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Spring 2011(Feb-July)

Master of Business Administration - MBA Semester X

Subject Code –MF0007

Subject Name –Treasury Management

2 Credits

(Book ID: B0856)

Assignment Set- 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1. What are the diverse functions of an Integrated treasury as compared to a conventional treasury

Q.2 Explain the features of book-building and different stages involved in book building.

Q.3 Explain the concept of float. How float can be managed effectively?


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Q.1. What are the diverse functions of an Integrated treasury as compared to a conventional treasury
Integrated Treasury basically does the same thing as the traditional Treasury i.e. effective management of the funds. The difference is that the Integrated Treasury paints on a wider canvas. It is necessary that the Treasury has an eye on every market of the world, and every type of financial market in the country. Funds have to be moved from one sector to another to achieve maximum returns. With the full current account convertibility and financial sector reforms, the Indian corporates are also able to achieve this. Integrated Treasury requires professionals with expertise in all the markets. The portfolio has to be churned not only within a market, but also from one market to another. Such a portfolio activity calls for searching for investment opportunities in all the markets. Apart from movement of funds, making use of derivatives to cover every type of risk has become an important function of the Integrated Treasury.
Functions of Integrated Treasury of a Bank
The banks have the compulsions of operating in almost all the organised markets. Apart from this, they also have to manage the risks arising from liquidity, interest rates, foreign exchange etc. Therefore, the functions of an Integrated Treasury of a bank cover most of the functions of a modern Treasury.
a) Statutory Investment Management: Every bank has to maintain a Cash Reserve Ratio (CRR) and statutory liquidity ratio (SLR). The law requires every bank to maintain the investment and its form in order to ensure the liquidity of the banks. Treasury has the basic duty of statutory compliance by making suitable investment and maintaining sufficient cash reserves in the manner prescribed.
b) Funds Management: It is also necessary to determine the suitable mix of deposits and other borrowings. This will determine the cost of funds and the liquidity position of the banks. It is also necessary to design the assets mix, which will include the investment and loans mix, designing the investment portfolio, and designing the loan portfolio in line with the social banking policies of the government. Such a planning of assets will determine the liquidity of the bank and its profitability.
c) Asset- Liability Management (ALM): The ALM has the objectives of achieving all the organisational objectives of the bank. The organisational objectives of the bank are solvency (survival in the long-term), profitability and sufficient liquidity. In performing the necessary functions to achieve the objectives, the Treasury decides on important aspects like designing deposit products, loan products etc.
d) Risk Management: As the bank is operating in all the organised markets, it is subject to every type of risk like currency risk, interest rate risk, market risk etc. Ever since the RBI liberalized interest rates and the banks started offering floating rate loans, the banks are subject to the risk arising from the changes in the interest rates. It becomes necessary for the banks to use every type of derivative to manage the risk like interest rate swap, arbitrage and hedging.
e) Capital Adequacy: The Treasury must ensure that the bank has sufficient TIER I capital i.e., equity share capital and reserves & surplus. This is to ensure long-term solvency of the bank, as only the equity share capital will bear the loss of bad loans ultimately. Reserve Bank Of India has also prescribed the deadline of March 31,2009 to comply with capital adequacy norms. In the light of this, Treasury has the responsibility to raise the necessary equity capital through the issue of equity shares.


