger.

15. Horizontal Merger
•The two companies which have merged
are in the same industry, normally the
market share of the new consolidated
company would be larger
•Horizontal mergers are those mergers
where the companies manufacturing
similar kinds of commodities or running
similar type of businesses merge with
each other.

16. Vertical Merger
• A merger between two companies producing different
goods or services for one specific finished product.
• A vertical merger occurs when two or more firms,
operating at different levels within an industry's
supply chain, merge operations.
• Most often the logic behind the merger is to increase
synergies created by merging firms that would be
more efficient operating as one.

17. Conglomerate Merger
A merger between firms that are involved in totally
unrelated business activities.
Two types of conglomerate mergers:
1. Pure conglomerate mergers involve firms with
nothing in common.
2. Mixed conglomerate mergers involve firms that
are looking for product extensions or market
extensions.

18. Conglomerate Merger
• There are many reasons for firms to want to merge,
which include
• Increasing market share,
• Synergy and cross selling.
• Merge to diversify and
• Reduce their risk exposure.
• However, if a conglomerate becomes too large as a
result of acquisitions, the performance of the entire
firm can suffer. This was seen during the
conglomerate merger phase of the 1960s.

19. Concentric Merger
• In these mergers, the acquirer and the target
companies are related through basic technologies,
production processes or markets.
• A type of merger where two companies are in the
same or related industries but do not offer the
same products.
• The acquired company represents an extension of
product-line, market participants or technologies of
the acquirer
• In a congeneric merger, the companies may share
similar distribution channels, providing synergies for
the merger.

20. Example of Concentric
Merger
An example of a congeneric merger is
• Citigroup's acquisition of Travelers Insurance. While both
were in the financial services industry, they had different
product lines.

21. Reasons for Mergers and Acquisitions
• The most common reasons for Mergers and
Acquisition (M&A) are:
1. Synergistic operating economics: Synergy May be
defined as follows:
• V (AB) >V(A) + V (B)
• In other words the combined value of two firms or
companies shall be more than their individual value
Synergy is the increase in performance of the
combined firm over what the two firms are already
expected or required to accomplish as independent
firm

22. Reasons for Mergers and Acquisitions
• A good example of complimentary activities can a
company may have a good networking of branches and
other company may have efficient production system.
Thus the merged companies will be more efficient than
individual companies
2. Diversification: In case of merger between two
unrelated companies would lead to reduction in
business risk
• which in turn will increase the market value Normally,
greater the combination of statistically independent or
negatively correlated income streams of merged
companies, there will be higher reduction in the business
risk

23. Reasons for Mergers and Acquisitions
3. Taxation: The provisions of set off and carry forward
of losses as per Income Tax Act may be another strong
season for the merger and acquisition. Thus, there will
be Tax saving or reduction in tax liability of the
merged firm. Similarly, in the case of acquisition the
losses of the target company will be allowed to be set
off against the profits of the acquiring company
4. Growth: Merger and acquisition mode enables the firm
to grow at a rate faster than the other mode of
growth.The acquiring company avoids delays associated
with purchasing of building, site, setting up of the
plant and hiring personnel etc

24. Reasons for Mergers and Acquisitions
5. Consolidation of Production Capacities and increasing
market power:
• Due to reduced competition, marketing power increases.
Further, production capacity is increased by combined of
two or more plants.

25. Demerger
• In “Demerger”, a division of a company is transferred to
a newly-formed company or an existing company
• The transferor is called a “Demerged” company and the
transferee is called a “Resulting” company
• Both the demerged company and resulting company
retain their existence after demerger
• Consideration is paid by allotment of shares of resulting
company to the shareholders of the demerged company

26. Acquisition
Acquisition: This refers to the purchase of controlling
interest by one company in the share capital of an existing
company. This may be by:
• An agreement with majority holder of Interest.
• Purchase of new shares by private agreement.
• Purchase of shares in open market (open offer)
• Acquisition of share capital of a company by means of cash,
issuance of shares.
• Making a buyout offer to general body of shareholders

