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Management Notes

Types and Registration of Prospectus

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It means a formal document that a Public Company issues to invite offers from public for subscribing its shares. It includes all the material information related to shares that a Company offers to the public. Furthermore, it usually help the investors to take investment decisions.

The company provides prospectus with capital raising intention. Prospectus helps the investors to make a well-informed decision because of the prospectus all the required information of the securities which are offered to the public for sale.

Whenever the company issues the prospectus, the company must file it with the regulator. The prospectus includes the details of the company’s business, financial statements.

  • To notify the public of the issue.
  • To put the company on record with regards to the terms of the issue and allotment process.
  • To establish accountability on the part of the directors and promoters of the company.

Types of prospectus

According to Companies Act 2013, there are four types of prospectus.

Deemed Prospectus: Deemed prospectus has mentioned under Companies Act, 2013 Section 25 (1). When a company allows or agrees to allot any securities of the company, the document is considered as a deemed prospectus via which the offer is made to investors. Any document which offers the sale of securities to the public is deemed to be a prospectus by implication of law.

Shelf prospectus: Shelf prospectus is stated under section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or any public financial institution offers one or more securities to the public. A company shall provide a validity period of the prospectus, which should not be more than one year. The validity period starts with the commencement of the first offer. There is no need for a prospectus on further offers. The organization must provide an information memorandum when filing the shelf prospectus.

Red Herring Prospectus: Red herring prospectus does not contain all information about the prices of securities offered and the number of securities to be issued. According to the act, the firm should issue this prospectus to the registrar at least three before the opening of the offer and subscription list.

Abridged Prospectus: Abridged prospectus is a memorandum, containing all salient features of the prospectus as specified by SEBI. This type of prospectus includes all the information in brief, which gives a summary to the investor to make further decisions. A company cannot issue an application form for the purchase of securities unless an abridged prospectus accompanies such a form.

Registration of Prospectus

(1) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless, on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his agent authorized in writing, and having endorsed thereon or attached thereto:

(a) Any consent to the issue of the prospectus required by section 58 from any person as an expert; and

(b) In the case of a prospectus issued generally, also:

(i) a copy of every contract required by clause 16 of Schedule II to be specified in the prospectus, or, in the case of a contract not reduced into writing, a memorandum giving full particulars thereof ; and

(ii) Where the persons making any report required by Part II of that Schedule have made therein, or have, without giving the reasons, indicated therein, any such adjustments as are mentioned in clause 32 of that Schedule, a written statement signed by those persons setting out the adjustments and giving the reasons therefor.

(2) Every prospectus to which sub-section (1) applies shall, on the face of it,

(a) State that a copy has been delivered for registration as required by this section ; and

(b) Specify any documents required by this section to be endorsed on or attached to the copy so delivered, or refer to statements included in the prospectus which specify those documents.

(3) The Registrar shall not register a prospectus unless the requirements of sections 55, 56, 57 and 58 and sub-sections (1) and (2) of this section have been complied with and the prospectus is accompanied by the consent in writing of the person, if any, named therein as the auditor, legal adviser, attorney, solicitor, banker or broker of the company or intended company, to act in that capacity.

(4) No prospectus shall be issued more than ninety days after the date on which a copy thereof is delivered for registration, and if a prospectus is so issued, it shall be deemed to be a prospectus a copy of which has not been delivered under this section to the Registrar.

(5) If a prospectus is issued without a copy thereof being delivered under this section to the Registrar or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to fifty thousand rupees.

Management Notes

Doctrine of Lifting the Veil of Corporate entity

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The Doctrine of Lifting the Corporate Veil is a significant concept in corporate law. It refers to a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Normally, a company is regarded as a separate legal entity, distinct from its shareholders, directors, or promoters, as established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897). However, in certain situations, courts may “lift” or “pierce” the corporate veil to look beyond the company’s independent existence and examine the real individuals behind it.

This doctrine is applied when the corporate form is used to perpetrate fraud, evade tax, defeat law, or engage in dishonest practices. Indian courts have also accepted this principle to ensure justice and equity prevail over rigid legal formalities.

Purpose of the Doctrine:

The doctrine aims to:

  • Prevent misuse of corporate personality.

  • Hold the real persons accountable in case of fraud or illegal acts.

  • Maintain fairness in the application of corporate law.

  • Discourage unethical use of limited liability protections.

In essence, it is used to safeguard the public interest and ensure that the concept of limited liability is not abused.

Legal Basis in India:

In India, although there is no specific statute defining this doctrine, courts have developed it through judicial precedents under the Companies Act, 2013 and earlier company laws. Section 2(20) of the Companies Act defines a company as a separate legal person. However, Indian courts have exercised their inherent powers to disregard this separateness under specific circumstances.

Instances Where the Veil is Lifted

  • To Prevent Fraud or Improper Conduct

If a company is formed or used to commit fraud, cheat creditors, or deceive the public, courts can lift the veil. In Delhi Development Authority v. Skipper Constructions (1996), the Supreme Court held that the veil could be lifted if a company was used as a facade for fraud.

  • Evasion of Tax

Companies cannot be used as tools to avoid taxes. In Commissioner of Income Tax v. Meenakshi Mills (1967), the court lifted the veil to investigate tax evasion and found that the company was used to divert income.

  • Avoidance of Welfare Laws

If a company is set up to escape compliance with labour or social welfare laws (like PF, ESI), courts may disregard the corporate entity. This ensures that employers do not hide behind the veil to deny workers their rightful dues.

  • Agency or Sham Companies

Where a company is a mere agent of another person or company, and does not function independently, the veil may be lifted. Courts will then attribute actions or liabilities of the company to the real controller.

  • Protection of Public Interest

Courts lift the corporate veil when it is necessary to protect national interest, prevent illegal trade, or uphold security and law. For example, in LIC v. Escorts Ltd. (1986), the court analyzed the shareholding of foreign companies to determine control and ownership, for the sake of public policy.

Statutory Provisions Under the Companies Act, 2013:

While the Companies Act does not directly mention “lifting the veil,” certain provisions indirectly support the doctrine:

  • Section 7(7): If the company is incorporated by furnishing false or incorrect information, the liability can be imposed personally on the persons responsible.

  • Section 34 and 35: Penalties for misstatements in the prospectus can make directors and promoters personally liable.

  • Section 339: In case of fraud during winding up, the Tribunal may hold the persons who were knowingly parties to the fraud personally liable for company debts.

Judicial Interpretation and Landmark Cases in India:

  1. Salomon v. Salomon & Co. Ltd. (UK case, 1897)
    Established the principle of separate legal entity.

  2. Life Insurance Corporation of India v. Escorts Ltd. (1986)
    Explained that lifting the veil depends on the facts and must be applied cautiously.