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Q.2 Explain the features of book-building and different stages involved in book building.
Features of Book-building:
1. Quantity Assessment:The number of shares to be issued so that company can get the maximum price is assessed and determined. Larger quantity of shares may reduce the share premium. To avoid this, the quantity is assessed by collecting the opinions of institutional investors.
2. Price Discovery: The investors are given a choice to bid different quantities at different prices. As happens in a public auction, the investors bid at different prices. Before public does this, the price preference of institutional investors is collected to determine the price band.
3. Documents: Instead of relying on a single document called prospectus as in the fixed price public offer, different documents can be used like notice, circular, Information Memorandum or a Red-Herring Prospectus (A prospectus that is incomplete regarding the price). The final prospectus is prepared after the allotment by including the issue price (cut-off price).
4. Category: The issue can be divided into two categories:
a) Private Placement Portion: It is the portion that is offered to the syndicate members and to the institutional investors. Institutional Investors are called "Qualified Institutional Buyers (QIB)". They comprise mutual funds, financial institutions, foreign institutional investors etc.
b) Public Issue: It is that portion which is offered to the public for bidding. It is known, as "net offer to the public" Originally 25% of the issue size was to be reserved for net offer to the public. From 2005, this portion is increased to a minimum of 35%.
5. Lead Book Running Manager: The main Merchant Banker is appointed as Lead Book Running Manager (LBRM). Other merchant bankers are called Co-Book Runners. For collecting the bids on behalf of their customers, syndicate members are appointed. Syndicate Members are those financial intermediaries who are eligible to be appointed as underwriters.

Stages of book building
A. Quantity Assessment Stage:
1. Appointment of Financial Intermediaries:The company appoints a Merchant Banker as Lead Book Runner (LBR). The LBR helps the company in appointing other Merchant Bankers as co- book runners. He also helps the company in appointing eligible underwriters as Syndicate Members. If found necessary, a Registrar can also be appointed.
2. Preparation of Information Memorandum (IM):The LBRM prepares an Information Memorandum containing significant details about the company, its operation, the promoters, financial structure etc. It contains as many details as a prospectus except the number of shares to be issued and the price.
3. Sending Information Memorandum:Copies of IM are sent to all the Qualified Institutional Buyers like mutual funds, Financial Institutions, Foreign Institutional, and Investors etc., through the Syndicate Members. The Syndicate Members collect the information about prices and quantities that these QIBs are willing to buy. This process begins at least 2-3 months before the actual issue. The retail investors are not involved in this process. The intended quantities and prices are collected by the Syndicate Members and supplied to the Lead Book Runner.
4. Determination of Quantity and Price-Band: On the basis of information received, the LBRM decides the quantity of shares to be issued in consultation with the company. He also decides the price-band. Price-band is the range of issue price within which the investor can bid different quantities at different prices. If a company decides the price-band as Rs.45-50, investors can indicate different quantities bid at different prices within this range.
5. Underwriting: The Syndicate members enter into an agreement with the Book Runner to underwrite a specific quantity of shares and the price at which they are willing to buy. The "net-offer to the public” portion has to be completely underwritten. The remaining portion can be underwritten at the discretion of the Company.