27. Top Acquisitions
Rank Year Purchaser Purchased
Transaction value
(in mil. USD)
1 2000
America Online Inc.
(AOL)
Time Warner 164,747
2 2000
Glaxo Wellcome
Plc.
SmithKline
Beecham Plc.
75,961
3 2004
Royal Dutch
Petroleum Co.
Shell Transport &
Trading Co
74,559
4 2006 AT&T Inc.
BellSouth
Corporation
72,671
5 2001
Comcast
Corporation
AT&T Broadband &
Internet Svcs
72,041
6 2004
Sanofi-Synthelabo
SA
Aventis SA 60,243
7 2000
Spin-off: Nortel
Networks
Corporation
59,974
8 2002 Pfizer Inc.
Pharmacia
Corporation
59,515
9 2004
JP Morgan Chase &
Co
Bank One Corp 58,761

28. Takeover
• Takeover: Normally acquisitions are made friendly, however
when the process of acquisition is unfriendly (i.e., hostile)
such acquisition is referred to as ‘takeover’.
• Hostile takeover arises when the Board of Directors of the
acquiring company decide to approach the shareholders of the
target company directly through a Public Announcement
(Tender Offer) to buy their shares.

29. Takeover might be :
Hostile Takeover
A takeover attempt that
is strongly resisted by
the target firm
Friendly Takeover
Target company's
management and board of
directors agree to a merger or
acquisition by another company.

30. WHY SHOULD FIRMS TAKEOVER?
• To gain opportunities of market growth more quickly than
through internal means
• To seek to gain benefits from economies of scale
• To seek to gain a more dominant position in a national or
global market
• To acquire the skills or strengths of another firm to
complement the existing business
• To acquire a speedy access to revenue streams that it would
be difficult to build through normal internal growth
• To diversify its product or service range to protect itself
against downturns in its core markets

31. KNIGHTS AND SQUIRES
• In the case of a hostile takeover, the firm making the bid can be
referred to as a 'black knight'.
• ‘White knight' is a firm that may enter the fray as a 'friendly'
bidder.
• A 'grey knight' is a third firm that is not welcomed by the 'victim',
seeking to exploit the situation to their own advantage.
• ‘Yellow knight' is a firm who originally seeks to launch a hostile
takeover bid but then moderates its stance and negotiates on the
basis of a merger.
• ‘White squires‘ is a firm which may not be big enough to be able to
take control of another firm but may well seek to buy into the
'victim' firm to prevent the 'black knight' from being able to
achieve its takeover plans.

32. Defense mechanisms
• Defense mechanisms available to target company
like
• White knight,
• Gray knight,
• white squire,
• Poison put,
• Poison pill,
• Golden parachute,
• Crown jewels,
• Green mail,
• Black mail,
• Share buy back,
• Going private,
• Packman strategy,
• Stand still agreement

33. Poison Pills
• The logic behind the pill is to dilute the targeting company’s
stocks in the company so much that bidder never manages to
achieve an important part of the company without the consensus
of the board and thus loses both time and money on their
investment.
• Flip-over pill
• Flip-in pill
• A typical pill is triggered when any individual or group acquires
or offers to acquire X percent of the company’s voting stock.
The pill gives every other shareholder the right to buy additional
share for a nominal sum of money.

34. Poison Pills
• Consider for example, a company with 100 million shares
selling at $50 each. Someone buys 15 million shares for $750
million. She owns 15 percent of the company, for a short while
anyway. The pill is triggered and holders of the other 85 million
shares get the right to buy 85 million newly issued shares for
$850. With 185 million shares outstanding, the price per share is
now $27(suppose) instead of $50. The acquirer’s 15 million
shares are worth only $405 million versus the $750 million she
paid, and she only has 8 percent of the voting shares instead of
15 percent. Other shareholders gain, they now have two $27
shares instead of one $50 share, and slightly increased voting
rights as well.

35. Poison Pills
• A flip-over pill issues rights. These rights are only
triggered and set in motion when 100 per cent of the
firms’ shares have been bought.
• Right to buy the acquiring companies’ shares for a
discounted price in the event of a total merger or
acquisition.

36. Poison Pills
• Using such rights is advantageous because of its
raise in debt to the shareholders as an affect of the
rights.
• Increasing the debt means to raise the risk of the
company’s financial leverage and thus seen as very
unattractive
• One major drawback regarding the flip-over pill is
that its actions are only made accessible when the
company is acquired 100 per cent. This gives the
bidder a loophole by gaining control of the company
but not acquiring it fully .