  3. Gilford Motor Co. v. Horne (UK case)
    The veil was lifted to prevent an ex-employee from using a company to breach a contract.

  4. Union Carbide Case (Bhopal Gas Tragedy)
    The Indian government tried to lift the veil of Union Carbide Corporation to hold it responsible for the actions of its Indian subsidiary.

Limitations of the Doctrine:

While the doctrine is important, courts use it sparingly and cautiously. It is not meant to disregard the corporate structure in every dispute. Courts generally uphold the sanctity of the corporate form unless there is strong evidence of misuse, fraud, or illegal conduct. The doctrine cannot be used merely to satisfy debts or liabilities when no wrongdoing is involved.

Management Notes

Cost, Profit and Selling price

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Profit and loss are the terms used to identify whether a deal is profitable or not. We use these terms very often in our daily lives. If the selling price is greater than the cost price, then the difference between the selling price and cost price is called profit. If the selling price is less than the cost price, then the difference between the cost price and the selling price is called loss. The price at which a product is purchased is called its cost price. The price at which a product is sold is called its selling price. Let us learn more about profit and loss in this article.

Profit and Loss Related Terms

When a person buys an article for a certain price and then sells it for a different price, he makes a profit or incurs a loss. There are various terms that are associated with the entire process of making a transaction. For example, cost price of the article (C.P.), selling price (S.P.), discount, marked price, profit, and loss. Let us understand the meaning of these terms one by one.

Cost Price

The price at which an article is purchased is called its cost price. For example, if Neil bought an umbrella for Rs. 8, this is the cost price of the umbrella. It is abbreviated as C.P.

Selling Price

The price at which an article is sold is known as the selling price of the article. For example, if Neil sold the same umbrella for Rs. 10, then Rs. 10 is considered the selling price of the umbrella. It is abbreviated as S.P.

Profit

When, in a transaction, the selling price is greater than the cost price, it means we earn a profit. Using the above example, the profit that Neil earned is Rs. 2. It is calculated with the help of the formula: Profit = Selling price – Cost price. In the above example, the Cost price of the umbrella was Rs. 8 and the Selling price of the umbrella was Rs. 10, so the profit that he made can be calculated by using the formula:

Profit = Selling price – Cost price. Substituting the values, we get, Profit = 10 – 8 = 2. Therefore, he makes a profit of Rs. 2.

Loss

When, in a transaction, the cost price is greater than the selling price, it means we incur a loss. For example, if a bag is bought for Rs. 20 and it is sold for Rs. 17, it means we incurred a loss of Rs. 3 in this transaction. Loss is calculated with the help of the formula:

Loss = Cost price – Selling price.

Taking the same example, the Cost price of the bag is Rs. 20 and the Selling price is Rs. 17, so the loss can be calculated with the formula:

Loss = Cost price – Selling price.

Substituting the values, we get, Loss = 20 – 17 = 3. Therefore, there is a loss of Rs. 3 in the transaction.

Marked Price

Marked price is the price set by the seller on the label of the article. It is a price at which the seller offers a discount. After the discount is applied on the Marked price, it is sold at a reduced price known as the selling price.

Example: Sandra goes shopping at a store where everything is at a 50% discount. The price tag on a dress is Rs. 120. This means that the Marked Price of the dress before discount = Rs. 120.

Discount

To cope with the competition in business and boost the sale of goods, shopkeepers offer discounts to customers. The rebate or the offer given by the shopkeepers to lure the customers is called a discount. Discount is always calculated on the Marked price of the article.

Discount = Marked Price – Selling Price

Discount (%) = (Discount/Marked Price) × 100

If the marked price of an article is Rs. 600, and there is a 40% discount on it, this means that the customer can buy the article at the following price:

40% discount on marked price = (40/100) × 600

Discount ($ )= 24000/100 = Rs. 240

Therefore, Selling Price = Marked Price – Discount ($) = Rs. 600 − Rs. 240 = Rs. 360

Profit and Loss Formulas

Now, let us learn the formulas for calculating profit and loss.

Profit Formula

If the selling price of an article is greater than its cost price, there is a gain in the transaction. The basic formula used for calculating the profit is:

Profit = Selling Price – Cost Price.

Loss Formula

If the selling price of an article is lesser than the cost price, there is a loss in the transaction. The basic formula used for calculating the loss is: Loss = Cost Price – Selling Price

Illustration

To calculate the selling price on this basis, the food costs have to be expressed as a percentage of the selling price using the following calculation. Food cost ÷ Food cost as a % of the selling price × 100

For example, if food costs for a dish come to £4.50 and the gross profit target is 75%, the food cost as a percentage of the targeted sale is 25%.

Management Notes

Problems on Speed and Time

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  1. Speed, Time and Distance:
Speed = Distance , Time = Distance , Distance = (Speed x Time).
Time Speed
  1. km/hr to m/sec conversion:
x km/hr = x x 5 m/sec.
18
  1. m/sec to km/hr conversion:
x m/sec = x x 18 km/hr.
5
  1. If the ratio of the speeds of A and B is a: b, then the ratio of
The times taken by them to cover the same distance is 1 : 1 or b : a.
a b
  1. Suppose a man covers a certain distance at xkm/hr and an equal distance at y km/hr. Then,
The average speed during the whole journey is 2xy km/hr.
x + y

 

Management Notes

Capital Market and Instruments

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Capital market refers to facilities and institutional arrangements through which Medium and long-term funds (for a period of minimum 365 days and above), both debt and equity are raised and invested. It provides all with a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. The capital market consists of development banks, commercial banks and stock exchanges.

A capital market assists an economy by providing a platform to gain funds for business operations, development activities, or wealth enhancement. The functioning of a capital market follows the theory of the circular flow of money.

For example, a firm needs money for business operations and usually borrows it from households or individuals. In the capital market, the money from individual investors or households is invested in a firm’s shares or bonds. In return, investors gain profits as well as goods and services.

The market comprises suppliers and buyers of finance, along with trading instruments and mechanisms. There are also regulatory bodies. Stock exchanges, equity markets, debt markets, options markets, etc., are some capital market examples.

Primary Market

The primary market is for trading freshly issued securities, i.e., first-time trading. It enables an initial public offering. It is also known as the new issues market.

Here, companies raise funds with the help of preferential allotment, rights issue , electronic IPOs, or the pre-selected issue of securities or private placement. Usually, like an investment bank, the intermediary attaches an initial price to the shares. Once the sale materializes, firms take their shares to the stock exchange to facilitate trading between different investors.

Secondary Market

The trading of old securities occurs in the secondary market, which occurs after transacting in the primary market. Both stock markets and over-the-counter trades come under the secondary market. We also call this market the stock market or aftermarket.