B. Pre-Issue Stage:This is a preparatory stage for the actual issue of shares. Other less significant financial intermediaries are appointed and all regulatory compliance efforts are to be made at this stage.
1. Appointment of other Financial Intermediaries: Other financial intermediaries like Registrar to the Issue, Bankers to the Issue etc., are appointed.
2. Application to Stock Exchange: Application is to be made to the Stock Exchange for listing the shares after the allotment. In addition, the IT Infrastructure of a Stock Exchange is essential for electronically uploading the bids received into the Server of the Stock Exchange. Either BOLT of BSE/NEAT of NSE should be used for making online information to the investors all over the country.
3. Preparation of Draft Red-Herring Prospectus: A Red-Herring Prospectus is prepared containing all the information about the public issue including the number of shares issued. However, the price -band is not mentioned in it, which makes it incomplete (red herring). Only the floor price is mentioned.
4. Filing Documents with SEBI: The Lead Book Runner sends the Red-Herring Prospectus to SEBI along with other documents. The other documents include the Memorandum of Understanding among the book runners containing their powers and responsibilities. The details regarding the networth of the Syndicate Members and their outstanding commitment are also sent. In addition, he sends a Due Diligence Certificate to declare that he has satisfied all the SEBI regulations governing a book-building issue.
5. Informing the Registrar of Companies: The Registrar of Companies who is an official appointed by the Govt. has to be informed about the issue by sending a copy of the Red Herring Prospectus (as a Draft Prospectus).
6. Agreements with the Depositories: The Company should enter into agreements with both of the Depositories National Securities Depository Ltd. (NSDL) and Central Depository Services Ltd. (CDSL) to allot the shares in the electronic form. In the fixed price issue offer, the investor can hold the shares in the share certificate from or in the electronic from. In case of book-building, only those investors who have Demat A/c can apply or bid for the shares.
7. Appointment of an Advertising Agency: As there is a legal requirement to announce the book-building, to announce the opening of the bidding and to announce the closure and allotment, an advertising agency is appointed. In addition to the statutory advertisement, the Agency also uses TV channels, Painted Hoarding & Magazines to announce the issue of shares through book-building.
8. Preparation and Filing Final Red Herring Prospectus: On the suggestions made by SEBI, the Lead Book Runner prepares a final Red-Herring Prospectus and files it with SEBI. He also files a final Due Diligence Certificate certifying that he has incorporated the suggestions of SEBI in the final Prospectus. In the final Red-Herring Prospectus, there may be some variation taking place during the intervening period from what was reported in the Information Memorandum. This fact should also be disclosed to SEBI.
9. Dispatch of Application Forms: The Registrar arranges to send Bid- cum-Application forms to the Syndicate Members or their offices. Along with them, Red-Herring Prospectus, Brochure and other relevant documents are sent to them. Either directly or through Syndicate Members, these are sent to the QIBs for their bidding.
10. Opening Escrow A/c: Escrow A/c should be opened with the bankers for accepting the application money. The syndicate members accept the Bid Forms and cheques/Drafts drawn in favor of Escrow A/c. As the filling up of the Bid Form may require guidance of Syndicate Members in case of retail investors, the Bid Forms are to be submitted to the Syndicate Members with the instruments drawn in favor of the Escrow A/c.

C. Actual Issue Stage:
1. Opening the Subscription List: The date of opening of the subscription list and its closure should be announced in leading national newspaper. The issue should be open for a minimum of 5 days out of which there should be a minimum 3 working days.
2. Receipt of Application-cum-Bid Forms: The Syndicate members will receive the Application-cum-Bid Forms. The applicant should provide all his personal details like name, address, bank name, bank A/c number, Demat A/c number, and the name of the depository.
3. Uploading the Information: As soon as the applications are received, the syndicate members should upload the information into the network. In addition, they should show graphically the number of shares bid at different prices from all over the country on their terminals.
4. Opportunity for Revision: The investors are given an opportunity to revise the bids at any time before the closure. If an investor finds from the syndicate members’ terminal that the demand is very high at the bid price, he can increase the price of his bid.
5. Closure of Subscription List: On the closure, the syndicate members send the bid forms to either the Lead Book Runner or the Registrar. The LBRM makes allotment to QIB while Registrar may make allotment to retail investors.

D. Allotment Stage: The allotment should be made within 15 days. As Information Technology is fully used, it does not take much time in receiving the applications and tabulating them. The information is available on real time basis. Allotment is slightly complex with the QIBs participating in a big way.
1. Determining the cut-off price: The Lead Book Runner decides the Cut-off price based on the bids received both from the QIBs and from the retail investors. Cut-off price is the price at which the shares will be allotted. Anyone bidding for a price less than the cut-off price does not get allotment.
2. Actual Allotment: Once the Cut-off price is decided, the basis of allotment is to be determined. For all those bidding above will get the allotment. But, how many shares are to be allotted for each category of bidders is also to be decided. The allotment is done accordingly.
3. Crediting Demat A/cs: The allotted shares are to be credited to the Demat A/cs of the investors. Communication is sent about allotment/ rejection or refund orders, if any.
4. Listing the Shares: The Shares should be immediately listed on the Stock Exchange for the benefit of the investors.
5. Final Prospectus: The final prospectus containing the cut-off price should be prepared and sent to Registrar of Companies. In addition, the fact about listing of the shares on the stock exchange should be informed to SEBI.


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