37. Golden Parachutes
• Golden Parachute as a defense strategy is a special and
lucrative package
• The defense strategy sets in motion as soon as the
acquiring firm has acquired a specific amount.
• The Golden Parachute’s primary function in a hostile
takeover is to align incentives between shareholders and
the executives of the target company as there generally
are concerns about executives who face a hostile
takeover while risking losing their jobs, oppose the bid
even when it increases the value for shareholders.
• Implementing a golden parachute defense strategy could
potentially help stagger and make a hostile takeover more
expensive, though only to a certain degree.

38. Insurance
• The Insurance Act of 1938 was the first legislation governing all
forms of insurance to provide strict state control over insurance
business.
• Purpose:-
• To safe guard the interest of insured, setting the norms for carrying out the
business of insurance smoothly, Minimizing disputes

39. IMPORTANCE OF INSURANCE
• Provides protection against occurrence of uncertain events.
• Device for eliminating risks and sharing losses.
• Co-operative method of spreading risks.
• Facilitates international trade.
• Serves as an agency of capital formation.
• Financial support.
• Medical support.
• Source of employment.

40. Types of Insurance

41. Life insurance
• Life insurance is a contract between the policy owner and the insurer,
• where the insurer agrees to reimburse the occurrence of the insured
individual's death or other event such as terminal illness or critical
illness.
• The insured agrees to pay the cost in terms of insurance premium for
the service. Specific exclusions are often written in the contract to
limit the liability of the insurer, for example claims related to suicide,
fraud, war, riot and civil commotion is not covered.

42. General insurance
• Insuring anything other than human life is called general insurance.
• Examples are insuring property like house and belongings against fire
and theft or vehicles against accidental damage or theft. Injury due to
accident or hospitalisation for illness and surgery can also be insured.
Your liabilities to others arising out of the law can also be insured and
is compulsory in some cases like motor third party insurance

43. Fire insurance
• Insurance that is used to cover damage to a property caused by fire.
Fire insurance is a specialized form of insurance beyond property
insurance, and is designed to cover the cost of replacement,
reconstruction or repair beyond what is covered by the property
insurance policy. Policies cover damage to the building itself, and
may also cover damage to nearby structures, personal property and
expenses associated with not being able to live in or use the property
if it is damaged.

44. Health insurance
• A type of insurance coverage that pays for medical and surgical
expenses that are incurred by the insured. Health insurance can either
reimburse the insured for expenses incurred from illness or injury or
pay the care provider directly. Health insurance is often included in
employer benefit packages as a means of enticing quality employees.

45. Marine Insurance
• Marine Insurance covers the loss or damage of ships, cargo, terminals,
and any transport or cargo by which property is transferred

46. PRINCIPLES OF INSURANCE
• Principle of Insurable interest.
• Principle of Utmost Good Faith.
• Principle of Indemnity.
• Principle of Subrogation.
• Principle of Contribution.
• Principle of Causa Proxima.
• Principle of Mitigation of Loss.

47. PRINCIPLES OF INSURANCE
• Principle of Utmost Good Faith.
• “Each party to the proposed contract is legally obliged to disclose to the other all
information which can influence the others decision to enter the contract”
• Principle of Subrogation.
• Subrogation means substituting one creditor for another.
• Mr. John insures his house for $ 1 million. The house is totally destroyed
by the negligence of his neighbour Mr.Tom. The insurance company shall
settle the claim of Mr. John for $ 1 million. At the same time, it can file a
law suit against Mr.Tom for $ 1.2 million, the market value of the house.
If insurance company wins the case and collects $ 1.2 million from Mr.
Tom, then the insurance company will retain $ 1 million (which it has
already paid to Mr. John) plus other expenses such as court fees. The
balance amount, if any will be given to Mr. John, the insured.