Examples of secondary markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc.

Elements of a Capital Market

  • Individual investors, commercial banks, financial institutions, insurance companies, business corporations, and retirement funds are some significant suppliers of funds in the market.
  • Investors offer money intending to make capital gains when their investment grows with time. In addition, they enjoy perks like dividends, interests, and ownership rights.
  • Companies, entrepreneurs, governments, etc., are fund-seekers. For instance, the government issues debt instruments and deposits to fund the economy and development projects.
  • Usually, long-term investments such as shares, debt, government securities, debentures, bonds, etc., are traded here. In addition, there are also hybrid securities such as convertible debentures and preference shares.
  • Stock exchanges operate the market predominantly. Other intermediaries include investment banks, venture capitalists, and brokers.
  • Regulatory bodies have the authority to monitor and eliminate any illegal activities in the capital market. For instance, the Securities and Exchange Commission overlooks the stock exchange operations.
  • The capital market and money market are not the same. Securities exchanged in the former would typically be a long-term investment with over a year lock-in period. Short-term investments trade in the money markets and include a certificate of deposits, bills of exchange, promissory notes, etc.

Functions of Capital Market

  • It mobilizes parties’ savings from cash and other forms to financial markets. It bridges the gap between people who supply capital and people in need of money.
  • Any initiative requires cash to materialize. Financial markets are central to national and economic development as they provide rich sources of funds. For example, the World Bank collaborates with global capital markets to mobilize funds to achieve its goals, such as poverty elimination.
  • The International Bank for Reconstruction and Development (IBRD) has assisted over 70 countries by raising nearly $ 1 trillion since the first bond in 1947. Likewise, a report suggested that the European Union companies need to turn to this market to manage their pandemic balance sheet as banks alone will not suffice.
  • For the participants, the exchange instruments possess liquidity, i.e., they can be converted into cash and cash equivalents.
  • Also, the trading of securities becomes easier for investors and companies. It helps minimize transaction and information costs.
  • With higher risks, investors can gain more profits. However, there are many products for those with a low-risk appetite. In addition, there are some tax benefits obtained from investing in the stock market.
  • Usually, the market securities can work as collateral for getting loans from banks and financial institutions.
  1. Equities:

Equity securities refer to the part of ownership that is held by shareholders in a company.

In simple words, it refers to an investment in the company’s equity stock for becoming a shareholder of the organization.

The main difference between equity holders and debt holders is that the former does not get regular payment, but they can profit from capital gains by selling the stocks.

Also, the equity holders get ownership rights and they become one of the owners of the company.

When the company faces bankruptcy, then the equity holders can only share the residual interest that remains after debt holders have been paid.

Companies also regularly give dividends to their shareholders as a part of earned profits coming from their core business operations.

  1. Debt Securities:

Debt Securities can be classified into bonds and debentures:

  • Bonds:

Bonds are fixed-income instruments that are primarily issued by the centre and state governments, municipalities, and even companies for financing infrastructural development or other types of projects.

It can be referred to as a loaning capital market instrument, where the issuer of the bond is known as the borrower.

Bonds generally carry a fixed lock-in period. Thus, the bond issuers have to repay the principal amount on the maturity date to the bondholders.

  • Debentures:

Debentures are unsecured investment options unlike bonds and they are not backed by any collateral.

The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company.

  1. Derivatives:

Derivative instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes.

The four most common types of derivative instruments are forwards, futures, options and interest rate swaps:

  • Forward: A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price.
  • Future: A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price.
  • Options: An option is an agreement between two parties in which the buyer has the right to purchase or sell a particular number of derivatives at a particular price for a particular period of time.
  • Interest Rate Swap: An interest rate swap is an agreement between two parties which involves the swapping of interest rates where both parties agree to pay each other interest rates on their loans in different currencies, options, and swaps.
  1. Exchange Traded Funds:

Exchange-traded funds are a pool of the financial resources of many investors which are used to buy different capital market instruments such as shares, debt securities such as bonds and derivatives.

Most ETFs are registered with the Securities and Exchange Board of India (SEBI) which makes it an appealing option for investors with a limited expert having limited knowledge of the stock market.

ETFs having features of both shares as well as mutual funds are generally traded in the stock market in the form of shares produced through blocks.

 ETF funds are listed on stock exchanges and can be bought and sold as per requirement during the equity trading time.

  1. Foreign Exchange Instruments:

Foreign exchange instruments are financial instruments represented on the foreign market. It mainly consists of currency agreements and derivatives.

Based on currency agreements, they can be broken into three categories i.e spot, outright forwards and currency swap.

Management Notes

Money Market Instruments, Meaning, Features, Types, Purpose

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Money Market is used to define a market where short-term financial assets with a maturity up to one year are traded. The assets are a close substitute for money and support money exchange carried out in the primary and secondary market. In other words, the money market is a mechanism which facilitate the lending and borrowing of instruments which are generally for a duration of less than a year. High liquidity and short maturity are typical features which are traded in the money market. The non-banking finance corporations (NBFCs), commercial banks, and acceptance houses are the components which make up the money market.

Money market is a part of a larger financial market which consists of numerous smaller sub-markets like bill market, acceptance market, call money market, etc. Besides, the money market deals are not out in money / cash, but other instruments like trade bills, government papers, promissory notes, etc. But the money market transactions can’t be done through brokers as they have to be carried out via mediums like formal documentation, oral or written communication.

Features of Money Market Instruments

  • Short-Term Maturity

Money market instruments are designed for short-term use, typically with maturities ranging from one day up to one year. Their short tenure makes them ideal for meeting immediate liquidity needs of governments, banks, and corporations. This feature helps institutions manage their working capital efficiently and reduces the risk exposure associated with long-term commitments. Investors also benefit from quick maturity cycles, allowing them to reinvest or adjust their portfolios frequently in response to changing market conditions and interest rate movements.

  • High Liquidity

One of the key features of money market instruments is their high liquidity, meaning they can be easily converted into cash with minimal loss of value. Instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit are actively traded in the secondary market, allowing investors to exit before maturity if needed. This liquidity makes them attractive to banks, corporations, and financial institutions that may need to quickly access funds. High liquidity also ensures smooth functioning of the short-term financial markets.

  • Low Risk

Money market instruments are considered low-risk investments because they are usually issued by governments, large corporations, or regulated financial institutions. For example, Treasury Bills are backed by the government, and Commercial Papers are issued by creditworthy companies. Their short-term nature further reduces the exposure to long-term market risks, such as interest rate changes or credit deterioration. As a result, they provide a safe investment option for risk-averse investors who want to preserve capital while earning modest returns.

  • Discounted Issuance

Many money market instruments, such as Treasury Bills and Commercial Papers, are issued at a discount to their face value and redeemed at par upon maturity. This means investors earn returns based on the difference between the purchase price and the face value rather than receiving periodic interest payments. Discounted issuance simplifies the pricing structure and makes these instruments attractive for investors seeking predictable, upfront returns. It also allows issuers to raise short-term funds efficiently without committing to long-term debt obligations.

  • Fixed Returns

Money market instruments typically offer fixed returns, meaning the yield or return is determined at the time of purchase and does not fluctuate with market conditions. This feature provides certainty to investors about the amount they will receive at maturity, making it easier to plan cash flows. Fixed returns are especially valuable in times of market volatility or declining interest rates, as they offer a predictable source of income. This predictability adds to the appeal for conservative investors.

  • Negotiability

Most money market instruments are negotiable, meaning they can be freely bought, sold, or transferred in the secondary market before maturity. This feature enhances their liquidity and makes them flexible investment options for institutions that might need to adjust their portfolios or meet unexpected funding requirements. Negotiability ensures that investors are not locked into their positions and can capitalize on market opportunities or address liquidity mismatches by trading these instruments easily with other market participants.

  • Large Denominations

Money market instruments are generally issued in large denominations, often in multiples of lakhs or crores, which makes them primarily suitable for institutional investors, such as banks, mutual funds, and large corporations. The large size of transactions ensures that the market remains stable and that participants are financially sound entities. While this limits retail investor participation, it helps maintain the professional, wholesale nature of the money market, ensuring efficient pricing and reducing administrative costs per unit of transaction.

  • Regulatory Oversight

Money market instruments operate under strict regulatory frameworks designed to ensure stability, transparency, and investor protection. In India, regulators like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) set guidelines on who can issue, invest in, or trade these instruments. This regulatory oversight minimizes the risk of fraud or default and ensures that only creditworthy issuers access the market. It also maintains market discipline, encourages transparency, and promotes investor confidence.

  • Low Returns Compared to Long-Term Instruments

Due to their short-term and low-risk nature, money market instruments typically offer lower returns compared to long-term investment options like equities or corporate bonds. While they provide safety and liquidity, the trade-off is that investors earn modest yields. This feature makes them suitable primarily for conservative investors or for institutions managing short-term surplus funds rather than those seeking high capital gains. Despite the lower returns, the security and flexibility they offer make them an important part of balanced portfolios.

Types of Money Market Instrument

1. Banker’s Acceptance

A financial instrument produced by an individual or a corporation, in the name of the bank is known as Banker’s Acceptance. It requires the issuer to pay the instrument holder a specified amount on a predetermined date, which ranges from 30 to 180 days, starting from the date of issue of the instrument. It is a secure financial instrument as the payment is guaranteed by a commercial bank.

Banker’s Acceptance is issued at a discounted price, and the actual price is paid to the holder at maturity. The difference between the two is the profit made by the investor.

2. Treasury Bills

Treasury bills or T- Bills are issued by the Reserve Bank of India on behalf of the Central Government for raising money. They have short term maturities with highest upto one year. Currently, T- Bills are issued with 3 different maturity periods, which are, 91 days T-Bills, 182 days T- Bills, 1 year T – Bills.

T-Bills are issued at a discount to the face value. At maturity, the investor gets the face value amount. This difference between the initial value and face value is the return earned by the investor. They are the safest short term fixed income investments as they are backed by the Government of India.

3. Repurchase Agreements

Also known as repos or buybacks, Repurchase Agreements are a formal agreement between two parties, where one party sells a security to another, with the promise of buying it back at a later date from the buyer. It is also called a Sell-Buy transaction.

The seller buys the security at a predetermined time and amount which also includes the interest rate at which the buyer agreed to buy the security. The interest rate charged by the buyer for agreeing to buy the security is called Repo rate. Repos come-in handy when the seller needs funds for short-term, s/he can just sell the securities and get the funds to dispose. The buyer gets an opportunity to earn decent returns on the invested money.

4. Certificate of Deposits

Certificate of deposit (CD) is issued directly by a commercial bank, but it can be purchased through brokerage firms. It comes with a maturity date ranging from three months to five years and can be issued in any denomination.

Most CDs offer a fixed maturity date and interest rate, and they attract a penalty for withdrawing prior to the time of maturity. Just like a bank’s checking account, a certificate of deposit is insured by the Federal Deposit Insurance Corporation (FDIC).

5. Commercial Papers

Commercial paper is an unsecured loan issued by large institutions or corporations to finance short-term cash flow needs, such as inventory and accounts payables. It is issued at a discount, with the difference between the price and face value of the commercial paper being the profit to the investor.

Only institutions with a high credit rating can issue commercial paper, and it is therefore considered a safe investment. Commercial paper is issued in denominations of $100,000 and above. Individual investors can invest in the commercial paper market indirectly through money market funds. Commercial paper comes with a maturity date between one month and nine months.

6. Call Money

Call money refers to extremely short-term borrowing and lending, usually overnight, between banks and financial institutions. Banks use the call money market to manage their daily liquidity and meet statutory reserve requirements like CRR (Cash Reserve Ratio). The interest rate charged in this market is called the call rate, which fluctuates daily depending on liquidity conditions. Call money plays a crucial role in maintaining the liquidity and stability of the financial system and is a key tool for monetary policy.

7. Notice Money

Notice money refers to short-term funds borrowed or lent for periods between 2 and 14 days. Unlike call money, notice money cannot be recalled on the same day but requires prior notice. Banks and financial institutions use notice money to manage short-term liquidity mismatches and regulatory requirements. The notice money market provides slightly better returns than call money due to the longer tenure, while still offering high liquidity. It is an important component of the interbank money market.

Purpose of a Money Market

  • Provides Funds at a Short Notice

Money Market offers an excellent opportunity to individuals, small and big corporations, banks of borrowing money at very short notice. These institutions can borrow money by selling money market instruments and finance their short-term needs.

It is better for institutions to borrow funds from the market instead of borrowing from banks, as the process is hassle-free and the interest rate of these assets is also lower than that of commercial loans. Sometimes, commercial banks also use these money market instruments to maintain the minimum cash reserve ratio as per the RBI guidelines.

  • Maintains Liquidity in the Market

One of the most crucial functions of the money market is to maintain liquidity in the economy. Some of the money market instruments are an important part of the monetary policy framework. RBI uses these short-term securities to get liquidity in the market within the required range.

  • Utilisation of Surplus Funds

Money Market makes it easier for investors to dispose off their surplus funds, retaining their liquid nature, and earn significant profits on the same. It facilitates investors’ savings into investment channels. These investors include banks, non-financial corporations as well as state and local government.