48. PRINCIPLES OF INSURANCE
• PRINCIPLE OF INSURABLE INTEREST
• One of the essential ingredients of an Insurance contract is that the insured
must have an insurable interest in the subject matter of the contract
• There are four essential components of Insurable Interests
• There must be some property, right, interest, life, limb or potential liability capable of
being insured
• Any of these above i.e. property, right, interest etc. must be the subject matter of
Insurance
• The insured must stand in a formal or legal relationship with the subject matter of the
Insurance
• The relationship between the insured and the subject matter must be recognized by law

49. PRINCIPLES OF INSURANCE
• Principle of Indemnity.
• “Financial compensation sufficient to place the insured in the same financial position
after a loss as he enjoyed immediately before the loss occurred.”
• Principle of Contribution.
• An individual may have more than one policy on the same property and in case there
was a loss and he were to claim from all the Insurers then he would be obviously
making a profit out of the loss which is against the principle of Indemnity. To prevent
such a situation the principle of contribution has been evolved under common law.
• “Right of Insurers who have paid a loss to recover a proportionate amount from other
Insurers who are also liable for the same loss”.

50. PRINCIPLES OF INSURANCE
• Principle of Causa Proxima.
• The Principle of Proximate (i.e Nearest) Cause, means when a loss is
caused by more than one causes, the proximate or the nearest or the
closest cause should be taken into consideration to decide the liability
of the insurer.
• If the proximate cause is the one which is insured against, the
insurance company is bound to pay.
• A cargo ship's base was punctured due to rats and so sea water entered
and cargo was damaged. Here there are two causes for the damage of the
cargo ship - (i) The cargo ship getting punctured beacuse of rats, and (ii)
The sea water entering ship through puncture. The risk of sea water is
insured but the first cause is not. The nearest cause of damage is sea water
which is insured and therefore the insurer must pay the compensation.

51. PRINCIPLES OF INSURANCE
• However, in case of life insurance, the principle of Causa
Proxima does not apply. Whatever may be the reason of
death (whether a natural death or an unnatural death) the
insurer is liable to pay the amount of insurance.
• Principle of Mitigation of Loss.
• According to the Principle of Loss Minimization, insured must always
try his level best to minimize the loss of his insured property
• The insured must take all possible measures and necessary steps to
control and reduce the losses in such a scenario

52. REGULATIONS OF INSURANCE BY IRDA
• Deposits.
• Investments.
• Valuation Of Assets.
• Submission of Returns.
• Insurance Advertisements.
• Foreign Exchange laws.

53. Life Insurance
• Life Insurance
• Insurance began as a way of reducing the risk to traders, as early
as 2000 BC in China and 1750 BC in Babylon.
• An early form of life insurance dates to Ancient Rome; "burial
clubs" covered the cost of members' funeral expenses and
assisted survivors financially
Term Insurance
Endowment Insurance

54. Term Insurance
• Term life insurance or term assurance is life insurance which
provides coverage at a fixed rate of payments for a limited
period of time, the relevant term.
• Term life insurance is a pure death benefit, its primary use is to
provide coverage of financial responsibilities for the insured or
his or her beneficiaries
• The simplest form of term life insurance is for a term of one
year. The death benefit would be paid by the insurance
company if the insured died during the one year term, while no
benefit is paid if the insured dies even one day after the last day
of the one year term.
• The premium paid is then based on the expected probability of
the insured dying in that one year.

55. Endowment policy
• An endowment policy is a life insurance contract designed
to pay a lump sum after a specific term (on its 'maturity') or
on death.
• Endowments can be cashed in early (or surrendered) and the
holder then receives the surrender value which is determined
by the insurance company depending on how long the policy
has been running and how much has been paid into it.
• Unit-linked endowments are investments where the premium
is invested in units of a unitised insurance fund.

56. Difference between Endowment and
term
Term Insurance Endowment Insurance
Term insurance plans only provide protection for the
term specified in the policy document
Endowment insurance plans provide protection along
with an investment opportunity
They offer just the death benefits They offer death as well as maturity benefits
For the same sum assured, the premium charged by
term insurance plans is much less than the endowment
plans
The premiums payable for endowment plans are more
expensive than term plans

57. Premium Determination
• Whatever be the insurance: life, accident, fire etc premium is
collected from each and every policy holder.
• To determine the premium use of probability is very
common, for example life insurance policy is based upon the
probability that the policy holder will die while insurance is
in effect.
• To determine the probability that the policy holder will
survive or die during the policy the insurance company make
use of mortality tables.
• These table are companies specific and separately for male
and female