  • Helps in monetary policy

A developed money market helps RBI in efficiently implementing monetary policies. Transactions in the money market affect short term interest rate, and short-term interest rates gives an overview of the current monetary and banking state of the country. This further helps RBI in formulating the future monetary policy, deciding long term interest rates, and a suitable banking policy.

  • Aids in Financial Mobility

Money Market helps in financial mobility by allowing easy transfer of funds from one sector to another. This ensures transparency in the system. High financial mobility is important for the overall growth of the economy, by promoting industrial and commercial development.

Management Notes

National Industrial Development Corporation

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National Industrial Development Corporation Limited is one of the foremost of the public sector undertakings India. The National Industrial Development Corporation Limited was set up as a financial institution which was a part of the Ministry of Commerce and industry under the Government of India.

The National Industrial Development Corporation Limited functioned as a consultancy for the purpose of providing to the country’s industrialization requirements. The National Industrial Development Corporation Limited was phenomenon in the establishment of primary producing units in the public sector in India. NIDC is at present among the well known organizations of global standard. The National Industrial Development Corporation Limited also render services to global organizations such as UNICEF, World Bank, USAID, etc.

The MIDC was established on 20th October 1954 by the Central Government which has been regarded mainly as the instrument to achieve a balanced development of Industries in the private as well as the public sector.

The NIDC plans and formulates projects for setting up new Industries or for developing new lines of production. It undertakes establishment of such undertakings which in the opinion of the central government would contribute to the industrial development of the country.

The main objective of the corporation is promotion of industries rather than granting of finance. It builds up industrial schemes of its own or collaborates with the private industry. It can also render assistance for the modernization of industries.

The corporation was set up with the authorized capital of Rs. 1 crore out of which Rs. 10 lakhs have been issued and paid up by the government which was increased to 50 lakhs by the end of March 1963. It can also borrow from the government. It is also empowered to issue shares and debentures to enlarge its financial base.

The NIDC has been started for providing assistance to cotton, jute, and sugar industries for modernization. It has established a consultancy in private and public sector. In the year 1970 it rendered consultancy services worth Rs. 69 lakhs.

The services of the MIDC are being availed of by Indian and foreign entrepreneurs as well as by United Nations organisation. The management of the NIDC is entrusted to a board of directors consisting of 8 members including the chairman and a managing director. All the appointments are made by the central government.

Management Notes

National Small Industries Corporation (NSIC), Introductions, Objectives, Functions, Types, Importance and Challenges

indiafreenotesby indiafreenotes1

National Small Industries Corporation (NSIC) is a Government of India enterprise established in 1955 to promote and support Micro, Small, and Medium Enterprises (MSMEs). It operates under the Ministry of Micro, Small and Medium Enterprises and plays an important role in assisting small industries through financial support, marketing assistance, technology development, and training programs. NSIC helps small businesses improve their competitiveness, productivity, and market access both domestically and internationally. Through its schemes and services, NSIC contributes to entrepreneurship development, industrial growth, and employment generation in India.

Objectives of National Small Industries Corporation (NSIC)

  • Promotion of Micro, Small, and Medium Enterprises (MSMEs)

One of the main objectives of NSIC is to promote and support the growth of Micro, Small, and Medium Enterprises (MSMEs) in India. It provides assistance in areas such as finance, technology, marketing, and training. By supporting entrepreneurs and small business owners, NSIC helps create new enterprises and strengthen existing ones. The development of MSMEs contributes to industrial growth, innovation, and employment generation, which are essential for balanced economic development across different regions of the country.

  • Facilitating Access to Raw Materials

NSIC aims to ensure that small industries have access to essential raw materials at reasonable prices and in adequate quantities. Many small enterprises face difficulties in procuring raw materials due to limited financial resources and lack of bargaining power. NSIC assists these businesses by arranging bulk purchases and distributing raw materials like steel, aluminum, and copper. This objective helps small industries maintain regular production, reduce costs, and improve efficiency in their manufacturing processes.

  • Providing Marketing Assistance

Another important objective of NSIC is to provide marketing support to small industries so they can effectively promote and sell their products. NSIC organizes trade fairs, exhibitions, and buyer-seller meets to help MSMEs showcase their products. It also facilitates participation in government procurement programs. Marketing assistance improves visibility and market access for small enterprises, enabling them to compete with larger companies and expand their customer base both domestically and internationally.

  • Encouraging Technology Upgradation

NSIC aims to support the modernization and technological development of small industries. Many MSMEs operate with outdated machinery and production techniques, which reduces productivity and product quality. NSIC promotes technology upgradation by establishing incubation centers, providing technical consultancy, and organizing training programs. By encouraging the adoption of modern technology, NSIC helps small enterprises improve efficiency, enhance product standards, and remain competitive in rapidly changing industrial markets.

  • Facilitating Financial Support

NSIC works to ensure that small industries have access to adequate financial resources for their operations and expansion. It facilitates credit support through banks and financial institutions by helping MSMEs obtain loans and working capital. Financial assistance helps businesses invest in machinery, raw materials, and infrastructure. This objective reduces financial barriers faced by entrepreneurs and enables small enterprises to grow, innovate, and contribute to industrial development.

  • Promoting Entrepreneurship Development

NSIC encourages entrepreneurship by providing training, mentoring, and incubation support to aspiring entrepreneurs. It organizes skill development programs and workshops to enhance managerial, technical, and financial knowledge. These initiatives help individuals develop business ideas and transform them into successful enterprises. By promoting entrepreneurship, NSIC contributes to the creation of self-employment opportunities, innovation, and economic growth, especially among youth and first-generation entrepreneurs.

  • Supporting Export Promotion

NSIC aims to help small enterprises expand their operations beyond domestic markets by promoting exports. It provides guidance on export procedures, international marketing, quality standards, and global trade opportunities. Through participation in international exhibitions and trade missions, MSMEs can reach global buyers. Export promotion helps small industries increase revenue, improve competitiveness, and contribute to the country’s foreign exchange earnings.

  • Strengthening Industrial Infrastructure

NSIC also focuses on strengthening the industrial infrastructure required for the development of small industries. It establishes training centers, incubation facilities, and common production centers to support MSMEs. These facilities provide access to modern equipment, technical expertise, and professional guidance. Strong industrial infrastructure improves productivity, reduces operational costs, and enables small enterprises to adopt efficient production methods. This objective ultimately promotes sustainable industrial growth and development.

Functions of National Small Industries Corporation (NSIC)

  • Marketing Assistance

One of the major functions of NSIC is to provide marketing support to micro, small, and medium enterprises (MSMEs). It helps small industries promote and sell their products through government purchase programs, trade fairs, exhibitions, and buyer–seller meets. NSIC also assists MSMEs in participating in national and international exhibitions, increasing their market exposure. This function helps small businesses overcome marketing challenges, expand their customer base, and compete effectively with large industries in domestic and global markets.

  • Raw Material Assistance

NSIC provides assistance in procuring essential raw materials required for manufacturing activities. Small enterprises often face difficulties in obtaining raw materials due to limited financial capacity and weak bargaining power. NSIC arranges bulk purchases of materials such as steel, aluminum, and copper and supplies them to MSMEs at competitive prices. This function ensures regular availability of raw materials, helps reduce production costs, and enables small industries to maintain uninterrupted manufacturing operations.

  • Credit Facilitation

NSIC facilitates credit support for MSMEs by helping them obtain financial assistance from banks and financial institutions. It works as an intermediary between small enterprises and lending institutions, ensuring that businesses receive adequate working capital and investment funds. Credit facilitation reduces financial barriers for entrepreneurs and supports business expansion, modernization, and new venture creation. Through this function, NSIC strengthens the financial foundation of small industries and encourages sustainable industrial growth.

  • Technology Support and Incubation

NSIC provides technological support through incubation centers, training programs, and technical consultancy. These initiatives help entrepreneurs adopt modern technology, improve production processes, and enhance product quality. Incubation centers provide guidance and infrastructure to new entrepreneurs to help them establish successful businesses. By promoting technology adoption and innovation, NSIC ensures that small industries remain competitive and capable of meeting changing market demands and quality standards.

  • Training and Skill Development

Another important function of NSIC is organizing training and skill development programs for entrepreneurs, workers, and small business owners. These programs focus on areas such as entrepreneurship development, financial management, marketing strategies, and modern production techniques. Training improves managerial and technical skills, enabling entrepreneurs to run businesses more efficiently. By building human resource capabilities, NSIC strengthens the overall productivity and competitiveness of the MSME sector.

  • Export Promotion

NSIC supports small industries in expanding their business into international markets. It provides guidance on export procedures, documentation, international marketing, and quality standards required for global trade. NSIC also facilitates participation in international trade fairs and exhibitions. Export promotion helps MSMEs reach global customers, increase revenue, and contribute to the country’s foreign exchange earnings. This function strengthens the global competitiveness of Indian small industries.

  • Government Procurement Support

NSIC assists MSMEs in participating in government procurement programs by registering them under the Single Point Registration Scheme (SPRS). This scheme allows small industries to supply goods and services to government departments and public sector enterprises. Through this function, NSIC helps MSMEs gain access to large government contracts, ensuring steady demand for their products and supporting business growth.

  • Infrastructure and Support Services

NSIC provides infrastructure facilities such as training centers, incubation centers, and technical laboratories to support small industries. These facilities offer modern equipment, workspace, and technical guidance to entrepreneurs. Infrastructure support reduces operational costs and helps businesses improve productivity and efficiency. By providing such support services, NSIC strengthens the industrial ecosystem for MSMEs and promotes sustainable growth in the small-scale sector.

Types of Assistance Provided by National Small Industries Corporation (NSIC)

1. Financial Assistance

NSIC provides financial assistance to micro, small, and medium enterprises (MSMEs) by facilitating credit support from banks and financial institutions. This assistance helps entrepreneurs obtain working capital and term loans required for establishing or expanding their businesses. Financial support enables small industries to purchase machinery, procure raw materials, and meet operational expenses. By improving access to finance, NSIC helps reduce financial barriers and supports the sustainable growth of small enterprises.

Example: A small manufacturing unit receives working capital support through bank loans facilitated by NSIC.

2. Raw Material Assistance

Raw material assistance is an important service provided by NSIC to ensure that small industries receive essential raw materials at competitive prices. NSIC arranges bulk procurement of materials such as steel, aluminum, copper, and other industrial inputs and distributes them to MSMEs. This reduces procurement costs and ensures regular availability of materials required for production.

Example: A small engineering company obtains steel at a reasonable price through the NSIC raw material distribution scheme.

3. Marketing Assistance

NSIC provides marketing assistance to help MSMEs promote and sell their products in domestic and international markets. It organizes trade fairs, exhibitions, buyer–seller meets, and supports participation in government procurement programs. These initiatives help small industries increase product visibility, attract customers, and expand their market reach.

Example: A handicraft manufacturer participates in an international trade fair organized by NSIC to showcase products to foreign buyers.

4. Technology and Incubation Assistance

NSIC offers technology support through incubation centers, training programs, and technical consultancy services. These centers provide infrastructure, modern equipment, and expert guidance to entrepreneurs. Technology assistance helps MSMEs adopt modern production methods, improve efficiency, and maintain quality standards.

Example: An entrepreneur receives training and technical support from an NSIC incubation center to start a small food processing unit.

5. Export Assistance

NSIC supports small industries in entering international markets by providing export assistance. It guides MSMEs on export procedures, documentation, quality standards, and international marketing strategies. NSIC also helps businesses participate in global trade exhibitions and connect with overseas buyers.

Example: A textile MSME receives support from NSIC to export garments to international markets through trade promotion programs.

6. Training and Skill Development Assistance

NSIC organizes training programs and workshops to enhance the technical, managerial, and entrepreneurial skills of MSME owners and workers. These programs cover areas such as financial management, marketing, production techniques, and business planning. Skill development initiatives help entrepreneurs improve productivity and manage their businesses effectively.

Example: A group of young entrepreneurs attend an NSIC training program on digital marketing and business management.

7. Government Procurement Assistance

NSIC helps MSMEs participate in government procurement through the Single Point Registration Scheme (SPRS). This scheme allows small industries to supply goods and services to government departments and public sector undertakings. It provides benefits such as exemption from tender fees and preference in government purchases.

Example: A small electronics manufacturer registers under the NSIC scheme to supply equipment to government agencies.

8. Infrastructure and Support Services

NSIC provides infrastructure facilities such as technical laboratories, training centers, and incubation facilities for MSMEs. These services help entrepreneurs access modern equipment, technical expertise, and workspace required for business operations. Infrastructure support improves efficiency and productivity of small enterprises.

Example: A startup uses an NSIC incubation center to develop prototypes and receive technical guidance before starting full-scale production.

Importance of National Small Industries Corporation (NSIC)

  • Promotion of MSME Growth

NSIC plays an important role in promoting the growth and development of Micro, Small, and Medium Enterprises (MSMEs) in India. By providing financial support, marketing assistance, and technical guidance, it helps entrepreneurs establish new businesses and expand existing ones. The development of MSMEs strengthens the industrial sector, encourages innovation, and increases production capacity. Through these initiatives, NSIC contributes significantly to economic growth and helps create a strong foundation for small-scale industries across the country.