58. Premium Determination
• Example:Mr Ram is 27 year old and he buys a 10 year
endownment policy which will fetch Rs.1000. Assuming 8%
interest rate and no other charges. Calculate premium?
• Premium = P.V of 1000 * L37/L27
•
1000
(1.08)10 ∗
9458921
9640922
• 454.454545

59. Premium Determination
• Consider last example where we had to find the premium a 27
year old person should pay to get a policy amount of Rs 1000
after 10 years using 8% interest P.A.
• Please calculate premium if policy amount is also payable to
him or his beneficiary on his death.
• P = 1000 d27 + 1000 d28
1
(1.08)
+ 1000 d29
1
(1.08)2 +
1000 d30
1
(1.08)3 + 1000 d31
1
(1.08)4 + 1000 d32
1
(1.08)5 +
1000 d33
1
(1.08)6 + 1000 d34
1
(1.08)7 + 1000 d35
1
(1.08)8 +
1000 d36
1
(1.08)9 + 1000
L37
L27
∗
1
(1.08)10

60. Premium Determination
• P = 1000 (
16486
9640922
+
16362
9640922
*
1
(1.08)
+
16526
9640922
*
1
(1.08)2 +
16785
9640922
*
1
(1.08)3 +
17235
9640922
*
1
(1.08)4 +
17873
9640922
*
1
(1.08)5 +
18602
9640922
*
1
(1.08)6 +
19518
9640922
*
1
(1.08)7 +
20618
9640922
*
1
(1.08)8 +
21996
9640922
*
1
(1.08)9 +
9458921
9640922
∗
1
(1.08)10 )
• 468.16

61. Securitization
• Introduction: Securitization is the process through which an issuer
pools several types of financial assets and sells the repackaged
instruments to Investors
• The repackaged instruments can be
• Bonds Through Certificates (PTCs),
• Collateralized Mortgage Obligations (CMOs) consolidated through
the pooling of contractual debt such as mortgages (residential and
commercial),
• Auto loans and
• Credit card debt obligations.

62. Securitization
• Securities which are backed by mortgages are known as
Mortgage Backed Securities (MBS)
• While the ones backed by other types of receivables are
known as Asset Backed Securities (ABS).
• Other instruments used are Collateralized Debt Obligations
(CDOs) and Loan Sell Off (LSO) issuances

63. History of Securitization
• Securitization in its present form originated in mortgage
markets of USA in 1970
• In India, first securitization deal dates back to 1990 when
Citibank secured auto loans and sold to the GIC Mutual Fund

64. WHAT CAN BE SECURITIZED
All sorts of assets are securitized:
• Auto loans
• Student loans
• Mortgages
• Credit card receivables
• Lease payments
• Accounts receivable.

65. Primary players in the securitization
• Originators – The parties, such as mortgage lenders and banks, that
initially create the assets to be securitized.
• Aggregator – Purchases assets of a similar type from one or more
originators to form the pool of assets to be securitized.
• Depositor – Creates the Special Purpose Vehicle for the securitized
transaction. The depositor acquires the pooled assets from the
aggregator and in turn deposits them into the Special Purpose
Vehicle (SPV).

66. Primary players in the securitization
• Issuer – Acquires the pooled assets and issues the certificates to
eventually be sold to the investors.
• Underwriter – Usually an investment bank, purchases all of the
SPV’s certificates from the depositor with the responsibility of
offering to them for sale to the ultimate Investors. The money paid
by the underwriter to the depositor is then transferred from the
depositor to the aggregator to the originator as the purchase price
for the pooled assets.

67. Primary players in the securitization
• Investors – Purchase the Special Purpose Vehicle’s issued
certificates. Each investor is entitled to receive monthly
payments of principal and interest from the Special Purpose
Vehicle.
• Trustee – The party appointed to oversee the issuing Special
Purpose Vehicle and protect the investors’ interests by
calculating the cash flows from the pooled assets and by
remitting the SPV’s net revenues to the Investors as returns.