  • Facilitating Access to Finance

One of the major contributions of NSIC is facilitating access to finance for small industries. Many MSMEs face difficulties in obtaining loans due to lack of collateral or credit history. NSIC helps these enterprises obtain working capital and investment funds from banks and financial institutions. By improving access to financial resources, NSIC enables small businesses to purchase machinery, procure raw materials, and expand operations, thereby supporting sustainable business development.

  • Strengthening Marketing Opportunities

NSIC provides valuable marketing support to MSMEs by organizing trade fairs, exhibitions, and buyer–seller meets. These platforms help small enterprises showcase their products to a wider audience and connect with potential buyers. NSIC also facilitates participation in government procurement programs. This marketing assistance improves product visibility, increases sales opportunities, and enables small businesses to compete effectively with larger companies in both domestic and international markets.

  • Ensuring Raw Material Availability

Small industries often struggle to obtain raw materials at reasonable prices due to limited financial capacity and purchasing power. NSIC addresses this issue by arranging bulk procurement and distribution of essential raw materials such as steel, aluminum, and copper. This support ensures continuous production and reduces operational costs for MSMEs. Reliable access to raw materials helps small industries maintain productivity and meet market demand efficiently.

  • Promoting Technology and Skill Development

NSIC promotes modernization and skill development among MSMEs through training programs, incubation centers, and technical consultancy services. These initiatives help entrepreneurs adopt advanced technology, improve production processes, and enhance product quality. Skill development programs also strengthen managerial and technical capabilities of business owners. By encouraging technology adoption and skill enhancement, NSIC helps small industries remain competitive in rapidly changing industrial and technological environments.

  • Encouraging Entrepreneurship and Self-Employment

NSIC plays a vital role in encouraging entrepreneurship by providing guidance, training, and support to aspiring entrepreneurs. It helps individuals with innovative business ideas establish new enterprises and develop managerial skills. This support creates opportunities for self-employment and reduces dependence on traditional jobs. By promoting entrepreneurship, NSIC contributes to economic development and fosters a culture of innovation and enterprise in the country.

  • Supporting Export Promotion

NSIC assists MSMEs in exploring international markets and expanding their export activities. It provides guidance on export procedures, international quality standards, and market opportunities. Participation in international trade fairs and exhibitions helps small industries reach global customers. Export promotion increases revenue, enhances competitiveness, and contributes to the country’s foreign exchange earnings. Through these initiatives, NSIC helps small enterprises become globally competitive.

  • Balanced Regional Development

NSIC contributes to balanced regional development by promoting industrial growth in rural and semi-urban areas. It provides support to small enterprises located in less-developed regions, helping them access finance, technology, and markets. This reduces regional economic disparities and creates employment opportunities in various parts of the country. By encouraging industrialization in different regions, NSIC promotes inclusive economic growth and improves the standard of living in underserved areas.

Challenges of National Small Industries Corporation (NSIC)

  • Limited Awareness Among MSMEs

One major challenge faced by NSIC is the limited awareness among micro, small, and medium enterprises about its schemes and support programs. Many small entrepreneurs, especially in rural and semi-urban areas, are unaware of the financial, marketing, and training services offered by NSIC. Due to this lack of awareness, several MSMEs fail to take advantage of the available benefits. Increasing awareness through outreach programs, digital platforms, and awareness campaigns is necessary to ensure wider participation.

  • Limited Financial Resources

NSIC often faces constraints in terms of financial resources required to support a large number of MSMEs across the country. As the number of small enterprises grows rapidly, the demand for financial assistance and support services also increases. Limited funds restrict the corporation’s ability to expand its programs and provide adequate support to all eligible enterprises. This challenge requires efficient resource management and stronger collaboration with financial institutions to meet the needs of MSMEs.

  • Competition from Private Institutions

NSIC faces competition from private financial institutions, consultancy firms, and marketing agencies that also provide support services to small businesses. These private entities often offer faster services, customized solutions, and advanced digital platforms. As a result, some MSMEs may prefer private service providers over government institutions. To remain competitive, NSIC must continuously improve service quality, adopt modern technologies, and provide efficient support systems for entrepreneurs.

  • Technological Challenges

Rapid technological advancement in industries creates challenges for NSIC in providing up-to-date technological support to MSMEs. Many small industries still operate with outdated machinery and lack the resources to adopt modern technology. NSIC must constantly upgrade its incubation centers, training facilities, and technical services to keep pace with evolving industrial technologies. Without continuous modernization, it becomes difficult to ensure that MSMEs remain competitive in the market.

  • Difficulty in Reaching Rural Enterprises

Many MSMEs operate in rural and remote areas where access to infrastructure, financial institutions, and support services is limited. NSIC faces challenges in reaching these enterprises and providing them with the required assistance. Poor connectivity, lack of communication facilities, and geographical barriers make it difficult to deliver services effectively. Expanding regional offices and strengthening digital platforms can help improve outreach to rural entrepreneurs.

  • Administrative and Procedural Delays

Like many government organizations, NSIC may face administrative and procedural delays in implementing schemes and providing services. Lengthy documentation processes, approval procedures, and coordination with multiple agencies can slow down the delivery of support services. Such delays may discourage entrepreneurs from seeking assistance. Streamlining administrative processes and adopting digital systems can help improve efficiency and service delivery.

  • Marketing and Global Competition

MSMEs supported by NSIC often face intense competition from large domestic companies and international producers. Even with marketing support, small enterprises may struggle to compete in terms of product quality, pricing, and brand recognition. This makes it challenging for NSIC to ensure sustainable market opportunities for MSMEs. Continuous marketing support, quality improvement initiatives, and export promotion programs are necessary to address this challenge.

  • Rapid Changes in Market Demand

Market trends and consumer preferences change rapidly, creating challenges for small industries to adapt quickly. MSMEs may find it difficult to modify their products or production processes due to limited resources. NSIC must constantly update its training and advisory services to help businesses understand market trends and adopt innovative strategies. Keeping MSMEs competitive in a dynamic market environment remains a major challenge for the corporation.

Management Notes

Circumstances of valuation of brand

indiafreenotesby indiafreenotes1

Brand valuation is the process of estimating the total financial value of a brand. A conflict of interest exists if those who value a brand were also involved in its creation. The ISO 10668 standard specifies six key requirements for the process of valuing brands, which are transparency, validity, reliability, sufficiency, objectivity; and financial, behavioral, and legal parameters. Brand valuation is distinct from brand equity.

Brands are ideally suited to this task because they communicate on a number of different levels. Brands have three primary functions; navigation, reassurance and engagement:

  • Navigation: brands help customers to select from a bewildering array of alternatives.
  • Reassurance: they communicate the intrinsic quality of the product or service and so reassure customers at the point of purchase.
  • Engagement: they communicate distinctive imagery and associations that encourage customers to identify with the brand.

Brand value

Traditional marketing methods examine the price/value relationship in terms of dollars paid. Some marketers believe customers perceive the value to mean the lowest price. While this may be true for commodities, some branding techniques are moving beyond this evaluation.

Brand valuation emerged in the 1980s. Early pioneers in brand valuations included the British branding agency, Interbrand, led by John Murphy and Michael Birkin, which is credited with leading the concept’s development. Millward Brown was also a leading brand valuer.

Both companies maintained “Top 100” lists of companies by valuation. In 1989, Murphy edited a seminal work on the subject: Brand Valuation; Establishing a true and fair view; and in 1991, Birkin laid out a brand earnings multiple models of brand valuation in the book, Understanding Brands. A 2009 paper identified “at least 52” brand valuation companies.

Valuation methodologies

There are three main types of brand valuation methods:

The cost approach

This is based on the cost of creating the brand. The fundamental premise of the cost approach is that it should not be worth more than it would cost to build an equivalent. The cost of building a brand minus any expenses is reflective of market value.

The market approach

In this approach, the market price is compared. This valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable brand rights. Given that often the asset undervaluation is unique,[clarification needed] the comparison is performed in terms of utility, technological specificity and property, considering the asset’s perception by the market. Since the market approach relies on comparisons to similar assets, it is most useful when there is substantial data available regarding recent sales of comparable assets. Data on comparable or similar transactions may be accessed through the following sources:

  • Company annual reports.
  • Specialized royalty rate databases and publications.
  • Court decisions concerning damages.

The income approach

This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand.[5] There are at least six recognized methods of the income approach, with some authorities listing more.

  • Price premium method: Estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method.
  • Volume premium method: Estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method.
  • Income split method: This values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand.
  • Multi-period excess earnings method: this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand.
  • Incremental cash flow method or Excess Margin: Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However, it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult.
  • Royalty relief method: Assume theoretically a company does not own the brand it operates under but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments.

Historical Cost Method

Brand valuation through the historical cost method is used at the initial stage of brand creation. The historical cost method isolates the direct costs and contributes to indirect costs. It attempts to recreate the historical development and creates an assessment value for the future. However, the cost of creating a brand does not play a major role in the present value.

Replacement Cost Method

This method values the brand keeping the investment and expenditure necessary to replace the brand with a new one which has equivalent utility to the company.

Market-Based Approach: A market-based method of brand valuation deals with the amount at which a brand is sold and the highest value that a buyer is willing to pay for it. The market-based approach is classified into:

Brand Sale Comparable Approach

In this method, the brand is valued by the recent transactions that involve similar brands in the same industry. It is viewed from a third party perspective and cannot be applied to all cases for comparing data.

Brand Equity Approach

The brand equity approach includes advertising and results in price premium profits. In this case, the value of brand equity is estimated using the financial market value.

Residual Method

The residual value is arrived at when the market capitalisation is subtracted from the net asset value. The variables such as risk-free interest rate, current exercise price, the variance of the asset, time of expiration of the option and value of the underlying asset are included. It helps to calculate the potential value of line extensions.

Income-Based Approach: In this approach, the potential of the brand is calculated by the future net earnings that directly contribute to determining the value of the brand. The following are the classifications in the Income-Based Approach:

Royalty Relief Method

As per this method, the value of the brand is related to characteristics applied by the company or valuer. The valuer will have to estimate the base for calculation and determine the appropriate royalty rate, a growth rate, expected life and a discount rate for the brand. This method is accepted by tax authorities and has an edge of being industry-specific.

Differential Price to Sales Ratio Method

This method will calculate the brand value as a difference between the estimated price to sales ratio for a company with a brand and the price to sales ratio for an unbranded company. This will be multiplied by the sales of the branded company.

Price Premium Method

The approach of this method is that a branded product should sell for a premium over an unbranded product. The value is calculated by comparing the cost involved for production and cost produced after sales. It creates the impact of assuming that the brand helps to accumulate additional profit.

Discounted Cash Flow

Cash flow acts as an important component for determining the value of an asset. It takes into account the increasing working capital and fixed asset investments. It estimates the amount of future cash flow that the brand can generate.

Management Notes

Circumstances of valuation of IPR

indiafreenotesby indiafreenotes1

Intellectual property rights valuation or IPR Valuation is one of the most critical areas of finance that comes into play during the sale and purchase of companies and during solvency, merger, and acquisition transactions. Intellectual property is intangible assets that are either already patented or a patentable product, process, or service, or a trademark, copyright, or brand. It’s the unique creation of the organization, responsible for its distinction in the market. Though intangible, it’s often a major driver of success for an organization. Valuation of Intellectual Property Valuation Rights fundamentally means the process of arriving at a fair value of a Company’s Intellectual Property that can be monetized and can leverage the overall selling price of the company. For a profitable sale transaction, it’s extremely important to place the selling price at such a rate that it’s sold at the best possible value. The IPR valuation process helps to achieve a part of this justifiable selling price.

Reasons of intangible assets valuable to a business

  • Registered patents prevent competitors from launching similar, competing products and potentially pushing the business aside within the market.
  • Holding the rights to a product design enables an organization to create a singular offering to their market, and price their products accordingly.
  • The company’s position and profile as an innovative business are boosted.
  • For design-only businesses, the license for IP, utilized by third parties to manufacture and sell their products, provides a major and valuable income stream.

Essentially, holding assets can increase revenue or reduce business costs, and once they generate an income for the business being sold, a variety of valuation methods will be utilized.

There is no particular method of valuation that’s suitable for each business sale, however the foremost appropriate one depends on a variety of things, including whether the intellectual property rights (IPR) are fully developed and functioning.

Valuation Based on Replication Cost

This is the cost that the acquirer would have to incur in order to replicate the intellectual property. There is also a time component to this calculation, in that the acquirer might require years of effort in order to create the intellectual property. If the acquirer wants access to the property immediately, it should be willing to pay a premium to buy it from the acquiree.

Valuation Based on Market Price

This is the price that third parties would pay for the intellectual property if it were put up for bid in a fair market, with multiple bidders. An acquirer may want to pay more than this amount in order to avoid a bidding war with potential competitors.

Valuation Based on Discounted Cash Flows

This is the present value of the cash flows currently generated by the intellectual property, with certain assumptions included regarding possible changes in those cash flows over future years. The rate at which these cash flows are discounted to a present value is subject to interpretation and negotiation.

Valuation Based on Relief from Royalties

This approach is based on the cost that the acquirer would otherwise incur if it were required to pay a royalty for access to the intellectual property. This approach may not work if access to the intellectual property cannot be obtained through a licensing arrangement.

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