68. Primary players in the securitization
• Servicer – The party that collects the money due from the
borrowers under each individual loan in the asset pool. The
servicer remits the collected funds to the Trustee for distribution
to the investors.
• Credit Enhancers - Possibly a bank, surety company, or insurer,
who provides credit support through a letter of credit, guarantee,
or other assurance.
• Rating Agency – The party that assesses credit quality of certain
types of instruments and assigns a credit rating

69. Special Purpose Vehicle or SPV
• The issuer is usually a company that has been specially set up
for the purpose of the securitization and is known as a special
purpose vehicle or SPV
• The creation of an SPV ensures that the underlying asset pool is
held separate from the other assets of the originator.
• This is done so that in the event that the originator is declared
bankrupt or insolvent, the assets that have been transferred to
the SPV will not be affected.

70. Special Purpose Vehicle or SPV
• The process of structuring a securitization deal ensures that the
liability side of the SPV – the issued notes – carries lower cost
than the asset side of the SPV.
• This enables the originator to secure lower cost funding that it
would otherwise be able to obtain in the unsecured market. This
is a tremendous benefit for institutions with lower credit ratings.

71. SECURITIZATION PROCESS
• Selection of assets by the Originator
• Packaging of pool of loans and advances (assets)
• Underwriting by underwriters.
• Assigning or selling to of assets to SPV in return for cash
• Conversion of the assets into divisible securities
• SPV sells them to investors through private stock market in return for cash
• Investors receive income and return of capital from the assets over the life
time of the securities
• The risk on the securities owned by investors is minimized as the securities
are collateralized by assets
• The difference between the rate of the borrowers and the return promised to
investors is the servicing fee for originator and the SPV .
• Assets to be securitized to be homogeneous in terms of underlying
assets,maturity period ,cash flow profile

72. WHY ORIGINATOR SECURITIZE
•Off-balance sheet financing – remove illiquid
assets.
•Improves capital structure
•Extends credit pool
•Reduces credit concentration
•Risk management by risk transfers
•Avoids interest rate risk
•Improves accounting profits

73. INVESTOR VIEW POINT
ADVANTAGE
• Opportunity to potentially earn a higher rate of return .
• Opportunity to invest in a specific pool of high quality credit-
enhanced assets .
• Portfolio diversification .
DISADVANTAGE
• Prepayment by borrowers can lessen the earning through
interest.
• Currency interest rate fluctuations which affect the floating
rates on ABS.
• Maintenance obligations of the collateral are not met as given in
the prospectus.

74. EXAMPLE OF SECURITIZATION IN INDIA
• First securitization deal in India between Citibank and GIC
Mutual Fund in 1991 for Rs 160 million.
• L&T raised Rs 4,090 mln through the securitization of future
lease rentals to raise capital for its power plant in 1999.
• Securitization of aircraft receivables by Jet Airways for Rs
16,000 mn in 2001 through offshore SPV.
• India’s largest securitization deal by ICICI bank of Rs 19,299
mn in 2007. The underlying asset pool was auto loan
receivables

75. Mortgage-Backed Securities
• A mortgage-backed security (MBS) is a type of asset-backed security that is
secured by a mortgage, or more commonly a collection ("pool") of sometimes
hundreds of mortgages.
• The mortgages are sold to a group of individuals (a government agency or
investment bank) that "securitizes", or packages, the loans together into a
security that can be sold to investors.
• While a residential mortgage-backed security (RMBS) is secured by single-
family or two- to four-family real estate,
• A commercial mortgage-backed security (CMBS) is secured by commercial and
multi-family properties, such as apartment buildings, retail or office properties,
hotels, schools, industrial properties, and other commercial sites

76. Asset-Backed Security
• An asset-backed security (ABS) is a security whose income payments and
hence value is derived from and collateralized (or "backed") by a specified
pool of underlying assets.
• The pool of assets is typically a group of small and illiquid assets which are
unable to be sold individually
• Pooling the assets into financial instruments allows them to be sold to
general investors, a process called securitization
• An "asset-backed security" is sometimes used as an umbrella term for a type
of security backed by a pool of assets.

77. Asset-Backed Security (Types)
• Home equity loans
• Auto loans
• Credit card receivables
• Student loans
• Others

79. Last
point
Generally all type of swap is
done through financial
institution and charge small
commission.

80. Last
point
Generally all type of swap is
done through financial
institution and charge small
commission.

81. Last
point
Generally all type of swap is
done through financial
institution and charge small
commission.

82. Last
point
Generally all type of swap is
done through financial
institution and charge small
commission.